What to expect

Small-dollar audits (sometimes called correspondence audits or limited examinations) examine specific items on a return — a deduction, credit, or income mismatch — rather than reopening the full return. They usually arrive by mail and ask for records or an explanation. Even though the dollar amounts are small, the IRS is testing the return’s accuracy (IRS, “IRS Audits”). (https://www.irs.gov/individuals/irs-audits)

Why the IRS runs them

The IRS uses targeted, lower-cost examinations to protect tax integrity and recover small but systemic errors (see IRS compliance and audit programs). These reviews are efficient ways to catch math errors, mismatches from third-party reporting (Forms 1099, W-2), and unsupported deductions. (https://www.irs.gov/businesses/small-businesses-self-employed/audits)

Common triggers

  • Math errors or missing schedules.
  • Mismatches between third-party forms (1099‑NEC, 1099‑MISC, W‑2) and your return.
  • Deductions or credits that are small in dollar terms but unusual for your filing profile (large home-office claim for low business revenue, unusually high charitable gifts relative to income).
  • Repeated small discrepancies across years — a pattern can trigger a closer look.

In my practice I’ve seen math mistakes and single mismatched 1099s cause the majority of small-dollar notices. Treat these notices promptly; most can be resolved without an in-person audit.

How to respond — step by step

  1. Read the notice carefully. It will explain what the IRS questioned, what records to provide, and a deadline (usually 30 days). Do not ignore it.
  2. Confirm the sender. IRS letters come from the IRS; check the letter number at the top and compare with IRS notice examples online. If you suspect a scam, contact the IRS directly before sending personal info. (See IRS notice verification.)
  3. Gather only the documents the IRS requests, plus supporting ledgers: bank statements, invoices, receipts, canceled checks, mileage logs, and third-party forms. Keep a copy of everything you send.
  4. Prepare a one-page cover letter that answers the question directly: state the adjustment you accept or rebut and cite the attached documents. Be factual and concise.
  5. Send materials using traceable mail or follow the IRS’s electronic submission option if available; note the mailing date and method.
  6. If you don’t agree with the IRS position, state the reason, include supporting documentation, and preserve your right to appeal. Consider hiring a CPA, EA, or tax attorney if the issue is complex.

Documentation checklist (what typically helps)

  • Bank statements and reconciliations.
  • Invoices, receipts, and proof of payment.
  • Mileage logs and appointment calendars for business travel.
  • Contracts or 3rd-party statements proving income sources.
  • Canceled checks or digital payment records for charitable gifts.

Timelines, outcomes, and appeals

Most small-dollar correspondence audits are resolved in weeks to a few months. Possible outcomes: no change, agree to an adjustment (you may owe tax plus interest), or a formal assessment. If you disagree, you can request an appeal through the IRS Office of Appeals or follow the procedures in the audit letter (appeal rights are in the notice). Keep in mind interest accrues on any balance due from the original return date.

When to get professional help

  • You’re unsure which records to provide.
  • The IRS proposes penalties or a tax liability you can’t verify.
  • The matter involves complex items such as home-office allocation, depreciation, or passthrough business income.

Practical tips to reduce small-dollar audit risk

Common mistakes to avoid

  • Ignoring the deadline or failing to send proof of delivery.
  • Over-supplying irrelevant documents that make the response harder to review.
  • Admitting an error in language that might prompt broader examination — stick to facts.

Example scenario

A freelancer claimed $4,800 in business expenses but only had partial receipts and inconsistent bank entries. The IRS sent a letter asking for supporting receipts and a profit/loss ledger. We organized the documents, supplied a clear reconciliation, and the IRS closed the case with a small adjustment and no penalty. Quick organization and a short cover letter made the difference.

Authoritative sources

Internal resources

Professional disclaimer

This article is educational and not personalized tax advice. Tax rules change and individual circumstances vary; consult a qualified tax professional (CPA, EA, or tax attorney) for advice tailored to your situation.