Legally Reviewed by: Judson Mallory
An audit letter is a classic, “we need to talk” (about taxes) from the IRS. Even before you know what it’s about, you already feel like you’re in trouble.
The typical reaction to receiving an audit letter is panic, anxiety, and overthinking. It’s stressful and unsettling, especially when you’re unsure of the way forward.
Understanding the nature of an IRS audit and how to respond can help resolve issues and minimize penalties (if any). If you’ve received an IRS audit notice, this guide will help you understand what it means, why you’ve received it, and most importantly, what your options are.
Key Takeaways
- If you get an IRS audit letter, respond promptly; ignoring it or missing deadlines limits your options.
- Answer the specific questions the audit letter asks. If you have other tax issues, address them in a separate letter.
What is an IRS Audit Letter?
An IRS audit letter is a notification from the IRS informing you that your tax return has been selected for review. The letter outlines why you were selected; it could be missing documentation, income reporting, or question deductions – there are many reasons why the IRS chooses to audit taxpayers.
The IRS sends the audit letters through certified mail, and they include your response deadline (usually 30 days).
Ignoring the letter can have consequences such as penalties, additional taxes, or legal action. However, it’s crucial to understand the audit letter to understand what part of your finances is being scrutinized before you respond.
Why Was I Chosen for an Audit?
You’re probably wondering why the IRS sent you an audit letter. There are many reasons why the IRS has chosen to review your income reporting. The IRS conducts tax audits to minimize the “tax gap” between what the IRS receives and what it’s owed.
Common IRS audit triggers include:
- Math errors: Accuracy is critical when it comes to reporting taxes. Accidentally writing a five instead of a nine can cause tax discrepancies that can trigger an audit.
- Failure to report all your income: You are required to report all your income, including side hustle income and stock dividends or interest. Reporting only part of your income can easily score you an audit.
- Claiming false donations: It’s legal to claim well-deserved deductions if you’re entitled to them. However, without proper documentation, it might raise some eyebrows.
- Reporting too many losses on a Schedule C: If you’re self-employed, filing personal expenses as business expenses to lower taxable income, and ending up with too many reported losses can attract an audit.
- Using nice, neat, round numbers: This may seem petty, but rounding off to the nearest hundred (e.g., $495.25 to $500) can cause discrepancies in your reporting, drawing unwanted attention to your tax return.
Common Types of Audit Letters
Since the IRS audits you for different reasons, they also send different audit letters based on the type of audit and its focus. Here are the most common types of IRS audit letters and what they mean.
CP2000 Notice: Underreported Income
The IRS sends a CP2000 when there’s a mismatch between the information they gathered from banks, employers, and third parties and what you reported.
A CP2000 is not a formal audit; it’s a proposed adjustment to your tax liability. It lists the discrepancies and gives you 30 days to agree or dispute the adjustments with supporting documents.
For example, if your 1099-MISC shows $12,000 in freelance income but you reported $10,000, the IRS will propose taxing the $2,000 difference plus penalties.
CP75 Notice: Request for Documentation
If you’ve received a CP75 notice, the IRS simply needs proof for verification for refundable credits such as the Child Tax Credit or the Earned Income Tax Credit (EITC).
This notice requires you to submit supporting documents, such as proof of residency, birth certificates, or school records, to substantiate eligibility.
For example, if you claimed a dependent and the IRS can’t confirm the relationship, they might request a custody arrangement or a birth certificate. If you don’t respond to a CP75 notice, the IRS denies you the credit.
Letter 525: Examination Notice
The IRS sends you a Letter 525 to notify you that specific sections of your return are under review or that your entire return is under review. You might be required to provide additional documentation to help with the process.
For example, if you deducted $40,000 in unreimbursed employee expenses, the IRS might ask for a written explanation, receipts, and mileage logs to validate the costs. The letter indicates whether the audit is a filed audit (in person) or a correspondence audit( by mail).
Letter 566: Audit Interview Scheduling
The IRS sends Letter 566 to schedule an in-person or phone interview to discuss a tax return. This audit type is commonly used for complex audits involving rental properties, self-employment income, or multi-year discrepancies.
For example, as a business owner, the IRS might send you a Letter 566 to clarify inventory accounting methods or payroll tax filings. The Letter 566 includes a proposed time, date, and a list of documents to bring to the meetings; you are allowed to reschedule if the timing is inconvenient.
What should I do when I get an Audit Letter?
Here are the steps to take once you receive an IRS audit letter for a better outcome:
Confirm the Audit Letter’s Authenticity
Before you decide what your next step is, first confirm that the audit is really from the IRS. There’s always a chance it’s a scammer trying to get your personal information.
Here’s how to verify your audit letter, especially if you don’t know what one looks like:
- Confirm the letter number is on the IRS’s official notice list at IRS.gov.
- Call the IRS directly at 800-829-4933 (businesses) or 800-829-1040 (individuals).
- Log in to your IRS online account to review digital copies of notices.
If you’re receiving unsolicited calls and emails, demands for immediate payment, gift requests, and wire transfers for payments, involve a professional.
