If you receive a notice from the IRS indicating that you are being audited, don’t panic. Just because the IRS is auditing you doesn’t mean that you have done anything wrong, or that you will owe any taxes. The scope and intensity of the audit often depend on whether it is a “correspondence audit” or a “field audit.”
As the name implies, a “correspondence audit” is handled through the mail, while a “field audit” involves a face-to-face meeting with a local IRS Revenue Agent assigned to your case. Generally, a correspondence audit is less formal and less intrusive than a field audit, but both can result in huge problems if they are not handled correctly.
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What is a correspondence audit?
A correspondence audit is an informal IRS audit and usually doesn’t involve large sums of money. The audits are usually narrowly focused on one or two issues on the return. Typically, a small discrepancy triggers the audit —perhaps a Form 1099 that you forgot to include on your return. As a result of the discrepancy, the IRS computers flag your return for review. Other times, an irregular item on your return – such as large amounts of charitable contributions or unreimbursed employee expenses – could cause your return to get flagged.
The CP2000 notice is the letter most commonly received by taxpayers in a correspondence audit. It occurs when the income or payment information the IRS has on file doesn’t match the amount reported on your tax return. The discrepancy may result in an increase – or potentially a decrease – in the amount of tax you owe.
After you’ve carefully read the notice, you can either agree with the changes the IRS proposes, or you can respond with information and an explanation of why the proposed changes are incorrect. If you do nothing, the IRS will issue a statutory Notice of Deficiency that determines the amount of tax, penalties, and interest you owe. This notice gives you the right to file a petition to the U.S. Tax Court if you want to dispute the liability.
What is a field audit?
Not to trivialize correspondence audits, but field audits generally are a more serious matter. In these audits, an IRS Revenue Agent is assigned to your case and usually conducts the audit at your home or place of business, unless you have a representative. As opposed to a correspondence audit, which usually focuses on just one or two items in a single tax year, a field audit is more comprehensive. It could involve several parts of your tax return or even the entire return for one or more tax years.
If you are being audited, it is important to have a professional IRS audit representative to ensure that your rights are protected. Also, having a representative prevents you from having to deal with the IRS directly. Information that a taxpayer volunteers to the IRS during an audit can result in the assessment of civil fraud penalties or, in extreme cases, referral for criminal prosecution.
At the conclusion of an audit, the tax deficiency, if any, will be assessed. There’s an administrative appeals process if you disagree with the results of the audit. If the administrative appeal is not successful, you have the right to dispute the liability by filing a Tax Court petition.
Whether you’re dealing with a correspondence audit or a field audit, it is important to have an experienced and qualified representative in your corner.
Questions about this blog or other IRS defense issues? Contact the accountants in our IRS Representation and Defense Group, or call Naveid Jahansouz at 972-818-5300.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.