Filing taxes can be stressful. When the IRS opts to take a closer look at your tax return, that can only increase your anxiety level. Getting your return flagged for review doesn’t mean you’ll be audited, but it canraise the odds that Uncle Sam will conclude that the numbers don’t add up. It helps to understand why returns are flagged and what reviews involve. If you’ve got a complicated tax situation, it may be wise to work with a financial advisor with tax expertise.
How Tax Returns Are Selected for Review
The most common reason for the IRS to review a tax return is something called the Discriminant Function System (or DIF) score. The IRS uses acomputerized scoring model that evaluates your return and gives it a score based onthe likelihood that it will need to be changed. To determine this score, the model compares your return to similar returns that the IRS received in past years. A second model, the Unreported Income DIF (or UIDIF) score, rates yourreturn on the probability that you didn’t fully report your income.
Returns that receive high DIF or UIDIF scores are more likely to be pulled aside for review. Factors that could trigger a high score include having a substantially higher or lower amount of reported income compared to the previous year, claiming excessive deductions for business expenses or leaving a 1099 form off your return.
It is also worth mentioning that the IRS randomly selects a small percentage of tax returns to review. The IRS compares these returns to a sample of “normal” returns to see if there are any discrepancies.
What an IRS Review Involves
If the IRS decides that your return merits a second glance, you’ll be issued a CP05 Notice. This notice lets you know that your return is being reviewed to verify any or all of the following:
- Your income
- Your tax withholding
- Tax credits you claimed on your return
- The withholding claimed on your Social Security benefits
- Schedule C income
- Claims for household help
At this point, you’re not expected to do anything. The IRS will attempt to verify whatever information triggered the review. In the meantime, you won’t be issued a refund if you’re expecting one. If you owe taxes, you will still need to pay by the tax filing deadline to avoid a penalty.
How long the review process takes depends on what information the IRS needs to verify. If you don’t hear anything within 45 days from the date of the initial notice, however, you can follow up to see what happened to your refund.
Potential Outcomes of a Tax Review
There are several differentscenarios that can play out when your tax return is flagged. The best thing you can do is hope for the best and plan for the worst. Obviously, the best outcome is for the IRS to find that your information is correct and process your refund.
The IRS could verify your information and determine that you owe more in taxes. If it’s a difference of only a few hundred dollars, that may not be problematic. But if it’s several thousand dollars, you could find yourself in a financial bind. Applying for an IRS installment agreement can give you time to pay it off. Just know that you’ll have to pay penalties and interest until the balance is wiped out.
Finally, there’s the chance that the initial review could lead to a full-scale audit. In that case, the IRS would look at every aspect of your return to determine whether you’ve reported your income properly and paid the appropriate amount of tax. The IRS can go back through three years’ worth of returns or review up to six years if they find a serious error.
Bottom Line
If you get selected for review, don’t panic! If you’re worried about the possibility of an audit, getting all of your income statements, receipts and other tax-related documents organized during the review processcan save you some time and headaches.The IRS may determine that your information is correct and process your refund. However, the government couldverify your information and determine that you owe more in taxes, or worse, order a full-fledged audit.
Tips for Tax Planning
- If you need any help, don’t hesitate to reach out to a financial professional. A tax accountant can help you with issues directly related to your tax return, but it may be better to work with someone who can take a holistic approach to your overall financial picture.Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Preparing is key to avoiding tax issues. Use SmartAsset’s free income tax calculator to see in advance what you’ll owe, so you are prepared in advance rather than risking a surprise.
Photo credit:©iStock.com/oneblink-cj, ©iStock.com/Minerva Studio, ©iStock.com/michaelpuche
FAQs
If the IRS decides that your return merits a second glance, you'll be issued a CP05 Notice. This notice lets you know that your return is being reviewed to verify any or all of the following: Your income. Your tax withholding.
How long will my refund be under review? ›
If it's been more than 21 days since you filed your tax return and you still haven't received your money, it's time to use the IRS refund tracker tool to check the status of your money.
