IRS Audit | Is It a Tax Notice or Audit?
A letter from the IRS can produce a range of feelings from dread to annoyance and irritation. Most of the letters from the IRS are computer-generated tax notices. They’re sent to correct a minor discrepancy between the information the IRS received from you, usually via your tax return, and its records. Receiving a tax notice is different from receiving a letter informing you that your taxes are being audited.
Tax notices often suggest a correction to your return according to the information the IRS has on file and levying additional tax, interest, and/or penalties (or in some cases, increasing your refund). Consequently, these tax notices can appear to be definitive, but this is not the case.
The IRS just wants you to resolve the discrepancy. So, the tax notice letter provides a format that (1) encourages you to respond, where the IRS information is incorrect, and (2) offers you a simple solution, where the IRS’s information is correct.
Letters Informing You of a Tax Audit
Much less common are notices informing you that your taxes are under “examination,” which means your tax returns are being audited.
IRS tax audits often focus on unusual ratios of income to deductions or on frequently abused areas, such as self-employment expenses or net operating losses. You can tell the difference between a tax notice and a letter informing you of an audit by a few distinguishing features (see the table below).
Regardless of the type of correspondence you’ve received from the IRS, you need to reply. For decades we’ve guided clients through successful audits and responses to tax notices.
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Is it a tax notice or a letter informing you of a tax audit?
|Tax Notice Letter||Tax Audit Letter|
|How common?||Very common||Less common|
|Purpose?||The inquiry seeks to resolve a minor error or discrepancy||An audit is a request for detailed substantiation of one or more amounts reported on your tax return.|
|How is the letter generated?||Computer-generated letter||Mix of computer selection and human review to identify a taxpayer for audit.|
|Distinguishing features?||The term “notice” in the upper right corner of the first page
There is a generic IRS contact number to call should you have questions.
|The term “exam” or “examination” in the upper left corner of the first page.
There is a name and specific contact number for the IRS examiner assigned to your case.
|There’s a summary of proposed changes on the first page, followed by an explanation of the proposed changes on subsequent pages.||This letter also begins by saying the IRS is examining your return and will identify the items under scrutiny.|
|There are instructions at the end to indicate what you should do if you agree or disagree with the proposed changes.||There are instructions for how to respond to the exam, including forms or a list of documentation that you must complete or provide in order to fully respond to the exam.|
|How to resolve the matter?||A notice may be resolved either (1) by providing evidence that the discrepancy is due to incomplete or incorrect information in the IRS’s records,
(2) by acknowledging that the IRS’s records are correct and accepting the IRS’s revised calculation of your tax, interest, and/or penalties.
|It can only be resolved by providing official documentation to substantiate those amounts.|
Whether you’re an existing client or a new client, we can help you resolve an IRS tax situation. Also, other tax professionals commonly refer clients to us who have an international aspect to their tax situation.
Our services include:
- Responding to and resolving tax notices with the IRS and states
- Obtaining Powers of Attorney for Tax Matters, which enable us to interact directly with the tax authorities to resolve the notices
- Preparing amended income tax returns, when needed, to submit with the tax notice response
- Audit support for full-scale audits and examinations
- Audit support for audits of Streamlined Filings
- Audit support for audits of Cryptocurrency
- Audit support for audits of Repatriation Tax Calculations
What is tax audit insurance?
One of the special benefits we offer our clients is audit insurance for their current-year tax returns. It is available in most cases, and it covers up to 5 hours of professional staff time to resolve tax notices and audits. Many of our clients appreciate the peace of mind the insurance offers. If they receive an IRS or state tax notice or are audited, we assist in deciphering the letter, explaining the options and implications, and interacting with the taxing authorities to get the matter resolved as expediently as possible.
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Frequently Asked Questions about IRS Letters
If you agree with the proposed changes in the notice, you can follow the instructions and accept the changes quickly.
If, however, you disagree with the proposed changes, the process takes longer. From the time you respond to the notice, you can expect a turnaround time of approximately 8 to 12 weeks, per the IRS. If the IRS has a backlog, it will send you a letter indicating the additional time that it will take to respond (typically an additional 30 to 60 days).
Tax notices are generally issued for the following reasons:
- Payment discrepancies
If you make quarterly estimated tax payments, extension payments, or payments of balances due, the IRS records those payments in your account. However, we commonly see cases in which the IRS has cashed a check but has not credited the payment to an account. We also commonly see cases where individuals have reported a different amount of payments on their return from what was actually paid.
- Assessment of interest and penalties
The IRS charges interest (and penalties, in certain cases) on any balances due that are paid after the April 15 filing deadline. Unfortunately, if you file an extension, this only extends the due date for your tax return, not the due date for paying any tax you might owe. Thus, if you file a return after April 15 and that return shows a balance due, you will owe interest on that balance.
Since the IRS assesses daily interest charges, the exact interest charge is not fixed until the IRS processes your return and credits your payment. Therefore, you may receive a notice from the IRS with the exact calculation of interest and penalties. The notice will reconcile the final amount of tax, interest, and penalties with the amounts that you have paid and then will request or refund the difference.
- Adjustments from prior years
If there were changes to one of your prior-year returns (either from an earlier tax notice or from an amendment), those changes could have a domino effect and affect the carryovers or calculations on your current-year return. We frequently see cases where the IRS levied interest or penalties on a prior-year return and since it did not receive payment of the interest and penalties, it took them out of an estimated payment amount intended for the current year.
- Income discrepancies
When you earn wages, interest, dividends, or other income, the payer of that income will generally send both you and the IRS a copy of your W-2, Form 1099, or other tax statement to report payment of the income. When the IRS receives your tax return, it will then attempt to confirm that you have reported those income amounts on your return. If the IRS is unable to clearly identify an income item on your return, it will issue a notice to resolve the discrepancy.
Why The Wolf Group?
Since 1983, we’ve worked with clients in the United States and abroad on international tax matters. We have a long history of “cleaning up” complex tax returns, reporting foreign assets, and reconstructing financial records.
Check out our extensive team of CPAs, all with vast international tax experience.
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