IRS AUDITS AND TAX NOTICES: TAX TIPS & RESOURCES

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IRS Audits and Tax Notices

Any kind of notice or communication from the IRS – apart from a refund, that is – might cause you to start worrying. Here’s what you need to know about audit communications, tax notices and letters that you could receive from the IRS.

What tax mistakes lead to getting an IRS letter or notice?

This covers the most common tax mistakes that could lead to getting an IRS letter or Tax Notice.

Common IRS Tax Notices

Common IRS Tax Notices Below:
Tax Debt Notices

IRS CP14 Notice

IRS CP14H Notice

IRS CP42 Notice

IRS CP49 Notice

IRS CP71 Notice

IRS CP71A Notice

IRS CP77 Notice

IRS CP90 Notice

IRS CP91 Notice

IRS CP92 Notice

IRS CP501 Notice

IRS CP503 Notice

IRS CP504 Notice

IRS CP521 Notice

IRS CP523 Notice

IRS LT11 Notice

IRS LT16 Notice

Tax Return Error Notices

IRS CP11 Notice

IRS CP12 Notice

IRS CP13 Notice

IRS CP16 Notice

IRS CP18 Notice

IRS CP20 Notice

IRS CP21B Notice

IRS CP23 Notice

IRS CP24 Notice

IRS CP25 Notice

IRS CP32 Notice

IRS CP60 Notice

IRS CP2000 Notice

IRS CP3219A Notice

Tax Fraud and Verification Letters

IRS 5071C Letter

IRS CP05 Notice

Late Returns and Penalty Notices

IRS CP30 Notice

IRS CP88 Notice

Other Letters and Notices

IRS LP64 Notice

IRS CP301 Notice

IRS CP566 Notice

IRS CP2501 Notice

IRS 4883C Notice

IRS Notice 1444

Ignoring a notice from the IRS could prove detrimental to your current and future financial life. This may be your first instinct, hoping that maybe the IRS will just go away. NOT. The situation is not going to disappear, and you have a finite amount of time to respond before the audit notice turns into a bill.
Tax Notices: More to Know
Top 6 Tax Problems faced by Taxpayers

IRS statistics are pretty reliable. So when it comes to tax problems, it is easy to identify the most common IRS problems taxpayers face.

IRS statistics are pretty reliable. So when it comes to tax problems, it is easy to identify the most common IRS problems taxpayers face. Each year, the IRS publishes its Data Book which gives insight into taxpayer issues. You can read other IRS reports from various sources like the General Accountability Office, the Treasury Inspector General for Tax Administration (TIGTA), and the IRS advisory committees to glean more data into tax problems. Here are the six most common problems faced by taxpayers:

Each year, the IRS publishes its Data Book which gives insight into taxpayer issues. You can read other IRS reports from various sources like the General Accountability Office, the Treasury Inspector General for Tax Administration (TIGTA), and the IRS advisory committees to glean more data into tax problems. Here are the six most common problems faced by taxpayers:

Tax Problem # of taxpayers annually Comments
Penalties
“The IRS penalized me for late payment, late filing, or an inaccurate tax return”
29.5 million  taxpayers annually
  • Over  150 different types  of IRS penalties
  • Only  11% of all penalties are abated
  • 80% are related  to individual taxpayers
  • Most common  penalty is “failure to pay”
  • Failure to pay, estimated tax, and failure to file penalties  make up 96%  of all penalties for individuals
Unpaid taxes
“I owe but I cannot pay”
As of 2019,  20.1 million  owe and cannot pay
  • Over $539 billion is currently owed to the US Treasury
  • 84% are individual taxpayers (16.8 million owe the IRS)
  • Over 90% obtain a streamlined installment agreement
  • IRS is  actively chasing  11.2 million delinquent accounts
Nonfilers
“I have not filed my required tax return”

10.6 million (individual only)

50.5 million business nonfilers

  • Identified nonfilers through W-2s/1099s
  • Likely several million more if you include small businesses
  • IRS can file a return for taxpayer called a “substitute for return” using information in its possession (W-2s/1099s)
Underreport income
“I did not report all of my W-2s/1099s”
2.0 million  (2019)
  • Known as the IRS Automated Underreporter Program (CP2000 notice)
  • Out of 150 million individual filers,  27 million taxpayers  do not report all W-2s/1099s
  • Average amount owed :  $3,336
Math error notices
“I made an error and the IRS adjusted my refund/balance owed”
1.9 million (2019)
  • Individuals only
  • Most common error is incorrect tax calculation
  • IRS adjusts return automatically by notice
Audits
“I am being audited by the IRS”
1.1 million (2019)
  • 74% are  done by mail
  • 89% of returns  audited are changed by the IRS
  • Mail audit-  average amount owed : $6,164
  • Field audit:   average amount owed :  $68,122

Tax problem categories can overlap as Many taxpayers have multiple issues. For example, if a taxpayer has an audit, a late filing, or the inability to pay, they can also have penalties. The reality is that the most common issue facing taxpayers is trying to understand their IRS notices. About 10% of all taxpayers get an IRS notice. Those taxpayers have to navigate and figure out if they have one or more of the issues listed above, or a different issue not listed here like identity theft. For assistance creating a strategy to address your tax issues contact us for today.

7 Common IRS Tax Notices. What you need to know:

If you don’t read your IRS notice, you may miss an easy resolution opportunity, important deadlines or accrue additional penalties and interest on outstanding tax debts. Learn more about common notices and what to do when you receive one.

