IRS Letters and Audits

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According to Jeremy Kisner, President of Surevest Wealth Management, there is an overall 1% chance of getting audited.  However, he also says for those bringing home more than $200,000 in 2013, their chances jump to 3.26% and 10.85% for those making more than $1 million.

Everyone fears receiving a letter from the Internal Revenue Service (IRS).  Although most people tend to react with panic, but frequently these audits can be settled rather simply.  When you receive a letter from the IRS, it does not actually mean an audit.  There are in fact 76 different types of letters and forms that the IRS sends out.

Each year, the IRS sends out different notices to taxpayers. Some are informational only; others require a response. They can be both favorable and unfavorable. On the plus side, they may advise you of your eligibility for a tax credit; on the minus side, of a pending audit.  Notices may also alert you to an error on your tax return that triggered a refund (or a balance due). Others may request an updated address, or alert you to your eligibility for something such as the Additional Child Tax Credit. Still others will ask you to file an additional form.

If you receive a letter from the IRS, we can help you to comprehend what the letter says, if you don’t understand.  If the letter is an audit, we can help in obtaining a solution and settle with the IRS on your behalf.  

For more information on the different types of letters from the IRS, click here.

+ Reducing the Risk of an IRS Audit

Once you have settled an issues with the IRS or before any issues arises, take appropriate actions to avoid receiving letters in the future. Many can be avoided by simply filing an accurate tax return. Careless mistakes will almost certainly trigger an IRS notice. Take special care with your return, check the math, review the rules, and sign on the bottom line.

The chance of being audited is low – only 1% of all returns are audited, according to 2009 IRS data. Yet some things on a tax return do increase your audit risk. Here are some red flags to watch out for:

  • Home business that loses money year after year. The IRS may view this as a hobby, not a legitimate business.
  • Home office deductions. If you claim a high percentage of your living space as a home office the IRS may be suspicious.
  • A high level of itemized deductions. Claiming $40,000 in deductions on an income of $60,000 will probably draw IRS attention.
  • Casualty losses out of synch with income. You can’t claim a casualty loss that’s less than 10 percent of your adjusted gross income net any insurance payments received.

+ Actions to take if you receive an IRS letter

Go ahead and open the envelope – the news may be in your favor. If it’s not, then here’s what you should do:

  • Give us a call right away so that we can discuss the letter with you along with your options.
  • If you procrastinate, you might miss the deadline to respond, which could make your case worse.
  • Stay calm. Panicking will not help your situation or decrease your tax liability.
  • We can assist you in completing a response to the IRS.
  • The letter will give you specific instructions on what needs to be done to resolve the issues. We’ll explain these instructions to you so that you can understand what’s going on.
  • We will let you know what information the IRS is requesting and make sure you meet your deadline in responding.  We will assist you in composing a respond to the IRS in a timely manner.
  • Other notices may advise you of corrections to your tax return. We will analyze your returns and clarify the situation.
  • We will send the letter and any requested documents to the IRS on your behalf and work out any other issues for you.
  • Keep a copy of any correspondence with the IRS. You may need to refer to it later.

 

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