Your Audit Case Was Closed. When to Expect an Explanation of Findings
Learn when to expect an explanation after your audit case is closed, what it includes, and how it may impact your tax liability or next steps.
Receiving notice that your tax audit has been closed can bring relief, but it often leaves taxpayers wondering what comes next. The IRS or state tax agency provides a summary of their findings, which may affect your tax liability, refund status, or future filing obligations. Understanding the process ensures you’re prepared for any necessary actions.
Explanation Letter Details
After an audit, the IRS or state tax agency sends a letter outlining their conclusions. This document, often called an Examination Report or Notice of Audit Results, details the reviewed tax years, the specific items examined, and any discrepancies found. The level of detail varies based on the audit’s complexity, but it typically includes findings, supporting calculations, and references to relevant tax laws.
The letter will state whether the audit resulted in no changes, additional taxes owed, or an adjustment in your favor. If discrepancies were found, it will explain the adjustments and cite relevant tax codes. For instance, if deductions were disallowed due to insufficient documentation, the letter may reference Internal Revenue Code 6001, which requires taxpayers to maintain adequate records. If income was underreported, the agency might cite Internal Revenue Code 61, which defines gross income.
Beyond financial adjustments, the letter may highlight compliance concerns. If the audit revealed repeated filing errors or misreporting patterns, the agency might recommend improved record-keeping or suggest seeking professional tax assistance.
Possible Adjustments to Tax Liability
Audit findings determine whether a taxpayer owes additional taxes or qualifies for a refund. If unreported income is identified, tax liability is recalculated, potentially increasing the amount owed along with penalties and interest. Under Internal Revenue Code 6662, a 20% accuracy-related penalty applies if the underpayment results from negligence or a substantial understatement of income.
Deductions and credits are another common area for adjustments. If deductions are disallowed, taxable income increases, raising the amount owed. Conversely, unclaimed deductions or credits may reduce liability. For instance, if a taxpayer qualified for but failed to claim the Earned Income Tax Credit, the IRS may adjust the return accordingly. Business expenses, which are deductible under Internal Revenue Code 162, may also be reviewed.
Changes in taxable income can affect tax brackets and eligibility for credits. If additional income moves a taxpayer into a higher bracket, the portion exceeding the previous threshold is taxed at a higher rate. This can also impact phase-outs for tax credits, such as the Child Tax Credit, which begins to phase out for single filers earning over $200,000.
Payment or Refund Procedures
Once audit results are finalized, taxpayers must either settle any outstanding balance or await a refund. If additional taxes are owed, the IRS or state tax agency will issue a Notice of Tax Due, outlining the recalculated amount, including interest and penalties. Interest accrues from the original due date of the return, not the audit conclusion, as required by Internal Revenue Code 6601.
For those unable to pay in full, installment agreements are available. The IRS offers short-term and long-term payment plans, depending on the amount owed. These plans require monthly payments, and while they prevent collection actions like levies or liens, interest and penalties continue to accrue. Taxpayers experiencing financial hardship may qualify for an Offer in Compromise, which allows for a reduced lump-sum payment if full payment would cause significant financial distress. Approval requires detailed financial disclosures under Internal Revenue Code 7122.
For those owed a refund, the IRS will issue payment via direct deposit or mailed check. In some cases, refunds may be applied to outstanding federal or state debts, such as unpaid taxes from prior years or delinquent student loans. If a refund is delayed, taxpayers can track its status using the IRS “Where’s My Refund?” tool.
Dispute or Appeal Paths
If you disagree with the audit outcome, there are formal processes to challenge the findings. The first step is direct communication with the auditor. Many disputes arise from misunderstandings or incomplete documentation, and providing additional records may lead to a revised determination. If discussions with the auditor do not resolve the issue, taxpayers can request a conference with the auditor’s supervisor.
For unresolved disputes, the IRS Office of Appeals provides an independent review. Appeals must be filed within 30 days of receiving the official audit determination letter, using Form 12203 or a formal protest letter for more complex cases. The appeals process aims to resolve disputes without litigation by considering the taxpayer’s position alongside applicable tax laws. Alternative dispute resolution methods, such as Fast Track Settlement, may also be available.
Post-Audit Record Storage
After an audit, maintaining proper documentation is necessary in case of future inquiries. The IRS recommends keeping tax records for at least three years from the date of filing, but in certain situations, longer retention periods may be required. If a taxpayer underreported income by more than 25%, the IRS can audit returns up to six years later under Internal Revenue Code 6501(e)(1)(A). In cases of fraud, there is no statute of limitations, meaning records should be retained indefinitely.
Records should include copies of the final audit determination, supporting documentation used during the audit, and any correspondence with tax authorities. This includes bank statements, receipts, invoices, and payroll records, particularly for business owners who may need to substantiate deductions under Internal Revenue Code 162. Digital storage solutions, such as encrypted cloud storage or external hard drives, can ensure accessibility while protecting sensitive financial data. Businesses may also need to comply with industry-specific record-keeping requirements, such as those outlined by the SEC or GAAP, depending on their regulatory obligations.