Correspondence Audit

What Is a Correspondence Audit?

The term correspondence audit refers to a tax audit conducted by mail or phone by the Internal Revenue Service (IRS). Correspondence audits are normally conducted on organizations, such as charities and nonprofits.

The IRS sends the organization a written request for additional information about a specific item or issue on their tax return and may continue to work with officers over the phone. It is considered the lowest level of auditing performed by the IRS. Correspondence audits have the potential to become more complicated.

Key Takeaways

  • A correspondence audit is a simple review of tax returns conducted by the IRS.
  • This kind of audit is normally aimed at charities and other nonprofits.
  • The IRS agent responsible initiates contact by mail or phone requesting clarification on issues or problems with an organization's tax return(s).
  • Audits of this nature can become more complicated if taxpayers can't provide suitable supporting documentation or don't respond.
  • If you receive a notice, get organized and respond before the deadline or get a professional to help you navigate the process if you need help.

Understanding Correspondence Audits

From time to time, the IRS may come across concerns, issues, or problems with individual or corporate tax returns. The agency routinely conducts audits to ensure that these situations are satisfied and that taxpayers are filing their tax returns correctly as per U.S. tax laws. One type of audit is the correspondence audit.

A correspondence audit is considered to be the least serious form of an audit. As such, it has a very limited scope. These audits are generally only used for charitable and nonprofit organizations, dealing with relatively simple matters that involve small amounts of money. As long as the taxpayer can produce sufficient evidence to resolve the issue, the procedure is closed.

The next step after a correspondence audit is an office audit, where the IRS requires the taxpayer to come to an IRS location to discuss the issue in question with an agent. If the agent discovers other issues or isn't satisfied with the information provided, the audit could be expanded. This is why most attorneys advise taxpayers to keep answers as simple as possible and never offer additional information, as that could allow the agent to expand the scope of the audit.

The penalties for an audit that turns up errors or fraud could include payment of additional taxes, liens on property, fines, garnishment, criminal investigations, and court hearings, so it's important to have legal representation in the event of an audit.

Correspondence Audit Process

Organizations should understand how they're selected for a correspondence audit and the process involved so they're better prepared in the event they need to complete one.

The IRS normally picks subjects at random or may conduct audits if there are inconsistencies in an organization's tax returns. The agency is informed by mail asking for additional documents or information. Once received, the agent conducts the exam in an IRS office, by phone, or in writing. A closing conference is then done by phone.

If no changes are required, the audit is closed and the IRS issues a confirmation letter. But if changes must be made, the IRS may take one or more of the following actions:

  • A change in tax or status
  • Securing outstanding returns
  • A closing agreement
  • The revocation of the organization's status

The case can be closed if the organization agrees to the changes. If the organization doesn't agree, it can file an appeal.

IRS Publication 556 provides details on examination and audit procedures.

How to Manage a Correspondence Audit

Don't panic if you get a notice about a correspondence audit. This kind of audit is often very simple and straightforward, so there's really no need to worry as long as you remain organized and make your case without delay.

Start by making sure you understand what's being asked of you. Ensure you know what the problem is and what documents you may need to support your case. Your letter will have a deadline by which you need to submit your evidence, so ensure you remain aware and act quickly. If you don't respond within that time frame, the agency sends you a Notice of Deficiency.

If you're unsure of the process and need help navigating through it or just want representation, consult a tax professional or attorney.

Types of Audits

The IRS may select a tax return for an office audit at random. In other cases, a tax return may be selected because of suspected errors. The three types of audits conducted by the IRS are correspondence, office, and field audits. As noted above, a correspondence audit can expand and become an in-person audit if the issues grow more complex or the organization does not respond.

Office Audit

An office audit is a type of in-person audit in which a representative from the IRS interviews the taxpayer and inspects their records. This usually takes place at an IRS office. The purpose of an office audit is to make sure the taxpayer is accurately reporting income and deductions and paying the lawful amount of tax. These audits often only cover a few specific issues identified by the IRS in a written notice to the taxpayer.

Field Audit

A field audit is another type of audit similar to an office audit but instead occurs at either the taxpayers’ home, place of business or accountant's office, and not at an IRS office. Field audits are typically scheduled for more complicated audits and can be quite extensive. These thorough audits can last from one day to a week, depending on the size of the taxpayer’s business.

What Is the Difference Between an Audit and a Correspondence Audit?

Audits are normally conducted in person. Correspondence audits, on the other hand, are reviews conducted by the IRS through the mail. The agency typically sends a notice to the taxpayer requesting evidence and supporting documents when an inconsistency is detected or if they're selected for a random audit. General audits can be more complicated while correspondence audits tend to be very simple.

How Long Does a Correspondence Audit Take?

Correspondence audits are the most straightforward inquiries. Most taxpayers get a written notice in the mail within six to seven months of submitting their tax returns. Taxpayers can expect the audit to be complete three to six months from submitting their evidence.

What Are the Different Types of IRS Audits?

The IRS has three different types of audits. Correspondence audits are the simplest and are conducted by mail and/or phone. Office audits require taxpayers to go to an IRS office to meet with an agent. A field office is another in-person meeting, usually at the taxpayer's home or business.

What Can Trigger an IRS Audit?

Some of the key factors that can trigger an audit include failing to report all of your income, higher annual income, multiple deductions, or significant changes from your previous tax returns. In some cases, though, the IRS may select you for an audit at random.

Article Sources

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  1. Internal Revenue Service. "Charity and Nonprofit Audits: Correspondence Audit." Accessed Feb. 3, 2022.

  2. Internal Revenue Service. "IRS Audits." Accessed Feb. 3, 2022.

  3. Internal Revenue Service. "Understanding a Federal Tax Lien." Accessed Feb. 3, 2022.

  4. Internal Revenue Service. "Penalties." Accessed Feb. 3, 2022.

  5. Internal Revenue Service. "Exempt Organizations Office/Correspondence Examination Flowchart." Accessed Feb. 3, 2022.

  6. H&R Block. "How Long Does It Take? IRS Audit." Accessed Feb. 3, 2022.

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