You Don’t Earn Much and You’re Being Audited by the IRS. Now What?

by Paul Kiel

The Internal Revenue Service audited nearly 1.1 million tax returns last year, but that represented just 0.5 percent of all returns. That means the chances of getting audited are fairly low.

But if you are audited, there's a good chance it's because you claimed the earned income tax credit. That's a credit the federal government offers to people who work, have kids to take care of and don't earn much money. Most households who claim it earn between $10,000 and $40,000 a year. The average credit is for $2,400, but it can go above $6,000 for larger families.

The IRS audits a lot of people who claim this credit. When that happens, the IRS blocks the refund. Some people may actually end up owing tax instead of getting a refund.

Below is an actual audit notice sent to a taxpayer last year, which was provided to us by the taxpayer's legal aid attorney. We've annotated it to provide important context and added links to helpful resources for those facing an IRS audit.

We're auditing your 2017 Form 1040

If you claim the credit and are audited, there's an excellent chance it will be done entirely through the mail. Of the 1 million-plus audits the IRS conducted last year, less than three-quarters were done by mail, with the remainder by examiners in the field. But for those who claimed the earned income tax credit, nearly all - 92 percent - were done by mail.

In the example here, the audit is ongoing, meaning the IRS hasn't yet made a final determination and won't release the refund until the audit is closed. And the forms don't make clear why this taxpayer, or any other, is selected for an audit. But for those claiming the EITC, the main issue is typically whether they have what's called a "qualifying child." In other words, if you are audited, it's usually because the IRS doubts that the child or children you claimed on your tax return actually live with you or are related to you (biologically or through adoption or marriage).

Whether a child qualifies can be confusing. This IRS FAQ can be helpful.

Tax Examiner

No single IRS employee is in charge of an EITC audit. Instead, taxpayers are told to call a service center to speak with a tax examiner. If you call, you may speak with a different person every time.

As a result, we found that you: owe a balance of 599.53. This amount may include tax, penalties, and estimated interest due. You should pay the balance due immediately to avoid additional penalties and interest charges.

This taxpayer claimed the EITC and had been expecting a refund of several thousand dollars. Instead, because the IRS believes she doesn't qualify for the credit, she is being told that she owes $599.53. Almost all of that amount is tax, not interest or penalties.

Since this is an open audit, she doesn't owe the money quite yet. The tax is legally owed after she receives a notice of deficiency, which would be a separate letter. This taxpayer eventually was able to reverse the IRS' audit finding through the help of a lawyer with the Low-Income Tax Clinic program and the Taxpayer Advocate Service.

The IRS has a full rundown of potential penalties and interest charges.

Review the enclosed Form 4549, *Income Tax Examination Changes*, and attached Form 886 and let us know by July 4, 2018 if you agree or disagree with our proposed changes. If your address has changed, please provide your current address and contact information when you respond.

Taxpayers are responsible for notifying the IRS of their current address. So if this notice goes to an old address and isn't forwarded, the taxpayer may lose the ability to respond to the audit notice. That doesn't mean there's no way to undo an IRS audit after it's done, but it's a lot harder.

**If you don't agree with our changes**Return a copy of this letter along with your explanation and any supporting documents, Form 886 attached to the Form 4549 explains documentation you need to give us. Publication 3498-A describes the audit process and explains other options, including your appeal rights, if you disagree with our proposed changes.

Taxpayers can respond to audits on their own. However, your chances are much better with help. If you qualify for the EITC, then you will likely qualify for free legal help. Here is a directory of Low-Income Taxpayer Clinic locations. If, when the audit is finished, the IRS still does not agree that you qualify for the credit, the next step is usually to file a petition with the U.S. Tax Court.

To qualify for assistance from a low-income clinic, your household cannot make more than 250 percent of the federal poverty level. For example, a family of four living in the contiguous U.S., Washington, D.C., or Puerto Rico has to earn less than $62,750 per year in order to qualify. And the amount in dispute generally must be less than $50,000.

**If we don't hear from you**If we don't receive a response from you, we'll send you a Notice of Deficiency, which will state the amount you owe with penalties and explain your right to file a petition in the United Slates Tax Court. Once a Notice of Deficiency is sent to you, you cannot appeal disagreements to the IRS. We will still consider new information you may provide to us, but you will need to file a petition With the United States Tax Court to challenge the deficiency.

Once you receive the final notice of deficiency from the IRS, you legally owe the tax. Your best option then is to file a petition in Tax Court. If you don't file within 90 days of receiving the notice of deficiency, you lose your chance to go to Tax Court. If you don't file a petition in Tax Court, the IRS may start to try to collect the tax you owe. You may still have a chance of undoing the audit finding through an audit reconsideration process, but that can take a very long time and your chances of success are lower.

If you need assistance, please don't hesitate to contact us. If you want to authorize someone, in addition to you, to contact the IRS about this letter, please complete and send us Form 2848, *Power of Attorney and Declaration of Representative*. You can download this form at www.irs.gov or request a copy by calling 1-800-TAX-FORM (1-800-829-3676).

Taxpayers who qualify for the EITC generally qualify for free legal help through the Low-Income Taxpayer Clinic program.

Who Is the IRS Employee Signing This Form? View note

This letter was signed by an IRS manager in Austin, Texas. These audits are generally computer-driven with minimal human interaction. However, if you respond to an audit, it will be reviewed by a human being. But that's also why the IRS can take as long as six months to review documentation that you submitted.