IRS Tax Notice, Tax Return Audit, and Audit Appeals
What's the difference between an ambitious tax auditor and a rottweiler?
A rottweiler eventually lets go.
Taxpayer Stories of Painful IRS Audits
The information below will help you prepare for an IRS tax audit and guide you through the Audit Appeal and Audit Reconsideration process:
IRS Tax Notice Tips
How to Prepare for a Potential Audit
Audit Appeals and Protests
Audit History and Statistics
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.
The IRS called or emailed me asking for information and/or demanding payments. Is this a legit notice?
It is most likely a tax scam. The IRS only sends notices and letters via mail. They do not contact taxpayers via email, social media, nor phone asking for personal or financial information (or demanding tax payments). If you receive any of these fake notices, report them to the IRS.
What is the best thing to do if I'm audited?
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 with as soon as possible.
If you are selected for an audit and the auditor determines an increase in your tax liability, you are entitled to an audit 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.
Can I receive audit assistance from efile.com if I efiled my return on efile.com?
efile.com offers free audit assistance for any tax returns you prepare and efiled on efile.com. Please contact efile.com and provide details about the audit so we can help you. On your personal, secure support page, you can attach a copy of the IRS and/or state notice you received so we can help you understand what the notice is requesting from you.
If you need a copy of your tax return to prepare for an audit, sign into your efile.com account, click on "My Account" on the upper right corner, and click the appropriate link to download your return in a .PDF format.
If you have purchased a 1040Project plan (provided by My Protection Plus) on efile.com during the preparation of your tax return, you will receive the following services for three years after the filing deadline of the tax year you efiled your tax return, including, but not limited to:
- Evaluation of all related IRS correspondence
- Professional document review, organization, and consultation
- Drafting of letters and other necessary correspondence
- Assistance with telephone communication with an IRS agent for explanations and discussions during the audit process
- Assistance with all forms (including Schedules A, C, and E)
- Assistance with denied credits (Earned Income Credit, Child and Dependent Care Credit, Education Credits, Child Tax Credit, Additional Child Tax Credit, Adoption Credit, Credit for the Elderly or Disabled, Savers Credit)
If you purchased this tax audit assistance plan, please call 866-942-8348 for further assistance or contact efile.com with your tax audit questions.
How do I get a copy of my tax return if I did not efile it on efile.com?
If you did not efile your return on efile.com, please get a copy of your tax return in preparation of a tax audit.
How to Be Prepared for a Potential IRS Audit
There are many preventative steps that an individual can take to be prepared for a potential tax audit. The most important thing to do to prepare for a potential 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. 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 IRS accepted tax return(s) at anytime. Here's how:
- Login to your efile.com account.
- Click "My Account" in the upper right. Under "My Returns", you will see a link to each of the returns you have prepared with us. Click the appropriate link to download your return in a .PDF format. You will be able to print the return by clicking on the print button on the top menu of the page.
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 the current tax season you will be able to import the previous year's tax return data into your new 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 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.
What if I did not efile my tax return(s) on efile.com?
You can get a copy of your tax returns in preparation of a tax audit from the IRS and/or state tax agency.
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.
Ten Tips for Appealing Audits
- The IRS Sends Most Audits by Correspondence: In most cases, you file a tax return and later receive a notice from the IRS stating that you did not report specific information on your return (such as additional income you received). Such notices usually ask you to sign the form included with the notices and mail it back if you agree, or will ask you for an explanation on why the information you reported is incorrect. If done promptly, you can inform the IRS that you disagree with it.
- Look Out for an Examination Report If You Don't Respond to 1st Notice: Be aware that the first IRS notice is not a notice of proposed deficiency, but you should still answer it by the date listed in the notice. The IRS may send you an Examination Report and letter (or what most tax layer call a "30-day letter") if you fail to respond to the first notice. It will usually say that you have 30 days to respond via a written and mailed protest letter.
- Write and Submit a Protest on Time: If you received an Examination Report from the IRS, write a protest letter, sign it, and mail it to the IRS before the deadline listed in the Report. Provide a complete explanation and attach relevant documents to your protest. Make sure that you keep a copy of your submitted protest (as well as proof of mailing). If you replied to the Report in a timely matter, you will usually receive a response from the IRS stating that they will transfer your case to the IRS Appeals Division (a separate part of the IRS).
- The IRS Appeals Division is Nationwide: The majority of tax cases are assigned and resolved by your closest Appeals Office (but you can often request a different Appeals Office where your tax lawyer is located to handle the Appeal). The IRS Appeals Division's mission statement is to help taxpayers resolve cases. Most cases involve the auditor recommending additional tax information and the taxpayer disagrees with the recommendation. Therefore, the process of working out compromises in the Appeals office can work for you. You can either employ a tax lawyer, accountant, or an enrolled agent authorized to practice before the IRS to help you with the appeal. Alternatively, you can do the appeal yourself, but be aware that it's generally less effective (though it may be less expensive).
