IRS Letter

What is a correspondence audit?

Receiving a notice from the IRS is usually an action nobody looks forward to, especially the notice that says audit. However, receiving an audit from

the IRS should not always frighten you because of the three types of audits the agency performs, there is one you can almost be happy about, which is a correspondence audit.
At the very least, you may be relieved since it isn’t a face-to-face process. Knowing what a correspondence audit is and how to handle it will guide you when you receive such notice from the IRS.

What is a Correspondence Audit?
The word correspondence is not often used these days, but it commonly means sending something in the mail. And that is exactly what a correspondence audit does and it takes place through the U.S. postal service, good old snail mail.
Based on statistics, over 75% of all audits are correspondence audits. It is simplest type to deal with and as well the least invasive. Even with that, the chances of any type of audit at all are pretty tiny. In 2016, the IRS audited just 0.6% of individual returns from that year. Even rich people have little or nothing to worry about. Also in 2018, only 3% of Americans who earned more than $1 million were selected for audit.

Audit selection process is pretty random. Most returns are tagged by a computer algorithm, most usually for unallowable items. Thus, the computer software used is called the Unallowable Items Program. Otherwise, audits occur because an informer tipped off the tax authorities, alleging wrongdoing or tax evasion. The IRS has another type of program called the Discriminant Index Function (DIF) that screens tax returns and tags each with a score showing the probability of error. The program has been in use since 1969 and confirms various lines on the tax document for problems.

The IRS has as much as three years to audit a specific return, so you should keep all documentation at least that long just in case a need for it arises In the future.
You can decide to take care of the whole thing that way, or you may need a phone call or two. Still, you won’t need to go to your local IRS office, and the agency won’t pay a visit your home or business. That is absolutely to your advantage.

The scope of a correspondence audit is comparatively narrow. If problems arise, it could expand into a field audit, where you need to meet with your local IRS representative. Except you know you have issues, don’t worry too much about an escalation. The correspondence audit is mostly used for simple errors on a tax return that can be corrected without difficulty through the mail.

What the IRS Sends
The first thing you will likely receive from the IRS is a 566 Letter. The IRS uses this letter to request more information so as to process your return, like data on your income, expenses, or itemized deductions. The letter has a list of missing documents the agency needs to confirm your return is accurate.

Responding to the IRS
If you fail to respond or the IRS requires even more material, you may receive a CP2000 letter or notice. More generally, if you receive this letter, it shows the information on your tax returns doesn’t correlate with the IRS records. Remember, most employers of any type are required to send a copy of your income statement to the IRS. With the CP2000, the IRS is suggesting a change to your return.
If you are faced with unpaid taxes, you may receive certain collection notices you ought to understand.

What to Expect
First, don’t panic. Like any other audit, a correspondence audit could end in your favor if you overpaid. Besides, with such a low-level audit, there’s most likely not much wrong.
People usually get a correspondence audit because they have unallowable items, which are IRS-speak for trying to take stuff off your taxes that you are not supposed to. Few examples are:

• Automobile expenses
• Medical expenses
• Utility taxes
• Disability income exclusion
• Deduction for married couple when you both work
• Adoption expenses

If you receive a 566 letter from the IRS and you provide the documentation, that’s final. When the documentation is approved, you get a nice “no-change” letter, and it’s over. If you have questions or uncertainties, the IRS is willing to speak by phone, although it may take a few days to get back to you.

If the documentation is not approved, or your income information doesn’t match theirs, the IRS follows up with a CP2000. The letter informs you of your appeal rights and any proposed changes to your tax return.
When you receive the CP2000, you must state whether you agree or disagree with what it says.

• If you agree that you owe money, submit payment right away, as required, or request a payment plan to pay off the balance.
• If you disagree, you must provide documentary support for what you claim. In any case, you must reply within 30 days of receipt.
• If you send documentation, the IRS may overturn its position, or it may send your return for further review.

The IRS can send written requests or a summons to third parties linked with you, including banks, vendors, clients, and business associates. The agency requests and reviews a wide range of documents, including:

• Receipts and invoices
• Records and credit card statements
• Canceled checks
• Copies of tax returns from previous years
• Copies of business income and expenses
• Tax returns from related taxpayers

The IRS cautiously scrutinizes to see whether the stated income and expenses are accurate.

How to Respond
First, it is advisable that you respond as soon as possible. Putting it off won’t make it go away; as a matter of fact, it just makes it worse. The following should be noted;
• The letter has a deadline. If you can’t meet it for any cause, call the number and explain your situation or request more time.
• If you send documents, only send copies. Do not send originals.
• If the IRS approves the documentation, you will get a letter stating any alterations the IRS proposes.
• If you are worried the audit will turn up something complex, call your tax attorney.

The initial contact letter offers you 30 days to respond. If you don’t, a second letter, called the 30-day letter is sent. It clearly offers you 30 days to respond. If you still don’t reply, the IRS issues a Notice of Deficiency. You have duration of 90 days to file suit to contest the determination made by the IRS. The IRS will file suit in the United States Tax Court, which you definitely don’t want to happen.