How to Respond to an IRS Audit Letter
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Did you receive Letter 6323 initiating an IRS Audit for your income taxes?
The same letter from the IRS is sent to businesses and individuals, and they are only sent through certified mail. Tax audits are not conducted through the phone.
The number of IRS audits is picking back up. The delay on audits ended on July 15th and IRS is sending out these letter 6323 notices right now. These may involve PPP loans or EIDL loans updates. If you receive one of these letters it will contain the following information:
PPP Loan Update
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If you received a Payment Protection Program (PPP) loan through the Small Business Administration (SBA), and it was forgiven, you should still keep the records. Records for both PPP one and PPP two should be kept for at least three years, even if the loans were forgiven.
Our team at Milikowsky Tax Law, recommends keeping PPP loan records for at least seven years. It is important to keep these records for longer because, although the loan was reviewed when you received it, and again reviewed when it was forgiven, the PPP loan doesn’t prevent SBA or any other government agency from returning and asking for further proof of financial hardship to justify your business receiving the loan.
Financials from the loans are disclosed on tax returns. 2020 tax returns have already been filed. Since PPP loans were distributed in 2021, they will be filed in 2022. This does not prohibit IRS or SBA to reopen your files to match the financials provided to SBA to receive the loan against the actual tax return. If IRS audits you, generally, IRS opens examinations or audits within three years of the date the return is filed.
Keeping records for seven years covers the period IRS audits, especially if you file for an extension of your tax return.
If SBA approved the loan forgiveness, there is justification for them to return later on and ask questions. It’s best practice to keep a file of all of the financials. Whether you recorded them yourself, or you hired a bookkeeper, make sure the files include:
- A summary of the facts
- Any assumptions you made
- All of the documents relied upon- bank statements, W-2, payroll, etc.
Sole proprietors were entitled, as part of the PPP, to receive a percentage of total net income from the prior year. This means it is important to save tax returns, and profit and loss statements for each year.
EIDL Loan Update
Economic Injury Disaster Loan (EIDL) is another SBA loan. If you applied and received an EIDL loan, you may still need to prove that the loan was necessary because of hardship. The facts and documents provided to SBA when applying for an EIDL loan determine the number of agency grants.
It’s important to keep documents of all correspondence with SBA or for PPP or EIDL loans because any red flag on your file could open an audit, even in the future after loan forgiveness.
Your audit letter contains:
- The tax year of the audit.
- The taxpayer name is being examined (this is where you will determine if you personally or your business are under review).
- The deadline to respond is 30 days.
- Your assigned Revenue Agent’s name and phone number.
- A summary of what issues are being audited.
IRS Audit Letter Tips
- You should not: Provide records to your Revenue Agent before consulting a tax lawyer.
- You should: Contact a tax professional before supplying the IRS with any records to ensure you don’t provide the wrong information. You can easily make things worse that may expand your audit if you believe you have made serious mistakes on your return.
- You should: begin your response as soon as possible. You have a window of 30 days to reply to your audit letter.
What Should Be Part of Your Audit Letter Response?
- Your Full Name
- The Name of the IRS officer on your case
- Employee ID
- Your Contact Information
- Tax ID Number
- Business ID if needed
- Requested Records or Supporting Documentation
Learn more about what red flags you should be aware of with the SBA PPP loan in our article here.
