IRS Letter 525: How Do I Respond?

You don’t even have to open the letter for your heart to start pounding and your stomach rolling with tension. The return address is enough to instill fear. You take a deep breath, rip open the flap, and find yourself staring at an IRS audit letter 525.

The IRS held 509,917 audits last year, recommending payment of an additional $12.9 billion in taxes. The IRS is increasing its audit focus on high-income taxpayers. This is due to estimates that the difference between taxes people owe and taxes they pay is around $1 trillion every year.

That doesn’t mean people of middle-low income levels are immune to audits. Anyone may receive an IRS letter 525. No matter what your pay scale, any IRS audit notice will leave you wondering about the steps you need to take.

Keep reading for information on what your obligations are, how to respond to IRS letter 525, what the legal process requires, and how to secure the best possible outcome.

What Is IRS Letter 525?

When you receive IRS Letter 525 it will contain a report of adjustments the IRS is proposing be made to your tax return. To learn how the IRS made the decision that an adjustment is necessary, look at everything in the letter which includes:

• Header — notice date, your Social Security number, applicable form and tax year, and IRS contact information
• Response Requirements — how to reply to the letter
• Explanation of Items — explains changes the IRS made and reasons for the change
• Income Tax Examination Changes — shows the recalculation of the items in dispute
• Calculation Sheets — detailed recalculation of the forms or schedules affected by the change
• Interest Computation — how they calculate interest if you own a balance
• How to Pay Your Taxes — proper procedures for paying any balance you owe

If you are in agreement with the suggested changes, sign and return the adjustment form. No further action is necessary if the change was an increase in your refund. If you owe additional tax, follow the instructions and make sure you pay the balance by the date it is due.

If you do not agree with their proposal, you need to submit a request for an appeal. Refer to the IRS publications and follow their appeal/protest procedures. This includes filing your appeal within 30 days of the IRS letter 525 notice date.

If your taxes were prepared by a certified public accountant (CPA) or other tax preparation service, they may be able to help you with a determination on whether to agree or disagree with the IRS findings. If you plan to file an appeal, your best course of action is to consult with experienced tax attorneys who are knowledgeable about the legal requirements for the IRS letter 525 and of the IRS appeal process.

How to File an Appeal

Your IRS 525 letter may include a phone number you can call to begin the appeal process. While this may seem the easiest and fastest way to reach a resolution, it isn’t necessarily the best. Making a phone call does not provide any written proof you took appropriate action.

It is better to submit a written request explaining the reasons you disagree with the IRS findings. While it is possible to follow the steps on your own, having qualified tax attorneys prepare the appeal gives you a larger chance of a successful outcome. They are familiar with how the IRS views specific information and documentation that will support your position.

Your mind is likely asking “what is an IRS audit going to do to me financially?” When those thoughts get tangled with the legal process, critical steps can get missed. Every notice you receive from the IRS will have a response deadline.

Missing those deadlines will result in you losing your right to appeal an auditor’s change with the IRS Office of Appeals. The IRS will issue a notice of deficiency and send you a notice that you have 90 days to file a petition with the U.S. Tax Court.

The IRS prefers to reach a settlement agreement rather than engage in litigation. If a settlement is not reached, the IRS will issue a statutory notice of deficiency requiring you to pay the disputed tax. Your tax attorney will handle any settlement negotiations and follow the appropriate steps to file a written appeal.

Steps to Writing an Appeal to IRS Letter 525

After you review all the information provided with your IRS 525 letter and decide you do not agree with the findings, you need to file an appeal within 30 days of when the notice was sent. Your IRS disagreement letter response will need to be sent by mail or fax and include:

• Explanation of Notice Response Requirements
• Income Tax Examination Changes
• All documents supporting your claim (including IRS form 4549 – Income Tax Discrepancy Adjustments)
• Write your Social Security Number and the tax year on the top of every page
• Your phone number and the best time to call you
• Keep a copy of the letter and all enclosures for your records

After they review your appeal, the IRS may agree with your response. If they do not agree they may schedule you for another audit.

Small Case Request

If the changes the IRS proposes are less than $25,000 in additional tax and penalties, you may submit a small case request on Form 12203, Request for Appeals Review. You must fill out the form completely, then follow the steps for submission. This includes returning the form in the envelope the IRS provides.

You may represent yourself in appeals. If you wish to have representation, they must be an attorney, CPA, or enrolled agent authorized to appear before the IRS.

If you want your attorney or representative to discuss the case without you present, you must submit Form 2846, Power of Attorney and Declaration of Representative. This form must contain the signatures and signing date of both you and each representative. You may want assistance from Silver Tax Group when filling out the form.

If your tax liability exceeds $25,000, you or your attorney will need to prepare a formal written protest.

