IRS audits can be stressful enough without having to decipher the meaning of the letters and correspondence the IRS will send you throughout the audit process. Especially when some of these letters carry with them time sensitive deadlines, and failing to meet them will cause you to lose your legal rights. For IRS audits, there are a few different types of letters the IRS sends depending on how the IRS will conduct (or conducted) your audit. Below are some of the most common IRS audit letters I’ve seen my clients receive during my many years of being an IRS tax attorney.
Notice of Audit and Examination Scheduled – The IRS will send you this standard notice to inform you that you will be audited and the IRS want to meet with you to discuss your tax return.
IRS Letter 525: General 30 Day Letter – The IRS will send you this letter to inform you that the IRS is proposing an adjustment to your IRS tax return. Many times, these letters are send when a mathematical error has been discovered by the IRS’s computer network. After thoroughly reviewing the IRS letter 525, if you agree with all the proposed changes then you should sign and return the form where indicated. In the event you disagree with the proposed changes outlined in the IRS Letter 525 you can appeal them with the IRS office that sent you the letter.
IRS Letter 531: Notice of Deficiency – The IRS will send you this letter to inform you that you owe additional tax for the tax year(s) identified in the letter. You can either agree and pay the tax (or work towards setting up an IRS payment plan) or file a petition with the US Tax Court within ninety (90) days from the date you received the IRS Letter 531. THIS IS AN EXTREMELY IMPORTANT LETTER. DON’T IGNORE YOUR NINETY (90) DAY RIGHT TO APPEAL TO THE US TAX COURT.
IRS Letter 692: Request for Considering of Additional Findings – The IRS will send you this letter, accompanied by a computation report, detailing the proposed changes made to your IRS tax return. After thoroughly reviewing the IRS Letter 692, if you agree with all the proposed changes then you should sign and return the form where indicated. In the event you disagree with the proposed changes outlined in the IRS letter 692, you can appeal them with the IRS office that sent you the letter. YOU MUST RESPOND QUICKLY TO THIS LETTER IF YOU DISAGREE. Within fifteen (15) days from the date of the IRS Letter 692, you must file your appeal with the IRS Office of Appeals.
IRS CP 2000 Notice: Automatic Adjustment Notice – The IRS will send you this standard notice letter to show you there are proposed changes to your IRS tax return. These letters are sent when the IRS’s computer network determines that their records of your income, deductions and credit information don’t match the information reported on your IRS tax return. After thoroughly reviewing the IRS CP 2000 Notice letter, if you agree with all the proposed changes then you should sign and return the form where indicated. If you disagree, you must submit an appeal request to the office that sent you the IRS CP 2000 Notice letter. YOU MUST RESPOND QUICKLY TO THIS LETTER IF YOU DISAGREE. Within thirty (30) days from the date of the IRS CP 2000 Notice letter, you must file your appeal with the IRS Office of Appeals.
IRS Letter 915: Letter to Transmit Examination Report – The IRS will send you this letter to inform you that there are changes to your tax amount. After thoroughly reviewing the IRS Letter 915, if you agree with all the proposed changes then you should sign and return the form where indicated. YOU MUST RESPOND QUICKLY TO THIS LETTER IF YOU DISAGREE. Within thirty (30) days from the date of the IRS Letter 915, you must file your appeal with the IRS Office of Appeals.
IRS Letter 950: 30 Day Letter Straight Deficiency or Over Assessment – The IRS will send this letter to you after IRS field audits covering many types of IRS taxes. The IRS uses this letter for un-agreed, straight deficiency, straight overassessment or mixed deficiency and overassessment cases. After thoroughly reviewing the IRS Letter 950, if you agree with all the proposed changes then you should sign and return the form where indicated. YOU MUST RESPOND QUICKLY TO THIS LETTER IF YOU DISAGREE. Within thirty (30) days from the date of the IRS Letter 950, you must file your appeal with the IRS Office of Appeals.
