How do you know if your taxes are being audited?

June 30, 2022 by Kate Ferreira, CTEC
Woman reading letter

If I had to choose between being audited or being tasked with taking the One Ring to Mount Doom, I honestly think I would rather go on an adventure with the Hobbits. Unfortunately, while The Lord of the Rings series might be fiction, an audit is not. With that in mind, knowing whether your taxes are being audited is a useful skill to have.

First things first, it is important to note that the IRS will always notify you by mail if your tax return is selected for audit. The IRS will not initiate an audit by a phone call, email, or text message. If you receive a threatening phone call from someone claiming to be the IRS, hang up immediately and do not give them any of your personal information. The IRS will never call and threaten taxpayers. For additional information regarding a phone call from someone claiming to be the IRS, click here to read one of our blogs on this topic. Keep in mind that, under certain circumstances, the IRS may call taxpayers and visit their homes or places of work without notice. Generally, this happens when the IRS attempted to contact the taxpayer on several previous occasions with no response. The IRS might also call or visit when an audit is already in progress. The IRS has an informative webpage regarding tax scams to look out for.

As mentioned above, if the IRS selects your tax return for an audit, you will be notified by mail. The letter from the IRS will contain your name (and spouse’s name if applicable), the tax year that is currently being reviewed, a notice number, and the issues from your tax return that are being looked at. It is important to look at the tax year in question when reviewing your notice. The IRS will typically review tax returns that have been filed within the last three years, which is the IRS’s general statute of limitation period for reviewing income tax returns. However, if they identify a substantial error, the IRS may review a return that was filed up to six or seven years after it has been filed. Furthermore, the IRS may extend an audit already in progress to other tax years – but usually will not go back more than six years. Bear in mind, there is no statute of limitation period for tax returns that are fraudulently filed or if a return was never filed when there was a filing requirement. In general, there are four types of IRS audits and they include:

 

  • Automated Underreporter Notices
  • Mail audits
  • Office audits
  • Field audits

One of the most common audit notices taxpayers receive comes from the IRS Automated Underreporter (AUR) Program. The AUR program is a computer-based system that matches information returns the IRS received with the information the taxpayers reported on their filed return. Examples of information returns that are reviewed include Form 1099-MISC, Miscellaneous Information, Form 1099-NEC, Nonemployee Compensation, W-2, Wage and Tax Statement, 1098, Mortgage Interest Statement, 1099-B, Proceeds from Broker and Barter Exchange Transactions, 1099-C, Cancellation of Debt, 1099-K, Payment Card and Third Party Network Transactions, etc. If the computer program suspects there is an error, such as an income mismatch, underreported income, or missing income, the return will be flagged and sent to a tax examiner. The tax examiner will review the return to determine if a notice should be issued to the taxpayer. If a notice is required, the IRS will send the taxpayer Notice CP2000, We are proposing changes to your (tax year) Form 1040 tax return. Generally, taxpayers have thirty days to timely respond. Taxpayers may contact the IRS by phone and request an extension of time to respond, if needed.

Another type of audit taxpayers frequently receive is an audit conducted by mail. Often the IRS issues a mail audit when they are reviewing if a taxpayer qualifies for the filing status reported or tax credit claimed on their return. For example, the IRS may review a return where the taxpayer claimed the Head of Household filing status or the Earned Income Tax Credit.

Although not as frequent as mail audits or AUR notices, the IRS does conduct office audits which take place at an IRS office or service center. Then, there are field audits, which take place at a taxpayer’s home, business, or where the taxpayers records are stored. Taxpayers who receive a notice for a field audit notice should be prepared for an extensive review of their return.

There are over 70 different types of notices the IRS sends out which cover a wide range of issues that go beyond an audit notification. Some of the most common notices the IRS issue that are not considered an audit notification are:
 
  • You have a balance due.
  • You are due a larger or smaller refund.
  • The IRS has a question about your tax return.
  • The IRS needs to verify your identity.
  • The IRS needs additional information.
  • The IRS changed your return.
  • The IRS needs to notify you of delays in processing your return.

These are just some of the common reasons that the IRS sends out letters, but every tax situation is unique. You can always visit the IRS website at IRS.gov to review specific information about the notice you received. Most notice types are found in the top or bottom right-hand corner of the letter.

The notice will also provide you with instructions on what to do if you agree or disagree with the notice. Whether you agree or disagree with the IRS notice, there will be instructions on how to move forward with responding, if needed.

If you have a membership with TaxAudit, and just received a letter from the IRS, then this is the perfect time to contact us! Click here to start a case so we can begin looking into the tax issue for you. You can also contact us by calling our Customer Service Department at 800-922-8348.

If you have not received a letter from the IRS but want the peace of mind of having audit defense in the event that your tax return is selected for audit, then click here to purchase our prepaid audit defense.

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Kate Ferreira
Communications Associate

 

Kate Ferreira is a Communications Associate with TaxAudit. A California Tax Education Council (CTEC) registered tax professional, Kate has been with the organization since 2015. Kate enjoys the challenge of writing about complex issues – including taxes. Outside of work she enjoys traveling, listening to vinyl, and going on adventures with her dog, Indiana Bones.


 

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