Tax codes, topics and notices are used across the IRS to provide information for individual and business filers around what is currently happening with their tax return filing, reasons for potential processing delays or further reviews/audits, when a refund will be paid or why it was lower than expected (offsets).
There are dozens of tax codes and notices, many are just informational and related to ongoing processing status’ while others are more worrying and require action from the tax filer when they see this code on their IRS account or official IRS correspondence.
Overview of IRS examination/audit process
Once of the more worrying or concerning IRS transactions are potential audit codes related to Tax Codes 424 (TC 424) and 420 (TC 420). You will generally see these codes on your tax transcript (under the Explanation of Transactions section) once your return has been through initial system processing by the IRS.
WMR or IRS2Go will generally show a generic message that your return is under processing when it is under further IRS examination. You will generally see TC 424, before you see TC 420.
Once your return is placed under audit, the IRS will notify you by mail through the CP75 A,C or D notices, which are discussed in the sections below
While an IRS review and audit will likely delay refund payments, the good news is that an IRS audit is not a reason to panic if you have not purposely provided incorrect information. You can normally resolve this by responding to the IRS notice with evidence supporting your claim and they will adjust your return/refund accordingly.
Anyone else get code 420 and got a letter in the mail today that they are being audited? I have to prove my EIC, that I am head of household, and that my kids are actually mine and they live with me? This is crazy. I have had the same job/income, filed HoH and dependents for years!Tax filer facing an audit (TC 420)
The IRS won’t initiate an audit by telephone or email. So be very careful of scammers trying to your your personal and financial information via these methods using the threat of an IRS audit.
Also make sure you respond to the IRS via mail or official fax number when responding to requests for additional information or documentation.
Why Did I Get Audited?
While it is scary to get an IRS audit notice, there is no need to immediately freak out as the IRS bases audits on random selections related to various audit red flags or if your return is related/linked to another tax payer or business entity facing an audit.
Given the number of new and differently paid tax credits over the last few years like the RRC (stimulus checks), Earned Income Tax Credit (EITC) and advance Child Tax Credit (CTC), many folks are mistakenly submitting incorrect information.
While minor filing discrepancies will be flagged during return processing, if the amounts claimed are above IRS statistical norms, it may systematically get flagged for further examination (TC 424).
If further IRS reviews cannot establish the eligibility for you or your claimed dependents (or someone else already claimed them), your return may get flagged for a formal audit (TC 420).
What Happens After My Return Is Under Audit (TC 424)?
Once the IRS selects your return for audit, it will be sent to their review/appeals department and an auditor will manually review the return and supporting documents. This may involve looking at prior returns as well.
At this point your tax transcript will likely show Tax Code 424, Examination request indicator, reflecting the fact that your return has been set aside for examination after initial examination.
While this still does not mean a full audit is occurring (and there are different levels of audit) there is a further review underway and will likely delay getting your return and refund processed.
If the review finds no significant issues it will be sent back for regular processing which includes paying the refund (TC 846) or adjusting the refund if relatively minor discrepancies are found with credits claimed (TC 570) or there is an offset to be applied (Tax topic 203)
However if the IRS audit agent does find discrepancies that warrant further investigation they will forward the return for assignment to an examining group, for a more thorough audit (TC 420).
The tax filer will then be notified via mail, using notices CP75 or CP75A, requesting a formal interview and/or additional supporting documentation. These notices will also tell you what items on your tax return the IRS is auditing.
You will see the confirmation that these formal notices were sent on your tax transcript against Tax Code 971, notice issued.
The CP75 notice/letter will provide all contact information and instructions in the letter you will receive. So it is important you review it carefully and consult an accountant or tax professional if you are not sure what to do.
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How will the IRS audit me and what do I need to provide?
The IRS can audit you over correspondence (mail) or in person. If via mail, they will request (via CP75) various supporting documentation for the items/claims under review.
This includes items like receipts, logs and other records to justify claiming certain credits and deductions. In some cases electronic records from your tax filing software may be acceptable.
They will provide contact details of an official IRS agent if you need to discuss this further, need more time to get supporting documents, or get clarity on what is being requested.
This is why tax law requires you to keep all records you used to prepare your tax return – for at least three years from the date the tax return was filed.
If an in-person interview is needed, which can be at an IRS office or at the taxpayer’s home, place of business, or accountant’s office (field audit). Ahead of the interview they will provide a list of documents and information you need to have ready for review.
You can see the IRS Audit Techniques Guides to give you an idea of what to expect.
What if you cannot or don’t send documents in?
It is a legal requirement to respond to IRS notices, but if you don’t or cannot send in the supporting evidence needed to close your audit, the IRS will send you an audit report showing their proposed changes.
This could include a garnishing of your entire refund or even resulting you in owing taxes due to a disallowance of claimed credits and penalties for yourself or your dependents.
This is why it so important to NOT ignore this or other IRS notices.
Also note, the IRS has said it takes them least 30 days (likely longer) to review the documents you send them. So don’t be surprised if it takes a while to get a response and there is not much you can do until they respond. Unfortunately this means any potential refund will be delayed.
How do I know the Audit or Examination is done (TC 421)?
The IRS will send you another notice once they are done with their review and satisfied you have proved your eligibility for items claimed, or agreed on adjusted amounts.
They will generally issue your refund within 8 weeks, subject to any other debts/liabilities or offsets they are required to collect against your refund.
You would see Tax Code 421 on your tax transcript to indicate the audit was closed.
If your refund is adjusted as a result of the audit you will also get another letter that explains the adjusted amounts and show the amount of tax you owe or the corrected amount of any refund you may receive.
What happens if I Amend by return?
An amended return is treated as a separate submission, so filing an amended return does not affect the audit selection process of the original return.
Amended returns also go through a screening process and the amended return may be selected for audit, just like the original return.