The dreaded audit often starts with a letter from the IRS stating, “We’re reviewing your tax return.” There are generally two types of “audit letters”: ones that ask you respond to the IRS, and ones that don’t. Regardless of which type of letter you receive, you need to act. How you respond to the letter and the actions you take (or don’t take) will largely determine how long and how complicated the audit may last.
A Notice CP05 is one of the letters that do not request that you respond to the IRS. The Notice CP05 merely indicates that the IRS is reviewing your tax return and verifying the following items, among other things:
- Income reported
- Income tax withholdings reported
- Tax credits claimed
- Withholdings from Social Security benefits claimed
- Household help you claimed (e.g. whether you properly reported the earnings and withholdings from an employee of your household)
- Schedule C income you reported
The Notice CP05 also notifies you that your refund is being held until the IRS finishes its review of these items and that, at the completion of its review, you’ll receive either the refund or, another notice.
What should you do if you get a Notice CP05?
The Notice CP05 does not require you to act, per se. However, there are certain steps that you should take if you receive this letter.
1. If you did not file a tax return for the tax year listed in the Notice CP05, download a Form 14039 (Identity Theft Affidavit) from www.irs.gov, complete and sign it, and submit it to the IRS.
2. Locate a copy of the return that you filed and copies of the information returns that you received. (“Information returns” are the documents filed by third parties and include documents such as W-2s, Forms 1098 and 1099.) Verify that the numbers on the Information Returns, such as the amounts paid and amounts withheld, are accurately reflected on your return.
3. Organize documents that substantiate the amounts you reported on your tax return.
4. If you move before you receive the refund or another notice from the IRS, make sure you update your address with the IRS by filing a Form 8822 Change of Address (available at www.irs.gov). Note that the IRS is not obligated to locate you—they will send notices to you at your last known address, which generally is the address you reported on your last tax return or Form 8822, whichever was filed last.
5. Know, “Who you’re gonna call” if you receive a follow-up notice from the IRS. While the IRS allows you some time to respond to its notices, it is often not enough time for you to begin interviewing tax advisors or tax attorneys to determine who you should retain to represent you in an audit or other proceeding before the IRS and to prepare a response. The stress of receiving such a notice will be greatly reduced when help is just a speed-dial away.
6. Relax. Losing sleep worrying about the “what if the IRS…?” scenarios never resolved a problem with the IRS.
And if you’re still losing sleep…refer to Step 5 and speak with the tax advisor/attorney. Your sleep is worth it. Besides, a rested individual is more productive and thus, more likely to earn more income, than a tired, worried one. That’s a result both you and the IRS can enjoy!