Receiving a letter from the IRS can be daunting, but it’s important to stay calm and handle the situation methodically. This post will help you understand the most common IRS notices and provide practical steps to address them effectively.
First, Don’t Panic! When taxpayers panic, they tend to eventually shut down and ignore the problem. Don’t do this! The IRS operates on schedules and deadlines. Ignoring the problem only makes it worse. Trust me, I worked for the IRS for nearly two and many tax problems start with a pile of unopened mail. So, take a deep breath…
Read Carefully and Understand the Reason. Each notice contains critical information about the issue. Look for the notice number in the top or bottom right-hand corner. The notice number (usually beginning with ‘CP’ or ‘LTR’) will help you identify the issue. This number is key to finding more detailed information on the IRS website.
The IRS sends notices for various reasons such as tax balances due, adjustments to your refund, verification of identity, or requests for additional information. Understanding the purpose of the notice is critical for the next step.
Verify the Notice. Ensure the notice is legitimate by checking for common signs of fraud, such as incorrect names, typos, or suspicious requests for personal information. The IRS will never contact you via email, text message, or social media to request personal or financial information. The only exception here is after making initial contact with you, an IRS agent may ask you to set up a secure object mailbox on the IRS’s computer system at IRS.gov/connect.
Contact the IRS. If the notice seems legitimate, don’t hesitate to call the IRS using the contact information provided in the notice if you need clarification. For complex issues, written correspondence might be necessary, though response times can vary. Tax issues can be very complex and as a taxpayer you have certain rights that need to be preserved. Therefore, you may wish to …
Seek Professional Help. If the notice is complicated, you’re unsure how to proceed, or if the IRS claims you have a debt exceeding $10,000, consulting with a tax resolution professional can be beneficial. Tax attorneys, CPAs, and enrolled agents are professionals who are admitted to represent taxpayers before the IRS. They can help interpret the notice, inform you of your rights, represent you in dealings with the IRS, and negotiate favorable terms.
Respond Promptly. Notices and Letters that require action on your part will always have a “Respond By” date. Whether you are dealing with the IRS yourself or hire a credentialed tax professional, responding before the deadline is crucial to avoid further penalties and interest and forced collection activities such as levies, liens, and garnishments. Whether you need to pay a balance, provide additional documentation, or dispute the findings, timely action is essential.
Types of Common IRS Notices
CP11 Notice: Changes to Your Return. The CP11 notice indicates that the IRS has found errors on your tax return and has made changes that result in a balance due. This notice provides a detailed explanation of the changes made and the amount owed. If you agree with the changes, pay the amount due by the date specified to avoid additional interest and penalties. If you disagree, contact the IRS with supporting documentation to dispute the changes.
CP12 Notice: Correction to Your Return. The CP12 notice is sent when the IRS corrects an error on your return that results in a refund or a balance due. This notice typically involves corrections to calculations or credits claimed on your return. If you agree with the corrections, no further action is needed unless there is a balance due. If you disagree, you can request an abatement or provide documentation to support your original filing.
CP14 Notice: Balance Due. The CP14 notice is the first reminder that you owe taxes. It details the amount due, including penalties and interest, and provides payment options. It is essential to respond promptly to avoid further penalties and interest. If you cannot pay the full amount, the IRS offers options such as installment agreements or temporary delay of collection.
CP2000 Notice: Underreported Income. The CP2000 notice informs you of income discrepancies between your tax return and the information reported to the IRS by third parties (e.g., employers, financial institutions). This notice is not a bill but a proposal of additional tax based on unreported or underreported income. Review the notice, compare it with your records, and respond by the deadline, either agreeing and paying the additional tax or providing evidence to dispute the proposed changes.
CP501 Notice: Reminder of Balance Due. The CP501 notice is a follow-up reminder that you still owe taxes. This notice reiterates the balance due and encourages you to pay immediately to avoid further penalties and interest. Ignoring this notice can lead to more severe collection actions.
CP503 Notice: Second Reminder of Balance Due. The CP503 notice is a second reminder that you owe taxes and have not responded to previous notices. It is crucial to address this notice promptly to prevent further collection actions, such as liens or levies.
CP504 Notice: Final Notice of Intent to Levy. The CP504 notice is a final notice before the IRS initiates a levy on your state tax refund or other assets. It is a serious notice indicating that immediate action is required to avoid enforced collection actions. Paying the balance or contacting the IRS to arrange a payment plan is critical at this stage.
CP523 Notice: Defaulted Installment Agreement. The CP523 notice informs you that your installment agreement is in default, and the IRS intends to terminate the agreement and enforce collection actions. To avoid termination, you must contact the IRS to resolve the issue, which may include reinstating the agreement or negotiating new payment terms.
LT2205 Notice: Examination Appointment Letter. The LT2205 notice is a formal notification from the IRS that your tax return has been selected for examination. In other words, you are getting audited. This notice provides details about the audit process and schedules an appointment with an IRS agent. It includes a list of documents and information you need to provide. Receiving this notice can be nerve-wracking, but understanding and preparing for the audit can help ease the process. Gather all requested documents, organize your records, and consider seeking help from a tax professional who can represent you during the audit.
