The IRS Sent You a Letter—Now What? Understanding Notices and Audits

Written By Sally Anderson

Understanding IRS Notices and Audits: What You Need to Know

Receiving an IRS notice can be stressful, but understanding the process can help you navigate it with confidence. The IRS sends millions of notices each year, covering everything from simple informational updates to more serious issues like audits. Knowing what to expect, common red flags, and how to respond can help you avoid unnecessary complications.

1. IRS Notices: What You Need to Know

If you receive an IRS notice, it’s essential to verify its authenticity and understand the reason behind it.

  • Official IRS notices are always sent via mail—never through phone calls, texts, emails, or in-person visits. Be cautious of scams that attempt to impersonate the IRS.

  • If you’re married and filing jointly, both spouses will receive a copy of the notice if applicable.

  • The IRS sends over 220 million notices annually, and 10% of taxpayers will receive one in any given year. Of those, about two-thirds are related to enforcement actions, such as unpaid taxes or discrepancies in filed returns.

2. IRS Audit Risk: What Happens If You’re Audited?

While receiving a notice doesn’t always mean you’ll be audited, certain issues can trigger further review.

  • If your notice leads to an audit, 9 out of 10 audits result in changes to the tax return, which can mean additional taxes owed, penalties, or adjustments to your refund.

  • Audits can be conducted through correspondence (by mail) or in-person meetings with an IRS representative.

3. Common Red Flags That Trigger IRS Notices or Audits

Certain tax filing mistakes or discrepancies increase the likelihood of an IRS notice or audit. These red flags are often categorized as "Above the Line" and "Below the Line" concerns.

Above the Line Issues:

  • Failing to report all sources of income, including self-employment income and side gigs.

  • Misreporting deductions, such as overstating expenses or claiming deductions you don’t qualify for.

Below the Line Issues:

  • Incorrect Schedule A itemized deductions, such as medical expenses, charitable contributions, or mortgage interest that exceed expected limits.

  • Failing to report required forms, such as Form 1095-A for health insurance through the Marketplace.

  • Errors in Earned Income Credit (EIC) or Child Tax Credit (CTC) claims, which often lead to IRS scrutiny.

4. Specific Tax Areas That Often Attract IRS Attention

Certain tax forms and credits are more frequently reviewed by the IRS due to high error rates or fraudulent claims. These include:

  • Schedule C – Business Income and Loss: Self-employed individuals and small business owners must be meticulous with reporting income and deductions.

  • American Opportunity Credit: This education-related credit is frequently audited due to misreporting.

  • Identity Theft Concerns:

    • If the IRS suspects identity theft, they will send a letter requesting identity verification, which may delay your tax return processing.

    • Taxpayers may need to submit Form 14039 (Identity Theft Affidavit) to resolve the issue.

    • This form can also be used if someone fraudulently claims a dependent on their return.

5. Common Reasons for IRS CP Letters

The IRS uses CP (Computer Paragraph) letters to notify taxpayers of various issues. Common reasons for receiving a CP letter include:

  • Unpaid tax balances from prior years.

  • Requests for additional information regarding a filed return.

  • Identity verification requests to confirm your identity before processing a return.

  • Missing documents or required forms that must be submitted.

  • Proposed changes to your tax return, such as adjusted deductions or income amounts.

  • Processing delays, which may require further review or clarification.

6. Avoid These Common Mistakes When Handling IRS Notices

If you receive an IRS notice, avoid these missteps to ensure a smooth resolution:

  • Panicking or ignoring the letter: Acting promptly can prevent additional penalties or collection actions.

  • Attempting to handle the issue alone: Some tax matters are complex and require professional guidance.

  • Failing to notify your accountant: A tax professional can help you understand and respond to the notice effectively.

  • Blaming others for mistakes: If an error was made on your return, focus on resolving the issue rather than assigning blame.

7. How to Handle an IRS Notice Effectively

  • Read the notice carefully and identify why it was issued.

  • Check for deadlines and respond promptly to avoid penalties or additional interest.

  • Gather supporting documents if the notice requires further verification.

  • Contact a tax professional if you need clarification or assistance in responding.

  • Keep records of all IRS correspondence and responses for future reference.

Get Help Navigating IRS Notices and Audits

If you’ve received an IRS notice and are unsure how to proceed, seeking professional guidance can help you avoid costly mistakes. At Excel Accounting & Consulting, LLC, we assist individuals and businesses in handling tax notices, responding to audits, and ensuring compliance with IRS requirements.

Have questions or concerns about an IRS letter you received? Contact us today for expert support!

Sally Anderson
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