First, take a deep breath. Now, make sure to read the notice as soon as possible. Some notices have been sent to inform you that the IRS needs additional information or that you owe money. If you don’t read them, you may miss an easy resolution opportunity, important deadlines or accrue additional penalties and interest on outstanding tax debts.

What types of letters does the IRS send?

Thankfully, IRS notices and letters are pretty clear about their purpose and what they want you to do, if action is needed. They also have a handy code in the top or the bottom right-hand corner that you can look up on the IRS site, or give to a tax professional who may be assisting you. Notice codes start with CP and letter codes with LTR. At least that’s straightforward!

You could receive a letter or notice because (example notices):

  • You have an installment payment due (CP521),

  • You owe money to the IRS (CP504)

  • Your refund amount is more or less than you thought (CP134R)

  • The IRS received more in taxes and will refund the difference (CP12, CP24E)

  • There may be a delay in processing your return (CP44)

  • Your return is missing a schedule or form and can’t be processed without it (CP180, CP181)

How to make sure you’re not being scammed or phished

Be aware that fake letters or notices may be sent by people hoping to get personal information from you. This is called phishing. If something you receive looks suspicious or just doesn’t seem right, we suggest looking for an IRS code and an IRS contact number, which should be in the top right-hand corner of the notice or letter. You can call that number, or this one, if you think a letter may be fraudulent: 800-829-1040. When you get through, follow the IRS assister’s prompts or visit their Report Phishing page to find out more.

Next steps

But, if you don’t agree with the information supplied, changes to your return, or an amount due in your notice, then you will need to respond to the IRS, and possibly also involve a tax professional.

The main thing you shouldn’t do when you have received an IRS letter or notice is ignore it! Ignoring an IRS notice is a great way to cost yourself extra money, among other things. Do yourself a favor and take the actions necessary to resolve the issue before it becomes much more complicated or costly.

Important IRS Communication To-Do’s:

Pay attention to due dates: missing a deadline can lead to increased interest and penalty fees—even the loss of your right to appeal an IRS decision.

Call, don’t write: Unless you’ve been specifically asked to mail something to the IRS, calling them is a better means of contact. If you write to the IRS, it can take 30 days to receive an answer! Use the number on your notice, if you need to discuss your notice with the IRS. Likewise, use the fax number provided to send any requested information.

Common IRS notices and what to do if you receive one

Each letter or notice (at least legitimate ones) should have a code in the top or bottom right-hand corner.

Common codes of notices/letters

Code Reason Action
CP12 Mistakes corrected; overpayment identified. Compare changes to tax return, update return in your records/contact the IRS within 60 days
CP501 Balance due. Make payment/Call if you disagree; setup/revise payment agreement
CP502 Second reminder of balance due. Pay as much as possible in order to minimize additional penalties and interest.
CP2000 Income or payment information doesn’t match return. Complete response form/follow instructions/Contact information provider
CP71C Reminder of tax, penalty and/or interest owed; also used to explain denial of or revoked passport. Make payment arrangements, speak with a tax debt resolution specialist
CP523 Notice of intent to terminate installment agreement and seize assets due to delinquent payments. Pay before termination date; contact IRS and possibly a tax debt resolution specialist
LTR3172 Notice of federal tax lien filing, your rights to a hearing
Request appeals consideration, contact a tax professional
Complete form 4089(Notice of Deficiency – Waiver) and return with payment/Mail additional information/Challenge the increase; consult a tax professional
LTR3219b Notice of Deficiency; the IRS intends to assess a tax deficiency (money due)

 

In general, the following steps are key to resolving a tax issue with the least amount of headache:

  • Read each notice or letter carefully.

  • Review your tax return to compare information.

  • Respond with one of the appropriate actions ASAP, or at least by the due date.

  • Retain the notice or letter for your tax records, for reference, or for any professionals who may end up assisting you.

  • Remember that you don’t have to deal with this all by yourself!

You’re not expected to know or understand tax laws and IRS jargon—that’s our job! Jackson Hewitt has expert Tax Debt Resolution Specialists who can deal with any tax situation.

We’ll help you stay on top of your returns (including amended or corrected), respond correctly and fully to notices and letters, and work with the IRS to get the best possible resolution for you, while working to protect your finances. Have a tax issue to discuss? Contact us now!

What is an IRS notice of tax deficiency?

A tax deficiency occurs when there’s a difference in the amount of tax you report on your return and the amount the IRS calculates you owe – and the IRS will inform you of this discrepancy with a notice.

Deficiency is a common issue associated with tax returns. A tax deficiency occurs when there’s a difference in the amount of tax you report on your return and the amount the IRS calculates you owe – and the IRS will inform you of this discrepancy with a notice.

A tax deficiency can easily throw a wrench into your finances, but there are some simple steps you can take to resolve it.

What Triggers a Notice of Tax Deficiency?

A tax deficiency is usually identified when IRS computers compare the documents they received with the tax return submitted for the taxpayer. This includes the information obtained from employers, banks, and other businesses. When the tax you owe on your income – as determined by the IRS using information reported by these third parties – is higher than what you reported on your return, there’s a tax deficiency.

For instance, let’s say you’ve forgotten to include some income, but your employer submitted a W-2 for it – that’s a deficiency.

How to Respond to a Tax Deficiency Notice

A notice of deficiency is a CP3219N or a 90-day letter. The notice will detail the discrepancies that have been documented, and you have 90 days to respond. It is important to act quickly if you have received a tax deficiency notice because the IRS can include court charges in the balance you owe, and interest and penalties continue to accrue. If you agree with the notice, you must sign the included form and send it back. There is no need to file an amended return. If you disagree, you can contest it. For this, you will have to get back to the IRS with an explanation and contact the third party (bank, employer, etc.) to correct any incorrectly reported income.

