The audit will start with the IRS sending you a written notice. The type of audit notice you receive can tell you quite a bit about the audit, what to expect, and how you should handle the audit. Therefore, the first step in the IRS audit is to review the IRS’s audit notice.
Make Sure It’s Not an Imposter
While the IRS may call you or even show up at your business or home, you should receive a notice about these visits first.
Before you respond to the IRS notice, you should check to ensure that the notice is actually from the IRS. There are con artists who impersonate the IRS to either get you to send them money or disclose your financial information.
The IRS sends most notices through the U.S. Postal Service. It may even send the notice via certified mail. The audit notice will usually come in a plain white envelope with a clear insert to show your name and address. The audit notice will not have a postage stamp on it. It will have a postage meter stamp on it or have no postage at all. These are clues that the notice is actually from the IRS.
The IRS notice will not make any threats in its communications. It will not say anything about a tax warrant or that an arrest will occur. A threatening letter suggests that the notice is a scam.
The same is true for calls and emails. IRS auditors rarely call taxpayers, until after they send written correspondence introducing themselves. When they do, they are always professional, courteous, and polite. The IRS caller will explain that they have been unable to contact you by mail. The IRS caller will never ask you to send money. The IRS will never mention transferring money by iTunes card, gift card, prepaid debit card, money order, or wire transfer. The IRS will never send you an email, if they have not talked to you before in person or on the phone.
If you have any doubts about the IRS notice’s authenticity, you can contact the IRS by telephone at 800-829-1040 to ask whether the IRS sent you a notice. The IRS customer service representatives can access your account. They can usually confirm whether your tax return is being audited and whether the IRS may have sent you a notice.
If you did receive a communication from an imposter, you can file a complaint with the Treasury Inspector General for Tax Administration (“TIGTA”). TIGTA has investigators that handle these issues. TIGTA has an “IRS Impersonation Scam” form on its website (www.tigta.gov). The reporting of TIGTA used to be quite effective, and every case was reported. TIGTA is no longer effective. The boldness and frequency of IRS imposters and IRS-related scams have increased so much that TIGTA may not pursue your report. To be safe, you should still report the incident.
What Type of IRS Notice Did You Receive?
There are several different types of IRS notices that you may receive. The IRS notice could either be a collection letter, a letter asking for more information to process the tax return you filed, a proposed adjustment to the tax return you filed, or an actual IRS audit letter. Let’s go through each one.
IRS Collection Letters
If you owe back taxes to the IRS, the IRS will usually bombard you with letters about your outstanding balance. These letters range from simple annual reminders about your balance to notices that the IRS intends to levy or seize your property. You will usually receive these letters after an IRS audit is closed (assuming the IRS increased your tax due), when you file a tax return but do not pay the balance owing on the return, or when you do not file a tax return and the IRS prepares a tax return for you. IRS collections are not the focus of this guide, but we briefly address IRS collections at the end of this guide. We have included examples of common IRS collection notices in Appendix 1.
IRS Processing Notice
The IRS often sends letters asking for more information to process the tax return you filed. The IRS notice will describe the documents or information needed to process the tax return you filed.
With this type of IRS notice, you just respond by mailing in the records or information the IRS is requesting. You can also fax the information to the number in the letter. You should Include a copy of the IRS notice with your response. The IRS will usually take 30 to 90 days to respond. The response will either be a notice that your tax return was processed with no changes or a notice describing the changes that were made by the IRS.
These IRS notices will usually have a notation at the top right saying that it is an “LTR 12C.” There are quite a few other other IRS processing notices. We have included a list of common IRS notices in Appendix 2. The descriptions should help you determine whether a response is even warranted and prepare the response. For example, the list in Appendix 2 shows that an IRS 11A is a math error involving an Earned Income Tax Credit (“EITC”). If you receive one of these letters, you should check your tax return to see how your EITC was computed.
IRS Proposed Adjustment Notice
The IRS may send you a proposed adjustment notice. Most of the time, this is a “CP2000” notice that proposes to make changes to your tax return. When income or payments reported by banks, businesses, and others to the IRS does not match the income you reported on your tax return, the CP2000 is sent. These proposed adjustments are based on data, such as Forms W-2, Forms 1099, etc., sent to the IRS or Social Security Administration by third parties. This type of notice is usually referred to as a “correspondence audit.” We’ll cover in the next chapter. An example of a CP2000 notice is included in correspondence audits Appendix 3.
IRS Audit Notice
The last type of letter is an actual audit notice. If it is an IRS audit notice, it will say so. The audit notice will indicate that your tax return has been selected for audit. The letter will usually note that it is a “Letter 2205-A” for individuals and “Letter 2205-B” for businesses. These codes can be found on the lower right-hand corner of the letter. An example of a Letter 225-A is included in Appendix 4.
The audit notice will list the periods under audit and the name of the assigned auditor, phone and fax number, and the office address. It may even have a list of issues under review, although it’s more likely for the IRS to request information or ask questions, by sending Form 4564 or Form 886A along with the audit notice. An example of a Form 4546 is included in Appendix 5.