Decoding IRS Assessment Letters: What Triggers an Audit

Why this matters

An IRS assessment letter is more than paperwork: it’s the IRS communicating that something on your return needs attention. Some letters merely propose adjustments based on third‑party reporting; others start a formal audit or give you legal rights to appeal. How you respond — promptly, with the right documents — determines whether the issue closes quickly or escalates into a field audit, a tax lien, or additional penalties. (Internal Revenue Service: CP2000 and Notice of Deficiency pages).

Types of IRS assessment letters you might receive

• CP2000 (Notice of Proposed Changes): Sent when information the IRS received — like a W‑2 or 1099 — doesn’t match what you reported. This is common and is often resolved with documentation or an amended return (IRS, CP2000 explanation).
• Notice of Deficiency (often called a 90‑day letter): A formal legal notice proposing additional tax; it gives you the right to petition U.S. Tax Court within a limited window if you disagree (IRS, Notice of Deficiency).
• Correspondence audit letters/Requests for Information: The IRS may request receipts, contracts, or bank statements to support amounts on your return. These are often the first step in a correspondence audit.
• Collection‑related notices (e.g., Notice of Intent to Levy): These occur after an assessment when tax remains unpaid and should be treated as high‑priority.

These documents are different in purpose and consequence. CP2000 is a proposed change based on third‑party data; a Notice of Deficiency has formal legal implications. Treat every IRS letter seriously, but don’t panic: many notices are resolved with documentation or minor corrections.

Common triggers that generate assessment letters or audits

The IRS uses automated data matching, statistical scoring, and occasional human review to pick returns for further inquiry. Typical triggers include:

• Third‑party reporting mismatches: Unreported or misreported income from W‑2s, 1099s, broker statements, or employer filings is the most common trigger for a CP2000 (IRS).
• Unusually large or out‑of‑pattern deductions: Deductions that look disproportionate to your income — for example, high charitable contributions or large Schedule C expenses — draw scrutiny.
• Repeated business losses: Claiming business losses year after year, especially without evidence of profit motive, can prompt an audit.
• Earned Income Tax Credit (EITC) and refundable credit claims: Historically, these credits face higher rates of review because of recurring eligibility errors.
• Cryptocurrency transactions: Mismatches between crypto exchanges’ reporting and your return can trigger notices now that exchanges provide robust 1099‑type reports.
• Round numbers or boilerplate descriptions: Excessive use of round numbers or generic descriptions (e.g., “consulting expenses”) can increase the chance of follow‑up.
• Large, unexplained cash deposits or transfers: These may trigger collection or audit inquiries when they don’t match reported income streams.
• International activity and ownership: Offshore accounts, foreign trusts, and ownership in foreign entities have specific reporting rules; failure to comply attracts attention.

In my practice I’ve seen simple 1099 mismatches start an extended review. Often the underlying cause is documentation gaps rather than fraud.

How the IRS decides: data matching, scoring, and human review

The IRS compares returns to information returns submitted by employers, financial institutions, and third parties. Automated filters and risk models score returns for anomalies. High‑score returns enter one of three main review tracks: correspondence audit (letter requests), office/field audits (more in‑depth), or referral for collection/penalty processing. The process is designed to be efficient, but it can catch honest mistakes as well as intentional errors.

(For broader context on audit types and outcomes, see FinHelp’s “Understanding IRS Audits: Types, Process, and Outcomes”.)

Immediate steps to take if you receive an assessment letter

1. Read the letter carefully: Note the tax year, the amounts cited, and any deadlines. The notice will explain whether it’s a proposed change, a request for information, or a deficiency notice.
2. Compare to your filed return: Identify the items the IRS references and find the supporting documents in your records.
3. Gather supporting documentation: W‑2s, 1099s, bank statements, receipts, mileage logs, and contracts. The IRS recommends keeping three to six years of records depending on the issue (IRS, How Long to Keep Records). Generally, keep records three years; keep them six years if you omitted more than 25% of gross income; keep indefinitely for suspected fraud.
4. Respond by the stated deadline: Provide requested documents or submit a clear written explanation, or file an amended return if you agree with the change.
5. Consult a tax professional if unsure: A CPA, EA, or tax attorney can prepare a response packet and negotiate with the IRS on your behalf.

