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What should I do if I receive an IRS Audit letter?

What should I do if I receive an IRS Audit letter?

First, relax; you are not the only taxpayer receiving this type of letter. The IRS has audit rate has decreased in recent years.  For tax year 2015, the audit rate for all taxpayers is just under 1%.   Refer to IRS publication 1, “Your Rights As a Taxpayer” and Publication 556 “Examination of Returns, Appeal Rights and Claims for Refund”. Both are available at the IRS website: ww.irs.gov.  These publications will help you to understand the IRS process involving audits.  Understanding the process will make it easier to deal with the IRS request for information about your return.

Read the letter, slowly, carefully; understand which items the IRS wants to examine on your return.  Note whether this is a correspondence audit, an office audit or a field audit.

  • A correspondence audit simply requires a written response with supporting documentation for items being questioned by the IRS. These audits are usually completed with one or two letters between the taxpayer and the IRS.
  • An office audit will require a meeting at the IRS offices, where supporting documentation for items being questioned by the IRS will be reviewed. These audits are more involved and may take several meetings at the IRS offices.
  • A field audit will require a meeting in your home or place of business, where supporting documentation for items being questioned by the IRS will be reviewed.  These are the most intensive and time consuming audits, conducted by experienced IRS field agents, which can take a series of meetings over many months to complete.

In all cases you are simply substantiating the positions taken and amounts reported on your return.

Things to do when you receive an audit letter:

  • Contact your tax professional, provide a copy of the IRS letter to the professional, when you receive it.
  • You or your representative should communicate with the IRS as directed in the letter.
  • You or your representative should attend scheduled meetings, provide requested documentation, deal with the matter in a professional, business-like manner.
  • You or your representative should request that the agent formally document and provide written requests for any additional items that the agent may mention. This limits the scope of the examination to the originally requested items.
  • Consider the opportunity to present to the agent, items that you did not claim on your return.  For example, perhaps you overlooked some charitable donations.

Things to avoid when you receive an audit letter:

  • Disregarding the letter, the IRS will not go away.
  • Offering additional information, beyond the requested facts. Answer questions honestly and concisely.
  • Permitting the agent to “fish” for other issues on the return. Make the agent formally request, in a written format any additional returns or items they wish to see.

The conclusion of the audit will produce an examination report which results in one of three outcomes:

  1. No change
  2. Refund
  3. Tax, interest and perhaps penalty assessments

You have appeal rights if you are not satisfied with the agents’ findings.  Appeal procedures are documented and include presenting your position to the IRS Appeals group (separate from the Examinations group) and court filings.

Any kind of an audit or examination is uncomfortable.  The IRS agent has a job to do, not a personal vendetta against you and your family.  Handling your IRS audit in a professional manner will help to manage your stress level and result in more favorable outcomes to you.