The IRS is the U.S. federal agency that is responsible for tax collection and tax law enforcement. Basically, they collect the money necessary for the government to run. The first income tax was assessed in 1862 to raise money for the Civil War. Today the IRS collects more than $3.5 trillion from U.S citizens each year.

The tax audit is the primary means by which the IRS double checks the consistency of submitted tax returns. The full auditing process comprises several steps:

• IRS finds potential discrepancies or omissions in your tax return(s)
• The IRS random computer screening selects you as the subject of an audit
• Depending on the selection method and the nature of your tax return(s), you receive a series of audit notices and letters
• You respond to the audit by mail or in-person interview
• Based on the audit’s outcome, you receive a determination that may require you to pay more tax
• You agree or disagree with the audit findings and take the appropriate next steps

If you receive an audit notice or letter, you should not automatically assume that you will be forced to pay additional taxes or subjected to penalties, fines or other punitive measures. However, you must understand how to anticipate and respond to the auditing process. Ultimately, the content of your response and your overall preparedness for your audit will play a critical role in its outcome - and your final tax liability.

Why the IRS Sends Audit Notices and Letters

The IRS sends a variety of notices and letters. Not all of these documents relate specifically to audits or tax return discrepancies. You may receive a notice or letter from the IRS for the following reasons:

• Notifications of account changes in which taxes due or refund amounts increase or decrease
• Requests for timely payment of taxes due
• Requests for additional information about your tax return that could result in an account change

As the IRS itself notes on its website, most of these reasons are fairly straightforward. However, this does not diminish their seriousness: In most cases, taxpayers who receive notices and letters from the IRS should seek advice from a seasoned tax defense expert before taking action.

IRS notices are generally written in plain English, but the sheer number of different notices can be confusing. Whereas some notices and letters require action on the recipient’s behalf, others are merely advisory. In the IRS’s own words, “the notice you receive covers a very specific issue about your account or tax return.”

While they might have that effect, these documents are not meant to intimidate you. In fact, the IRS recently redesigned its letters and notices to render them as straightforward as possible.

Differences Between Notices and Letters

There are three main types of audits. Only one of these resembles the dreaded audit of popular imagination:

• The examination audit: This is a “traditional” audit that typically requires taxpayers to provide in-depth information through the mail or at an in-person interview. Taxpayers are typically selected for examination audits by computer programs that uncover serious discrepancies, potential errors or common inconsistencies that may hint at improperly paid taxes. Despite its size, the IRS lacks the resources to conduct examination audits on 99 percent of all taxpayers in any given year.
• The correspondence audit: Again, these are uncovered by computer algorithms that look for filing inconsistencies. The involved issues are rarely as in-depth as those that trigger examination audits. Correspondence audits are announced by Letter 566 or CP 2000 notices and can typically be addressed via mail.
• The adjustment letter: These are the simplest “audits.” They are typically generated when an internal IRS audit finds a simple inconsistency in your tax return and makes an adjustment to your “balance due” figure for the current tax year. Adjustment letters work both ways: While they may result in a higher tax bill, they can also lower your total obligation.

How to Identify Notices and Letters

Every IRS notice or letter includes some important information that can help you identify it and respond appropriately. These include:

• A “notice number” in the upper right corner
• A brief description of the document’s purpose, including a “topic” category
• A longer, plain-English description of the issue
• A section that clearly outlines any required action
• IRS contact information, including toll-free numbers and local branch office information

Each of these bullets is important. For instance, your notice number allows you to identify your notice in future correspondence with the IRS, and the “required action” section ensures that you respond appropriately to your notice.

Some audit-related notices and letters are more common than others. These are among the most important.

Letter 525: General 30 Day Letter

This letter contains specific information about an apparent mistake on your tax return. It also includes Form 4549, a “proposed changes” addendum that aims to correct the mistake. It is generated after a computerized or manual review of your tax return, but the information contained within it is often incorrect. As such, you should double-check your return for consistency. If you do not agree with the proposed changes, you can request an appeal in writing or by phone with the appropriate IRS branch office.

Letter 531: Notice of Deficiency

Also known as a “90 Day Letter,” this document serves as notice that you owe additional taxes for the current tax year. If you agree with the assessment, you have 90 days to pay in full. If you do not agree, you must consult with a tax expert and formally appeal within the same time period. You may face harsh penalties for failing to observe the 90-day deadline.

Letter 692: Request for Consideration of Additional Findings

While Letter 692 is similar to Letter 525, it requires a more urgent response. This document always accompanies Form 4549, a detailed explanation of proposed changes to your tax liability. You have 15 days to respond to this letter with full acceptance of the changes or a formal appeal.

CP 2000 Notice: Automatic Adjustment Notice

Unlike Letters 525 or 692, this notice isn’t the result of a manual review of your tax return. Instead, it is generated by an automatic comparison between the information provided on your return and information about your assets, income, potential credits and deductions that the IRS has requested from third parties. Since this information can be outdated or flat-out incorrect, you should compare your own records to the IRS’s claims before responding. However, you must respond with payment or a formal appeal within 60 days of receiving your notice.