IRS Letter 3391: 30 Day Nonfiler Letter – The IRS will send you this letter, accompanied by a computation report, if it believes you owe taxes from unfiled IRS tax returns. The letter includes proposed changes to your tax liability. After thoroughly reviewing the IRS Letter 3391, if you agree with all the proposed changes then you should sign and return the form where indicated. YOU MUST RESPOND QUICKLY TO THIS LETTER IF YOU DISAGREE. Within thirty (30) days from the date of the IRS Letter 3391, you must file your appeal with the IRS Office of Appeals.
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For nearly 20 years I’ve represented countless individuals and businesses with IRS audits of their tax books and records. IRS audits can be very serious tax matters, and their objective is to confirm the accuracy of the tax reported on filed IRS tax returns. In most of the IRS audits that I’ve represented clients, the IRS tax debt has ranged from the tens of thousands of dollars to tens of millions of dollars. Many people, though, are surprised to learn that no matter the size of the dollar amount of an IRS audit, many of the same rules, regulations and procedures apply. Therefore, I want to share with you some of my general experiences and observations regarding the IRS audit process. While IRS audits can be extremely stressful, and for some clients they are truly terrifying events, my experience has taught me that by understanding the rules and procedures governing IRS audits as well as BEING VERY THOROUGHLY PREPARED, there usually is reason to be optimistic about the outcome. Believe it or not, being selected by the IRS for an audit doesn’t necessarily mean that you will owe any money when it is completed. On many occasions, there have been no changes made to taxes owed and sometimes it is even determined that refunds due.
Why was my tax return selected by the IRS for an audit?
Two of the most common questions I’m asked by individuals and businesses contacting my office are: “Why am I being audited?” and “Why was my tax return picked by the IRS?” These are great questions and my usual answer is that “it depends”. Tax returns are selected by the IRS “lottery process” for several reasons. My experience has been that clients are selected for audit by the IRS because of either of three (3) distinct reasons:
1. A clear majority of all IRS tax audits are determined by the IRS’s internal computer network. I commonly refer to this internal computerized selection process as the “secret sauce” used by the IRS. The IRS's computer systems score tax returns based on the statistical probability that they were filed with inaccurate information. While the algorithms used by the IRS computer systems are closely guarded secrets, we do know a few things about the following IRS computer systems and programs:
IRS Discriminant Function System (DIF): The IRS states in Publication 556 that it uses a computer system called the Discriminant Inventory Function System (DIF). This IRS computer system scores each filed tax returns based on the statistical likelihood that the tax return is accurate. The higher the “DIF” score a tax return receives, the greater the likelihood that the tax return will be audited by the IRS.
IRS Unreported Income Discriminant Function (UIDIF): This IRS computer system scores tax returns differently than the DIF system. It rates tax returns on their potential to have unreported income, utilizing expense and income ratios of the filers. If someone reports spending more in expenses than is being earned, it might be possible that more money is being earned than is being reported. Of course, this type of predictive model, in and of itself, can be inaccurate because many clients have fluctuating income each year and spend funds from savings and/or loans, etc. Many times, by explaining the income and expense differences (and providing supporting documentation), these IRS audit concerns can be overcome without too much difficulty. Specifically, however, the IRS typically targets four (4) areas when considering an IRS audit this system: (a) high income, high risk taxpayers, (b) high income non-filer taxpayer, (c) high amounts of itemized deductions, and (d) self-employed taxpayers.
IRS Information Returns Processing System (IRP): This IRS computer system receives and stores vast amounts of data submitted by employers and other third parties (payers) reporting income paid during the tax year, such as wages, bank interest, investment dividends, pension payments, etc. Third-parties such as employers, financial institutions, government agencies (such as the Social Security Administration), and other organizations are legally required to report payment information to the IRS. This type of information is reported to the IRS on various forms and secludes, as Form 1096, Form 1042, Form 1098, Form 1099, Schedule K-1, Form 5498, Form 8300, Form 8362 and W-2s.) The IRS matches the information reported on filed tax returns against the information reported to it by employers and other third parties to ensure the information reported to the IRS on filed tax returns is complete. This IRS computer system is used to identify those who have not filed their IRS tax returns or likely have underreported their income on their filed tax returns.
