Don’t panic! Even though you’ve been issued an IRS audit letter, it’s not the end of the world. Less than 1% of all tax returns are selected for an IRS audit and that percentage is even smaller for those who make less than $100K. However, anyone can be selected for an IRS audit—no matter what their income is. If the IRS sees enough red flags in your return, you may be chosen to audit. For example, if someone earning $80,000 in a year claims $40,000 in charitable donations, the IRS’ computers could flag that account for a potential audit. As long as you are honest on your returns, audits can be handled with relative ease. However, if you were dishonest on your return—either by mistake or intention—you might receive a notice CP2000 or be in some more complex trouble. You’re not alone; the chart below details the amount of IRS audits implemented on individual tax returns for past years.
No matter what your situation may be, you should contact a tax professional as soon as you receive an IRS audit letter.
What Does an IRS Audit Letter Look Like?
The IRS is clear and concise in its letters and notifications. An IRS audit letter is certified mail that will clearly identify your name, taxpayer ID, form number, employee ID number, and contact information. For example, the first line of text might say, “We have selected your (state or federal) income tax return for the year shown above for examination”. The IRS will also explain the primary focus of the meeting and what you need to provide in order to resolve it within four sections of the letter:
Why the information document request is important
This section simply explains why it’s important to bring the documents that the IRS has requested.
What to expect in the examination
The IRS will notify you how long your meeting will last (typically 3 hours) and explain their wish to complete the entire process in the time allotted—this is contingent on the documents you provide and whether or not you were selected for a non-correspondence audit.
Who may come to the examination
If you filed a joint return, you and or your spouse may attend. You may also have someone represent you at the meeting; if you plan on not attending with your representative, a power of attorney form must be filed.
What will happen if you do not respond
The IRS will issue a report showing additional tax due so it’s in your best interest to call and schedule an appointment as soon as possible.
Finally, the letter will be signed by the examination officer who has been assigned to your case and wrote your audit letter. An IRS letter (certified mail) will clearly tell you exactly what information they are looking for.
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How to Create an Audit Response Letter
Your actions before, during, and after your IRS audit will determine your compliance with the government. Respond as soon as possible with either a phone call or an audit response letter—you will have 30 days to do so without a penalty. If you choose to write an audit response letter, here are some tips.
- Include the following: Tax ID number, full name, contact information, employee ID, business ID (if applicable), and the name of the IRS officer who is in charge of your case.
- Address each finding issue that the IRS stated in your audit letter.
- Provide any and all related documentation attached to your letter.
- Request a time and date to meet and resolve the finding issues.
The best thing to do when receiving an IRS audit letter (by certified mail) is to contact a tax professional. A CPA or tax attorney will know exactly how to handle your unique circumstances and reasons for the audit. These response letters need to be flawless; if done correctly, they can resolve an audit quickly and stress-free.
How Long Does it Take to Get Audited?
The auditing process can vary from case to case. The typical audit will last 3 months—allowing for four weeks of planning, four weeks of field work, and four weeks of compiling the audit report. However, large corporate cases may take a significantly longer amount of time. The following are variables may extend the length of your audit:
- Current tax agency backlog
- The nature of your audit (what the IRS has taken issue with on a return or another matter)
- The type of audit
- Appeal (you can appeal the results of your audit thus increasing the amount of time it will take to complete the entire process)
Keep in mind also that the IRS has up to three years to audit your tax return.
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