Are There Penalties if I Don’t Respond?

Failing to pay taxes on time can result in tax liens on your bank accounts or wages. In the worst case scenario, the IRS can seize your property and other assets. If a criminal investigation is initiated, it can also lead to jail time.

While that sounds dire, most tax discrepancies occur as the results of honest errors by a taxpayer, and can be resolved in short order. If the tax deficiency occurred as a result of identity theft or fraud, you will not be liable for paying tax on income you did not earn, like if someone works at a job and earns an income by using your name and Social Security number. If you suspect identity theft, report it to the IRS immediately.

Being aware of the nuances of tax notices and the right way to handle them can save you valuable time and money.

What to do if you receive a notice or letter from the IRS

Receiving any correspondence from the IRS can instantly strike fear in the heart of most. While fear is a completely normal reaction, learn the four steps every taxpayer should follow if they receive an IRS notice or letter.

Receiving any correspondence from the IRS can instantly strike fear in the heart of most. You have to admit that one would naturally get a little nervous when you see that the Treasury department wants to have a word with you. In this moment you don’t want to become overcome with panic, you want to prepare! Millions of taxpayers get IRS notices saying there may be an issue or error and you may owe additional tax, including penalties and interest. Just because you get a notice doesn’t mean that it’s correct.

While fear is a completely normal reaction, here are four steps every taxpayer should follow if they receive an IRS notice or letter:

Open the letter RIGHT AWAY

Don’t delay in opening and reading the correspondence. The notice will state the following:

  • Tax period
  • Issue in question
  • Requested information
  • Due date of response/payment

Whether or not you used a tax professional to file your income tax return, it’s a good idea to contact one for help with your notice. If you have questions or aren’t exactly sure how to meet the demands of the IRS, your tax professional will be able to assist you in the situation.

It’s important to understand your IRS notice or letter

Make sure you read the instructions associated with the IRS notice or letter carefully. Each notice has specific instructions, so read your notice carefully because it will tell you what you need to do next. Make sure to bring a copy of the letter and your original return complete with your copies of all documents used on the tax return. Regardless of the situation you face, it’s important that you address the situation appropriately and in a timely manner.

The IRS will not contact you outside of using “snail mail”. The IRS does not solicit payments by phone, email, or social media. If the agency needs information from you, they write a letter first. If you receive that type of contact from someone claiming to be an IRS representative, be wary of a scam.

Check for errors

Review the notice for any errors, such as a misspelled name or an incorrect Social Security number. Carefully compare any noted corrections or changes in your return with your original submission. These could ultimately be simple mistakes, modifications to correct errors on your original return, or signs that someone has tried to send in a fraudulent tax return in your name.

Respond quickly

Ignoring a notice from the IRS could prove detrimental to your current and future financial life. This may be your first instinct, hoping that maybe the IRS will just go away. NOT. The situation is not going to disappear, and you have a finite amount of time to respond before the audit notice turns into a bill. The IRS letter will require a response by a specific date, usually 30 days. Your response should be in writing, and you should retain copies of your correspondence, as well as any information you send along with the correspondence, for example, proof of a particular deduction that you’ve claimed.

Most mailed notices or letters are simple: you forgot to sign your return, or the IRS recalculated your entries and found that you made a math error and are due a refund. But, there are more ominous ones that may question income or deductions. The bottom line, clarification is needed and resolving a notice can be less painful than you might think.

Audit Tax Notices:
How do you know if you're being Audited by the IRS?

While the risk of being audited is quite low for most, being aware of what audits are, why they are conducted, and how to know that you are being audited is essential for every taxpayer.

The idea of an IRS audit can be frightening no matter how diligent you are about reporting your income to the IRS. While the risk of being audited is quite low for most (statistics indicate that in 2016, the IRS audited only about 0.5 percent of all returns), being aware of what audits are, why they are conducted, and how to know that you are being audited is essential for every taxpayer.

What Is an Audit?

An audit is an assessment done by the IRS to determine whether the financial information you have provided is accurate and in keeping with tax laws, and if the tax amount reported is correct. Audits can be conducted through mail or via in-person interviews.

Who Is at Risk of an Audit?

Returns that have errors or discrepancies, or claim high risk of fraud deductions and credits, such as a home office or the earned income tax credit, are at greater risk of being subjected to an audit. Sometimes, your name is randomly selected through a computer screening, or your return has duplicate information, such as you and another taxpayer claiming the same dependent.

Also under the microscope are taxpayers with an income of $1 million or those with no income. Excessive spending and large deposits, not reporting part of your income, claiming suspiciously high deductions, or no deductions, on your self-employment income are some other reasons you may find yourself getting attention from an IRS auditor.

How Soon After I File Will I Know if I’m Being Audited?

According to the IRS, the agency does its best to audit tax returns as quickly as possible, and the majority of audits are performed on returns filed in the last two years. The IRS can go further back if there is a pattern of incorrectly claimed deductions and credits or under reported income.

How Will I Know I Am Being Audited?

If the IRS has shortlisted you for an audit, then you will be informed of this through a written notification that will be sent to your last recorded address. The IRS usually doesn’t notify you of an audit via phone or email, so be wary of any email that claims to be about an IRS audit. There are different types of IRS audit letters, and the kind you receive will depend on what the issue is with your tax return.

In most cases, a Notice of Audit and Examination Scheduled will be issued. This notice is to inform you that you are being audited by the IRS, and will contain details about the particular items on your return that need review. It will also mention the records you are required to produce for review. The deadline to submit these documents and materials will also be mentioned in the notice. In either a mail audit or an in-person audit, IRS must give you time to respond with, or prepare, the necessary documents.

