What Does IRS Reference Number 1242 Mean?
Finding a 1242 reference number attached to your tax return’s status means the IRS has selected your return for review. This does not indicate the IRS has already found issues with your return. Instead, the selection process associated with reference number 1242 reviews is designed to be random.
The primary reason the IRS pulls random tax returns for review is to prevent tax fraud and identity theft.
Is an IRS 1242 Review Considered a Tax Audit?
Yes, 1242 is considered a type of tax audit with a few differences from a traditional one. The IRS states traditional tax audits that are not part of a 1242 review are “sometimes selected based on statistical formulas and compared against norms” versus being completely random.
For example, if the IRS receives a return that claims to qualify for an Earned Income Credit refund of $10,000, IRS systems may flag this as “statistically abnormal” and trigger a tax audit.
This amount is seen as too high for most EIC refunds, and the IRS will review the return for a calculation error or even evidence of fraud.
Remember that having a tax return selected for a1242 review does not automatically mean the return contains errors.
How Will I Know the IRS Selected My Return for Review?
Taxpayers checking the status of their refund may see the number 1242 when they access the “Where’s My Refund” portal.
1242 will be followed by one or more of the following notes:
- Electronic (e-file) return received three or more weeks ago
- E Freeze
- In review (request for more info will be sent by Information Request Management)
The IRS does not perform random reviews on electronic returns until they have been in its system for at least three weeks. 1242 reviews can take several weeks or months, depending on taxpayer response times and any problems the IRS discovers while evaluating a tax return.
In addition to noting a 1242 review in the refund portal, the IRS will send taxpayers notice CP05.
What Should I Do If I Received a CP05 Notice for Reference Number 1242?
A CP05 notice referencing number 1242 means that your tax return is under review, and the IRS needs additional time to verify income and other tax documents, credit eligibility, or other return-related items.
The notice will specify which areas of a tax return require verification and what documents/financial information they want to see that support what you entered on your tax return.
It is important to note that you should not file an amended return if you receive a CP05 notice from the IRS. Simply respond to the notice as soon as possible and follow IRS instructions.
Monitoring your mail and online IRS accounts regularly can help you respond to requests for additional tax information more quickly. The sooner 1242 reviews are completed, the sooner the IRS will process returns and issue refunds, if applicable.
What Does the IRS Review for a 1242?
The most common items reviewed by the IRS under 1242 include:
- Income Verification: wages, investments, rentals, self-employment, capital gains
- Itemized Deductions: mortgage interest, medical expenses, charitable contributions
- Tax Credits: child tax credit, earned income tax credit, education credits
- Business Expenses for self-employed individuals
- Filing Status: head of household, married filing jointly/separately
- Dependents: the IRS may ask for verification of dependent relationships and Social Security numbers of dependents named on the return
- Cryptocurrency Transactions and Other Investments: foreign accounts, lack of 1099s, trading cryptocurrencies
What are the Code 1242 Possible Outcomes When the IRS Audits a Return?
If the IRS finds no errors on tax returns under 1242 review, they will continue processing them and issue refunds to the taxpayer when applicable.
Adjustments to your return during a 1242 review may lead to an increase or decrease in your tax liability. Be aware that owing additional taxes also adds interest and penalties until your tax debt is paid.
When the IRS believes tax return errors are due to an individual’s extreme negligence or intentional disregard of federal tax rules, they may impose additional and more severe penalties on taxes already owed.
If taxpayers disagree with changes the IRS wants to make on their return after a 1242 review, they can appeal the decision and have their case heard by an IRS appeals officer.
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