Audits can seem intimidating, but the majority of the problems regarding returns the IRS selects for additional reviews are resolved without the taxpayer’s assistance.
IRS Code 420 suggests a tax return is selected for an additional review. Still, its addition to a tax account transcript doesn’t necessarily mean the IRS will initiate a full-scale audit.
This transaction code only indicates that the IRS needs more time to review your tax return and confirm the validity of the information you included in your tax return. However, seeing Code 420 on your tax account transcript almost inevitably means your tax refund will be delayed.
Table of Contents
Overview of the Individual Master File System
The IRS uses the Individual Master File (IMF) system to store and process all tax returns it receives. When you e-file a return, the IRS will need some time, usually between 24 and 48 hours, to enter it into this system.
The waiting period for paper tax returns is between two and three weeks. During this time, taxpayers won’t have access to their tax account transcript.
IMF automatically analyzes all tax returns and compares them against taxpayer information the IRS obtains through form W2 or 1099-NEC form. The system also has specific pre-set parameters or norms for different tax return types.
Hence, a tax return can be flagged for an additional review if it doesn’t meet one or more of the system’s norms.
Audit Types
IMF selects returns for an additional review based on a statistical formula to close the tax gap. This term refers to the difference between the amount the IRS expects to collect from taxpayers in a tax year and the amount it collects.
Consequently, your tax return may be selected randomly for an additional review after the computer screening, even though it doesn’t contain any errors.
Knowing which parameters can trigger the system to flag a return for an additional review is impossible.
However, underreporting taxable income, calculating expenses incorrectly, claiming tax credits and deductions you’re ineligible for, or discrepancies between the information on Form W2 and a tax return are some of the most common reasons why tax returns are flagged for additional reviews.
All returns flagged for review are sent to the Examination Department of the IRS. Upon additional review, the department’s agent decides if a full-scale audit is required for each return.
If the IRS agent determines your tax return must be audited, they might recommend a mail or in-person audit.
- Mail audit – Most IRS audits are conducted via mail. You’ll receive a notice with instructions regarding the documents you must submit to resolve the issue that triggered an audit.
- In-person audit – An auditor will be assigned to your case. You must contact the auditor and collaborate with them to resolve a problem with your tax return.
How to View a Tax Account Transcript?
As we pointed out earlier, the IRS needs time to upload a tax return to the IMF and start processing it. You must wait for at least a couple of days before requesting the digital version of your tax account transcript.
The Get Transcript tool on the IRS website lets you access your tax account transcript. This transcript contains different transaction codes, such as Code 150, Code 806, or Code 570, which refer to different actions the IRS takes while processing a return.
Cycle Code shows you your account’s updating frequency so that you can know when to check for new transaction codes on your tax account transcript.
Code 420 might appear on this transcript if your tax return is selected for an additional review after the initial computer screening.
A Closer Look at IRS Code 420
According to Section 8A – Master Code Files, IRS Code 420 is an Examination Indicator. This code title only suggests that the IRS uses this code to inform taxpayers their returns are under additional review.
Code 420 line on a tax account transcript features four sections like all other transaction codes in this document. You’ll find the code’s number in the Code section.
The Explanation of Transaction section next to it shows the ‘Examination of tax return’ description. The Date segment informs you when the IMF flagged your return for a review.
The Amount in Code 420 line will always show $0,00 because the purpose of this code isn’t to assess tax credits or liabilities to your account. Depending on why the IRS flagged your return for a review, you may see other transaction codes, like Code 290, that indicate your tax return processing is on hold.
Implications of IRS Code 420
The Explanation of Transaction segment of IRS Code 420 line offers a vital clue for the code’s interpretation.
It reads ‘Examination of tax return,’ which indicates that your tax return is still not selected for a full mail or in-person audit. Even so, this transaction code can imply that the IRS intends to audit your return.
Code 420 might also appear on your tax account transcript if you filed an amended tax return to indicate that the IRS is reviewing the new information you submitted.
The IRS will send you a notice if their Examination Department decides that a full audit is necessary. Code 421 will be added to your tax transcript account if no action is required from you once the IRS has completed the review.
Remember, most additional reviews take weeks to complete, so your tax refund will almost certainly be delayed if Code 420 appears on your tax transcript.
How to Avoid Additional Tax Return Reviews?
Although it’s nearly impossible to eliminate any chance of being selected for an additional review, there are a number of things you can do to avoid being flagged for an examination by the IMF.
Let’s look at the steps you can take to reduce the chances of seeing Code 420 on your tax account transcript:
- Double-check all information on a tax return before filing it – Spelling and math errors are common on tax returns. The IRS usually corrects these mistakes automatically, but in some cases, you may receive a Math Error Notice.
- Don’t claim tax deductions and credits you’re ineligible for – You may face an audit if you claim EITC or Child Credit on your tax return even though you don’t qualify for these tax credits.
- Keep all financial records – Taxpayers who cannot present proof of their business expenses might find themselves in a difficult position if Code 420 results in an audit. Keeping your financial records organized will make explaining your reasons for claiming business expenses on a tax return easier.
- business expenses on a tax return easier.
- Report accurate income amounts – The IMF system will flag your tax return for a review if it detects that the taxable income you reported doesn’t match the information the IRS received from your employer.
Consider hiring a professional return preparer to ensure your tax return will be filed according to the IRS’ guidelines.
Frequently Asked Questions
Don’t spring into action as soon as you see this transaction code on your tax account transcript. The IRS will notify you if a mail or in-person audit is necessary. Otherwise, Code 421 will appear on your transcript after the additional review is completed.
Code 420 indicates that a tax return was selected for an additional review that can result in an audit. Still, this code doesn’t mean that your tax return is currently being audited.
The current administration plans to increase audits on the wealthiest taxpayers. Even so, the chances of being selected for an additional review or an audit are under 1%, which means you’re unlikely to see Code 420 on your tax return.
The IRS might need up to a month, sometimes even longer, to resume processing your tax return after Code 420 appears on your tax account transcript.
Contact a CPA
The Individual Master File system isn’t perfect, and sometimes it selects tax returns for additional review even though they don’t contain inaccurate information. Consequently, you shouldn’t be too concerned about Code 420.
You should remain cautious and closely monitor your tax return’s status because this transaction code could indicate an audit.
Call 866-8000-TAX or go to choicetaxrelief.com if you need a CPA to help you prepare a tax return or understand the potential consequences of IRS Code 420.
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Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
