What is IRS reference code 1201?

As per the IRS reference code 1201 it means a catch all code when all other codes fail to apply on the person. This is a very normal process that is generated by the computer on a random basis and hence the agent may not know the knitty gritty. As mentioned this is not a mistake done by the audit team and the IRS agent would clearly review your papers and the process will be complete. In most cases the papers are returned back without problems. You should not be depressed or worried as this is a normal routine check-up followed by the banks.