What Happens After an Audit?

Once the audit is completed, an IRS General 30 Day Letter will be sent to you outlining the proposed changes to your tax returns. It will be accompanied by a form detailing the auditor’s findings known as Proposed Changes/Adjustments to Your Tax Return. If you agree with the findings, you can sign the agreement form that accompanies it, known as Request for Consideration of Additional Findings. If not, you can file a tax appeal or lodge a protest with the tax office that conducted the audit. You have 15 days to do this.

If you get a Notice of Deficiency, also known as a 90-Day Letter, then it means that you have unpaid taxes. The notice will contain details about the year(s) taxes are owed. You will have 90 days to pay the amount specified or to file a petition with the tax court within 90 days. You must treat this letter seriously and respond to the issue immediately, so you don’t end up without options to address the balance in the letter.

If you are being audited, it is highly likely that the assessment year is not the current one. Maintaining accurate personal and business tax records, filing an error-free tax return, and being punctual about filing can further minimize your chances of being subjected to an audit.

Your 5 step guide to surviving an IRS Audit

If you’ve received a notice from the IRS about a tax audit, you’re probably feeling a bit dizzy right now. Don’t panic! Learn about immediate steps you can take to improve your situation.

If you’ve received a notice from the IRS about a tax audit, you’re probably feeling a bit dizzy right now. First, don’t panic – most audits are done by mail, and there are some immediate steps you can take to improve your situation. Instead, do get organized. You can ace this audit if you do the following five things.

Why am I being audited?

An audit is an official review of your tax return to verify income, credits, and deductions. These inquiries can range from a mail audit – a request to send documents clarifying specific line items – to an office or field audit, an interview with the IRS at their office or your home or business. The IRS selects taxpayers through a random process, as well as intentionally, based on the information provided. Taxpayers with complicated returns and higher incomes may stand a greater chance of being audited.

What should I do first in an audit?

  1. Acknowledge the IRS notice immediately. You don’t want to keep the IRS waiting. Plus, the sooner you respond, the sooner you can get your audit resolved.
  2. Gather supporting documents and verify that they match your return. A typo or miscalculation could have triggered the audit.
  3. Review your tax return to make sure everything is included and correct – we mean double, triple and quadruple check! If you can, look it over with your spouse or someone you trust – two pairs of eyes are better than one.
  4. Follow up with any requests for information by the stated deadline. If you don’t, the IRS will assess additional taxes based on what they think you owe without your input or defense. For office or field audits, make sure your documents are organized and that you are prepared to answer questions and defend your tax return.
  5. Consult a tax professional if you have questions or need help with the audit process. Having the guidance of a skilled specialist can ease your anxiety and help you proceed with confidence.

Do I have rights in an audit?

Be truthful when providing information to the IRS – it’s a crime to lie to a federal agent. If you don’t agree with the penalties and taxes assessed by the auditor, ask to present your case to the audit manager. They may agree with your defense, saving you time and money. If they don’t, you can file an appeal with the IRS Office of Appeals for further review.

If you end up owing money, pay it as soon as you can. This will help minimize penalties or interest which continue to accrue until the full tax bill is paid. If you are unable to pay your tax bill in full right away, the IRS does offer Installment Agreements. However, the IRS Installment Agreement has a fee, charges interest based on the Treasury rate, and continues to assess penalties and interest on the unpaid balance until the total is paid in full.

If you are facing an IRS tax audit, remember: Don’t panic. Just get organized and be prepared to present your case truthfully and confidently.

How long does it take to resolve an IRS Audit?

IRS audits are rare. But if you are subject to an audit, how long does it take to resolve?

Audits and the Assessment Statute of Limitations

Audits are almost never resolved in a day. From the moment you receive an audit notice to a final resolution (including appeals), you may need two years or longer. The IRS must close the audit and take action to assess the additional tax, penalties, and interest before the assessment statute of limitations (the “Assessment Statute Expiration Date or “ASED”) expires. The normal ASED is three years from the date of filing a return.

For a 4/15/2019 filer, the normal statute would expire on 4/15/2022. There are exceptions to the three-year ASED. Two more common exceptions to the 3-year ASED include if a taxpayer excludes more than 25% of income (now a 6-year ASED) or commits fraud (fraud has no ASED). Often, the IRS will ask for an extension of the ASED which—if agreed to by the taxpayer—allows the IRS to continue the audit for a longer period as stated in the extension agreement.

Most 1040 audits are completed within 26 months (27 months for businesses) after filing. Why? The IRS, as a rule, sets this time frame so it can have adequate time to assess the additional tax before the ASED expires (the IRS calls this “protecting the ASED”). Also, the IRS cannot start an audit with 12 months or less remaining on the ASED unless it gets special internal approval. As stated above, there are exceptions to this general time frame.

Time frames for different audit types/actions

If you are involved in an audit, here are potential time frames you need to know:

Type of Audit Considerations
Mail Audit
One to nine-month resolution
Most mail audits can be resolved in one month if the taxpayer addresses the IRS letter instantly with one thorough and complete response. Multiple responses and disputes can last even longer than 9 months. Add more time if the audit is appealed.
Face-to-Face (office/field) Audit
Three to 15-month resolution
Office audits generally take less time if the initial meeting with the IRS completely addresses all issues. Field audits are generally extensive (small business audits) and time duration can be shortened by thorough preparation. Add more time if the audit is appealed.
Audit Appeals
Four to 15-month resolution
Audit appeal appointment times generally begin about 3 ½ months after the close of the audit. The average audit appeals resolution time is 11 months
Audit Reconsideration
Three to nine-month resolution
An accepted audit reconsideration ordinarily takes about three months to assign to an IRS auditor. Thorough evidence and documentation can lower duration time. If the dispute is only for accuracy penalties, the process can take up to 3 years.

