What Causes a Letter or Audit from the IRS?

The rate of IRS audits remains historically low. In 2019, the General Accounting Office audited 0.25% of all individual tax returns, compared to 0.900% in 2020. The frequency of letters for mismatching or return discrepancies is significantly higher. How does the IRS determine who will receive a letter or an audit?

An IRS matching program exists. They are provided with copies of all W-2s, 1099s, K-1s, and other tax forms. The program compares the reported income on your tax return to its own database. For instance, if the IRS has a 1099 for interest that was not reported on your tax return, you will receive a letter. If you concur with the income adjustment and pay the revised tax, the matter is typically resolved. Maintain copies of all tax forms and provide them to your tax preparer.

Equally applicable to forecasted tax payments. Ensure reported estimates are accurate. It is a great idea to provide duplicate checks because it is sometimes very simple to transpose numbers. If the reported tax payments do not match IRS records, a letter will be sent. If they are correct and you made an error, simply pay the corrected balance due, but only after verifying that they are accurate.

Every tax return received by the IRS is analyzed by a system designed to detect anomalies. The name of this computer system is Discriminant Information Function (DIF). The system is intended to compare a return to data compiled from returns that are comparable. For instance, it is unlikely (or uncommon) for someone earning $50,000 per year to have $40,000 in contributions. If a return is detected by DIF, it is reviewed by a human agent.  If you have proof that you contributed $40,000, you may deduct the contributions.

The IRS has three (3) years from the date of filing to conduct an audit. If the return was filed electronically, you will typically be notified via letter within three to four months if there is a discrepancy in matching.