An audit letter sets a response date. If no response arrives, the examination does not simply stop: the IRS can decide the issues on the information it has, and the result can become a tax assessment and, eventually, collection. This article explains the sequence and the options that remain at each step.
Step 1: The Response Date Passes
For audits by mail, IRS Publication 3498-A states that if you do not reply by the due date, the IRS will disallow the items identified. In an in-person audit, the examiner can likewise propose changes based on the information available.
A missed date is not always the end of the conversation. Contacting the IRS promptly, at the number on the letter or through the assigned examiner, may allow documents to be considered. For audits by mail, the IRS says it can ordinarily grant a one-time 30-day extension when asked.
Step 2: The 30-Day Letter and the Notice of Deficiency
When the IRS proposes additional income tax, it generally sends a 30-day letter explaining the proposed changes and the right to appeal. According to IRS Publication 556, if there is no response to the 30-day letter, the IRS will send a notice of deficiency, also called a 90-day letter.
A notice of deficiency is not a bill. It generally gives the taxpayer 90 days (150 days if the notice is addressed to a person outside the United States) to file a petition with the U.S. Tax Court without paying the tax first. During that period, and while a timely Tax Court case is pending, the IRS cannot assess the deficiency.
The notice of deficiency is generally the last opportunity to have the Tax Court decide the amount of tax before it is paid. The petition deadline should be calendared the day the notice arrives.
Step 3: Assessment and Billing
If no petition is filed, the IRS assesses the tax and sends a bill. Interest generally runs from the original due date of the return at the federal underpayment rate, which under section 6621 equals the federal short-term rate plus three percentage points and is set quarterly. The IRS may also assert penalties, such as the 20% accuracy-related penalty under section 6662.
Step 4: Collection
An unpaid assessment moves into the collection process. Before most levies, the IRS must send a Final Notice of Intent to Levy and Notice of Your Right to A Hearing at least 30 days before the levy. If the IRS files a notice of federal tax lien, it must notify the taxpayer within five business days, and the taxpayer then has a 30-day period to request a hearing.
These Collection Due Process hearings, held by the IRS Independent Office of Appeals, are a forum for collection alternatives such as an installment agreement or an offer in compromise. Under section 6330(c)(2)(B), however, the taxpayer can challenge the underlying tax liability at the hearing only if the taxpayer did not receive a statutory notice of deficiency for that liability or did not otherwise have an opportunity to dispute it.
Options After the Tax Is Assessed
Audit reconsideration
According to the Internal Revenue Manual (IRM 4.13.1), audit reconsideration is the process the IRS uses to reevaluate the results of a prior audit where additional tax was assessed and remains unpaid, or a tax credit was reversed. The taxpayer must identify the adjustments being disputed and provide new information that was not considered during the original examination, or show an IRS computational or processing error. Reconsideration is not available for an assessment made under a closing agreement or an accepted offer in compromise.
Pay and claim a refund
A taxpayer who pays the tax can file a claim for refund. Under section 6511(a), the claim generally must be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever is later. If the claim is denied, a refund suit can be brought in a U.S. District Court or the U.S. Court of Federal Claims.
Collection alternatives
If the liability is correct but cannot be paid in full, options can include an installment agreement, an offer in compromise or a temporary delay of collection.
If a Deadline Has Already Been Missed
Identify the most recent notice received, since it shows which stage the case has reached. If a notice of deficiency was issued and the petition period has not run, a Tax Court petition remains available. If the tax has been assessed, audit reconsideration, a refund claim after payment, or a collection alternative may still be possible.
The Bottom Line
Ignoring an audit letter shifts decisions to the IRS and narrows the options for disputing the result. Each notice in the sequence carries its own deadline, and responding at the earliest stage preserves the most choices, including the right to an independent appeal and to Tax Court review before payment.
Missed an IRS audit deadline?
Tax attorney Cassra Minai, Esq. can review your notices and remaining options in a confidential consultation.