You check your mail and find a tax letter from the IRS–but you’re not expecting a refund. This letter is most likely either a tax notice or an audit notification. Though these two types of IRS correspondence can often be confused, they each come with different implications and action items. So what is the difference between these two forms of notifications, and how can you ensure you’re responding to your letter accordingly?
TAX AUDITS
A tax audit notification occurs when the IRS makes a determination to examine the details and support for the items of income, deductions and credits reported on your tax returns in comparison to other support documentation received by the IRS to ensure that the income, deductions and credits reported are accurate. The IRS chooses a taxpayer’s return for audit based on random selection, computer screening or related examinations. Random selection and computer screening complement each other in the selection process, as these methods select the taxpayer for audit based on a comparison of the taxpayer’s returns to similar returns. This is done by means of a search for certain norms determined by the IRS National Research Program. Additionally, the taxpayer’s return can be selected because the taxpayer does business or engages in certain transactions with other taxpayers who are being audited. If the taxpayer files an amended tax return, the amended return then gets screened through the audit selection process independently of the original return filed; thus the screening processes for the amended return and the original return do not impact one another. States can also select a taxpayer for audit, though their procedures may differ some from those of the IRS.
After a taxpayer’s return is selected for auditing, the IRS will notify that taxpayer by mail that he or she is being audited. Please be aware that an audit by the IRS will never be initiated via telephone. Taxpayers often fall victim to scams by releasing personal information over the phone to scammers posing as IRS employees. The IRS audit letter contains instructions regarding the audit and provides contact information for an IRS representative. The IRS can conduct the audit one of two ways: either by mail, in which case the taxpayer mails all requested documents to the specified IRS office, or by an in-person interview. In the second scenario, the IRS reviews the taxpayer’s records at an agreed location such as the taxpayer’s office, an IRS office or—in some cases—the office of the taxpayer’s accountants.
An IRS audit can conclude in a number of different ways. The first such outcome would be no change to the income tax liability, no additional refund to the taxpayer, no denial of a refund, denial of credits or assessment of additional taxes, penalties and interest. If the taxpayer agrees with the audit results, the taxpayer signs an examination report and complies with the agreement on the report. If the taxpayer does not agree with the audit results, however, the taxpayer has the right to appeal the audit results with the IRS or through the court system.
What Records Can be Requested by the IRS?
The types of taxpayer records that can be requested by the IRS are determined by the income, expense or deduction that is being audited. For example, if the IRS is auditing the sale of a building, a request can be made for a copy of the closing documents. An audit can span back several years, and does not always relate to the last tax return filed. Therefore, it is recommended that all taxpayers keep their tax records supporting items of income, credits and deductions claimed on their tax returns until the statute of limitations for auditing the return has ended. In many cases, the statute of limitations is generally three years–however, this period can be extended several years based on certain circumstances such as type of transaction.
Additionally, some taxpayers may need to keep their tax records indefinitely if certain situations apply, because there is no statute of limitations for some cases. This includes scenarios such as a taxpayer never filing a tax return for a given tax year. If you cannot find your tax records, the IRS will make a determination based on the information in its system—so be sure to keep your records secure and accessible to yourself.
TAX NOTICES
A tax notice, unlike an audit notification, typically acts to alert the taxpayer that there is an issue of some kind with a tax return that has been filed. Often this notice will provide a proposed adjustment to the tax return and will give the taxpayer an option to respond by a certain date if the taxpayer disagrees with the proposed adjustment amount. If you receive such a notice and are in disagreement of the proposed adjustment amount, you can respond to the notice by calling the IRS or sending a letter of response to the IRS along with supporting tax documentation for the position you have taken on the return. IRS tax notices are frequently for simple discrepancies such as differences in estimated tax payment records, calculation corrections on a tax return or amounts that the IRS has records of for forms such as 1099s or Schedule K-1s that do not agree with the amounts on the taxpayer’s return.
Where can I find help?
The most important thing to remember as a taxpayer is that if you receive an audit notification or a tax notice from the IRS (or any state), you should contact your trusted tax advisor. Do not be alarmed if you receive such correspondence and risk a delay in notifying your tax advisors; the sooner you notify your accountant, the sooner the response process can begin. Tax notices and audit notifications are usually time sensitive, and certain actions must be taken by the deadline provided on the correspondence.
FOR MORE INFORMATION
Correspondence from the IRS can often be confusing, but our experienced staff here at FF&F will act as your trusted advisors to assist you in appropriately responding to any such correspondence. If you have received something from the IRS and are unsure about what steps you should be taking to respond, or for more information about our services, please contact us at info@fffcpas.com or (212) 245-5900.
Aneisha Desouza, CPA, MST, is a Tax Manager at Farkouh, Furman & Faccio with over 12 years of experience in public accounting. Throughout her public accounting carrier, Aneisha has worked with clients in the manufacturing, real estate, healthcare services, and marine transportation industries. She has expertise in various tax areas related to large multinational and multistate corporate and partnership tax returns.