Tips to spend less time with the IRS in an audit

Taxpayers cannot control the amount of time it takes for the IRS to conduct an audit. IRS auditors sometimes they have too much on their plate to conduct the audit quickly. It helps to understand the mindset of your auditors so that you can effectively deal with them during the examination.

However, taxpayers can follow a few tips to minimize their time with the IRS. Timely, complete responses are the key to resolving the most common audit – the mail audit.

Face-to-Face audit duration usually is dependent on the complexity of the taxpayer and the condition of their records. Most field audits are conducted on the most complex taxpayers, including business entities. Naturally, the field audit takes longer to complete. For Face-to-Face audits, the prepared taxpayer who is in a position to control the information flow with the IRS usually spends the least amount of time with the IRS. A prepared taxpayer typically anticipates IRS questions and can provide answers that avoid additional IRS audit inquiries.

Finally, appealing an audit’s outcome can add considerable time to the audit process. However, appeals are important parts of the audit process. Taxpayers exhausted from the audit should always dispute valid disagreements, including penalty disputes, with the IRS Independent Office of Appeals. This extra time is usually worth the effort.

One final tip: taxpayers should consider using a licensed tax professional to help with Face-to-Face audits and disputing audits with IRS Appeals. Experienced tax professionals understand the audit process and how to effectively manage the audit to reduce the amount of time spent dealing with the IRS. For assistance creating a strategy to address your tax issue, contact us today for assistance and to find out the various wanys we can help you.

 

Will my tax return trigger an Audit?

However small the chances, you likely want to avoid being audited by the IRS. Here are some tips to help you figure out if your return is likely to spark an inquiry.

Contrary to popular belief, the chances of being subjected to an IRS audit are quite low – 0.54% if we go by the figures for 2017. However small the chances, though, you likely want to avoid being audited by the IRS, period. Here are some tips to help you figure out if your return is likely to spark an inquiry.

What is an Audit?

The purpose of an IRS audit is to verify the financial information you’ve included in your tax return is correct. An audit helps the IRS determine if you have adhered to tax law and reported the correct amount of income, or claimed legitimate deductions or credits. An audit can take place in person or via mail.

What Can Trigger Audits?

The process of selecting tax returns for audits by the IRS is partly done by computers, since the comparing information received from third parties to information on the tax return has been automated. If the computer generates an audit letter, it doesn’t necessarily mean you have done anything wrong, just that an anomaly has been detected on your return, and raised a red flag. This could be a simple mistake, such as a typo, or the IRS may need supporting documentation for your claim.

Being careful when submitting your tax returns can help you avoid mismatch audits. Other factors like high income or extremely low income may be unavoidable, but the appropriate supporting documents should be able to resolve matters, getting you out of an audit without extra penalties or interest.

While you shouldn’t necessarily be afraid of these potential flags, it would help to keep them in mind while filing your taxes.

Does a large tax refund trigger an audit?

A large tax refund in itself is not a red flag. However, if the refund is a result of fraudulent claims, such as inaccurately reporting income or claiming deductions you are not actually eligible for, then it can trigger an IRS audit.

Your return is more likely to come under scrutiny if your income has decreased significantly or your charitable deductions have significantly increased, leading to an unusually large tax refund.

Can charitable deductions trigger an audit?

There is no reason for the IRS to initiate an audit based on the charitable deductions you have claimed, unless it is disproportionate to your income. According to the IRS, you can deduct charitable contributions amounting up to 60% of your Adjusted Gross Income (AGI), and if your deductions are above this, they can be carried forward to the next year. Do not make false claims, and ensure you have all necessary receipts and any other documentation you need to prove your charitable donations.

Will rounding off figures attract an IRS audit?

The IRS allows taxpayers to round to the nearest dollar when completing their return. Taxpayers should round down at 49 cents or below, and up at 50 cents or above. For example, a taxpayer with an income of $42,159.60 would round to $42,160 – but an income of $51,268.49 would be rounded to $51,268.

Will claiming my hobby as a business bring on an audit?

There is a fine line between a hobby and a business when it comes to tax rules. Claiming your hobby as a business when you have not demonstrated a net profit in at least three of the preceding five years can lead to an IRS audit. The IRS has a number of methods to distinguish a business from a hobby – a taxpayer must have a business plan and show an attempt to make a profit.

Does checking for refund trigger audit?

No. Checking to see if you have received your refund does not trigger an audit. But there are many other factors that can lead the IRS to take a closer look at your return – such as math errors, failure to report income, or too many deductions claimed. Since the IRS can pursue an audit for up to three years after the return was filed, it is possible to be audited even after you have received a refund.

Does home office deduction trigger an audit?

Claiming a home office deduction is a red flag to the IRS primarily because a lot of people tend to misuse the deduction. According to the IRS, a home office deduction is to be claimed by people who use a part of their home exclusively for business or trade purposes. If you have a room or separate area of your home that you use exclusively for business, you may be able to deduct the business portion of your expenses on your tax return. You must be self-employed, and the space should be a place that is not used for any other purpose or personal use, other than your work. You could be in trouble if you claim a home office deduction while working a few hours every week at a desk with a computer set up in your living room or spare bedroom.

Will having assets or cash in a foreign country lead to an audit?