Letter 915: Letter to Transmit Examination Report

This letter notifies you of an adjustment to your tax liability. As with the aforementioned letters, you may agree to its proposed changes and pay the balance in full or lodge a protest with the IRS’s Office of Appeals. You have 30 days to respond.

Letter 950: 30 Day Letter Straight Deficiency or Over Assessment

This letter functions as a “status report” after the first stages of an official IRS audit. It identifies “unagreed issues” as well as deficient balances or over-assessments. These can be defined as follows:

• “Unagreed issues” may pertain to proposed changes or assessments that have resulted in the filing of a formal complaint with the IRS Office of Appeals. Any ongoing dispute with the IRS should appear here.
• Straight deficiencies pertain to inadequate tax assessments that necessitate the prompt payment of additional taxes. Failure to pay or appeal within the proscribed time period may subject you to further penalties or obligations.
• Straight over-assessments refer to over-enthusiastic accountings of your tax liability. When the IRS discovers an over-assessment, it typically credits the balance of the over-assessment to your tax refund, thereby increasing its size.

Letter 3391: 30 Day Non-Filer Letter

If you didn’t file a tax return for a specific tax year, you may receive a 30 Day Non-Filer Letter. This document notifies you that you will be expected to pay taxes on income for the “non-filed” year and offers a proposed liability that you may accept or protest as you see fit. In either case, you must lodge a formal response within 30 days.

You may receive a non-filer letter in situations like:

• You failed to file a return for a given tax year
• You under-reported or incorrectly assessed your total tax liability
• The IRS believes that you were ineligible to be included on a joint return filed on your behalf
• Your legitimately filed return was lost or never completed
• Income from investments or other sources carried over from previous years and produced an unexpected tax liability

When you receive a notice or letter from the IRS, your first response might be panic. While this is understandable, it is counter productive. Most audit notices - especially initial notices - should not be cause for alarm.

After collecting yourself, read your notice or letter carefully. Determine its source: Both the IRS and state revenue agencies send similar-looking letters. If it comes from the IRS, note the name of the issuing division(s) and branch office(s).

Next, use the information provided in the section above to identify your notice’s purpose. Check over any supplemental forms or notices that may be included in your envelope.

Once the letter’s purpose is clear, determine what - if any - obligations it creates for you. Look for an “additional tax due” figure on the document as well as any information about a response time frame.

Most IRS notices require an active response or acknowledgement. After carefully reviewing your letter, check its claims and figures against your own copy of your tax return and any pertinent financial records. To speed up this process, you should organize and save such records for several years.

Use the results of this review to evaluate your next steps. If you plan on appealing the IRS’s findings, you must organize and lodge your appeal within the specified time frame. An experienced tax defense expert can strengthen your case and help you meet any deadlines

If you receive an audit or adjustment notice that you cannot immediately satisfy, you are not alone. Every year, hundreds of thousands of taxpayers receive notices that are beyond their ability to settle. When you receive an audit that you do not plan to put to bed immediately, follow these steps.

1. Avoid the temptation to ignore a payment request. Instead, respond promptly to all requests for information. The IRS tends to be unsympathetic towards taxpayers who appear to be avoiding its contact attempts. Even if you have no intention of paying the requested amount in full, your continued communication acts as a sign of good faith and increases the likelihood that the IRS will treat you with leniency.
2. Do not divulge unnecessary information. An IRS audit is not a criminal investigation, but you should be mindful of the potential for self-incrimination. While you must answer questions truthfully and respond to requests for information, you do not have to “over-explain” your position. Without being rude, you should answer in-person or over-the-phone interview questions with as few words as possible.
3. Do not pay before all the facts are known. It is in the IRS’s interest to secure timely payment, but the organization is not infallible. Every year, in-house mistakes produce thousands of unnecessary or inaccurate IRS audits. Unless you are absolutely sure that the fault lies with you, consult a professional who can help you appeal the agency’s determination.
4. Compile documents that may refute the IRS’s claims. Audit notices and letters often stem from confusion over one or two line items on your tax return. In many cases, they can be resolved by referring the agency to specific documents to which it might not have had access. Your tax defense professional can help you find and compile these documents.
5. Avoid passivity. Whether you are being audited in person, over the phone or by mail, do not assume that the IRS has all the answers. You have every right to ask questions about the process and demand a thorough accounting of your rights and obligations under the law. If you feel as if you are not being treated fairly at any time during the process, you should seek the assistance of an expert.

Regardless of your individual tax situation, it is important to keep things in perspective. The IRS is a complex organization whose auditors are highly-trained specialists. While this guide is meant to serve as a resource for individuals facing an audit, it is no replacement for the advice of a tax resolution expert.

At Top Tax Defenders, we are committed to providing all the resources that you need to appeal you through the overwhelming audit process. We can help:

• Interpret specific audit notices and letters
• Meet specified deadlines and information requests
• Lodge well-thought-out appeals or protests with reasonable chances of success
• Communicate with the IRS on your behalf
• Negotiate payment plans and settlements
• Prevent harassment or inappropriate disclosures of financial or personal information

Contact us today for more information about audit representation.