Review and Understand the Letter
After confirming the letter is legitimate, the next step is to review the contents of the audit letter, as they’ll define your response.
Here are some of the crucial details of your audit letter:
- Letter number: What’s the notice type ( e.g., Letter 566)? This number will highly influence your response strategy. It indicates why the IRS is auditing you.
- Tax year: What tax return is under review?
- Deadline: What is your deadline? Missing a response date can waive your appeal rights.
Gather Documents
To defend yourself, during an audit, you’ll need documents showing everything you claimed on the return in question.
The documents you need vary depending on the specific items the IRS is auditing you for. Here are the documents you’ll need for common audit triggers:
- Receipts: All receipts proving what you spent money on for business expenses or personal deductions.
- Bills/invoices: Prove you paid the bills you claim you paid through credit cards, ATM, debit card receipts, or actual bills or invoices for which you claimed deductions.
- Canceled checks: Gather all canceled checks you’ve written to pay for renovations, payments for charity organizations, tax payments, alimony payments, or whatever else the IRS wants to see.
- Employee documents: This includes W-2 reimbursement statements, timesheets, proof of payments, etc.
- Legal documents: This depends on what applies, which could be birth certificates, custody agreements, divorce settlements, civil defence papers, etc.
Prepare Your Audit Response
Now that you all have all your supporting documents, draft a clear, factual response addressing the specific points of an audit letter. Here are some tips on writing an audit letter response:
- Address your recipient correctly and respectfully – remember this is their first impression of you.
- Structure your information for clarity – state your letter’s purpose, followed by a concise explanation, and use numbered lists, bullet points, and short paragraphs for easy reading.
- Use precise language – vague or ambiguous language can increase the chance for misunderstandings.
- Maintain professionalism – use respectful language, and avoid being overly emotional in your letter.
- Provide adequate context – ensure the recipient understands the scope of the response.
Submit Your Audit Response
After preparing your response and gathering documentation, submit your response to the IRS by the specified deadline. For the documents, only submit copies, no originals.
The standard submission method is by mail with a return receipt requested to prove your response was sent and received by the IRS. Some IRS notices may have an online submission option. Regardless of the method you use, keep copies of everything you send to the IRS for your record.
Common Mistakes to Avoid When Responding to an Audit Letter
Now that we’ve discussed the dos of responding to an IRS audit, it’s essential to discuss what to avoid. Here is what not to do:
- Ignoring the notice: Ignoring the audit letter won’t make the audit go away; it could lead to bigger problems. Failing to respond or to provide requested documentation or missing deadlines can result in additional penalties and complications.
- Arguing and being hostile: An audit can make your emotions run high, but hostility towards an auditor is counterproductive. Be polite and express your concerns calmly.
- Signing without understanding: Only sign what you understand; otherwise, you’ll end up with implications you can’t undo.
When to Involve a Tax Attorney In Your Audit Case
While in some cases, you may want to represent yourself. Here are some instances when getting counsel is advised:
- You’re not familiar with tax laws: If you don’t have even a basic understanding of the tax laws and regulations regarding your situation, it’s best to include a professional. Knowledge of tax laws helps in communicating effectively with the IRS agent. Understanding tax laws also ensures you know your rights as a taxpayer during the auditing process.
- You’re being questioned about income reporting: If the IRS believes you’ve been significantly underreporting your income, it’s advisable to consult with a tax attorney.
- You’re being audited for multiple years: Having the IRS look into multiple years means this could be a serious matter, and it’s best to involve a professional.
- You’re facing fraud allegations: The IRS has harsh consequences for tax fraud. You’re better off with an attorney if this is why you’re being audited.
Working with a professional during an audit means better representation, which significantly improves your outcome.
At Wiggam Law, when you approach us, we first investigate to prevent further escalation of any kind, then strategize and execute our plan to resolve the matter. Despite having seen thousands of audit letters, we take our time with each of our clients to ensure we get them the best outcome suited to their situation.
Frequently Asked Questions (FAQs)
Can I handle an audit myself?
Yes, if the audit is straightforward (such as a correspondence letter), you can handle it yourself. Gather the supporting documents, organize them, and respond on time. For complete audits, we recommend seeking professional help to ensure you answer correctly and protect your rights.
How long does an audit last?
It varies; correspondence audits take a few months while field and office audits can take longer, depending on how complex the audit case is. Timely and complete responses to the IRS requests help speed up the process.
What happens at the end of an audit?
Once you’ve responded, expect at least 30 days before getting a response from the IRS. At that point, the results can vary depending on the findings. The IRS can decide there’s no change in your file return or ask for more documents. You can also get an added tax bill, which you can agree to and pay or disagree with and appeal.
Do You Need Help Responding to Your IRS Audit Letter?
At Wiggam Law, we help handle all the complexities and hardships that come with being audited. We deal with our clients with empathy because we understand the emotions that come with being audited. We also understand tax laws, so we ensure our clients’ rights are being observed throughout the auditing process.
Besides communicating and negotiating with the IRS, we help evaluate all your best outcomes. We don’t leave until you’re in the clear and know how to avoid another editing process. If you just received your notice, contact us today and let us support you.