Got an IRS notice or letter? Here are the steps you need to follow

You filed your tax return on time and did your best to ensure everything was accurate. But then a letter arrives from the Internal Revenue Service (IRS). What should you do? First, try not to stress about it. Although most returns are accepted as filed, the IRS does review others to verify information.

Next, make sure you respond by the date noted in the letter. If a professional tax preparer, accountant, or someone else helped you file your return, let them know. Then gather your tax records—whether they’re locked in a fireproof box, saved to a secure hard drive, or stuffed in a drawer you haven’t opened since tax time—so you’re prepared to answer any questions.

Common reasons the IRS sends notices or letters

Getting a letter from the IRS might cause you some anxiety, but it doesn’t always mean something is wrong. In many cases, the IRS is just passing on information or asking for clarification. You might receive a notice if:

• The processing of your return is delayed for some reason
• Your return has been corrected or changed
• Your identity needs to be verified
• There’s a question about your return
• You owe tax, interest, or penalties
• Your refund amount has changed

What to do when you receive a letter from the IRS

The notice letter will outline what steps you need to take.

• If you agree with the notice, follow the instructions, which may include making payment by the date noted in the letter. If any information on your return has changed, update your records.
• If you disagree with the notice, you can dispute the finding using the instructions in the letter. Be sure to reply by the deadline and include any documents that support your case.
• If you think the notice is a scam, report it by calling the IRS at (800) 829-1040.

What to expect during an IRS audit

If your return is selected for examination, the IRS will explain in its letter what to do next. If the audit is handled by mail, submit all documentation by the due date. You can request an in-person audit if you have too many documents to send easily.

If you are scheduled for an in-person audit, gather all the relevant documents and prepare for the meeting. It may be held at an IRS office, your business or home, or your attorney or accountant’s office. The examiner may ask questions about your financial records, business operations, or filing history. If you don’t already have a tax attorney or accountant, it may be worth considering hiring one for an in-person audit.

After reviewing your documents, the IRS may respond in one of three ways:

• If your original return is accepted, no further action is needed.
• If the IRS proposes changes and you agree, sign and return the form by the due date and pay any additional tax due.
• If the IRS proposes changes to your return and you disagree, don’t sign. You may send additional documentation or request a phone conversation with the examiner.  If you still can’t reach an agreement, request a conference with a manager or appeal. Once an agreement is reached, sign and return the form by the due date and pay any additional tax due.

Your rights during an IRS audit or tax dispute

IRS employees are expected to explain and protect taxpayers’ rights throughout the audit process. According to the agency, these rights include:

• Professional and courteous treatment
• Privacy and confidentiality about tax matters
• Clear explanations of why the IRS is requesting information, how it will be used, and what happens if you don’t provide it
• The option to have someone represent you when dealing with the IRS
• Payment of only the correct amount of tax—no more, no less
• Assistance with unresolved tax problems
• The ability to appeal disagreements
• Relief from penalties and interest caused by IRS errors

How the IRS chooses tax returns to be audited

There’s no guaranteed way to avoid an audit. The best you can do is file an accurate return and understand how the IRS decides which returns to review. Some common IRS audit triggers include:

• Information matching. If the income or other details on your return don’t match what employers, banks, or other third parties reported, the IRS may flag your return. When that happens, you may receive a CP2000 notice, which explains the discrepancies and proposes changes.
• Related examinations. If your business partner or investor is being audited, your return might also be selected.
• Local compliance. The IRS sometimes focuses on certain areas or industries. If your return falls within one of those, it may be selected.
• Computer scoring. The IRS uses a scoring system to identify returns that have a high rate of unreported income. Some returns receiving a high score are selected for an audit.
• Court-generated reports. If a court links you to a potentially abusive tax strategy, such as those designed to hide income or evade taxes, your information may be sent to the IRS.

The bottom line

Getting a letter from the IRS doesn’t automatically mean there’s a problem. You may have made a mistake that the IRS has already corrected, and you might not need to contact or speak to an IRS agent.

Still, it’s important to be prepared. File your return on time or request an extension if needed, and pay what you owe. Once it’s filed, keep a copy of your tax return and any supporting documentation for at least three years—or at least six years if you grossly underreported your income.

If you are selected for an audit, respond as requested. Keep in mind that one of your taxpayer rights is to pay only the tax you owe—no more, no less.

References

• Understanding Your IRS Notice or Letter | irs.gov
• [PDF] The Examination Process (Audits by Mail) | irs.gov
• Taxpayer Advocate Service | taxpayeradvocate.irs.gov
• [PDF] The Examination (Audit) Process | irs.gov