This is a major red flag for the IRS, especially if the nation in question is one that has tax laws which are much more lenient than the US. Of late, the IRS has been strictly monitoring such tax returns. You must report all foreign accounts that you hold with a total cumulative balance exceeding $10,000. If your foreign assets are valued in excess of $50,000, these must also be reported. In most cases, the IRS can seek information about your account from the foreign bank.

All this does not mean that you have to live in fear of an audit all the time. Maintaining accurate records and keeping the proof ready for all the deductions claimed and income reported will ensure that you have nothing to worry about, even if an audit is conducted.

What is the statute of limitations for an IRS Audit?

By being aware of the statute of limitations for an IRS audit, you can save yourself trouble and money.

Being audited is not pleasant. However, tax audits are conducted at the discretion of the IRS, and there is only so much you can do to steer clear of those. But IRS audits are subject to a statute of limitations; this means the IRS cannot initiate an audit after a specific number of years have passed since filing the tax return. By being aware of the statute of limitations for an IRS audit, you can save yourself trouble and money.

Tax Law Timelines for Audits

In terms of the statute of limitations, tax law is the same for individuals, partnerships, corporations, and nonprofit organizations. Under normal circumstances, the IRS can audit tax returns filed over three years. Here are some key features of the statute of limitations applicable to IRS audits:

  • The statute of limitations runs for three years from the due date of the return if the return is filed before the due date.

  • If you get an extension up to October for filing your returns, the three-year rule will apply from the new due date.

  • If you filed late without an extension, the three-year limit will apply from the date of filing.

Are There Any Exceptions to the Statute of Limitations?

If the IRS has reason to believe that there is an understatement of more than 25% of gross income, they can go as far back as six years. Some triggers that can lead to an extension of the statute of limitations on an IRS audit are:

Understatement of Income: If you have underreported your income by over 25 percent, you can be audited for up to six years. Doing this unintentionally does not clear you in the eyes of the IRS. If you paid less than what you actually owe as a result of overstating credits or deductions, the six-year rule also does not apply. If the IRS determines you acted fraudulently, you can be audited for any number of years!

Overstating Your Basis: Basis is what you paid for (plus any improvements to) an investment, tangible asset, or property you own. If you overstate your basis when you sell some investment, tangible assets, or property, you can be audited for up to six years. For example, you sell a property for $3 million and claim that your basis in the property was $1.5 million, when it was actually only $500,000 so you paid taxes on $1.5 million of the profit when you should have paid taxes on $2.5 million.

Omitting Foreign Income, Gifts, and Assets: Offshore assets and income have been a major trigger for IRS audits for a long time. If you omit more than $5,000 of your foreign income, you are leaving yourself open to a six-year audit window. Foreign income here includes interest earned on an overseas account. Simply disclosing the existence of the account or filing an FBAR reporting the existence of the account will not exempt you from the six-year rule. There are certain forms that have to be submitted when you have foreign assets or receive foreign gifts. Failure to submit these can cause an extension of the statute.

Fraudulent Return or Not Filing a Return: The IRS is not bound by any statute of limitations if you have not filed a return or if it can prove that you have committed criminal or civil fraud. Not signing your return also gives the IRS a good reason to extend the statute.

State tax statutes can vary from the three- and six-year federal tax statutes. For example, California has a four-year basic tax statute of limitations.

Can someone "turn me in" to the IRS?

What happens when someone is turned in to the IRS for tax fraud? The IRS gets tens of thousands of informants each year. Here is how they look at this information.

es. It is surprisingly easy to do so.

The IRS even has a form for turning in suspected tax cheats: Form 3949-AInformation Referral.  The IRS also explains on its website how whistleblowers can report various forms of suspected tax fraud. (Note: whistleblowers can claim a reward using IRS Form 211.)

IRS Form 3949-A allows informants to provide information on tax cheats

For years, the IRS and the tax code encouraged whistleblowers to turn in both legal and illegal activity that results in tax fraud. The tax code provides incentives for whistleblowers. Informants may be entitled to a reward if their original information leads to the collection of additional taxes and penalties. Individuals that have information about tax fraud and want to claim a reward should use Form 211.

The IRS also plans to make it easier for informants to report their concerns. They are exploring an online Form 3949-A which would make it easier for informants to submit an online information referral application.

How many people get turned in to the IRS?

The Treasury Inspector General for Tax Administration (TIGTA) provided some insight on the number of taxpayers turned into the IRS. The TIGTA report provided information on the number of Forms 3949-A received:

TIGTA data on the number of informants providing information on tax cheats

The report also provided data on how many information referrals were audited and the additional assessments from the audits:

TIGTA data on audits started from informants

The data clearly shows that many informant reports do not result in IRS activity. In fact, the data indicates that only a little more than 6% (FY16-FY18 comparable data) result in an audit.

However, these leads are very fruitful for IRS auditors. The IRS clearly gets a substantial increase in average assessments from its informant-sourced audits vs. other sources of audits. For its Small Business/Self-employed audits, the IRS gets over a 64% increase in its information report sourced audits ($30,225 vs. $18,393).

In addition to audits, the IRS also sends a few of these referrals each year to IRS Criminal Investigation for review. The results of these investigations are not known.

What can a taxpayer be turned in for?

Section B of the Form 3949-A provides the informant a list of violations:

Alleged violations list on Form 3949-A, Information Referral

The list is fairly inclusive of most tax fraud situations, and the “other” category provides the informant a catch-all for any further allegations of wrongdoing not covered on the list.

Most quality information referrals come with evidence supporting the allegations. The Form 3949-A allows for the informant to attach the supporting evidence.

What does the IRS do with the information?

