Do you know the difference between an IRS audit and an IRS review?
Many taxpayers confuse these two processes. In reality, they include different steps and can result in different outcomes for your financial situation.
Read on to learn the difference between an IRS audit vs. review, then contact our team at Levy and Associates for assistance.
What Is an IRS Review?
When you submit a federal tax return, the IRS will run your return through a computerized scoring system. This system will analyze your return and provide a few scores that indicate its accuracy and legitimacy.
The Discriminant Function System (DIF) score indicates the likelihood that the information in your tax return may need to be adjusted. In contrast, the Unreported Income DIF (UIDIF) score rates your tax return on the probability that you did not fully disclose your income.
If your tax return receives a high DIF or UIDIF score, the IRS may flag your return for review. You’ll receive a CP05 notice indicating that the IRS will review your returns to verify your:
- Tax withholding
- Tax credits
- Schedule C income
- Social Security benefits withholding
- Claims for household assistance
You won’t need to take any action at this stage. However, you will not receive a tax refund until the IRS verifies the above information.
Potential Outcomes of an IRS Review
The best outcome from an IRS review is that the IRS finds the information in your tax return to be correct. Because IRS reviews result from computerized predictions, they do not always indicate actual issues in tax returns.
However, the IRS could also review your information and determine that you owe more in taxes. It would then send you a tax bill for the exact amount you owe.
Finally, if the IRS cannot verify the information in your returns, it may initiate a full-scale IRS audit.
What Is an IRS Audit?
An IRS audit is a thorough examination of your tax accounts and information to ensure that you have accurately reported this information and paid the appropriate taxes. If the IRS decides to audit you, it will send you a written notice with the exact information it needs to verify.
The IRS can conduct audits through the mail or through in-person interviews. If the IRS conducts your audit by mail, you will need to send the requested financial documents to the address in the letter. In an in-person interview, an officer from the IRS would come to your home or place of business to review the information.
You may face an IRS audit after an IRS review. If the IRS reviews your information and detects inaccuracies in your tax returns, it may conduct a comprehensive audit to look into the matter further.
Potential Outcomes of an Audit
An IRS audit can result in three potential outcomes:
- No change: The IRS reviews your financial information and determines no changes to your tax returns.
- Agreement: The IRS proposes changes to your tax returns, and you agree with those changes.
- Disagreement: The IRS suggests changes to your tax returns, and you disagree with those changes.
If you agree with the proposed changes, you may owe additional taxes or other penalties. If you disagree, you can request a conference with an IRS manager to state your disagreement. You can also file an appeal if you are within the statute of limitations.
What Should You Do When You Receive Notice of an IRS Audit or Review?
If you have received a notice of an IRS audit or review, you should read the information in the notice carefully and take the appropriate actions by the stated deadline. If you need assistance, feel free to contact our Levy and Associates tax team at 1-800-TAX-LEVY.