IRS Notices: An Audit by Another Name
Most taxpayers fear IRS audits, but taxpayers more than twice as likely to get audit-like notices
Taxpayers fear IRS audits, with 59 percent reporting it influences how they report their taxes, but the IRS has another way of challenging tax returns to collect additional revenue: notices that are like an audit. In fact, taxpayers are 2.5 times more likely to receive one of these audit-like IRS notices rather than face an actual audit.
There are 1.4 million IRS audits each year, but last year there were 3.7 million IRS notices regarding underreported income. That’s just a small portion of the overall 178 million IRS notices sends annually.
More taxpayers will continue to receive IRS notices as IRS systems can now comb through billions of information statements and automatically send notices when it detects information that doesn’t line up with a tax return.
Whether an IRS audit or an IRS notice, the impact on the taxpayer is the same: the taxpayer’s return faces scrutiny, with a high probability of a change, in a process that takes several months to complete and can result in additional tax, penalties and interest.
“In an audit or with a notice, the IRS may request additional information or paperwork. So it is very important to be ready and able to back up what is on your tax return. Responding on time could mean the difference between owing extra tax or successfully defending your original return,” said Kathy Pickering, executive director of The Tax Institute at H&R Block.
What a taxpayer should do when contacted by the IRS
Audits and notices can happen at any time of the year, not just during tax season. It could be very soon after filing a return or as late as three years from the filing date. Taxpayers who have their documents organized and accessible will have an easier time meeting deadlines and defending their return.
“Responding to an audit or notice means understanding what is being asked of you and providing that information only,” Pickering said. “Taxpayers should work with the IRS when it requests more information or initiates an audit. Ignoring the IRS will only make the situation worse.”
- Act quickly. Taxpayers who hear from the IRS – which will happen by mail initially, never by phone – should take action as soon as possible. Delays could result in additional penalties and fees.
- Assess the situation. Resolving some notices or audits may be as simple as sending supporting documentation to the IRS. In other cases, the process may be more complex, with the most onerous audits requiring face-to-face meetings with the IRS. Taxpayers should research their IRS notice to learn more about their issue.
- Know when and where to get help. Tax professionals can help resolve the audit, apply for penalty relief or help figure out a payment plan. If a face-to-face meeting is required, enrolled agents can represent the taxpayer before the IRS.
Report all income, document expenses and eligibility
The surest way to get a letter from the IRS is to not report all income. A document-matching program makes it easy for the IRS to check income reported on tax returns against what is reported by employers, banks, brokers, etc.
The IRS also compares deductions taken by taxpayers in the same income bracket to find inconsistencies in areas including mileage and charitable donations. Taxpayers should carefully document their expenses and eligibility for any tax credits or deductions they take. Those who made large donations, particularly non-cash donations like clothing, household supplies or even vehicles, may have additional record-keeping requirements to substantiate those deductions.
Taxpayers shouldn’t grow complacent in their record keeping and reporting. While the chances of an IRS audit are slim, many more millions of taxpayers will still go through a very audit-like process with the validity of their return on the line.
Penalties for not filing a tax return or not paying taxes are well-known, but there are many more tax penalties. Knowing how to avoid them when possible, and minimize them when unavoidable, is key.
Learn what to do if you received one of the more than 4 million CP14 balance due notices the IRS is sending this summer.