IRS Audit: What to Do When You Receive a Notice

## Don't Panic — But Act Promptly Receiving an IRS notice is stressful, but ignoring it makes everything worse. Penalties and interest accrue, and the IRS can file liens or levies if you don't respond. The good news: Most IRS notices are resolvable. With proper representation, you can often reduce penalties, establish payment plans, or resolve the matter discreetly. With 25+ years of experience representing clients before the IRS, Alan Balmer has successfully resolved thousands of audits, notices, and collection actions. This guide walks you through exactly what to do when that envelope arrives. ## Step 1: Read the Notice Carefully IRS notices come in different forms, each with specific response requirements and deadlines. Understanding what you've received is the first step to resolving it. ### Common IRS Notices **CP2000 — Proposed Adjustment Due to Unreported Income** - The IRS matched your return against 1099s and W-2s - Found a discrepancy between what you reported and what they have on file - Proposes additional tax, penalties, and interest - You have 30 days to respond **Letter 226 — Proposed Employer Shared Responsibility Payment (ACA)** - Related to Affordable Care Act employer mandate - Applies to applicable large employers (50+ full-time employees) - Proposes penalty for not offering minimum essential coverage - Response deadline varies **Letter 525 — Audit Notification** - The IRS wants to examine your return - Specifies which items are under examination - May be conducted by mail, in person, or at your office - Typically gives 30 days to schedule **CP501 — Reminder of Balance Due** - First notice of unpaid tax balance - Includes tax, penalties, and interest - Requests full payment - Sent after the IRS assesses additional tax **CP504 — Intent to Levy** - Second notice of balance due - Warns that the IRS will seize assets if you don't pay - Gives you 30 days to respond before levy action - Serious—act immediately **LT11 / Levy — Final Notice of Intent to Levy** - Final notice before the IRS seizes wages, bank accounts, or property - You have 30 days to request a Collection Due Process hearing - After 30 days, the IRS can levy without further notice - Critical—contact a CPA immediately ## Step 2: Don't Respond Yet Before you respond to the IRS, consult with a CPA, enrolled agent, or tax attorney. Anything you say can be used against you, and well-meaning responses can inadvertently admit to things that increase your liability. **Why You Need Professional Representation:** - **Only CPAs, attorneys, or enrolled agents may represent you before the IRS** - Without representation, you must attend audits yourself - The IRS can use your statements against you - Professionals know how to frame responses to minimize liability - Representation often reduces penalties and interest **What Alan Provides:** Alan provides full representation and communicates directly with the IRS on your behalf—you're never alone in the room. He handles all correspondence, attends audits, negotiates settlements, and protects your rights throughout the process. ## Step 3: Gather Documentation Collect all relevant records before your CPA responds to the IRS. Having complete documentation upfront speeds up resolution and strengthens your position. ### Essential Documents to Gather **The IRS Notice and Correspondence:** - The original notice (keep the envelope with postmark date) - Any follow-up notices or letters - Prior correspondence with the IRS **Tax Returns in Question:** - The tax return(s) under examination - All schedules and forms filed with the return - Amended returns (if any) **Supporting Documentation:** - W-2s and 1099s for the year(s) in question - Receipts for deductions claimed - Bank statements showing income and expenses - Business records (if business return is under examination) - Mileage logs (if vehicle deduction is questioned) - Home office records (if home office deduction is questioned) **Other Relevant Records:** - Prior audit results (if this is a follow-up audit) - Correspondence with your previous CPA (if you switched preparers) - Legal documents (if the issue involves legal matters) ## Step 4: Understand Your Options Depending on the notice, you have several options for resolution. Your CPA will help you choose the best strategy based on your specific situation. ### Resolution Options **Agree — Pay the Proposed Adjustment** - If the IRS is correct, you can agree and pay - May be able to set up an installment agreement if you can't pay in full - Penalties and interest continue to accrue until paid - Best option if the adjustment is small and you can pay quickly **Disagree — Provide Documentation to Support Your Position** - If the IRS is wrong, provide documentation to prove your position - Your CPA will prepare a response with supporting evidence - May resolve by mail without an in-person audit - Best option if you have strong documentation **Negotiate — Request Penalty Abatement or Installment Agreement** - If you owe but can't pay in full, negotiate payment terms - Request penalty abatement if you have reasonable cause - Set up installment agreement for monthly payments - Best option if you owe but can't pay immediately **Appeal — If the IRS Doesn't Agree with Your Position** - If the IRS examiner doesn't accept your documentation, you can appeal - Appeals is an independent organization within the IRS - Higher success rate than initial examination - Best option if you disagree with the examiner's findings ## Step 5: Respond by the Deadline Most notices give you 30 days to respond. If you