If you just received a letter from the IRS, you may be freaking out and envisioning the IRS breaking down your door – swat team in tow – to raid your house for valuables to satisfy your tax debt. Before you shred the letter in hopes it will magically disappear forever, take a moment to educate yourself on what’s going on and what the IRS letter actually means.
Understanding why the IRS is contacting you can help expedite the process and get the IRS out of your life as quickly as possible. Furthermore, understanding the correspondence will help you decide whether it’s necessary to enlist the services of a tax attorney.
In some situations, the IRS sends correspondence after an audit without any prior communication. Alternatively, the IRS correspondence may serve as notice that they are planning to audit your return.
The following explains various types of audit letters and notifications:
- IRS Form 566(CG): Correspondence Audit. A correspondence audit is requested when there are questions regarding specific items on your tax return. This is the most common type of audit, and is conducted by correspondence with the IRS through the U.S. Mail. This type of audit is triggered by the IRS computer systems when there is an error in computing the tax contained within the tax return itself. This is usually due to a mathematical error on the tax return, and you will be either issued a refund or assessed additional tax accordingly. The IRS may also request through Correspondence Audit additional information or documentation from you to substantiate such items as income, deductions, credits, and expenses claimed by you on your tax return.
- IRS CP 2000: Automatic Adjustment Notice. In most cases, this letter from the IRS is simply a Request for Information. It will contain a proposed change to your income tax return which may propose that you owe additional tax. This proposed change is generated by a “matching error,” which is a discrepancy between information you provided on your tax return and information provided to the IRS by other sources. The IRS compares the income, payments, credits, and deductions you provide on your tax return with the information your employers, banks, businesses, and other payers report to the IRS. If the information you provided on your tax return and the information provided by other sources do not “match,” then the IRS sends the CP 2000 Letter. This letter proposes any corrections and changes in the amount of your tax liability based upon the information provided by other sources. If you agree with the proposed changes to your return, then you can accept the changes by paying the amount of tax owed. However, if you do not agree with the proposed changes, you may provide documentation to the IRS to prove or explain any discrepancies which triggered the changes. If you do not respond to the CP 2000 Letter, the IRS will treat the proposed changes as correct and continue to assessment of the additional amount of tax in the proposal. For a step-by-step guide to answering questions concerning the CP 2000 letter, see the IRS website: http://www.irs.gov/individuals/article/0,,id=136857,00.html
- IRS Form 3572: Audit at the IRS Office. These types of audits are usually directed at self-employed persons and small businesses. This type of audit requires the taxpayer to gather and provide requested information and documentation at a meeting with a field agent at the local IRS office. This type of audit is usually conducted to allow a taxpayer to prove certain deductions, credits, or business expenses. In this situation, it is the duty of the taxpayer to provide documented proof of any item questioned by the IRS.
- Field Audit. This type of audit is the most comprehensive form of IRS audit, and is most common for businesses. In conducting this audit, the IRS will send field auditors to the business owner’s home or business and conduct an on-site examination of the business’ records. The field auditors’ main objective in a Field Audit is to determine whether your deductions are accurately stated on your tax return. Usually the field auditors not only inspect business records, but also the business facility and physical items claimed as deductions, expenses, etc. Field Audits usually require several visits from the auditors and are the most complex and difficult to resolve.