Why is my tax return being held for review? ›
The IRS is reviewing your return because there is something in your return that they want to verify or look at more closely. It still does not automatically mean that you are being audited, but it does mean the IRS is taking a closer look at your return.
Why is IRS randomly selected for review? ›
District offices select returns randomly sometimes for special research programs, but generally the returns are selected because they have good audit potential. The potential is discovered by a computerized system called the Discriminant Function System (DIF). In most cases, the decisionmaker is not the auditor.
What triggers an IRS review? ›
The IRS receives copies of your W-2s and 1099s, and their systems automatically compare this data to the amounts you report on your tax return. A discrepancy, such as a 1099 that isn't reported on your return, could trigger further review.
How long does the IRS have to complete a review? ›
Once the notice of an IRS audit is sent out, the procedure itself should take place within one year from the date in which the return was filed, but it can take as long as three years when the statute of limitations expires.
Does the IRS actually review every tax return? ›
The IRS does not check every tax return; in fact, it does not check the majority of them; however, the IRS implements methods that track certain factors that would result in a further examination or audit by them.
What does reference 1242 mean? ›
IRS Reference Number 1242 is a code the IRS uses to notify you that your return has been selected for review.
What does tax topic 151 and reference 1242 mean? ›
Tax topic 151 usually means there is an offset. However, reference number 1242 is a dependency exemption issue. You will receive a letter from the IRS, usually within 2–3 weeks, advising you of the specific issue and telling you what you need to do next, if anything.
How long can the IRS freeze your refund? ›
Refund holds
The IRS usually holds the refund for six months to allow you to explain or file your return. After the six-month hold, if the IRS doesn't receive a return, the IRS may make an assessment through the Automated Substitute for Return program.
Comparing audit, review, and compilation:
Audits offer the most assurance that a client's financial statements are free from material misstatements, while reviews provide a limited level of assurance, and compilations provide no assurance.
How long does it take IRS to review audit? ›
Some IRS audits require you or your representative to meet with an agent in-person, at an IRS office. Office audits are usually initiated within one year of when you file your federal tax return and can take roughly 3-6 months to complete. The process goes something like this: Receive a notice from the IRS.
Can you get audited after your return is accepted? ›
Key Takeaways. Your tax returns can be audited even after you've been issued a refund. Only a small percentage of U.S. taxpayers' returns are audited each year. The IRS can audit returns for up to three prior tax years and, in some cases, go back even further.
How do I know if the IRS is investigating me? ›
Signs You May Be Under Investigation
IRS agents suddenly stop contacting you after requesting information or asking you to pay taxes owed. Your IRS auditor seems to disappear without explanation. You or your bank gets subpoenaed for financial records.
What raises red flags with the IRS? ›
Too many deductions taken are the most common self-employed audit red flags. The IRS will examine whether you are running a legitimate business and making a profit or just making a bit of money from your hobby. Be sure to keep receipts and document all expenses as it can make things a bit ore awkward if you don't.
How can I speed up my IRS review? ›
If your refund is being held up by a temporary backlog in processing, you can ask the IRS to expedite all or part of your refund to cover hardship expenses by calling 800-829-1040 and explaining your situation.
How long should I wait for a refund to process? ›
If you file a complete and accurate paper tax return, your refund should be issued in about six to eight weeks from the date IRS receives your return. If you file your return electronically, your refund should be issued in less than three weeks, even faster when you choose direct deposit.
Why hasn't my refund been approved yet? ›
An incomplete return, an inaccurate return, an amended return, tax fraud, claiming tax credits, owing certain debts for which the government can take part or all of your refund, and sending your refund to the wrong bank due to an incorrect routing number are all reasons that a tax refund can be delayed.
How do you know if your refund status is approved? ›
Use the IRS Where's My Refund tool or the IRS2Go mobile app to check your refund online. This is the fastest and easiest way to track your refund. The systems are updated once every 24 hours. You can contact the IRS to check on the status of your refund.