need more time, Alan can request an extension. But don't wait until the last day—the IRS is slow to process requests, and delays can trigger enforced collection. ### Response Timeline **Within 48 Hours of Receiving Notice:** - Contact your CPA - Provide the notice and all relevant documents - Schedule a consultation to review your options **Within 1 Week:** - CPA reviews the notice and your records - Determines the best response strategy - Prepares initial response (if extension is needed) **Within 2-3 Weeks:** - Gather all supporting documentation - CPA prepares detailed response - Review and approve response before sending **Before Deadline:** - CPA sends response to IRS - Keeps copy for your records - Follows up to confirm receipt ## Common Scenarios and How Alan Resolves Them ### Scenario 1: CP2000 — Unreported Income **The Situation:** The IRS matched your return against 1099s and W-2s and found a discrepancy. **If the Notice is Correct:** - You owe the tax plus penalties and interest - Alan can negotiate penalty abatement if you have reasonable cause - Can set up installment agreement if you can't pay in full - Often reduces penalties by 50-100% **If the Notice is Wrong:** - The 1099 may be for a non-deductible expense, not income - The 1099 may have been issued in error - The income may have been reported on a different schedule - Alan gathers documentation to prove your position - IRS closes the case with no additional tax ### Scenario 2: Audit Notification **The Situation:** The IRS wants to examine your return. **Audit Types:** - **Correspondence Audit:** Conducted by mail, limited to specific items - **Office Audit:** Conducted at IRS office, more comprehensive - **Field Audit:** Conducted at your home or business, most comprehensive **How Alan Handles Audits:** - Reviews the audit scope and your return - Prepares documentation for questioned items - Attends the audit on your behalf (you don't have to attend) - Communicates with the examiner throughout - Negotiates to minimize adjustments - Appeals if necessary ### Scenario 3: Balance Due **The Situation:** You owe tax but can't pay in full. **Resolution Options:** - **Installment Agreement:** Monthly payments over time (up to 72 months) - **Offer in Compromise:** Settle for less than you owe (if you qualify) - **Currently Not Collectible:** Temporary hardship status (no payments required) - **Penalty Abatement:** Reduce or eliminate penalties (if you have reasonable cause) **How Alan Helps:** - Analyzes your financial situation - Determines the best resolution option - Prepares required financial statements - Negotiates with the IRS - Often reduces total amount owed by 30-70% ### Scenario 4: Intent to Levy **The Situation:** The IRS is about to seize your wages, bank accounts, or property. **Immediate Actions:** - Request a Collection Due Process (CDP) hearing within 30 days - This stops the levy while you negotiate - Alan files the CDP request immediately - Negotiates a resolution before the levy takes effect **Resolution Options:** - Installment agreement - Offer in compromise - Currently not collectible status - Innocent spouse relief (if applicable) ## Common Audit Triggers Understanding what triggers audits helps you avoid them in the future. ### High-Risk Deductions **Home Office Deduction:** - Must be used exclusively and regularly for business - Must be your principal place of business - Common audit trigger if not properly documented **Vehicle Deduction:** - Must maintain mileage log - Must document business purpose for each trip - Common audit trigger if mileage seems excessive **Charitable Contributions:** - Non-cash donations over $500 require Form 8283 - Must have documentation for all donations - Common audit trigger if donations are high relative to income **Business Meals and Entertainment:** - Only 50% deductible (as of 2023) - Must document business purpose and attendees - Common audit trigger if deductions seem excessive ### High-Income Returns **Income Over $200,000:** - Audit rate increases significantly - IRS focuses on high-income taxpayers - More scrutiny of deductions and credits **Business Income Over $100,000:** - Higher audit rate for Schedule C filers - IRS looks for underreported income - More scrutiny of business expenses ### International Transactions **Foreign Bank Accounts:** - Must file FBAR if aggregate value exceeds $10,000 - Must report foreign income on Form 8938 - Failure to file triggers automatic penalties **Foreign Assets:** - Must report foreign corporations, partnerships, and trusts - Complex reporting requirements - Penalties for non-compliance are severe ## Next Steps: Get Professional Representation If you've received an IRS notice, contact Alan immediately. He reviews the notice, explains what it means, gathers necessary documentation, and communicates with the IRS on your behalf. Whether it's a simple correction or complex audit, his decades of experience ensures the best possible outcome. **What Alan Provides:** - Immediate review of IRS notices - Full representation before the IRS - Documentation gathering and organization - Response preparation and submission - Audit attendance and negotiation - Penalty abatement requests - Installment agreement negotiation - Offer in compromise preparation - Appeals representation **Related Resources:** - [Record Retention Guide](/insights/record-retention-guide/) — Keep the right documents for audits - [Tax Deadlines Calendar](/insights/tax-deadlines/) — Never miss a response deadline - [Entity Selection Guide](/insights/entity-selection-guide/) — Choose the right structure to minimize audit risk