2. Audits of Related Businesses: Many times the results of one audit will drive additional new audits being opened. This is commonly seen when the IRS audits tax returns that report transactions involving other taxpayers, such as business partners and/investors, and it is determined that the tax returns are problematic. In these situations, it is common for the IRS to open audits on other tax returns involving these same business partners and/or investors. It is also very common for audits of individuals and businesses who pay for services or products in cash, for the IRS to open audits on tax returns for those individuals and businesses to determine whether those cash payments were properly reported.
3. Incriminating Documents Provided to the IRS: I’ve also represented clients whose tax returns were selected by the IRS for audit because incriminating documents were provided to it about questionable tax reporting. These types of IRS audit cases arise from many beginnings, such as IRS unrelated investigations and IRS audits against third parties for questionable tax reporting practices. For example, a few of these types of IRS audit cases I’ve seen have arisen from (a) IRS investigations of unscrupulous tax return preparers and/or tax shelter promoters who were required by a court to turn over the names of their clients, (b) federal government agencies (other than the IRS) examining the business practices of individuals and determining the IRS should be notified of possible tax reporting problems, and (c) incriminating evidence provided to the IRS by informants (whistleblowers) reporting individuals and businesses for not paying taxes that they legally owe in the hope of receiving an award.
Different Types of IRS Audits
Once your “number has been picked” for an IRS audit, the process begins to contact you and request additional information about what you reported in your IRS tax return. In this process, you will be notified in writing, by either being mailed or delivered a letter, that your tax return has been selected for an IRS audit. IRS audits are conducted by the IRS using one of these three (3) different methods:
1. IRS Correspondence Audit: By far the most common method of audit performed by the IRS of tax returns is conducted solely by mail. In these audits, the IRS will request specific documentation to support items on your tax return.
2. IRS Field Audit: Unlike an IRS correspondence audit, this audit method involves an IRS representative wanting to come to your home and/or you place of business to perform the audit. BE VERY CAREFUL! Usually there are no legal requirements that you allow for the anyone with the IRS to enter your home or business. I usually advise against it! IRS audits of my clients’ tax returns are conducted in my office's conference room.
3. IRS Office Audit: This IRS audit method requires you (or your IRS representative) to personally appear at the IRS and meet with an IRS auditor. You must bring with you for that meeting all the documents the IRS requested in the audit notice letter you received, as well as anything else you believe will help substantiate what was reported on your tax return.
Life after an IRS audit: Is it over?
One of the great things about the laws protecting taxpayers is that no one can be forced to agree with the results of an IRS audit with first the chance to dispute and/or appeal the findings. After completion if the IRS audit, you will be provided IRS Form 4549, which details the charges to your IRS tax return being proposed because of the audit. Interest and penalties will usually also be included if the proposed audit determination finds taxes are owed. If this report shows that the IRS has determined you must pay more in taxes (or you disagreed with the proposed refund amount), you may either approve or disapprove the findings.
Approval of IRS Form 4549 Audit Findings: You must sign the accompanying IRS Form 870, Consent to Proposed Tax Adjustment, if you agree with all the proposed changes, and return to the IRS with it a copy of IRS Form 4549.
Disapproval of IRS Form 4549 Audit Findings: If you don’t approve of the proposed changes to your IRS tax return listed on IRS Form 4549, the you have 30 days to do any of the following:
1. Provide the IRS any additional documents necessary for consideration supporting your disapproval;
2. Request to discuss with the IRS auditor the audit findings and, also if necessary, provide additional documents necessary for consideration supporting your disapproval.
3. Request a meeting with the IRS auditor’s group manager or senior manager to discuss the reason(s) for your disapproval.
Request an appeal: In the event your reasons for disapproval are rejected and are unable to resolve any disagreements with the IRS auditor, then you have the legal right to appeal the IRS audit determination. The timing of your appeal is very important. You will have 30 days from the IRS notifying you that no changes will be made to properly file an appeal of the IRS’s audit findings in IRS Form 4549. Missing that deadline will result in the IRS audit changes becoming final.