A taxpayer can receive a notice from any taxing agency they are subject to. This could be a state agency for income, sales or payroll (including unemployment) matters or, of course, the Internal Revenue Service (IRS) for federal income or payroll tax matters.
What Happens If I Get a Tax Notice?
As notices and the reason for them vary widely between states, this article will focus on notices received from the IRS. If you received a notice from a state taxing agency, it is best to contact a professional, such as a Certified Public Accountant (CPA) or Enrolled Agent (EA) in your state for help.
The IRS Contacts You by Mail
A common concern amongst the taxpayer is any contact from the IRS. First, and foremost, the IRS does not contact you by phone or e-mail. If you get such a contact, it is a scam and DO NOT click on the e-mail or give someone any information over the phone (hang up).
Second, don’t worry about doing that. They may say they are from the IRS, but they aren’t. Often, they will say “Internal Revenue Services” when it is really Internal Revenue Service. If the IRS has cause to contact you, it will always be by mail, either regular or certified.
All tax notices should be dealt with in a timely matter, but anything marked Certified should be opened Immediately as it is most likely a more serious matter.
One other caution, many times a notice will arrive in the mail that looks like a state or IRS notice but really isn’t. While not necessarily a scam, it is often from a company that has obtained public information about you, especially if you owe the state or the IRS money, in an attempt to get you to let them represent you in the matter with promises of a significant reduction in the amount you owe.
While certainly legal, this is really an advertisement for their services designed to scare you into contacting them. You should evaluate such services carefully because your situation may not best be handled by their approach and the corresponding fees can be quite costly. Specifically, the common approach here is to immediately talk about an Offer in Compromise if you owe a lot of money.
These are very costly and very difficult to negotiate with the IRS and rarely accepted by them. Don’t hesitate to talk to a professional CPA or EA who will evaluate your situation in a no-cost, no-obligation consultation before deciding.
Types of Tax Notices
The IRS website identifies seven reasons why they will send you a notice or letter.
- You have a balance due;
- You are due a larger or smaller refund;
- We have a question about your return;
- We need to verify your identity;
- We need additional information;
- We changed your return;
- We need to notify you of delays in processing your return.
These categories are quite broad. Every notice the IRS sends out has a code and a number associated with it which will be displayed in the upper right-hand corner of the first page of the notice. For example, a common notice will be a CP2000 which is a notice of proposed changes to tax return. These codes indicate varying levels of concern (CP90 is a Notice of Intent to Levy and is quite serious).
These notices can be several pages, but normally the first page provides the explanation and what needs to be done, so start by reading it carefully. The remaining pages typically provide more detail as to why the IRS is contacting you and an explanation of your rights.
Let’s look at some specific types of notices.
If you have filed a return but haven’t paid what you owe or if the IRS has determined that you owe an amount after adjusting a return, such as after an audit, they will send a notice showing the taxes owed and any penalties and interest they have assessed. There are two types of penalties, one for not filing a return and one for not paying your taxes. The penalty for not filing is far more severe than for not paying. Penalties can also be imposed for filing or paying late. The IRS is also entitled to charge interest on outstanding amounts.
If you receive a notice like this, and the amount is correct, then make arrangements to pay the amount. You can pay the amount in full or request an installment agreement or an Offer in Compromise. The IRS website provides information on how to set up an installment agreement and it is relatively simple unless you owe a large amount. The larger the amount owed, the more paperwork the IRS will require to accept the agreement.
As mentioned above, if an Offer in Compromise (to reduce the amount owed) is an option, be prepared for a large amount of paperwork and costs to prepare it with a limited chance that it will be accepted. It is often less costly to just accept what you owe and make installment payments but do check with a professional to understand all your options.
In certain circumstances, the IRS may reduce or adjust penalties on the balance due if there is good cause to do so (interest can never be reduced). This requires contact with the IRS to make a request and should be done by a professional who is authorized by you to do so.
While you can call the IRS yourself, a professional, such as a CPA or EA, has different channels to work through with people at the IRS who are more professionally trained to handle these types of requests. There is no guarantee, but it is certainly worth the effort if there is a chance you would qualify for such adjustments. Again, a professional who offers a free consultation can assess your situation.
If you get one of these notices, the important thing is to not ignore it. The longer you put this off the more costly it becomes as penalties and interest continue to be assessed. And if you let it go too long you run the risk of having liens placed on your property and levies made against your earnings and bank accounts.
These notices normally occur when the filed tax return doesn’t match the IRS records. This usually occurs when a taxpayer either leaves information off a self-prepared return or fails to give it their tax preparer.
Any income that involves a W-2, 1099 for interest, dividends, non-employee compensation, etc., or a K-1 is reported to both the taxpayer and the IRS and so must match. This can work in the favor of the taxpayer or the IRS, depending on what is missing but it usually results from under reported income which means additional tax is owed.
This type of notice typically doesn’t require a payment at the time it is received. The IRS is asking you to clarify the difference. If you agree with their information, they will assess the tax (and penalties and interest if appropriate). If you don’t agree, the IRS gives you time (usually 30 days from the date of the notice) to provide more information before any assessment is made. An example of the latter would be a taxpayer with a Health Savings Account (HSA). The taxpayer has setup a savings account to pay medical bills.
The IRS gets a document from the bank saying that a certain amount was deposited and a certain amount was taken out to pay medical bills. If the taxpayer fails to claim the expenses on their return, the IRS will say the withdrawals are income and subject to tax when they were really reimbursements of expenses that are not taxable.
Again, it is important to consult with a professional when this kind of notice is received to determine the best approach for dealing with it. The same opportunity to reduce potential penalties also exists.
Recently, a new type of letter has been received by taxpayers saying that the return has been filed and received by the IRS but that more information is required before it can be processed (and a refund issued). It then asks for the taxpayer to send copies of the supporting documents used to prepare the return to the IRS.
It appears that at least one reason for this revolves around the potential for identity theft. The IRS has become increasingly concerned about identity theft as tax information is particularly useful to those attempting to steal identities.
For example, a taxpayer who has always prepared and filed a paper return but then files an electronic return has recently moved and who forgot to include an estimated tax payment made during the year on the return would definitely raise suspicions regarding their identity. In this case, it took almost six months after the return was filed to get a refund (although the IRS did pay interest for the time it took).
While this is not a serious matter, it certainly is an inconvenience and such a notice should be dealt with time in order to reduce the amount of time it takes the IRS to satisfy themselves.
Audits and Notices of Intent to Levy
These are serious and will normally be by certified mail. You should immediately seek professional help when you receive one.
Tax Services and Support
There are at least twenty different letters that the IRS can send out and each state has their own list. Receiving a tax notice can be a scary thing. The most important point to remember is that the IRS contacts you by mail, not e-mail or the phone, and if you receive a notice don’t ignore it.
Read it carefully and determine if you can handle it yourself or if you should contact a professional CPA or EA to help you. The professional can contact the IRS for you and guide you through the steps to answer the notice and maybe even help reduce any penalties that have been assessed.