Why is my tax return being reviewed?
Explore what triggers the IRS to review your tax return and how to respond if your return is under scrutiny.
What is a tax return review?
When you file a tax return, you’re submitting a detailed report of your income, expenses, and other financial details for the year to the IRS. This report helps determine how much tax you owe or if you’re due a refund.
So, what does your tax return being reviewed mean?
If your tax return is under review, the IRS is examining it to ensure that it is accurate and in accordance with tax laws.
They’re checking to confirm that all the information you provided is correct and that there are no mistakes or missing details that could affect your tax bill or refund.
This process helps ensure that your return is complete and compliant.
Why is my tax return being reviewed?
Your return coming under review does not mean you’ve made an error or been dishonest.
Several factors can trigger a review of your tax return.
Common reasons include:
Inconsistent information: Discrepancies between the information reported on your tax return and what the IRS receives from third parties, such as employers or banks.
Large deductions or credits: Unusually high deductions or tax credits compared to your income can raise red flags.
Random selection: Sometimes, returns are selected for review as part of the IRS’s routine checks.
Prior issues: Previous issues or audits can lead to increased scrutiny in subsequent years.
Mathematical errors: Simple arithmetic mistakes can prompt a review.
What should I do if my tax return is being reviewed?
You will find out that your tax return is being reviewed through a CP05 notice from the IRS.
This notice indicates that your tax return is under review for accuracy regarding income, tax withholding, and credits.
If you receive a CP05 notice, you do not need to take any action. The IRS asks that you wait 60 days from the notice date to contact them to allow them time to review your return.
If you’re due a refund, expect a delay until the review is finished. If you owe taxes, make sure to pay by the deadline to avoid penalties.
Be ready to provide additional documentation if requested.
If you have not heard back from the IRS within 60 days, it’s best to follow up.
How are tax returns selected to be reviewed?
The IRS uses the Discriminant Function System (DIF) to select returns for review. This system assigns a score based on the likelihood that your return has errors or needs adjustments by comparing it to past returns.
The Unreported Income DIF (UIDIF) score also plays a role in assessing the risk of underreported income. High DIF or UIDIF scores can lead to a review, especially if your income or deductions differ significantly from previous years or if you missed important forms.
The IRS also randomly reviews a small percentage of returns to ensure compliance and detect discrepancies.
How does the IRS review tax returns?
With a tax return under review, the IRS focuses on several key areas.
To ensure consistency, they start by comparing your reported income with documents provided by third parties, such as W-2s and 1099s.
They also scrutinize any claims for deductions or credits to verify their accuracy and compliance with tax laws.
Additionally, they will check that your tax withholding aligns with what was reported on your return and examine the tax credits you claimed to ensure they are valid and correctly applied.
If applicable, the IRS will review the withholding on your Social Security benefits to confirm it is reported accurately.
What are the outcomes of a tax review?
There are several possible outcomes of a tax return being reviewed:
No change: If everything is in order, the IRS will notify you that no changes are necessary.
Adjustment: The IRS may adjust your tax return, which could result in a revised tax liability or refund.
Request for additional information: The IRS might ask for more documentation or clarification on specific items.
Audit: In more complex cases, the review could lead to a full audit for a more detailed examination.
If issues are identified, they can often be resolved by providing additional information or correcting errors.
Prompt and accurate responses can help smooth the resolution process.
How can I avoid tax return mistakes?
To minimize errors on your tax return, consider the following tips:
Double-check your information: Ensure all numbers and details are accurate and match supporting documents.
Keep detailed records: Maintain thorough records of your income, expenses, and deductions to support your claims.
Use tax software or a professional: Utilize reliable tax preparation software or consult a tax professional to help catch mistakes.
Stay informed: Keep up-to-date with tax laws and changes to ensure compliance.
File early: Filing early can give you more time to review and correct any issues before the deadline.
Get expert financial advice
Understanding what happens when your tax return is being reviewed will help you navigate potential issues with the IRS more effectively.
By knowing what triggers a review, how the IRS assesses your return, and what steps to take if you are flagged, you can better prepare and respond to any challenges.
Let Unbiased match you with a financial advisor for expert financial advice in navigating tax reviews and optimizing your financial strategies.
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