Receiving a notice from the Internal Revenue Service (IRS) can be daunting. While some notices are resolved fairly easily, others require an audit.
So, how does the IRS determine who gets a notice? Michelle Singletary of the Washington Post reported, “The IRS examines returns to ensure that income, expenses, deductions, and credits are reported accurately. When an inconsistency is found, a taxpayer may undergo an audit or be notified that adjustments were made that could result in a refund or a required tax payment.”
Here are three issues that can bring a tax notice to your mailbox:
1. Math mistakes. Taxes are a great example of the importance of math in real life. In 2022, the IRS issued more than 9 million notices because of math errors. The top triggers were calculations related to the Recovery Rebate Credit and the Child Tax Credit. Most notices simply adjusted taxpayers’ returns and indicated whether additional amounts were owed, or higher refunds were due.
2. Missing income. Tax returns are supposed to account for all income a tax filer earned over the tax year. Income typically is reported by employers, mortgage companies, banks (or other sources of income) on Forms W-2 and 1099, and other forms. The IRS Automated Underreporter program systematically matches tax returns and informational tax forms. When the information does not match, the tax filer gets a notice.
3. Unusual tax deductions. The IRS uses statistics to determine normal levels for various deductions. If your deductions are higher-than-average, your return may be flagged. Joy Taylor of Kiplinger Personal Finance reported,
“If the deductions, losses, or credits on your return are disproportionately large compared with your income, the IRS may want to take a second look at your return. Taking a big loss from the sale of rental property or other investments can also spike the IRS's curiosity. Ditto for bad debt deductions or worthless stock.”
That doesn’t mean you shouldn’t take a deduction or tax credit, just make sure you have proper documentation.
If you have any questions about taxes, talk with a tax professional. They can help minimize the chance that your tax return will trigger an audit or a notice from the IRS.
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