Tax Audit CPA discusses IRS Letter 566 (CG) and Notice CP2000 | Initial Contact Letter | IRS Audit

Tax audit CPAs routinely handle IRS Letter 566 (CG), Initial Contact Letter. Letter 566 (CG) marks the start of an IRS correspondence audit. They’re not always correct, but you have to prove that to the IRS. Any IRS audit deserves prudence and due diligence. I’ll give some insight into how a tax audit CPA approaches IRS Letter 566 (CG).

IRS Letter 566 (CG) versus Notice CP 2000

• Letter 566 (CG) states your return is being audited and lists issues the IRS wants to verify.
• IRS Notice CP2000 makes proposed changes to your tax return which include more tax, penalties and interest. Here’s our post on Notice CP2000.

Can You Handle a Correspondence IRS Audit Yourself?

Sometimes. Not every case requires a tax audit CPA. I think it depends on what Letter 566 (CG) asks for. I think it depends on how money is at stake. Every situation is different. If you handle it yourself:

• I don’t suggest just accepting the IRS is correct.
• Just stick to the facts and don’t open up other areas of your tax return to scrutiny.
• Try not to open issues in any other tax returns.
• Don’t poke the Bear; be polite and professional.
• Don’t let emotions distract you.
• Don’t waste valuable defense time by just ignoring Letter 566 (CG).

How CPAs handle an IRS Correspondence Audit

• CPAs check Letter 566 (CG) carefully. What tax year is it for? What tax form is it for? What tax issues are there?
• CPAs correlate Letter 566 (CG) to underlying tax return.
• CPAs examine the documentation used to prepare the audited tax return.
• Tax audit CPAs listen to your side of the story.
• I like to know what the dollar consequences are. So I calculate that, sometimes using alternate scenarios.
• CPAs usually write to the IRS requesting more time.

If the IRS is Correct

• CPAs generally request the IRS waive penalties.
• If you can’t pay the IRS demand, CPAs may look at an Offer in Compromise via Form 656 to learn if the IRS will accept less money as payment in full. This is the pennies on the dollar technique. Here’s one of our posts on Offer in Compromise, Form 656.
• A CPA also looks at an Installment agreement, Form 9465 to pay the IRS demand off over time. Here’s a post on Installment Agreements and Form 9465.

“The IRS usually has a valid point delineated on Letter 566 (CG), which typically is income related. But they don’t factor in legitimate deductions and tax credits.”
- Gary Bode, IRS Letter 566 (CG) CPA

What if Letter 566 (CG) is Wrong?

The IRS calculates their demand to render the highest amount of payment due. perhaps just to get your attention. They don’t really expect that entire amount. They understand that if, say, you didn’t report a Form 1099 MISC you received as a subcontractor, you didn’t report the expenses associated with it either. Our post on back taxes covers this issue thoroughly. So here, a CPA would look at presenting an amended tax return on Form 1040-X showing your side of the story for that Form 1099 MISC. Here’s a post on Amended Tax Returns, Form 1040-X. I generally try to build your case like a college paper to a grumpy professor; a succinct cover letter and well-organized documentation. I keep the discussion confined to the Letter 566 issue. When appropriate, CPAs request an actual IRS Agent be assigned to handle the case.

Progression of a Correspondence Audit

From the opening round of Notice CP2000 or Letter 566 (CG), things escalate slowing but surely.

• Here’s our post on Notice CP501 and Notice CP504. Here’s our post on Form 668(Y), Notice of Federal Tax Lien. Here’s our post on Form 12277, Withdrawal of Federal Tax Lien.

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