I don't know about you, but, for me, receiving an unexpected letter from the IRS, especially one that questions an item on my tax return and asks for more money, is downright terrifying. It happened to me a few years ago, and although, in the end, the issue was resolved in my favor, the experience was nerve wracking.
The correspondence I received from the IRS is what is called a tax letter audit, and thousands of Americans receive them each year. Often they are triggered by a mismatch between what is reported to the IRS by an employer or someone else and what is on a tax return. While sometimes this is because income has not been reported, it also can be because the IRS expected to find it on the tax return in one category, but it was reported in another. That is what happened to me.
While I'm sure each situation is different, here's how I handled my IRS letter audit.
I Researched the Issue
Once I got over my shock at having my tax return questioned by the IRS, I carefully read the letter and began to research the issue it addressed. I started by looking at the applicable tax return and identifying the specific item singled out in the letter. I then looked at the paperwork I had to back up the amount I had reported and my judgment as to where it belonged on my return.
I Prepared a Letter and Documentation to Support My Position
I prepared a letter to the IRS, explaining exactly what the income in question was and why I had reported it as I did. It turned out that the issue was whether the income should be reported as a capital gain (my view) or ordinary income (the IRS's position). With the letter, I include documentation I had used to determine the type of income I had received, highlighting certain words that I believed identified it as arising from an investment. I also included text from the tax code that I had relied on to determine what qualifies as a capital income.
I Responded Promptly
Even though it would have been nice to ignore the IRS's letter and pretend I hadn't received it, I knew that denial wasn't the way to go. Instead, once I was satisfied with my supporting documentation, I sent it, certified mail, to the IRS.
I Handled It Myself
I didn't consult an accountant for two reasons. First, I had prepared my tax return myself, so I didn't have an accountant at the time, and, second, I felt reasonably confident that I could respond effectively myself. However, if the IRS's questions were more extensive, if I had been called in for a face-to-face audit, or if I had been uncertain about my position, I would have sought professional help.
I Was Patient
It took several weeks for the IRS to respond to my letter, and then the letter I received said that the IRS needed more time to come to a conclusion on my issue. I wasn't sure if that was good or bad, but there was nothing to do but wait some more. Fortunately, it wasn't too long before I received a letter saying the case was closed and no additional taxes were due. That was one letter from the IRS I was actually very happy to receive.
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- Personal Taxes