When taxpayers think of an IRS audit, many still think of going into an IRS office with all of their paperwork and sitting down with an IRS employee. They picture a tense situation, with the taxpayer bringing boxes of paper and being interrogated by the IRS employee.
In reality, that’s not what most audits are like today. Most audits conducted by the IRS are Correspondence audits. A correspondence audit is an audit which is conducted entirely through mail, although the taxpayer may have phone discussions with the IRS and/or fax information if they choose to do so. It is considered the lowest level of the IRS audit, and typically revolves around non-complex and lower dollar tax issues.
What tirggers an Audit?
First, let’s discuss how is a return selected for audit? The IRS attempts to identify returns with a high potential for a tax adjustment using the following factors:
- Results of prior audits.
- Third party information including W-2’s and 1099’s.
- Entries on the return itself that are either conflicting or are outside of the norm.
The Types of Audits
When one of these situations flags a tax return for audit, an audit is triggered. Audits can be field or office audits, or correspondence audits. What determines if the IRS will complete a Correspondence audits vs. a field audit?
- Correspondence audits have a defined scope – single or limited audit issues.
- The audit is Generally less complex.
- The focus is on documenting specific tax return entries to verify accuracy.
The Correspondence Audit
While Correspondence Examination Issues can be wide ranging, they typically involve:
- The Earned Income Tax Credit
- Schedule A Itemized Deductions including Employee Business Deductions and Charitable Contributions.
- Schedule C Entries
- Non-filing conditions where the taxpayer did not file, but should have. This is typically based on 3rd party information IRS receives.
How to Handle a Correspondence Audit
If you have been selected for a Correspondence Audit, here are some key points in effectively handling one effectively:
- Respond to notices timely.
- Ask for additional time if needed by contacting the IRS by phone or mail.
- Provide complete and organized responses. Send copies and keep originals.
- Fax or mail (certified receipt return) documentation to address on the envelope provided. Provide response page (form notice) on top of the documentation so the IRS processes it properly.
- Work with the IRS to resolve issues. In most cases, the IRS is trying to resolve the issue fairly.
- If you are unable to resolve the issue, request a call with the Manager. If you are still unable to resolve the issue in a fair manner, request an appeal.
- Audit reconsideration is available if new information becomes available at a later date (Pub 3598 outlines the process)