Informant referrals are looked at closely by the IRS. However, very few informant referrals make it into the hands of IRS agents for investigation. When the IRS receives the referral, they screen it for routing to specialists throughout the IRS. For example, complicated foreign bank account referrals may go to the IRS’s Large Business and International Division. Unreported income from a small business owner may go to IRS Small Business/Self-employed units.

The IRS can do internal and external research to determine if further action is warranted. For example, an information referral may allege that a taxpayer is a small business non-filer. The informant could provide invoices from the non-filer as evidence that they are in business and their website address. The IRS could review its records to see if the taxpayer filed a return. The IRS can also review the taxpayer’s website and see if they have been in business for the non-filing years. If validated, the IRS can send the report for a non-filer investigation.

What makes a good IRS referral?

A good information referral provides evidence of wrongdoing and an audit trail that the IRS can validate. In short, it provides the auditor a clear line-of-sight to finding the tax fraud activity.

Many information referrals received by the IRS reflect very little evidence of wrongdoing. For example, a competitive business may allege that that their competitor has two sets of books and isn’t reporting all of their sales. In this case, the IRS may be interested but has some practical reservations that the audit would be fruitful because it does not have a specific audit trail to follow. The IRS may also be reluctant to pursue the referral because it may have come from a disgruntled competitor with very little evidence of wrongdoing.

However, if a referral includes specific evidence of wrongdoingevidence of unreported lines of business that the taxpayer was hiding are good examplesthe IRS may be more interested. In addition, the referral is more likely to be accepted if it includes traceable information like a vendor paid in substantial amounts of cash and evidence showing that the subsequent sales were “off the books.” Audit trails are very important.

What can we expect in the future?

The IRS always looks to use its limited audit resources effectively. The IRS likes to start audits that it believes will  provide the best return on investment. Good IRS information referrals have always provided the best return on investment.

Taxpayers should always do the right thing and pay their taxes, or they may have to look over their shoulder to see if someone is turning them in to the IRS. For assistance creating a strategy to address your tax issue, contast us for assistance .

CONTACTING THE IRS
IRS Phone Lines: Frequent Numbers & Hours

If you have to deal with the IRS outside of filing your tax return, that usually means calling or visiting them. Visiting the IRS is almost out of the question. With about 358 taxpayer assistance centers and long waiting lines for an appointment, face-to-face interaction is not realistic. That leaves calling the IRS by phone.

If you have to deal with the IRS outside of filing your tax return, that usually means calling or visiting them. Visiting the IRS is almost out of the question. With about 358 taxpayer assistance centers and long waiting lines for an appointment, face-to-face interaction is not realistic. That leaves calling the IRS by phone.

When it comes to reaching the IRS through its phone lines, it would be beneficial to know how and when to contact the IRS.

Here is a helpful chart of the most common phone numbers used by taxpayers and Tax Pros to get IRS help on post-filing issues and account information:

IRS Hotline

Phone number

Hours/availability

Individual accounts

(800) 829-1040

M-F, 7A.M.-7P.M., local time

Business and Specialty accounts

(800) 829-1040

M-F, 7A.M.-7P.M., local time

Taxpayer Advocate National Hotline (central intake)

(877) 777-4778

M-F, 7A.M.-7P.M., local time. Local offices: 8A.M.-4:30P.M.

Payment plans: Taxpayer not in IRS Collection

(800) 829-0922

M-F, 7A.M.-7P.M., local time

Automated Collection: Individuals

(800) 829-7650 (W&I)

M-F, 8A.M.-8P.M., local time

Automated Collection: Self-employed and businesses

(800) 829-3903 (SB/SE)

M-F, 8A.M.-8P.M., local time

Centralized Offer in Compromise Unit

(844) 398-5025 (Memphis) (844) 805-4980 (Holtsville)

M-F, 8A.M.-10P.M. (CST) M-F, 8A.M.-10P.M. (EST)

Centralized Lien Unit

(800) 913-6050

M-F, 8A.M.-5P.M., local time

Treasury (Tax) Offset Program (not an IRS number)

(800) 304-3107

M-F, 7:30A.M. –5P.M. CST

Practitioner Priority Service (PPS) Tax Pros only.

(866) 860-4259 Option #2: Individual accounts Option #3: Business accounts Option #4: Automated Collection System

M-F, 7A.M. – 7P.M., local time.

Automated Substitute for Return Unit

(866) 681-4271

M-F, 8A.M.-8P.M., local time

Some tips:

  1. Get an IRS e-Services account: Get access to your IRS account by authenticating your identity on IRS.gov. Access to these online services allow instant access to your transcripts and a few IRS functions.
  2. Taxpayers shouldn’t call the 1040 line for tax law answers: The 1-800-829-1040 number has long been the central number for taxpayers to call. However, since 2016, the IRS has not answered tax law questions on this line. Your best bet is to research the issue yourself or contact a Tax Pro for assistance.
  3. Call early: IRS phone lines get clogged up quickly. It is best to call at 8 a.m. to avoid wait times or “courtesy disconnects.”
  4. A Tax Pro can contact the IRS on your behalf: Tax Pros can access the Transcript Delivery System or contact the Practitioner Priority Service (PPS) to get information for their clients. Access to PPS is limited to Tax Pros with valid authorizations (i.e., Forms 2848 or 8821) from their client

Getting in touch with the IRS during COVID-19 Pandemic

Taxpayers felt the impact of IRS closures due to the coronavirus pandemic. IRS campus operations and phone services were almost non-existent, leaving taxpayers in a quandary on how to get answers from the IRS.

Taxpayers felt the impact of IRS closures due to the coronavirus pandemic. IRS campus operations and phone services were almost non-existent, leaving taxpayers in a quandary on how to get answers from the IRS.