Formal Written Protest

Formal written protest procedures are provided in IRS Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree. Take a look into IRS form 5701 – Notice of Proposed Adjustment. Your formal protest must include a statement that you are appealing the IRS proposal of changes and include with your protest the following information:

• A list of all the disputed issues, including the tax periods and years
• The proposed changes and the reason you disagree with each issue
• The facts that support your position on each issue in dispute
• The law or authority that supports your position on each area of dispute, if any exist
• A penalty of perjury statement using the IRS specific wording
• Keep a copy of the letter and all enclosures for your records

The penalty of perjuries statement requirements are different if you are representing yourself or if an attorney is filing on your behalf. The person submitting the protest must sign below the written perjury statement.

Office of Appeals

The Office of Appeals operates independently from the division of the IRS that proposes changes to tax liability. It is also the only level of appeal within the IRS.

The appeals division considers the arguments of both sides in a tax dispute and makes a decision by applying relevant tax law. This includes court decisions and other legal authorities relative to the case facts. The majority of disputes reach a resolution at the appeals level without litigation.

This is usually achieved through an informal conference. Your attorney may appear on your behalf or with you. At that time you will discuss all areas of dispute and your reasons for disagreeing with the IRS findings.

One requirement is that the appeal argument(s) must be based on tax law. They will not give consideration to arguments that are made due to moral, political, religious, constitutional, or conscientious objections.

Because the IRS has a legal requirement to assess any proposed taxes within a specific period of time, they may request you extend that deadline. If you do not agree to an extension of the finalization date, the IRS Office of Appeals will refuse to hear your case.

Court Action

If you are unable to reach a settlement with the IRS Office of Appeals, you may file a petition with one of the following courts. You must meet that court’s jurisdictional and procedural requirements:

• The United States Tax Court
• The United States Court of Federal Claims
• The United States District Court in the jurisdictional district of your residence or business

Each court can provide you with a copy of its rules. If you plan to take your appeal to this level you definitely want an experienced tax attorney representing you. Each of these courts has separate procedures, requirements, and court rules that you must comply with. Failure to follow all procedures and deadlines may result in the dismissal of your case.

Penalties From Tax Examination

The penalty amount will depend on how much you underpaid on your taxes. The most serious penalty is incarceration. That is only for serious offenders committing tax-related crimes. The majority of cases are people who will have to pay interest from the date they filed the original return until they pay the tax. The IRS may also impose monetary penalties dependent on the seriousness of your tax reporting error.

IRS Audit vs IRS Examination Report

The IRS usually begins audits within a year after you file your return. Most audits are complete within 3-6 months. An IRS audit is a review or examination of the accounts and financial information of an individual or company. The goal is to determine if the person or business is reporting in accordance with tax laws. They also verify if the income on the reports is correct. There are three types of examinations:

• Correspondence—through the mail
• Field examinations—face-to-face in-home or place of business
• Office examinations—held in the IRS offices

An IRS audit and IRS Examination are the same things. A computer system in the IRS uses a scoring function, and a high score will likely result in your return receiving a review. Taxpayer returns are selected for examination for a variety of reasons.

Things the computer looks for include a discrepancy between your total deposits and the amount of income you report on your tax return. The income is reflective of their review of your financial statements, investments, and bank accounts.

The IRS has a 3-year period to decide if you made any mistakes when filing your return. If the amount exceeds 25% of your income, they have a 6-year examination window to work with. If you file a fraudulent return or fail to file, there is no statute of limitations.

If You Can’t Afford to Pay…

If you are unable to pay the amount the IRS determines is an additional tax obligation, there are options available. The biggest mistake you can make is ignoring the notices. You must show you are in compliance with the IRS requirements by filing tax returns on time and paying the balance due or setting up a payment plan.

The IRS imposes severe tax penalties and interest, so working out a payment plan or securing a loan that allows you to pay the balance are your best options. You may also want to consider using the IRS Fresh Start Program. This program allows people who owe back taxes to pay their obligation without the risk of liens being placed against their homes or vehicles.

Can My CPA or Attorney Handle My IRS Audit Letter 525?

The majority of CPAs and attorneys only handle a few minor IRS problems each year, and typically not IRS audit letter 525. By retaining an attorney that specializes in IRS tax conflicts and law, you are gaining the experience and knowledge of a professional that works in this area of law every day. This includes being up-to-date on the constantly changing laws, rules, and regulations of tax law.

Don’t Risk It Alone

When you are facing any type of problem with your taxes, Silver Tax Group can help. We can assist you with an IRS audit, stop the IRS from garnishing your wages, keep tax payments and penalties from growing out of control, and more.

Contact Silver Tax Group using our convenient online form or call today to schedule a consultation regarding your tax-related questions.

FAQs about IRS Letter 525