When Does the IRS Send Out Audit Letters?
Navigate the complexities of IRS audit letters. Learn when they're sent, common triggers, and how to confidently manage the process.
Receiving an audit letter from the Internal Revenue Service (IRS) can be a source of immediate concern for taxpayers. These letters are formal notifications indicating that the IRS is reviewing a tax return to verify the accuracy of reported income, deductions, and credits. It is a standard part of tax administration, aimed at ensuring compliance with tax laws.
Typical Timing for IRS Audit Letters
Most IRS audits involve returns filed within the last one to two years. The IRS generally has a three-year statute of limitations to initiate an audit from the later of the tax return’s due date or the date it was filed. For instance, if a tax return was due on April 15 but filed early, the three-year period for an audit typically begins on April 15. If a return is filed late without an extension, the three-year period starts from the actual filing date.
In cases where there is a substantial error, such as an omission of gross income exceeding 25% of the amount reported, the audit period extends to six years. There is no statute of limitations for audits in instances of fraud or if a tax return was never filed. Amended returns can also undergo a screening process and may be selected for audit.
Common Reasons for IRS Audits
The IRS selects tax returns for audit through various methods, including random statistical sampling and its income document-matching program. Discrepancies between reported income and information received from third parties, such as W-2s and 1099s, are common triggers. If the data does not match, the system may flag the return for review.
Unusually high deductions relative to income can also draw scrutiny. For example, self-employed individuals reporting significant expenses or consistent losses on Schedule C may face increased attention. Large charitable contributions, especially non-cash donations, are another area the IRS examines closely due to potential overvaluation or lack of proper documentation. Tax credits, particularly the Earned Income Tax Credit (EITC), can also lead to an audit due to their complexity and historical instances of error.
Types of IRS Audit Communications
The IRS communicates audit selections exclusively by mail, never by phone, email, or text. The type of audit communication received indicates the scope and method of the examination.
The most common is a correspondence audit, which is conducted entirely by mail. These audits typically address simpler issues and require taxpayers to send requested documentation to the IRS.
An office audit is more involved and requires the taxpayer to visit a local IRS office for an in-person meeting with an IRS agent. These are generally for more complex issues than mail audits, often relating to specific schedules like Schedule A (itemized deductions) or Schedule C (business profit/loss).
The most extensive type is a field audit, where an IRS agent conducts the examination at the taxpayer’s home, business, or accountant’s office. Field audits are typically reserved for complex returns or when significant discrepancies are suspected and involve a thorough review of financial records.
Responding to an IRS Audit Letter
Upon receiving an IRS audit letter, the initial step is to read it carefully to understand the specific tax year and items under review. It is important not to ignore the letter, as timely response is necessary to avoid further complications, penalties, or even enforced collection actions. The letter will outline the information the IRS is requesting, which may include receipts, bank statements, and other financial records.
Gathering all requested documentation and supporting evidence is a crucial next step. Taxpayers should organize these records clearly and concisely. If the issues are complex or if the taxpayer feels unsure about the process, seeking assistance from a tax professional, such as a Certified Public Accountant (CPA) or Enrolled Agent, is advisable. Finally, taxpayers must adhere to the specified response deadline, which is typically 30 days from the date of the letter. If more time is needed, an extension request can often be made by contacting the IRS using the phone number provided in the notice.