What to Do If You Disagree with an IRS Notice
Here are a few things you may want to do if you disagree with the notice:
Review Your Records. Carefully review your tax return, supporting documents, and the IRS notice to identify the areas of disagreement. Gather any additional documentation that supports your position.
Contact the IRS. If you disagree with the notice, contact the IRS using the contact information provided. Be prepared to explain your position and provide any supporting documentation. It is often helpful to write a letter outlining your disagreement and include copies of relevant documents.
Request an Abatement. If you believe that penalties were assessed in error or you have reasonable cause for not complying with tax laws, you can request an abatement of the penalties. This request can be made in writing or over the phone, depending on the type of penalty and notice. Many abatement cases are fairly simple, but sometimes they require justifying your request through a principal called reasonable cause. In these cases, you may wish to have a professional familiar with penalty abatement and reasonable cause standards make your case for you. My co-author Robert Nordlander and I literally wrote the book on penalty abatement. Either of our firms’ can represent you in your IRS penalty abatement case. Our contact information is at the bottom of this blog.
File an Appeal. If you cannot resolve the issue with the IRS, you have the right to file an appeal. The IRS Office of Appeals is an independent organization within the IRS that helps taxpayers resolve disputes without going to court. Follow the instructions in your notice to request an appeal. In matters that are complex, it is helpful to have a professional tax resolution specialist going to bat for you.
Preventing Future IRS Notices
Some proactive steps that you can take to reduce the likelihood of getting an unpleasant notice from the IRS are:
File Accurate and Timely Tax Returns. Ensuring that your tax returns are accurate and filed on time is one of the best ways to prevent receiving IRS notices. Double-check your calculations, include all required information, and file by the deadline. If the IRS requires a form for a particular tax transaction, use it. Writing “see attached list” on a tax form and attaching a jumbled list of figures is an invitation to the IRS to audit you. Don’t do it!
Report All Income. Report all income, including wages, interest, dividends, and other income reported on forms such as W-2, 1099, and K-1. Matching the income reported to the IRS with your tax return can help avoid discrepancies. The IRS receives “information returns” from businesses and banks. You probably are familiar with Forms 1099 and K-1, for example. These are forms that people who paid you use to report to you and the IRS how much they paid. The IRS finishes processing these forms in May of each year. That’s when they start selecting returns for audit for underreporting, with notices going out throughout the year.
Keep Detailed Records. Maintain detailed and organized records of your income, expenses, deductions, and credits. These records will help you accurately complete your tax return and provide support in case of an IRS inquiry. If you do get audited, having these records will help your tax professional successfully make your case.
Respond Promptly to IRS Correspondence. Promptly responding to any IRS correspondence can prevent minor issues from escalating into more significant problems. Even if you need more time to gather information, contacting the IRS to request an extension or discuss your situation can help. If you ignore the IRS, they will always take more aggressive action.
Use Professional Tax Preparation Services. Consider using professional tax preparation services to ensure your tax returns are accurate and complete. Tax professionals have the expertise to navigate complex tax laws and can help you avoid common mistakes that trigger IRS notices.
Consequences of Not Responding to IRS Notices
Ignoring IRS notices can lead to serious consequences. Here are some of the potential outcomes if you fail to respond:
Increased Penalties and Interest. Unpaid balances accrue interest and penalties over time, significantly increasing the amount you owe. These charges can add up quickly, making it harder to settle your tax debt.
Liens. The IRS can place a lien on your property, which is a legal claim against your assets. This can affect your credit score and ability to sell or refinance your property.
Levies. The IRS can take your stuff. The IRS can levy (seize) your assets, including bank accounts, wages, and other property. This is a more severe collection action and can disrupt your financial stability.
Loss of Refunds. If you have unpaid taxes, the IRS can apply future tax refunds to your outstanding balance, reducing or eliminating your expected refund.
Passport Revocation. If you owe a significant amount of tax debt, the IRS can notify the State Department, which can then revoke or deny your passport application.
We Can Handle This
Receiving a notice from the IRS can be stressful, but with the right approach, you can effectively address and resolve the issues at hand. Understanding the type of notice, verifying its legitimacy, and taking prompt, informed action are key steps to managing your tax situation. Remember, staying calm and methodical will help you navigate this process more smoothly.
If you find yourself overwhelmed or uncertain about how to proceed, professional assistance can make a significant difference. Our firm specializes in tax resolution and has extensive experience in dealing with the IRS. We are here to help you understand your notice, protect your rights, and achieve the best possible outcome.
If you have a tax problem, contact us today for a consultation and let us assist you in resolving your tax issues efficiently and effectively. Don’t face the IRS alone—our team of experts is ready to support you every step of the way.
You may schedule a consultation call with Steven Boon at boon.tax/book-now/.
Robert Nordlander may be contacted through his website at nordlandercpa.com.
The content on this blog is for informational and educational purposes only and should not be considered as specific tax, legal, or financial advice. Tax matters are highly individualized and depend on various factors unique to each situation. While we strive to provide accurate and timely information, it is essential to remember that the tax code is complex and constantly changing. Before making any decisions or taking action based on the information provided here, please consult with a qualified tax professional who can analyze your specific circumstances and offer tailored advice. The author and publisher disclaim any liability for actions taken based on the content of this blog without seeking professional guidance.
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