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What Does It Mean When the IRS Reviews Your Return?

Filing taxes can often appear complicated, especially when the Internal Revenue Service (IRS) decides to take a closer look at your return.

If you're one of the taxpayers chosen for review, you'll receive a CP05 Notice. This notice is not a cause of concern. Think of it as the IRS doing a routine check-up on your tax return. It might be just verifying information like your income, tax withholding, claimed tax credits and more. During this period, if you are owed a refund, it will be withheld until the review is complete. If you owe taxes, they still need to be paid by the due date to avoid penalties.

The IRS uses a sophisticated system to select returns for review. A key tool in this process is the Discriminant Function System (DIF) score, which basically looks at how your return compares to norms and flags any discrepancies. Another scoring model, the Unreported Income DIF (UIDIF), estimates the probability of unreported income. Returns with high DIF or UIDIF scores are more likely to be reviewed.

Common Triggers for Review

The IRS may review your tax return for several reasons, often related to discrepancies or unusual items. One common trigger is a significant change in income or deductions from previous years. Large or uncommon deductions can raise questions, especially if they are disproportionate to your reported income.

Mathematical errors, though seemingly minor, can also prompt a review. These could be simple miscalculations or incorrect data entries. Similarly, missing or incomplete forms, especially those required for specific credits or deductions, can flag your return.

Incorrectly reported income is another red flag. This includes both underreporting and overreporting income. The IRS has means to cross-check reported incomes with forms received from employers and banks.

Claiming tax credits or deductions incorrectly or in amounts that are unusually high for your income level can also lead to a review. This is particularly true for credits that have a history of fraudulent claims.

Finally, returns that differ significantly from the norm for similar taxpayers might be reviewed. The IRS has extensive data and can identify returns that stand out from others in your income bracket or geographical area.

The Review Process

These triggers are part of the agency’s efforts to ensure accuracy and compliance with tax laws. The length of the review can vary. It may take a few weeks to several months, depending on the complexity of the issues being examined. If additional information is needed, the IRS will contact you. Providing prompt responses can help expedite the process. Having said that, if no communication is received within 45 days of the notice, it's prudent to follow up with the IRS.

Possible Outcomes

There are several potential outcomes from this review. The IRS might find everything in order and process your refund. Alternatively, they could conclude you owe more taxes. In cases of substantial amounts, setting up an IRS installment agreement is an option, though penalties and interest will accrue until the debt is cleared. In rare cases, this initial review could escalate to a full audit involving a more thorough examination of your tax return.

Essential Tips to Keep in Mind

If you find yourself in the crosshairs of an IRS review, don’t panic. Being proactive by organizing your income statements, receipts and other tax-related documents can save time and headaches. It’s also essential to ensure your return is accurate and truthful to begin with. Common errors like incorrect personal information or miscalculations can delay the process significantly.

When it comes to filing, electronic submission is generally more efficient than mailing paper returns. E-filing can detect common errors and reject returns for immediate correction, thus avoiding delays. On the other hand, mailed returns take longer to process and are subject to human error during manual review.

To avoid future reviews, report all information accurately and be mindful of common audit triggers. If your return is flagged, cooperation with the IRS, such as providing additional documentation when requested, can facilitate a smoother process.