Most IRS employees at central campuses now have remote working capabilities (laptops, VPN access, etc.) and are able to assist taxpayers. However, the IRS is overwhelmed with taxpayer inquiries and questions, especially as it relates to stimulus payments.

Taxpayers with compliance issues can interact with the IRS, but may have to wait months to get an IRS acknowledgement of their response and resolution. The IRS is holding off on issuing many notices during this time.

Contact a Local Taxpayer Advocate (LTA) in Texas

City Address Phone Fax
*Austin 3651 S. Interregional Highway, Stop 1005 AUSC, Austin, TX 78741 (512) 460-8300 (855) 204-5023
Dallas 1114 Commerce St., Room 1001, MC1005DAL, Dallas, TX 75242 (214) 413-6500 (855) 829-1829
El Paso 700 E. San Antonio St, C101F, El Paso, TX 79901 (915) 834-6512 (877) 929-1822
Houston 1919 Smith St., Stop 1005 HOU, Houston, TX 77002 (713) 209-3660 (855) 829-3841

IRS.gov can provide a phone/fax # for your local advocate

*Austin’s mailing address is: IRS Taxpayer Advocate Service, P.O. Box 149223, Austin, TX 78767.

Common taxpayer questions

Taxpayer questions that can only be answered by the IRS have not stopped because of the pandemic. In fact, because of stimulus checks, the need for the IRS to answer taxpayer questions is greater than ever.

Here are some of the more common taxpayer questions during this time:

  1. Why is my refund being held up? (or, if the IRS is holding the refund pending information from the taxpayer, how does the taxpayer get the IRS to consider the information and release the refund?)
  2. I got an identity verification letter from the IRS. How do I speak to an IRS representative to verify my identity and release my refunds?
  3. Why can’t the “Get my payment” tool provide me with information about when and how much stimulus payment I will receive?
  4. I am trying to refinance my house and take advantage of favorable interest rates, but I need a payoff amount on my outstanding balance. How do I get an official payoff amount from the IRS?
  5. I am suffering financial hardship and also owe the IRS.  How can I modify my payment plan or ask for payment deferral until my situation gets better?
  6. How can I get a copy of my IRS transcripts when I am not able to create an IRS online account and use the “Get Transcript” feature?

Many of the questions raised have urgent financial impacts for the taxpayer. Refund holds and stimulus payment issues rise to the top of the taxpayer concerns. The IRS provides frequent updates at www.irs.gov/coronavirus.

Taxpayers with immediate needs have multiple options for contacting the IRS. A few are included below:

Hardship situations: If the taxpayer has a financial hardship, the taxpayer can contact their LOCAL Taxpayer Advocate’s office. Find the phone and fax number for your local advocate here: https://www.irs.gov/advocate/local-taxpayer-advocate. For example, if you live in Texas, you will pick the advocate’s office closest to your location:

When you call, you are likely to get a voicemail (not speak to a live person) that will allow you to leave your information to receive a call back from a caseworker. The message will give you their timeframes for returning a call.

One important tip in working with your local taxpayer advocate is this: sending a Form 911Request for Taxpayer Advocate Service Assistance, is the best way to get the IRS to address your issue. An informal phone request to the Taxpayer Advocate Service (TAS) may not get you into their workstream, but a Form 911 allows your case to be formally assigned to a caseworker. Formal assignment means you get a call back and attention from the IRS. Taxpayers can get Form 911 online at https://www.irs.gov/pub/irs-pdf/f911.pdf

Download a Form 911 at IRS.gov
Make sure you fully complete the form, including your hardship in box 12a and the specific relief you are requesting in box 12b. Fax the Form 911 (and any supporting documentation, notices) to the local TAS office. This will get the process started. You may hear back from a caseworker in a week. With high caseloads, it is not uncommon for the IRS to take 3 weeks or more to respond.

Collection issues: If you owe back taxes and need answers, the IRS’s central Automated Collection System (ACS) is up and running. ACS can be reached at 1-800-829-7650 or 1-800-829-3903. Taxpayers can contact the ACS to speak with a live person about skipping installment agreement payments, obtaining payoff information, and resolving past-due accounts.

Some taxpayers have used this line to ask questions about their stimulus payments and other account issues. Some ACS agents will entertain these questions, but they may try to push taxpayers to the online tool instead.

If you are calling any of the IRS hotlines, be prepared for very long wait times. In fact, many taxpayers who call later in the day or during high call volume times are not able to get through to the IRS. Call early.

Try to create an online account for information

The best way to get your personal tax information is to access your account at IRS.gov. Your account is especially useful in obtaining past filing information. Taxpayers can try to create an IRS online account and view their transcripts.

However, past experiences show that only about 38% of taxpayers are successful in creating an IRS online account. Most cannot pass the IRS’s strict authentication rules which include providing personal financial account information and a cell phone that is in their name.

Information needed to create an IRS online account at IRS.gov
The pandemic has shown the urgent need for the IRS to modernize its taxpayer services platform to allow taxpayers to interact with the IRS online. The IRS is in the middle of a 6-year modernization effort

Back to normal soon

IRS operations will hopefully return to normal soon. Taxpayers who need information should try IRS online resources first. However, if a taxpayer has a hardship, they should turn to their local Taxpayer Advocate’s Office. For assistance creating a strategy to address your tax issue, contact our office.

NAPOLI TAX SERVICES LLC

12 PENNS TRAIL

NEWTOWN PA 18940

Based in Newtown PA, a Phila PA suburb. Serving Clients in Phila Metro region and Nationwide.

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215-995-0457