Federal Assessment of 1099 Transactions

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May 04, 2016

Whenever the I.R.S. is planning to assess changes to your return, or has already made changes to your return based upon information received, there are a few types of correspondence that may be received. The general types of correspondence regarding issues with your tax returns are as follows:

Notice of Proposed Changes
If the I.R.S. has enough information available so as to allow them to correct your return without any further information from you, then you will receive a notice of proposed changes, or Notice CP 2000. This notice details the proposed changes to your tax return in question.

The proposal is based on a comparison of the income, payments, credits, and deductions reported on your tax return with information on these items reported to the I.R.S. by employers, banks, businesses, and other payers. Notice CP 2000 also reflects any corrections that have been made to your original return when it was processed. The taxpayer does not have to accept these changes, and in fact they will have a chance to respond to the notice with any information or documentation that refutes the proposed changes. Notice CP 2000 will include a due date for the taxpayer’s response.

Notice of Correspondence Audit
If the I.R.S. does not have enough information available to assess the amount of tax owed to them, but rather they simply believe that there is likely an error on your return, then you will receive a notice of correspondence audit.

Typically, this type of audit will require only a few pieces of documentation in order to verify the information on your return. The notice will indicate what documentation is required in order to complete the audit. A correspondence audit is completed by mailing documentation or information to the address listed on the notice.

This type of audit is conducted through the mail due to the anticipated lack of volume in documentation and information required to complete the audit. Upon review of your submitted documentation, the examiner will prepare an examination report which will detail all changes, if any, made to your return. As with the Notice CP 2000, the examination report will indicate that the taxpayer may challenge the findings of the report by submitting additional documentation or information prior to a deadline.

Notice of In-Person Audit
If your return is randomly selected for an audit, or if the I.R.S. deems that the error on your return is significant enough to warrant an in-depth review of a multitude of documents and information, then you may receive a notice for an in-person audit. If the time and place that the I.R.S. schedules is not convenient, the taxpayer may request a change, including a change to another I.R.S. office if the taxpayer has moved or business records are there. Although this request can be made, the I.R.S. does not have to grant the taxpayer’s request.

It is not uncommon for the I.R.S. to request that an audit be conducted at the business’s office. The underlying reason for this is so that if additional records are needed, the taxpayer should be able to easily retrieve them from wherever they are stored at the business. However, should the taxpayer feel uncomfortable with an audit taking place at their business, a request can be made to have the audit completed at a local I.R.S. office. Although the I.R.S. has the discretion to reject such a request, these types of requests are typically granted.

As with any other audit, an examination report will be submitted to the taxpayer once a review of all submitted documentation and information is complete. This report will detail all changes, if any, made to your return, and will instruct you on how to challenge the findings of the report should you disagree with them.

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