- You'll Receive a Notice of Deficiency if You Don't Reply to IRS or Appeal Your Case: Referred to as a "90-day letter" by tax practitioners, the IRS mails you a Notice of Deficiency requesting you to respond to the notice within 90 days (theIRS is required to list the actual deadline on page of of the notice). The IRS requires you to respond to the notice by filing a Tax Court petition in the U.S. Tax Court clerk's office in Washington, D.C. Though it's best to hire a tax lawyer to handle these notices, some taxpayers decide to handle it on their own. If you choose to handle the notice on your own, there is a small tax case procedure available where you can represent yourself in cases where less than $25,000 in tax is in dispute. Unfortunately, the U.S. Court cannot hear your case if you miss the 90-day deadline.
- Tax Court Judges Travel to Your Area: Though the Tax Court building and clerks are located in Washington, D.C., the judges travel to federal courthouse across the country to conduct trials. When you filed your Tax Court petition, you can pick the city where you want your case to be heard. The Tax Court rules and procedure are streamlined with relaxed rules of evidence, so no jury is present at these types of trials. However, you can call witnesses, and many cases are presented based on a "stipulated record" (which means you and the government agree on certain facts about the case).
- You Can Go Back to IRS Appeals After Responding to a Notice of Deficiency: Though the only way to respond to a Notice of Deficiency is to file a timely petition U.S. Tax Court, it does not mean that your case will be decided in court. After an IRS lawyer responds to your Tax Court petition (usually denying whatever your petition says), you can request that the lawyer transfers your case to IRS Appeals.
- You May Be Able to Get an Extension of Time to Respond: The IRS will grant extensions of time to respond to many notices, but there are some types of notices (such as Notices of Deficiency) that you will not be able extend your time to respond to time. Request and confirm your extension request via a written reply (here's an additional tip: confirm everything you do with the IRS in writing).
- Some IRS Actions Can Be Undone: It's still possible to undo some IRS actions after responding to IRS notices on time (such as liens on property or levies on a bank account). However, it's usually more expensive and harder to undo these actions, so it usually requires professional help.
- You Can Pay the Taxes the Notice of Deficiency Says You Owe, Then Sue for a Refund: If you don't respond to a Notice of Deficiency within 90 days, but have an assessment, you can still appeal against your taxes owed amount in federal district court or the U.S. Claims Courts. Usually, you're required to pay the taxes first and then file a refund claim. If your refund request is not granted, then you can sue for a refund. You can still go into court, and sometimes you're only required to pay a portion of the tax liability.
What if the IRS makes an adjustment to the taxes owed amount I reported on my tax return?
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.
Is the IRS Appeals Office the same as the IRS?
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.
What if I Don't 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.
Where can I find more information about the appeals process?
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 tax 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.
Tax Audit (Examination) History and Statistics
The thought of a tax audit, called an "examination" by the IRS, 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.
How are tax audits determined by the IRS?
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.
Other signals that might trigger an IRS audit include a high amount of tax deductions compared to income, tax items that are erroneous, or failing to include proper proof or explanation for major one time losses.
What is the current IRS audit rate?
In 2014, the IRS audit rate of all individual tax returns fell to 0.86%. That means that the IRS audits less than one out of every 100 tax returns. This is the lowest rate since Tax Year 2005. The rate is expected to drop further in 2015. In fact, according to the IRS, the number of audits feel 21.4% for the last five years.
How many tax returns were audited in 2014?
The IRS audited tax returns for approximately 1.2 million individuals in 2014 (with less than 1.1 million tax returns from taxpayers with income of less than $200,000).
Examination Coverage: Individual Income Tax Returns Examined, by Size of Adjusted Gross Income, Fiscal Year 2014
Reproduced and adapted from Internal Revenue Service Data Book, 2014, Table 9a.
|Size of adjusted gross income||Returns filed in Calendar |
(percent of total)
|Examination coverage |
in Fiscal Year
|No adjusted gross income
|Less Than $25,000
|$25,000 to $50,000
|$50,000 to $75,000
|$75,000 to $100,000
|$100,000 to $200,000
|$200,000 to $500,000
|$500,000 to $1,000,000
|$1,000,000 to $5,000,000
|$5,000,000 to $10,000,000
|$10,000,000 or more
* The IRS received nearly 240 million individual income tax returns for Tax Year 2013. The number of returns filed has been estimated by the percentage of returns filed as provided by the IRS.
The Latest Tax Audit Statistics
During Fiscal Year (FY) 2014, the IRS examined 0.7 percent of all returns filed in Calendar Year (CY) 2013, 0.9 percent of all individual income tax returns filed in CY 2013 , and 1.3 percent of corporation income tax returns (excluding S corporation returns).
Overall, in FY 2014, individual income tax returns in higher AGI classes were more likely to be examined than returns in lower AGI classes.