IRS audit letters: what kind of examination this actually is
Most examinations are conducted entirely by mail about a single line on a return. The letter number tells you which kind you have, and that determines almost everything about how it should be handled.
THE CLOCK — USUALLY 30 DAYS TO RESPOND, AND A SEPARATE THREE-YEAR ASSESSMENT WINDOW
Examination letters set their own response dates, which are administrative and can often be extended by asking. The deadline that is not administrative is the assessment statute — generally three years from filing — which is why a request to extend it deserves thought rather than a signature.
Three kinds, and they are not the same
A correspondence examination is conducted entirely by mail and normally covers one or two items — a deduction, a credit, a dependent. CP75 and Letter 566 are typical. These are the large majority of examinations, and they are answered with documents rather than meetings.
An office examination asks you to attend an IRS office with records, usually where the issues are broader than a single line but the return is not complex.
A field examination brings a revenue agent to your business or your representative's office. These are reserved for larger or more complex returns, and the scope tends to widen as the agent works. The distinction matters because the effort worth spending, and the value of having someone experienced involved, differ enormously across the three.
How to answer an information request
Answer what was asked. Precisely what was asked. An examination has a defined scope, and the fastest way to widen it is to send a box of records covering things nobody had asked about.
Organize the response to the request rather than to your filing system: item by item, in the examiner's order, with a covering schedule that ties each document to the number on the return. Where a document does not exist, say so plainly and explain what does exist instead. Reconstruction is permitted for many expenses, and a coherent reconstruction with corroboration is far better than silence.
Keep a complete copy of everything sent, with the date. In a correspondence examination the file the IRS holds is the only version of events.
RIGHTS THAT APPLY THROUGHOUT
- To know why information is being requested and how it will be used
- To be represented by someone authorized to practice before the IRS, and to have an interview suspended while you arrange it
- To have the examination take place at a reasonable time and place
- To appeal a proposed adjustment to the Independent Office of Appeals
- To petition the Tax Court if agreement is not reached and a deficiency notice is issued
The right to suspend an interview to obtain representation is the one most worth knowing before an interview rather than during it.
The consent form is a decision
Where an examination is running out of time against the three-year assessment period, the IRS asks you to sign Form 872 extending it. Refusing has a predictable consequence: the examiner will typically issue a Notice of Deficiency on the information then available, which moves the case to the Tax Court on the IRS's terms and its timetable.
Signing keeps the examination open and preserves the chance to resolve it with documents and with Appeals. It also extends the period during which additional tax can be assessed, which is exactly what it says.
There is a middle path that is often better than either: a restricted consent, which extends the period only for the specific issues under examination rather than for the whole return. It is not offered by default. It has to be asked for.
How an examination ends
Agreed, with a signed report and a balance to pay or a refund. Unagreed, with a report and a thirty-day letter inviting a written protest to Appeals. Or no change, which does happen.
Appeals is a genuinely separate function whose job includes weighing the hazards of litigation, which an examiner's does not. That difference is why a case that looks stuck at examination often moves at Appeals.
If Appeals does not resolve it, the Notice of Deficiency follows and the 90-day clock starts. At that point the case is on a statutory track and the deadlines stop being negotiable.
Where this comes from
The statutes behind this page, so you can check any of it rather than take it on trust.
- IRC §6501(a)
- Three years from the later of the due date or the filing date to assess additional tax.
- IRC §6501(e)
- Six years where more than 25 percent of gross income was omitted.
- IRC §6501(c)
- No limit at all where a return was fraudulent or never filed.
- IRC §7602
- The examination power: to examine records, summon documents, and take testimony.
- IRC §7491
- Shifts the burden of proof to the IRS in limited circumstances, principally where you have cooperated and substantiated.
This page explains what the IRS or the Massachusetts Department of Revenue does and cites the statute. It is not advice about your situation, which depends on facts none of this knows. Tell us what your letter says and what date is on it. Please do not send Social Security numbers or tax documents through the form.
Notice of Deficiency
The letter that ends the administrative stage. It carries the only window in which you can have a court decide the amount before paying it, and that window is statutory.
Audit reconsideration
A discretionary process for reopening an assessment where the IRS has information it has not previously considered. It is the main remaining route once the 90-day Tax Court window has passed.
Notice CP2000
An automated comparison found income reported to the IRS that does not appear on your return. The proposed tax is frequently much larger than the correct answer, because the computer does not know what anything cost you.
Authorizing someone to act
Two different authorizations that are constantly confused. One lets someone act on your behalf; the other only lets them see your file. Not everyone who can prepare your return can hold the first one.
Questions about audit and examination letters.
- Does an audit letter mean the IRS suspects fraud?
- Almost never. Returns are selected largely by scoring systems and document mismatches. The overwhelming majority of examinations are about substantiation — whether a claimed amount can be supported — rather than about intent.
- How far back can the IRS go?
- Generally three years from filing. Six if more than a quarter of gross income was omitted. Without limit where a return was never filed or was fraudulent. An examination of one period can lead to others being opened.
- Should I sign the form extending the deadline?
- It depends on whether the extra time helps you. If documents exist that would resolve the issue, it usually does, and a restricted consent limited to the issues under examination is worth asking for. If refusing simply produces a deficiency notice you would have to litigate, refusing has not gained much.
- I have lost the receipts.
- Reconstruction is accepted for many categories of expense, using bank and card records, vendor statements and third-party confirmations. Some categories, notably travel, meals and vehicle use, carry stricter substantiation rules where reconstruction is harder. Missing records are a problem, not automatically a loss.
- Can I just pay whatever they propose and be done?
- You can, and sometimes for a small amount that is the rational choice. Be aware that agreeing to an adjustment on a recurring item invites the same adjustment in later periods, so the cost is not always limited to the year in front of you.
- What happens if I ignore it?
- The examiner proceeds on the information available, which means disallowing what was not substantiated. A report follows, then a deficiency notice, then assessment and collection. Ignoring an examination does not make it stop; it removes you from it.
Tell us what the letter says and what date is on it.
Scope and price in writing before anything starts. Where what you need is something we do not do, you will be told that instead.
Please don't send Social Security numbers or tax documents through this form.