How to respond to IRS Tax Notice 525

How to Respond to an IRS Audit Letter (Letter 2202)

The number of audits that still resulted in a refund in 2018.

The IRS audited 0.5% of all tax returns filed in Fiscal Year (FY) 2017 which amount to about 1.1 million audits. While receiving an IRS audit letter is enough to give you a lump in your throat, it’s not always a bad thing. In fact, In FY 2017, almost 34,000 audits resulted in refunds to the taxpayer! So take a deep breath and remember, responding promptly is the best approach to prevent bigger problems in the future.

Read on to learn how to respond to an IRS audit letter if you get one.

How to respond to an IRS audit letter

1. Read through the IRS audit letter carefully and identify the problem.

2. Decide if you agree or disagree with the issue.

3. Gather your documents. The IRS audit letter you receive will explain the reason for your audit and will request copies of the documents they want to review. According to the IRS, the requested records can include:

  • Bills.
  • Receipts.
  • Legal papers.
  • Canceled checks.
  • Logs.
  • Diaries.
  • Loan agreements.
  • Medical and dental records.
  • Travel tickets.
  • Lottery tickets.
  • Loss or theft documents.
  • Schedule K-1.
  • Documents from your employer.

You may also want to include additional documents that prove your case. No document can stand on its own, the IRS requests that you provide context for each of your documents (e.g., notes, descriptions, etc.). The IRS audit letter will spell out the details of what you need to do.

4. Get organized. You can streamline the process by organizing all of the records you need to send by expense type, type of income, or year. Further, include a summary of the transactions.

5. Fill out the questionnaire if you receive one.

6. Send in your response. Depending on the type of audit the IRS assigns you, you may mail in your documents or present them in-person. If the IRS gives you the option of an audit-by-mail but you have too many documents to mail, you may request an in-person audit.

Be sure to respond by the date listed on your notice. If you need more time, you can contact the IRS to request an extension. It will usually grant a 30-day extension.

Frequently asked questions about IRS audit letters

What is an IRS audit?

An IRS audit involves the IRS reviewing or examining your accounts and financial information. The purpose is to ensure that everything you reported is correct and in alignment with tax laws.

Why does the IRS decide to audit someone?

The IRS may audit you because it suspects a problem, however, that is not always the case. Sometimes it will randomly select accounts to audit. Further, if you have an association to a taxpayer, investor, or business undergoing an audit, that can result in an audit for you as well.

What methods does the IRS use to communicate audits?

The only way the IRS will notify you is via mail.

How does the IRS conduct audits?

The IRS conducts audits both by mail and in-person. In FY 2017, 70.8% of audits were conducted by mail and 29.2% were in the field. If in-person, the audit may be in your home, place of business, or accountant’s office. To see how IRS examiners conduct audits, see these Audit Technique Guides (ATGs).

What are the possible outcomes of an audit?

There are three possible outcomes of an audit: no change, agreed, or disagreed.

  • No change means that you have proven your case and no change is made to your return.
  • Agreed means that you agree with the changes proposed by the IRS.
  • Disagreed means that you understand the proposed changes from the IRS but disagree with them.

If you disagree, you can undergo mediation with the IRS or, if you have enough time left on the statute of limitations, you can file an appeal.

In FY 2017, 4% of audited returns had no change and 2% had additional tax after being examined.

Read the definitive guide to IRS letters and notices to learn more.

What if you need help with an IRS audit?

If you need help with the audit process, you have the right to representation by an authorized representative. Authorized representatives can be CPA’s, tax attorneys, or enrolled agents who the federal government authorizes to represent individuals in tax audits.

If you end up owing money, and it’s more than you can comfortably pay, multiple payment options are available. To get help navigating the best payment solution, you can hire a tax relief firm. Review and compare tax relief firms here.