What Should You do if You Get an IRS Audit Letter in the Mail?

The following is a guest post from H&R Block’s Leigh Mutert, CPA and hrblock.com Community Manager.

Tax filing is on the minds of most Americans right now. Now is also the time taxpayers begin to wonder if they are filing correctly. From valuable tax deductions to new tax credits, it can be disconcerting to consider the possibility of an IRS audit. H&R Block has some tips to keep in mind as you prepare your tax return this year – as well as some advice if you find yourself being audited.

So, what should taxpayers do if they find themselves being audited?

In 2009, the IRS conducted 1.1 million tax audits by mail and more than 326,000 in-person audits. As the IRS tries to collect approximately $290 billion in unpaid and underpaid taxes, more taxpayers and tax evaders may be audited.

What happens if I get a tax audit letter?

Ignoring an IRS audit notice will not make it “go away.” The clock starts ticking as soon as the IRS sends the notice, meaning interest and penalties are added to any additional tax owed – whether or not the taxpayer has read the audit letter.

If the taxpayer asks for more time to respond, the IRS typically will grant an extra 30 days.

What should I do if I receive an IRS audit notice?

Taxpayers should meet with their certified tax professional to discuss what the notice means, what information is being requested and what records they need. If H&R Block prepared your return, or if it was completed at home or online using H&R Block tax preparation software, H&R Block will support you in the rare event of an IRS audit.

“While most people only think about taxes during the first four months of the year, the IRS actually communicates with taxpayers year-round," said H&R Block Master Tax Advisor, Elaine Smith. "A timely response to an audit notice can save you money and the guidance of a tax professional can make you feel more secure about competently responding to the inquiry.”

If I’m audited, does it mean I owe the IRS more money?

Getting an IRS audit notice does not necessarily mean you will have to pay more taxes. It does mean the IRS wants to verify the information reported on tax forms is correct by reviewing supporting documentation and financial information.

In some situations, the IRS will work out payment arrangements, which may mean some additional paperwork for the taxpayer. A tax professional can ensure all requested documents are filed correctly.

These notices could be common for senior taxpayers when it comes to making sure they claim all of their income. Often, taxpayers misplace or genuinely forget to claim certain income from stocks, other investments. It’s important to remember that the IRS gets the same paperwork you should from your investment providers.

FMF note: My wife was audited the first year after we were married. She actually got more money back AFTER the audit.

What if I disagree with what the IRS is claiming?

Taxpayers can provide additional information to support their tax returns and partially agree or disagree with the IRS audit notice. If the IRS initially did not have all the information needed to assess a return, a taxpayer may be able to prove less is owed in taxes.

How are taxpayers selected for audits?

There are three ways tax returns are selected for audits:

• Random selection and computer screening based on statistical data
• Document matching that compares the information on forms like 1099s and W-2s with what individuals report on their actual tax returns
• Related examinations, which may occur when the accuracy of one taxpayer’s return is questioned. This may mean that individuals with close financial ties to the taxpayer also receive audit notices.

I hear tax audits are on the rise. Is that true?

The IRS initiated 150,000 audits specific to the new Homebuyer Credit. For this coming year, more audits are checking into the Adoption Credit.

What are some myths about audits?

Audits are just for the rich and famous. - That’s a myth. The IRS doesn’t discriminate based on income. In fact, more than half of audits are for taxpayers with less than $50,000 in income, and nearly 1/3 of all audits are centered on those claiming the Earned Income Tax Credit.

Owning a small business will trigger a tax audit. - This myth is popular because some Schedule C filers may claim income that isn’t necessarily reported by another party to the IRS. Certain self-employed taxpayers just need to be more diligent with tracking all expenses.

Making a large donation or claiming a new credit that they didn’t last year will trigger a tax audit. - That is just not true. Some taxpayers even forgo claiming all of their charitable donations, for example, thinking they must keep it below a certain dollar value to avoid an IRS audit. In fact, taxpayers should claim all credits and deductions they are entitled.

H&R Block's tax tips for someone who gets audited:

First, don’t panic. Most of the time the IRS is simply requesting information. A tax professional at an H&R Block office near you can assist you with responding if needed. And because H&R Block is open year round, they even help clients who didn’t originally file with them through the audit process.

Second, don’t ignore the IRS audit notice. That could add up to be a costly delay.

Finally, if you feel you need representation, an Enrolled Agent, who is authorized to represent taxpayers with the IRS, can assist you. That’s why it’s important to find a certified tax professional who is available year round. Taxes aren’t just a one-day, annual event.

Comments

[Sunil from The Extra Money Blog]

do not panic - workers at the IRS are people just like you. i have gotten audited twice before, once i ended up with more refund $$$ after the audit. the second time ended up in the audit closed / thrown out due to it having no merit.

[jim]

I agree with Sunil on 'do not panic' that should be step #1. I got a letter one year myself and it was no problem, I just sent them back a letter and they replied the issue was closed. I had failed to report a stock sale properly but there was no significant gain/loss.

[Georgia]

I wonder if I will ever get audited. For the 2008 tax year, I put in a note that I was unsure of my figures. Would they please double check for me. I received a check 2-3 weeks later for $300.

I also double checked what they said I missed. It was incorrect. I should not have received the difference. How do you tell the IRS that they made a mistake? I haven't tried yet, but I am keeping that much on hand in my emergency fund in case they find it.

[Steven Lupton]

I’ve been operating as a sole proprietor for a few years now – and every year around this time, I get nervous, terrified that I’ll be audited. I generally do a good job of record keeping so if I do get audited I’m sure I’ll be OK – but it’s still encouraging to know the audit would likely be contained to one aspect, and it’s good to know there’s help if needed. Thanks for the post!

[pamela dye]

How long dose it take after u send in everything the irs has asked for I only had to prove my kids was mine I sent in everything they asked for but its been a week an still haven't got my money.how long dose it take ?