For a practical checklist of documents and timelines, see FinHelp’s “Preparing for a Correspondence Audit: Documents and Timelines” and “Recordkeeping Best Practices to Survive an IRS Audit.”

If you disagree: appeals and litigation options

• Correspondence audit responses can often resolve the issue administratively. If the IRS issues a formal adjustment you disagree with, you can generally appeal. The IRS Office of Appeals is an independent organization that handles disputes without court involvement.
• A Notice of Deficiency gives you the specific legal right to petition the U.S. Tax Court within 90 days (150 if the notice is addressed to someone outside the U.S.). If you miss that deadline, you’ll generally need to pay the tax and pursue refund litigation in U.S. District Court or the Court of Federal Claims.

(See IRS guidance on appeals and tax court procedures for exact deadlines and options.)

How to lower your risk of an assessment letter

• Keep accurate records and receipts, and use consistent bookkeeping systems.
• Report all income shown on third‑party forms. If a 1099 is incorrect, ask the issuer for a corrected form and file Form 1099 correction if you’re the payer.
• Avoid unusually large, round, or unexplained deductions; document business intent and profit motive for loss‑generating businesses.
• Use e‑filing and pre‑file checks to catch common mistakes.
• For crypto and foreign reporting, follow IRS guidance and include required forms (e.g., FBAR, Form 8938 where applicable).

Common misconceptions

• “A letter means I’m guilty.” Not true. Many letters are routine and seek clarification. Responding quickly often resolves the issue.
• “I can ignore a CP2000 if I don’t agree.” Ignoring any IRS notice risks automatic assessment and collection action. Always respond by the deadline.

Practical tips from my experience

• Create an audit file: a single folder with the tax return, W‑2s/1099s, bank reconciliations, and receipts for each year you keep.
• When possible, include explanatory memos for unusual items (e.g., why a significant deduction was required). Clear, contemporaneous notes can shorten or avoid follow‑up requests.
• If you receive an initial CP2000 for a small amount and you genuinely missed a $500 income item, it’s usually faster and cheaper to pay or amend than to litigate.

What if you can’t pay the assessed tax?

If you owe and can’t pay, options include installment agreements, an Offer in Compromise (strict eligibility and documentation required), or temporary hardship relief. Don’t ignore collection notices — they can escalate to liens and levies.

Final checklist: respond, document, consult

• Read the notice fully and note deadlines.
• Match IRS claims to your records.
• Supply supporting documentation or file an amended return where appropriate.
• Seek a qualified tax professional for anything beyond straightforward documentation.

Professional Disclaimer: This article is educational and does not constitute individualized tax advice. For advice specific to your situation, consult a licensed tax professional (CPA, EA, or tax attorney) or visit IRS.gov.

Authoritative sources and further reading

• Internal Revenue Service — CP2000 explanation and Notice of Deficiency pages (irs.gov).
• IRS — How Long to Keep Records (irs.gov).
• Tax Policy Center and IRS Data Book for trends in audits and enforcement.

Related FinHelp articles

• Preparing for a Correspondence Audit: Documents and Timelines — https://finhelp.io/glossary/preparing-for-a-correspondence-audit-documents-and-timelines/
• Recordkeeping Best Practices to Survive an IRS Audit — https://finhelp.io/glossary/recordkeeping-best-practices-to-survive-an-irs-audit/
• Preparing a Concise Audit Response Packet: Checklist of Documents — https://finhelp.io/glossary/preparing-a-concise-audit-response-packet-checklist-of-documents/

By knowing the typical triggers and acting quickly, you reduce the chance an assessment letter becomes an expensive, time‑consuming audit. In my 15 years helping clients, the most common success factor is preparation: organized records and prompt, factual responses close most cases fast.