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The short version

  • IRS Reference Number 1242 is a code the IRS uses to pull your tax return for review.
  • The IRS routinely reviews tax returns for fraud.
  • Your tax return is held until you can validate the information requested by the IRS.

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What is IRS Reference Number 1242?

IRS Reference Number 1242 is a code the IRS uses to notify you that your return has been selected for review. Your return will remain frozen in the IRS’s system until the review process is complete.

The selection process for code 1242 reviews is intended to be random. Receiving a notification that your tax return is being held for review doesn’t necessarily indicate that you misfiled your return or were dishonest. It's simply the IRS’s process for determining if income, expenses, and credits are accurately reported.

That being said, one of the reasons the IRS conducts these types of reviews is to prevent fraud, especially identity theft. If the IRS suspects a tax return is fraudulent it will use code 1242 to trigger a review.

Related: What happens if you don’t file taxes on time?

How do I know my tax return is under review?

The IRS uses code 1242 to indicate in its system that your return was received and is under review. From there you’ll be issued a CP05 Notice from the IRS requesting that you verify some of the information you provided in your tax return.

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What is a CP05 notice?

CP05 Notice is a letter from the IRS issued to verify information on your return such as a business income or tax credits you claimed. The IRS will hold your refund until you confirm the information requested in the CP05 Notice.

Why would my tax return be audited or under review?

According to Logan Allec, a CPA and owner of the personal finance site Money Done Right, the 1242 review process is part of the IRS’s identity theft refund fraud program.

From Allec’s experience, the IRS “uses a combination of automated tools such as various filters, algorithms, and data models combined with manual reviews by IRS personnel to identify potentially fraudulent returns with refund claims.”

Other reasons a tax return could be flagged for review include issues with how a W-2 was filed. If an employer doesn’t file a W-2 properly, your return could be held for review to ensure the correct amount was withheld. To validate this you may be asked to provide a proof of payment from your employer, such as a pay stub or a canceled check.

Working from home? Here's what to know: Tax implications when working remotely

How do I respond to an IRS Reference Number 1242?

Once your CPO5 Notice has been issued, you should provide the specific piece of information requested in the notice back to the IRS in a timely manner.

Make sure you keep copies of the notice as well as any documentation you provide. You can mail or fax the information back to the IRS following the guidance provided in your CP05 letter.

Aim to answer the IRS’s request within 30 days. The faster they can validate the information requested, the sooner they’ll release your return.

Should I appeal a Reference Number 1242?

Usually, a CP05 Notice issued by code 1242 isn’t something you will need to appeal. In many cases, it is just a request to validate information in your tax return. In some cases, your notice could be the result of a computer error.

Allec notes that many people get CP05 Notices every year even though their returns are legitimate and there is no evidence of fraud.

How do I avoid receiving an IRS Reference Number 1242 in the future?

The best way to avoid your return being flagged for review is to be as accurate as possible when you do your taxes. This might entail using a robust tax software or hiring a tax professional especially if you have a complicated return.

For example, says Allec, you may want to enlist help if you’re trying to deduct a credit that you’re not sure you’re qualified for or if “You were overly aggressive in taking business deductions on your Schedule C,” he adds.

Tax software tools (many of which now offer tiers that include tax pro support) can help make sure you file your taxes accurately. They can also help you prepare for an audit in the event your review turns up something the IRS decides to investigate further.

The takeaway: Don't sweat the IRS 1242

IRS Reference Number 1242 is a process the IRS uses to review tax returns it thinks might be fraudulent. The IRS will hold your return until they can validate certain information on it.

Keeping accurate records to inform how you file your taxes is one of the best things you can do, regardless of whether or not your return is flagged for review. This way you'll have everything you need to handle the IRS’s request for additional information in a timely manner.

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Amanda Claypool Freelance Contributor

Amanda Claypool is a writer, entrepreneur, and digital nomad. She writes about wealth, blockchain technology, consumerism, and the future of work

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