IRS Audit Letter 566 or 525: What To Do Next

This page is general education, not legal or tax advice. The IRS uses audit letters 566 and 525 in slightly different contexts and programs. Always read your specific letter and talk with a qualified professional about your situation before you respond.

First: take a breath – what are IRS Letters 566 and 525?

When a client brings me an IRS envelope with Letter 566 or Letter 525 at the top, what it usually means is:

• The IRS has selected your return for examination (an audit), and
• They are telling you which items they want to review and what they need from you next.

In plain English:

• Letter 566 is often used for a correspondence audit – mostly by mail – focused on specific issues (credits, dependents, filing status, Schedule C, etc.).
• Letter 525 is commonly used when the IRS is proposing changes to your return after an examination, including tax due, penalties, and how to agree or disagree.

Common reasons the IRS uses Letter 566 or 525

Some of the issues I see most often in audit letters like 566 and 525 include:

• Earned Income Tax Credit (EITC) questions – income levels, qualifying child rules, or living arrangements.
• Child Tax Credit / Additional Child Tax Credit – who is allowed to claim which child.
• Head of Household filing status – whether you qualify under the rules.
• Schedule C (sole proprietor) expenses – mileage, home office, large deductions with low or inconsistent income.
• Schedule A itemized deductions – especially charitable contributions or big medical deductions.
• Rental activity (Schedule E) – whether it’s actually rental or a personal property situation, and whether losses are allowed.

The letter itself will list what they’re questioning. I like to go through that list with a highlighter and translate each item into normal language for my clients.

Step 1: Read the letter carefully (especially the deadlines)

Before we do anything else, I always look for three things:

1. Tax year and taxpayer name.
   Make sure the notice really belongs to you and the year you think it does.
2. Response deadline.
   Most audits have clear timeframes. Missing that window can cause the IRS to close the case in their favor by default.
3. Type of audit and contact method.
   Is this a correspondence audit (by mail), an office audit, or something more involved?

I encourage clients to write the response deadline in big letters on the front of the envelope and add it to their calendar immediately.

Step 2: Identify what the IRS is really questioning

In a 566 or 525 letter, the IRS usually includes:

• A list of items under examination (credits, income, deductions).
• A request for documents or explanations to support those items.
• Sometimes a proposed change showing how much tax you’d owe if they disallowed certain items.

With my clients, I’ll often:

• Make a simple checklist: “We need proof for X, Y, and Z,” and
• Compare it to the original return so we know exactly what we’re defending.

If the original return was prepared by someone else (or DIY software), this is also where I look for preparer errors or weak spots that may need to be corrected rather than defended.

Step 3: Gather clean documentation

The quality of your documentation makes or breaks most audits.

Depending on what’s being examined, I might ask a client for:

• Proof of dependents living with you (school records, medical letters, lease agreements, etc.).
• Receipts and logs for business expenses (mileage logs, invoices, bank and card statements).
• Rental agreements, mortgage statements, property tax bills for real estate issues.
• Pay stubs, W-2s, and 1099s to reconcile reported income.

My goal is to:

• Match each IRS question with one or more clear, dated documents, and
• Avoid sending piles of random paperwork with no explanation.

Step 4: Decide whether to agree or disagree with the IRS

With Letter 525 in particular, the IRS may already be proposing changes to your return. You usually have options to:

• Agree with their changes (if they’re correct or not worth fighting).
• Partially agree and provide documentation on certain items.
• Disagree and send a full response with explanations and supporting proof.

When I’m advising a client, I look at:

• How strong our documentation is.
• How much money is at stake (tax, penalties, interest).
• Whether the issue is likely to come up again in future years.

Sometimes, correcting an error and moving on is the right call. Other times, if the law and the facts are on your side, it’s worth pushing back.

Step 5: Prepare a professional, respectful response

A typical response packet I prepare for a client includes:

• A short cover letter summarizing:
  • Which letter (566 or 525) we’re responding to,
  • The tax year, and
  • Whether we agree, partially agree, or disagree.
• A point-by-point reply that tracks the IRS’s questions in the same order.
• Numbered exhibits (documents) that match the explanations in the letter.
• Copies of the notice itself and sometimes the relevant pages of the return.

We then send the response:

• To the exact address or fax number on the letter, and
• By a method that gives us proof of delivery (for mail, usually certified).

Step 6: Understand what happens after you respond

After you send your response, a few things can happen:

• The IRS accepts your documentation and closes the case with little or no change.
• They partially accept your position and adjust the tax and/or penalties.
• They disagree with some or all of your response and issue an exam report or notice of deficiency with appeal rights.

This is where it really helps to have an Enrolled Agent or other licensed professional involved from the beginning, so your options are preserved and deadlines aren’t missed.

How audit letters fit with other IRS notices

Letters 566 and 525 often show up in the same lives as other notices, such as:

• CP2000 – “We matched your return to W-2s and 1099s and found differences”
• CP14 – First balance-due notice after the IRS posts a liability
• CP501 / CP503 / CP504 – Escalating collection notices when a balance isn’t paid

The sooner you take audits seriously and respond with care, the less likely you are to end up deep in the collection notice chain.

When to bring in an Enrolled Agent for an IRS audit

I generally suggest not going alone if:

• The IRS is questioning multiple years or complex issues (business, rentals, credits).
• You didn’t personally prepare your return and don’t fully understand the entries.
• You’ve received more than one IRS notice and the situation already feels tangled.
• The proposed changes involve significant tax, penalties, or potential future risk.

As an Enrolled Agent, I can:

• Review your notice and return with you in plain English.
• Explain where the IRS has a fair point and where they may be overreaching.
• Help you gather and organize documentation that actually answers their questions.
• Communicate with the IRS on your behalf so you’re not calling alone.

Sometimes the best outcome is “no change.” Other times it’s “less pain, more control.” Either way, my goal is to move you from panic to a clear plan.