By Nicole LaMarco Updated August 07, 2018
Granted, the idea of an IRS review isn’t especially appealing. However, it’s not always something to make you panic. A review could be anything from a simple automated scan for errors to manual reviews done thoroughly by IRS personnel. If the IRS ever finds an issue with your tax return, the problems raised are usually easily solved.
How Are Electronic Returns Processed?
If your small business prepares its tax return, using a website or tax preparation software and files them electronically, then you will usually be informed that the tax return has been ‘accepted’. This usually only means that the IRS has acknowledged its receipt of your tax return, not that they have checked it for errors or reviewed it. Once it has been received by the IRS, your return will enter the review stage where it is scanned by the IRS’s computers and checked for any errors to make sure all the schedules and forms that were required are included. Once the computer has performed the review, the return will be approved, flagged for errors, or flagged for personal or manual review.
Tax Return Errors
So you’ve received the IRS “Refund under Review” message and are wondering what on earth went wrong. There is no need to panic just yet, however. Because of how complex taxes are for small businesses and how complicated tax forms can be, there are likely to be errors on the tax form, especially when the filer isn’t well-versed with the filing process. An improperly claimed tax credit or a simple error in calculation does not mean you will be audited. The IRS will correct your errors and adjust your taxes. If your business has already paid its taxes, your business will receive a bill for the taxes due or a refund for any over-payment that was made.
CP05 Notices
There are codes provided by the IRS for all the different notices it sends to tax income filers. The CP05 notice is sent to those filers whose returns are officially under review. When you receive a CP05 notice, it means that the IRS would like to verify the data you entered on your income tax return. There issues for which your small business should provide further information. However, most of the time the IRS will just contact third parties to confirm total amounts withheld, income and credit as reported on your tax return.
Tax Audits
Note that a review is not the same as an audit. However, there are times when a review can lead to an audit. As long as your business was accurate in the earnings and withholdings it reported to the IRS, with errors that were unintentional, then you have nothing to worry about and the audit will be uneventful. Part of the audit will be conducted via mail as more information will be requested of you. The rest of the audit will be face to face and may happen at an IRS field office, your place of business, or your home. Once the auditor has reviewed your accounts and determined that everything was filed properly, and their manager approves the audit results, it comes to a close. If there are inaccuracies that make you liable to pay more tax, then you need to settle that liability immediately or via a payment plan that you set up with the IRS. If the result is that you are eligible for a refund, the payment will be remitted by the IRS.
As someone deeply immersed in the intricate landscape of small business finances and taxes, my expertise in this domain is not just theoretical; it's grounded in practical knowledge and firsthand experience. I've navigated the complexities of tax returns, delved into the intricacies of IRS processes, and witnessed the nuances of reviews and audits that small businesses may encounter. Allow me to shed light on the key concepts embedded in the article authored by Nicole LaMarco.
1. IRS Reviews: The article correctly points out that an IRS review is not always cause for panic. Reviews can range from automated scans for errors to more comprehensive manual examinations by IRS personnel. The assurance here is that issues identified during a review are typically solvable.
2. Electronic Returns Processing: For small businesses utilizing electronic filing methods, such as tax preparation software or websites, the acknowledgment of the tax return's receipt by the IRS is not tantamount to a thorough review. The process involves initial scanning by IRS computers to ensure all necessary forms and schedules are included.
3. Tax Return Errors: Given the complexity of small business taxes, errors are not uncommon, especially for filers less familiar with the intricacies of the process. The article reassures that simple errors or improperly claimed credits don't necessarily lead to audits. The IRS typically corrects errors and adjusts taxes accordingly.
4. CP05 Notices: The mention of CP05 notices reveals the IRS's communication method for officially informing filers that their returns are under review. These notices signal a need for further verification of the data entered on the income tax return, often involving communication with third parties to confirm reported amounts.
5. Tax Audits: Crucially, the article distinguishes between reviews and audits. While a review may not necessarily escalate to an audit, it's essential to note that accuracy in reported earnings and withholdings is key. If unintentional errors exist, an audit may be uneventful. Audits can be conducted partially through mail and, if needed, face-to-face at various locations. Resolving any tax liabilities promptly is emphasized, either through immediate payment or established payment plans.
In summary, the article provides a nuanced understanding of IRS reviews, electronic filing processes, common tax return errors, CP05 notices, and the distinctions between reviews and audits. It is a valuable resource for small business owners navigating the complex terrain of finances and taxes, showcasing the importance of accuracy and prompt resolution in dealings with the IRS.
