Receiving a notification that your tax return is under review can be unsettling for many taxpayers. This status indicates that the tax authority is examining your submitted information more closely, which could lead to processing delays or adjustments to your refund. Understanding what this review entails and why it might occur is key to navigating the process.
Meaning of the Review Status
When a tax return is flagged for review, the tax authority, such as the IRS, is taking a closer look at the details of your return. This does not necessarily indicate errors or wrongdoing; it can be part of routine procedures to ensure compliance with tax laws. Reviews may be triggered by discrepancies in reported income, unusual deductions, or random selection for quality control.
The review process compares your submitted return against the tax authority’s records. A mismatch, such as between the income reported on your return and the information provided by your employer, can prompt a review. High deductions compared to others in your income bracket may also attract scrutiny. Advanced algorithms and data analytics are often used to detect these anomalies.
In some cases, reviews arise from new tax legislation. For instance, changes introduced by the Tax Cuts and Jobs Act or the growing focus on cryptocurrency reporting have increased reviews to ensure compliance with updated rules.
Possible Reasons for the Review
Several factors beyond simple discrepancies can lead to a tax return review. High-income reporting without corresponding tax payments may raise concerns about potential underreporting. For example, reporting significant capital gains without making estimated tax payments could trigger a closer examination under rules governing underpayment penalties.
Complex financial transactions or investments often invite additional scrutiny. Taxpayers involved in partnerships, S corporations, or foreign investments may be subject to review under regulations such as the Foreign Account Tax Compliance Act (FATCA), which requires reporting of foreign financial assets. Similarly, claiming renewable energy-related deductions, such as the Investment Tax Credit (ITC), may prompt a review to verify eligibility.
The Earned Income Tax Credit (EITC) is another common focus due to its complexity and potential for errors. Taxpayers may be asked to provide documentation to confirm income thresholds or dependent qualifications. Significant income fluctuations from prior years or missing documentation for claimed dependents are frequent triggers for reviews in this area.
What Documents Might Be Requested
If your tax return is under review, the tax authority may request specific documents to verify claims and ensure compliance. These requests are tailored to the areas of your return under scrutiny. For instance, substantial business expense claims may require receipts, invoices, or bank statements. IRS Publication 535 outlines deductible business expenses like rent, utilities, and travel, and proper documentation is essential.
For rental property income, the tax authority may ask for lease agreements, property tax statements, or mortgage interest documentation to verify entries on IRS Schedule E. Discrepancies in reported rental income or expenses often lead to these requests.
Charitable contributions, particularly large ones, may also require substantiation. This could include acknowledgment letters from charities or Form 8283 for non-cash contributions. Contributions over $250 require written acknowledgment from the charity, while non-cash donations exceeding $5,000 must include an appraisal report.1Internal Revenue Service. Publication 526, Charitable Contributions
How Changes to Your Refund Amount Can Occur
Refund adjustments during a tax review often result from reevaluating deductions or credits. For instance, claiming a deduction under Section 179 for business equipment may prompt a reassessment of depreciation calculations, affecting your refund.
Income adjustments can also impact refunds. If unreported income is discovered or taxable income is recalculated using alternative methods like the installment method for sales income, your refund amount may change. For example, installment sales under rules for reporting income over multiple periods can lead to adjustments if improperly reported.
Communication from the Tax Authority
The review process begins with a notice or letter from the tax authority outlining the items under review and any additional information needed. This correspondence, often referred to as a CP letter by the IRS, is critical for understanding the scope of the review and the steps required to resolve it.
Tax authorities typically provide multiple communication channels, such as phone, mail, and online portals. The IRS “Where’s My Refund?” tool, for instance, allows taxpayers to track the progress of their refund and review. Responding promptly to requests is essential to avoid delays or additional penalties. Keeping records of all communications ensures clarity and provides a paper trail in case of further inquiries.
To navigate complex reviews, consulting a tax professional can be helpful. They can guide you in compiling and presenting requested information effectively, ensuring a smoother resolution.
Time Frames to Expect
The duration of a tax return review varies depending on the complexity of the return and the documents required. Most reviews are resolved within 45 to 90 days, but reviews involving international transactions or significant deductions may take longer. Understanding these timelines helps taxpayers manage expectations and plan accordingly.
If disputes arise or additional information is required, the review may transition into a more comprehensive audit, which can take months. The IRS generally does not pay interest if a refund is issued within 45 days of the later of the return due date or the date the return is filed; after that, interest accrues until the refund is issued.2Internal Revenue Service. Interest Being informed about these provisions can provide some reassurance during extended reviews.