Correspondence Audits and Other IRS Notices
Correspondence (mail) audits make up approximately 75% of all IRS audits, or a total of 1.2 million per year. Most often, they are used to verify straightforward issues. For instance, the IRS may send you a correspondence audit notice requesting that you send in routine purchase and sale documentation to verify gains or losses on listed securities, or closing statements for real estate sales. Also, amended tax returns are often audited by mail.
Correspondence (Mail) Audits
Welcome a correspondence audit and be thankful that you weren’t chosen for an office or intensive field audit. Read the notice carefully so that you understand exactly what the IRS is asking you to verify. Comb your records and find documentation to justify your credit, deduction, or exemption. Make photocopies of the documents and promptly send them back. Do not send originals—the IRS may misplace the papers, and in any case, you won’t get them back. Use certified mail, return receipt requested, to send in your documents.
If you’ve lost your papers or don’t have any to justify a specific credit, deduction, or exemption, follow the suggestions in Chapter 3 on proving deductions.
You can call the correspondence auditor to discuss your case. Or you can write to the IRS and ask someone to call you. The notice from the IRS should list the name and telephone number of the correspondence department. If you write and ask for someone to call you, send your letter certified mail, return receipt requested.
If you have a problem with the correspondence auditor—perhaps he or she won’t accept your supporting documentation—you can request a transfer for a face-to-face meeting at your local IRS district office.
This may give the correspondence auditor a reason to rethink your case. When correspondence audits are forwarded to local IRS district offices, those audits are often closed with no adjustments—sometimes without further contacts.
Service Center Automated Adjustment Notices (Not Real Audits)
Congress allows the IRS to “correct” errors on tax returns without audits, by sending computer-generated notices called service center automated adjustments (Internal Revenue Code § 6213(g)(2)). To add insult to injury, because these are not formal audits, your tax return is still at risk of being audited. About one in 40 tax returns filed produces an automated adjustment notice.
The IRS has four categories of automated adjustment notices. The headings differ and often change, but careful reading of the notice should make it clear what the IRS is after. Error correction notices. If you’ve received an error correction notice, it is because the IRS believes it has found a math error or a similar problem on your tax return. For example, you may have stated that you have four dependents, but listed the names of only three. The IRS assumes that your mistake was in the math, not that you simply omitted the name of one of your dependents, and recomputes your tax liability with only three dependents. Or you might have claimed the standard deduction amount for head of household but failed to list dependents; the IRS assumes you get the standard deduction for a single person. This notice includes a corrected computation and a bill for the amount the IRS claims you owe. The IRS claims 6% of all tax returns contain some type of error.
Penalty assessment notices
If you’ve received a penalty assessment notice, it means that the IRS believes you did not meet a filing deadline or tax payment deadline. The notice may be wrong for any number of reasons.
For example, you may have sent the payment to the IRS, but the IRS did not properly credit it to your account. Or you may have filed the form on time, but the IRS took six months to process it. Or, you may have missed a deadline, but for a reason beyond your control— perhaps a blizzard delayed your mail to the IRS—and you are entitled to have the penalty abated (canceled). Penalty abatement information can be found here.
Interest assessment notices. An interest assessment notice means that the IRS believes you did not pay a tax bill on time. By law, the IRS must charge interest if, in fact, you owed the bill and did not pay it on time.
In a few cases, you can get interest waived even if it is correct, such as when the IRS delays in sending an audit bill by more than 30 days. Usually, however, the IRS is correct, and if you challenge the notice you may not get anywhere. Still, it doesn’t hurt to ask.
An underreporter notice means that the IRS has found a mismatch between two data sources. The most common example is when your tax return doesn’t list all income that others have reported to the IRS on 1099 or W-2 forms. (Approximately 3% of all tax returns are found to have this type of mismatch.)
Here’s how to respond to the most common underreporter notices, if you believe the IRS is wrong:
- Unreported IRA distributions.The IRS may generate an underreporter notice if you rolled over an IRA account into another IRA, but did not list it correctly. Notify the IRS that you want to correct the error on your tax return, and provide your documentation.
- Income listed on your return, such as payments you received as an independent contractor, don’t match a 1099 on file.You may have reported the income somewhere on the tax return other than where the computer looked for it.
- Mortgage interest deduction doesn’t match your lender’s report on a 1098 form.You may have made an extra mortgage payment at the end of the year, but the lender didn’t report it to the IRS until the following year.
- Wages or withholding reported on your tax return doesn’t match your employer’s W-2 form.Your employer may have made a reporting error. In that case, you will have to ask your employer to issue an amended W-2.
No matter which kind of notice you receive, it will ask you to explain the discrepancy or it will propose additional tax, penalties, and interest-based on the discrepancy. In either case, you’ll be given 30 days to respond.