IRS Tax Notice, Tax Return Audit, and Audit Appeals
The information on this page will help you prepare for an IRS tax audit and guide you through the Audit Appeal and Audit Reconsideration process.
Tax Notice Tips - Seven Things to Know If You Receive an IRS Tax Notice
Did you get one of those scary audit notices from the IRS in your mailbox?
The good news is: you are not alone. Every year, millions of letters and notices are mailed out to taxpayers.
If you received an IRS tax notice, just keep these seven eFile Tax Tips in mind:
1. Stay calm and don’t panic. The IRS is a bureaucracy and many notices require little attention by you and can be dealt with simply and painlessly.
2. You might be asked to make changes to your account or provide additional tax information. The notice you receive normally covers a very specific issue about your account or tax return. And yes, you might be asked for more money.
3. Each notice will have specific instructions on what to do next.
4. In case you received a notice concerning a correction made by the IRS, you should review any changes and compare them with the information on your tax return. If you agree with the correction, no reply may be necessary unless a tax payment is due.
5. Should you disagree with the correction made by the IRS, be sure to respond as requested. Explain why you don't agree and keep records of your correspondence with the IRS (include documents and information you want the IRS to consider, along with the bottom tear-off portion of the original notice). Mail your tax information to the IRS address shown in the upper left-hand corner and allow at least 30 days for a response from the IRS.
6. If you have questions, call the phone number on the top of the notice. When you call, have a copy of your tax return and the notice on hand and write down the ID of the IRS agent to whom you speak.
7. It is very important that you keep copies of all your records and correspondence safely stored in case of a tax audit.
What's the difference between an ambitious tax auditor and a rottweiler?
A rottweiler eventually lets go.
Tax Audit Statistics and History
The thought of a tax audit terrifies most taxpayers. Even the mention of the IRS can evoke strong emotions from people suspecting that an IRS auditor is there to increase their tax liability rather than give an accurate assessment of their taxes.
According to the IRS the total number of audited individual tax returns increased by 7 percent to 1,384,563 in 2007 from 1,293,681 in 2006. That’s the highest number since 1998. Good tax record keeping is important in case you get audited.
Tax audits are selected by computer programs that calculate which tax returns are most likely to be in error. The auditor then approaches the individual and conducts a line by line analysis of their personal finances.
The IRS has averaged a little bit less than a 1% audit rate of all individual tax returns. That means that the IRS audits less than one out of every 100 tax returns. Other signals that might trigger an IRS audit include a high amount of deductions compared to income, tax items that are erroneous, or failing to include proper proof or explanation for major one time losses.
Income for Tax Returns
Tax Returns Filed
Tax Returns Examined
Less Than $25,000
$25,000 to $50,000
$50,000 to $100,000
Greater Than 100,000
The Latest Tax Audit Statistics
In 2009, the IRS introduced a new tax audit or enforcement group called the Global High Wealth Industry Unit with the objective to investigate the finances of the wealthiest US taxpayers. A statistic released during 2011 shows that the tax audits for taxpayers with incomes above $10 million increased by 75% during 2010. That results in a tax audit of 1 in 5 of America's wealthiest households or 18.5% of that income group (compared to 1 in 10 during 2009).
The second highest tax audit increase was in the income bracket range from $5 million and $10 million; the audit increase was 55% in 2010 or totaling 11.6%. Tax audits for taxpayers with an income between $ 1 and $75,000 remained steady over the years.
In summary, from 2009 to 2010 tax audits increased by about 11% to a total of 1.58 million tax returns or about 1.11% of all tax returns filed. The IRS cost for these audits: 53 cents per $100 taxes collected (3% more than in 2009).
Taxpayer Stories of Painful IRS Audits
Avoiding an IRS Tax Audit
There are many preventative steps that an individual can take to avoid a tax audit. If you are already in the process of a tax audit, there are things that you can do to expedite the process and incur minimum unfavorable adjustment to your tax obligation. The most important thing to do to avoid an audit is to keep good records. Good records allow you to easily organize and accurately calculate your tax return. Good records also supply the physical proof for unusual deductions. If you are already in the midst of an audit, absolute compliance is the best way to help your situation. Making things easier for the auditor shows that you have nothing to hide and that you want to get the process over as soon as possible.
