A Mail Audit is the most common type of IRS examination. It generally involves a review of specific items on your tax return, conducted primarily by mail. The IRS generally sends you a letter requesting documentation to verify deductions, credits, income, or other details. You respond with requested and related supporting records, and the IRS reviews them to determine any adjustments.
The IRS contacts taxpayers only by official letters delivered via United States Postal Service (USPS) mail for initial notifications, including audits. They do not initiate contact by phone, email, or text message. Common audit-related notices include Letter 2205 (initial contact), Letter 525 (examination report), and CP2000 (underreporter issues).
Mail audits are the simplest type of audits and generally do not require any meeting with the auditor. The IRS requests proof to validate the taxpayer’s claim or position regarding an item on the tax return. The taxpayer has a certain time listed on the notice to submit the requested documents.
Next, let’s understand how the IRS conducts mail audits of international taxpayers outside the United States.
International taxpayers, including U.S. citizens living abroad, green card holders residing overseas, and non-resident aliens, may be subject to mail audits. These audits related to international tax matters are not limited to taxpayers residing overseas. They may apply to those living in the United States who have foreign or domestic income. Accordingly, mail audits may involve sending correspondence to addresses either in the U.S. or overseas.
Next, let’s understand how mail audits are triggered for international taxpayers.
Mail audits are commonly initiated after the IRS’s computer screening systems identify tax returns with potential issues. Generally, the IRS uses automated systems such as the Discriminant Inventory Function System (DIF), Unreported Income DIF (UIDIF), document matching, and other filters to identify returns for potential examination.
Returns may also be selected based on random selection, information matching, related examinations, or other compliance initiatives.
Some IRS audits are selected at random, regardless of factors such as nationality, gender, race, or where a taxpayer lives. However, returns reporting higher income or more complex transactions are more likely to be selected because they are more likely to contain errors or result in additional tax.
Taxpayers generally cannot challenge the IRS’s decision to select their return for an audit. However, they have the right to dispute any changes the IRS proposes during the audit, through IRS Appeals, or in court.
For taxpayers with international activities, the following issues that may attract IRS scrutiny include:
The IRS conducts the office audit procedure through the following steps. Let’s understand each of them, which are as follows:
The IRS does not use just one letter for every mail audit. The letter or notice you receive depends on what the IRS wants to review.
Some common examples are:
Letter 566 is commonly used for correspondence audits.
It tells you what the IRS wants to review and what documents or information you need to provide.
For example, the IRS may ask you to provide proof for a deduction or tax credit you claimed on your tax return.
CP75 and CP75A are commonly used when the IRS wants to verify whether you qualify for certain tax credits, such as the Earned Income Tax Credit (EITC) or Child Tax Credit.
The IRS may ask you to provide documents showing that you meet the requirements for the credit.
For example, you may need to provide documents showing where a child lived, the child’s age, or your relationship to the child. The exact documents will depend on what the IRS is asking you to prove.
A CP2000 is different from a traditional audit notice.
The IRS generally sends a CP2000 when information reported by a third party does not match the information on your tax return.
For example, suppose you report $50,000 of income on your tax return, but a bank or brokerage company reports another $10,000 of income to the IRS.
The IRS may send you a CP2000 asking you to explain the difference.
A CP2000 is generally a proposed tax adjustment, rather than a formal audit notice. You can respond by agreeing with the proposed change or explaining why you believe the IRS is wrong.
Letter 525 generally comes later in a correspondence examination.
The IRS uses it when it is proposing changes to your tax return.
The letter explains the proposed changes and gives you an opportunity to respond before the case moves to the next stage.
The IRS letter or notice will generally tell you:
The IRS may also give you instructions for uploading your documents online.
The same basic rules apply if you live outside the United States.
One important concept for international taxpayers is the “last known address.”
In simple terms, your last known address is generally the address the IRS has on record for you.
Usually, this is the address on your most recently filed and properly processed federal tax return, unless you have properly notified the IRS that your address has changed.
For example,
Suppose you previously lived in the United States but later moved to India. If you properly update your address with the IRS, the IRS can have your Indian address on record. If you do not update your address, the IRS may continue using your old U.S. address.
This can create a serious problem. An important IRS letter could be sent to your old U.S. address, and you may never see it. As a result, you could miss the deadline to respond.
Next, let’s understand how the IRS contacts taxpayers for the mail audits.