What Is a Correspondence Audit & How to Respond?
Rationally navigate an IRS correspondence audit. Understand what it is, how to effectively prepare your response, and what to expect next.
An IRS audit is an official review by the Internal Revenue Service of an individual’s or organization’s financial records and tax returns. The purpose of this examination is to verify the accuracy of reported information and ensure compliance with tax laws. Audits are a standard component of tax administration, helping to maintain the integrity of the tax system and promote voluntary adherence to tax regulations.
Among the various types of IRS audits, a correspondence audit is the most common and generally the least intrusive. This audit is handled entirely through mail or online communication, meaning no in-person meeting is required. It focuses on specific items or issues on a tax return, often involving simple errors or discrepancies that can be resolved by exchanging documents and information.
Identifying a Correspondence Audit
Taxpayers typically learn about a correspondence audit through an official notice sent by mail from the IRS. This letter, on IRS letterhead, specifies the tax year(s) and items in question. Common notice numbers for correspondence audits include IRS Letter 566 or CP2000, though other notices like CP23 or CP503 may also indicate a need for a response regarding discrepancies. The notice will clearly request additional information or an explanation regarding specific entries on your tax return.
Correspondence audits are distinct from other audit types, such as office audits or field audits, because they do not require an in-person meeting. Office audits require a taxpayer to visit an IRS office, while field audits involve an IRS agent visiting the taxpayer’s home or business. Common reasons for these audits include discrepancies between reported income and information received by the IRS from third parties (like W-2s or 1099s), unusually high deductions, or issues with credits like the Earned Income Tax Credit. Math errors or typos on a return can also trigger this type of review.
Preparing Your Response
Responding to a correspondence audit requires careful preparation of supporting documentation. The IRS will request specific records to substantiate the income, credits, or deductions claimed on your return. This might include receipts, invoices, canceled checks, bank statements, W-2 forms, 1099 forms, mileage logs, medical bills, or records of charitable donations.
Organizing these documents is an important step. Sort them by year and type of income or expense. It is also crucial to make copies of all documents for your personal records, as only copies, not originals, should be sent to the IRS. If the IRS notice includes a specific response form, complete it accurately. A concise and clear cover letter or statement should accompany your documentation, referencing the IRS notice number and explaining the submitted information.
Submitting Your Information
Once all necessary documents and forms are prepared, send your response to the IRS. Including your name and Social Security Number on each page of documentation helps the IRS properly associate all materials with your file.
Using certified mail with a return receipt requested is a recommended practice. This provides proof of delivery. Alternatively, certain private delivery services designated by the IRS also offer proof of timely mailing. Pay close attention to the deadline specified in the IRS notice, as timely submission is important to avoid further complications or penalties. If an extension is needed to gather documents, it may be possible to request one by calling the number on the audit letter.
Understanding the Outcome
After the IRS receives your response to a correspondence audit, they will review the provided information. Several outcomes are possible. The IRS may accept your information, resulting in no change to your tax liability. This means your tax return is approved as originally filed. Alternatively, the IRS may determine that changes are necessary, which could lead to a notice of additional tax due or, in some cases, a refund if an overpayment is identified.
The IRS might also request further information or clarification if their initial review is not conclusive. If an agreement cannot be reached, and the IRS maintains that additional tax is owed, they may issue a Notice of Deficiency, often referred to as a “90-day letter.” This formal notice provides you with 90 days to file a petition with the U.S. Tax Court to challenge the proposed assessment without first paying the tax. Ignoring the audit or failing to respond can lead to the IRS assessing the proposed tax liability and initiating collection actions.