What Happens When Your Tax Return Is Flagged for Review?

Few things cause more anxiety during tax season than learning your return has been flagged for review. While it’s easy to assume the worst, a closer look reveals that many reviews stem from routine checks or simple inconsistencies, not accusations of wrongdoing. The IRS uses a mix of automated systems, data matching and random sampling to ensure returns are accurate, which means any filer could be selected in a given year. Knowing how the process works can help you stay calm, respond effectively and protect yourself from unnecessary delays or complications.

If you’ve got a complicated tax situation, it may be wise to work with a financial advisor with tax expertise.

How Tax Returns Are Selected for Review

Tax returns can be selected for review for several different reasons, and not all of them indicate a problem. In many cases, the IRS uses automated systems that flag returns with numbers that fall outside normal patterns for a given income level or filing status. These algorithms are designed to spot potential errors, inconsistencies or omissions, anything from unusually high deductions to mismatched income reported by employers and financial institutions.

Some returns are also chosen randomly as part of the IRS’s routine compliance checks. Even if everything on your return is accurate, it may still be pulled for a closer look simply due to statistical sampling. Additionally, certain types of income or deductions, such as large business expenses or complex investment activity, can naturally draw more scrutiny. Understanding how reviews are triggered can help ease concerns and remind you that a flagged return doesn’t automatically mean you did something wrong.

When a return is selected, the IRS typically begins with a correspondence review, requesting clarification or documentation to verify specific entries. Responding promptly and thoroughly can help speed up the process and prevent misunderstandings from escalating. If you’re unsure how to address the IRS’s requests, a tax professional can help you navigate the review and ensure your response is both accurate and complete.

What an IRS Review Involves

If the IRS decides that your return merits a second glance, you’ll be issued a CP05 Notice ¹ . This notice lets you know that your return is being reviewed to verify any or all of the following:

• Your income
• Your tax withholding
• Tax credits you claimed on your return
• The withholding claimed on your Social Security benefits
• Schedule C income
• Claims for household help

At this point, you’re not expected to do anything. The IRS will attempt to verify whatever information triggered the review. In the meantime, you won’t be issued a refund if you’re expecting one. If you owe taxes, you will still need to pay by the tax filing deadline to avoid a penalty.

How long the review process takes depends on what information the IRS needs to verify. If you don’t hear anything within 45 days from the date of the initial notice, however, you can follow up to see what happened to your refund.

Potential Outcomes of a Tax Review

There are several different scenarios that can play out when your tax return is flagged for review.

Obviously, the best outcome is for the IRS to find that your information is correct and process your refund. However, the IRS could verify your information and determine that you owe more in taxes. If it’s a difference of only a few hundred dollars, that may not be problematic. But if it’s several thousand dollars, you could find yourself in a financial bind. Applying for an IRS installment agreement can give you time to pay it off. Just know that you’ll have to pay penalties and interest until the balance is wiped out.

Finally, there’s the chance that the initial review could lead to a full-scale audit. In that case, the IRS would look at every aspect of your return to determine whether you’ve reported your income properly and paid the appropriate amount of tax. The IRS can go back through three years’ worth of returns or review up to six years if they find a serious error.

What to Do if You Receive an IRS Notice

If you get an IRS notice in the mail, don’t panic. But don’t ignore it either. Most IRS correspondence is routine and can be resolved quickly if you respond correctly. Here are some key steps to take:

1. Confirm that the notice is legitimate: The IRS never initiates contact by email, text or social media. A real notice will arrive by mail on official IRS letterhead and include a notice number, such as CP05 or CP2000. Check the number against the IRS website to confirm what it means before taking any action.
2. Read the notice carefully: Each IRS notice explains why you were contacted, what information is being verified and whether you need to respond. Sometimes the IRS is simply notifying you of a review. In other cases, they may be asking for clarification or documentation.
3. Gather relevant documents: If the notice references specific income, deductions or credits, collect any supporting records, such as W-2s, 1099s, receipts or proof of charitable contributions. Having your documentation ready makes it easier to respond accurately and avoid delays.
4. Respond within the stated deadline: The notice will include a reply date. Failing to respond promptly can lead to penalties or escalation. If you need more time, contact the IRS to request an extension.
5. Know how to contact the IRS: In most cases, the best practice is to respond by mail, following the instructions in the notice. If you call, use the phone number listed on the letter and have your tax return and notice handy. Be prepared for long wait times during tax season.
6. Involve a tax professional when needed: If you don’t understand the notice, disagree with its findings, or the IRS requests a large payment or extensive documentation, it’s worth working with a tax professional or financial advisor. They can help interpret the letter, communicate with the IRS on your behalf, and ensure your response is complete and accurate.

Bottom Line

Being selected for a tax return review doesn’t mean it’s time to panic. If you’re worried about the possibility of an audit, getting all of your income statements, receipts and other tax-related documents organized during the review process can save you some time and headaches. The IRS may determine that your information is correct and process your refund. However, the government could verify your information and determine that you owe more in taxes, or worse, order a full-fledged audit.

Tax Planning Tips

• If you need any help, don’t hesitate to reach out to a financial professional. A tax accountant can help you with issues directly related to your tax return, but you may prefer to work with a financial advisor who can take a holistic approach to your overall financial picture. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Preparing is key to avoiding tax issues. Use SmartAsset’s free income tax calculator to see in advance what you may end up owing, so you are prepared in advance rather than risking a surprise.

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