Something all my clients have in common is absolute dread when a letter from the Internal Revenue Service arrives. For many, the letter causes, at a minimum, great concern, and on the other end of the spectrum, actual anxiety. Unfortunately, the letters tend to arrive on a Friday and by the time the taxpayer contacts me on Monday, they have had a whole weekend to panic. Fortunately, a lot of the letters are not difficult to clear up. They definitely can, however, be very time consuming and can require persistence and patience. The professionals at Ketel Thorstenson, LLP have the persistence, patience, and knowledge necessary to take care of whatever issue needs to be resolved.
So, you may ask, “Why did I receive an IRS letter?” and “What should I do if I receive an IRS letter?” There are a lot of different reasons why someone might receive an IRS letter.
First and most common, the IRS thinks there has been a misreporting of an item of income. The IRS receives copies of all tax forms that are filed on behalf of an individual, such as W-2 income reported by an employer or non-employee compensation reported on a 1099-MISC. The IRS then performs computerized data matching, where they cross check the information they received with the tax return that is filed. The IRS tends to look for these reported items in a certain place on the tax return, and if the item has been reported in a different place, the IRS computers will not catch it. They simply assume the information was not reported at all and generate a CP2000 notice they send to the taxpayer. There is probably a very good reason why the income was reported in a place other than where the IRS expected it to be and usually a well-written response to the notice will take care of the matter.
Another reason someone might receive an IRS notice is if a tax return was not filed. As mentioned previously, the IRS receives copies of tax forms. If a form that the IRS receives reports enough income and the IRS doesn’t receive a tax return reporting that income, they will calculate what they assume your tax should be and will simply send you a notice of tax due. They will not take into account any deductions against the income that you may be entitled to and they will typically file the return using the worst filing status. For example, if you are self-employed and receive a 1099-MISC showing income of $100,000 and you have deductions of $60,000 to subtract from the income, you need to file a tax return to report those deductions to the IRS. If you do not file a tax return, the IRS will assume your net income is $100,000 rather than $40,000. Another example would be if you qualify for a head of household filing status, they will probably file you as single with no dependents. Each of these scenarios would not be accurate and would generate a much higher tax due to the IRS.
What should a person do if they receive an IRS notice?
- Don’t panic! While the notices are not pleasant to receive, keep in mind there is a good chance the IRS is wrong. I think of IRS notices simply as inquiries asking for clarification of what was claimed or not claimed on a tax return.
- Don’t just assume the IRS is right and pay the tax they are requesting.
- Let your tax professional look at the notice. This gives us a chance to determine what the notice is asking for and if the IRS is correct in their assumptions. The wording on IRS notices can be very confusing and if you are not familiar with tax law and tax “jargon”, it can be difficult to determine what the IRS is saying or requesting . Once we have reviewed the notice, we can then determine the best course of action for responding to the notice. There are certain procedures that must be followed when responding to an IRS notice. If these procedures are not followed correctly or the letter of response does not refer to a certain Internal Revenue tax code section, it can result in an automatic IRS ruling that is very unfavorable to you.
- Don’t ignore the notice. There are situations where you have a certain window of opportunity to respond to the IRS. If you don’t respond timely, then your options could be severely limited. For example, a taxpayer may bring in a notice of IRS intent to levy property that tells us that they have received at least two previous notices. It is much harder to respond to an intent to levy notice as opposed to the first or second notices received.
Our knowledgeable tax professionals would be happy to answer any questions you may have on this topic. Please feel free to contact us.