The IRS begins Letter 566 by saying, "We are examining your [year] federal income tax return" and then a series of boxes are checked indicating what areas of your return they are questioning.
Letter 566 is a combination of a notice of audit and a request for information from the IRS. It is usually sent for a letter audit. They could check the boxes on the front page to tell you the issues or they could use this letter in conjunction with Form 886A or Form 4564 to request information from you. Form 566 and/or Form 886A are extremely important because the IRS will want their questions answered by you!
The evidence required to prove your case is not simply cancelled checks or even an accounting software program or printout. The IRS requires the evidence to be in a specific format or you will be rejected. Each element must be proved in it's own unique manner - not just a lot of cancelled checks.
Our Audit Defense Program gets you prepared for your IRS Audit by showing you what specifically to get for every line of every IRS form while TaxHelpLaw.com gives you Tax Attorney advice along the way!
Steps for IRS Letter 566 Audits
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The IRS will often request your bank statements & other income information but they more often, they request your deductions only to reject them with little or no explanation. You bear the burden of producing the correct information for the IRS.
You may fear an IRS audit because your records are lost or unavailable or you didn't keep your papers. However, unless you only used cash for all transactions, bank records & credit card records can be re-created. But, even if cash was used, affidavits can be obtained or we can use industry standards to arrive at a reasonable figure. See TaxHelpLaw - Lost Documents.
Please also see the TaxHelp Blog series, "Audit Issues".