Don’t forget to print and/or save a PDF copy of your tax return for your tax records. On efile.com, you can print your completed and accepted tax return until late October each year.
If you efiled your previous year's tax return on efile.com you will be able to import this data into your new tax return. For example during tax season 2012 you will be able to import 2011 Tax Return data into your new 2012 Tax Return. It is in your personal interest and it is very helpful to have your previous year's return available when you start to prepare your 2012 Tax Return. It might also be helpful to have copies of your tax returns from earlier years handy in case there are any questions or if you need to provide documentation for schools, banks, etc.
If you are selected for an audit and the auditor determines an increase in your tax liability, you are entitled to an appeal. The IRS will send you a letter that explains the adjustments made to your tax return. The letter will also inform you of your right to meet with an Appeals officer and how to contact the officer. You must bring supporting documentation to your appeals conference with an Appeals officer.
Get a copy of your tax return in preparation of a tax audit.
Audit Appeals and Protests
If you have been audited and you disagree with the results, you have the right to file an appeal. You may also file an income tax appeal in response to a tax lien, a tax levy, a rejection of an offer in compromise, a penalty, or if you otherwise disagree with a tax liability adjustment made by the IRS.
If the IRS makes an adjustment to your tax liability as you reported it on your tax return, you will receive a letter containing instructions on how to begin the appeals process. You will generally have to make a Small Case Request by filling out Form 12203, Request for Appeals Review, and mailing it to the address indicated in the letter you received. In certain cases, such as owing more than $25,000, you may be required to draft a Formal Written Protest and send it to the IRS.
For more details about how to make an appeal through a Small Case Request or a Formal Written Protest, please see Publication 5 - Your Appeal Rights and How to Prepare a Protest if You Don't Agree.
The IRS Appeals Office is independent from the IRS office whose action you are appealing. Once your appeals request is granted, you will be asked to attend an informal conference with an appeals officer. At this conference, you may represent yourself or you may be accompanied and represented by an attorney, certified public accountant, or other tax professional enrolled to practice before the IRS. You should bring to the conference any documentation which supports your position. You may also bring witnesses to support you.
If you do not agree with the results of the appeals process, your only recourse is the court system. Certain claims may be heard by the United States Tax Court, but only after you have gone through the appeals process. If you choose not to make an official appeal to the IRS, you may still be able make a claim with the United States District Court or the United States Court of Federal Claims.
For more information about your rights of appeal and why the IRS might examine (audit) your tax return in the first place, please see Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund.
Audit reconsideration is an "informal" process through which tax disputes can be resolved without having to take the issue to tax court.
When Can I Request Audit Reconsideration?
You may request audit reconsideration in two cases:
Your tax return was audited by the IRS and you disagree with the assessment.
The IRS created a tax return for you (because you did not file but were required to) and you disagree with the results.
The IRS May Only Accept an Audit Reconsideration Request If:
You submit new information affecting the amount of tax you owe.
You were denied credits you believe you deserved.
You believe the IRS made errors assessing your tax or processing your return.
You filed a tax return after the IRS created one for you.
Note: Remember that even if the IRS accepts your request they may not change their original assessment.
The IRS Will NOT Accept an Audit Reconsideration Request If:
You have already made any sort of payment agreement with the IRS, including: offers-in-compromise, installment agreements, closing agreements, etc.
Any U.S. tax court has already issued a final determination of your tax liability.
"Final partnership item adjustments" have been made to your tax return under the Tax Equity Fiscal Responsibility Act of 1982 (TEFRA).
How to Begin the Audit Reconsideration Process
File a tax return if you have not already done so.
Write the IRS a letter informing them of the changes you wish them to consider.
Include as much documentation that supports your position as possible and your examination report (generally a Form 4549).
Include your daytime and evening telephone numbers and indicate the best time to reach you.
Mail the letter and documentation to the IRS campus indicated on your examination report.
Concluding the Audit Reconsideration Process
Once your request has been considered, or if more information is needed, the IRS will contact you. Whether they have reduced the tax they initially assessed or not, you will now have the choice of paying your tax liability or making an Appeal.
If you decide to pay your taxes, you may pay the bill in full, make an Installment Agreement Request, or make an Offer-in-Compromise.