Your taxes have been filed, and when you check the mail, you see "the letter". The one piece of mail that makes your heart pause, hairs curl, and sweat come down. You got a letter from the IRS.
Surely, this letter can throw even the most seasoned taxpayers nervous.
Before you freak out, know that there is a playbook for this.
Thankfully, the VAST majority of tax audits are triggered just from "math errors":
Just because you got an IRS letter, does not mean you are being audited. Let's break this down a little more.
What If You Get Audited?
“Audit” is a word that can strike fear into the hearts of taxpayers.
However, the chances of an Internal Revenue Service audit aren’t that high. Between 2010 and 2018, the IRS only audited 0.6% of all individual tax returns.1
And being audited does not necessarily imply that the IRS suspects wrongdoing. The IRS says an audit is just a formal review of a tax return to ensure information is being reported according to current tax law and to verify that the information itself is accurate.
The IRS selects returns for audit using three main methods.2
- Random Selection. Some returns are chosen at random based on the results of a statistical formula.
- Information Matching. The IRS compares reports from payers — W2 forms from employers, 1099 forms from banks and brokerages, and others — to the returns filed by taxpayers. Those that don’t match may be examined further.
- Related Examinations. Some returns are selected for an audit because they involve issues or transactions with other taxpayers whose returns have been selected for examination.
There are a number of sound tax practices that may reduce the chances of an audit.
- Provide Complete Information. Among the most commonly overlooked information is missing Social Security numbers — including those for any dependent children and ex-spouses.
- Avoid Math Errors. When the IRS receives a return that contains math errors, it assesses the error and sends a notice without following its normal deficiency procedures.
- Match Your Statements. The numbers on any W-2 and 1099 forms must match the returns to which they are tied. Those that don’t match may be flagged for an audit.
- Don’t Repeat Mistakes. The IRS remembers those returns it has audited. It may check to make sure past errors aren’t repeated.
- Keep Complete Records. This won’t reduce the chance of an audit, but it potentially may make it much easier to comply with IRS requests for documentation.
Remember, the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
Audits Have Changed
Most audits don’t involve face-to-face meetings with IRS agents or representatives. In 2019, the latest year for which data is available, 73.8% were actually conducted through the mail; only 26.2% involved face-to-face meetings.
Source: IRS.gov, 2022
1. IRS.gov, 2022
2. IRS.gov, 2022
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2023 FMG Suite.
You Got A Letter From The IRS: What Should You Do Now?
I’ve received so many letters from the IRS, I know the drill. I find out what they are seeking and work through their process.
But most people freak out when they get an IRS letter.
Take a deep breath. This is what you need to know:
Read the letter carefully. Most IRS letters and notices are about federal tax returns or tax accounts. Each notice deals with a specific issue and includes any steps the taxpayer needs to take. A notice may reference changes to a taxpayer's account, taxes owed, a payment request or a specific issue on a tax return. Taking prompt action could minimize additional interest and penalty charges .
Review the information. If a letter is about a changed or corrected tax return, the taxpayer should review the information and compare it with the original return. If the taxpayer agrees, they should make notes about the corrections on their personal copy of the tax return and keep it for their records. Typically, a taxpayer will need to act only if they don't agree with the information, if the IRS asked for more information or if they have a balance due.
Take any requested action, including making a payment. The IRS and authorized private debt collection agencies do send letters by mail. Taxpayers can also view digital copies of select IRS notices by logging into their IRS Online Account . The IRS offers several options to help taxpayers who are struggling to pay a tax bill.
Reply only if instructed to do so. Taxpayers don't need to reply to a notice unless specifically told to do so. There is usually no need to call the IRS. If a taxpayer does need to call the IRS, they should use the number in the upper right-hand corner of the notice and have a copy of their tax return and letter.
Let the IRS know of a disputed notice. If a taxpayer doesn't agree with the IRS, they should follow the instructions in the notice to dispute what the notice says. The taxpayer should include information and documents for the IRS to review when considering the dispute.
Better yet, if you’re working with a tax preparer, always forward the letter to them. The competent preparers can take care of it with no drama — and often at no charge.
One key thing to remember: The IRS will contact you through snailmail. If someone texts, emails or calls you — and claims to be from the IRS — it’s a scam.
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