What to Do when You Receive an IRS Notice
ByIsmail F. Bharmal, CPA, EA
Los Angeles, CA
Receiving notices from the IRS can be scary. Most of us let our fear control our reactions to these sometimes disturbing pieces of mail. Often, what we choose to do is whatever will make our anxiety go away. Some choose to simply pay whatever the notice says is the amount due. Others contact the IRS themselves, and often find themselves a victim, and in a bigger mess than when they first received the notice. Still others make the tremendously poor decision to ignore the notice altogether. There is, however, another choice: seek professional help the moment you get the IRS notice.
Getting a notice from the IRS is not, in and of itself, a reason to panic. A recent study has shown the IRS approach to notices is based on its perception of a “tax gap.” (This gap is defined by the agency as the amount of taxes owed by taxpayers which has not been paid in a timely fashion.) The agency’s response to the gap has been to become extremely aggressive about sending out notices. These notices can go for any reason, and the IRS takes the position that once it sends out the notice “the meter starts running on” what a taxpayer owes. This policy is very strict, by the way. In one instance, the agency sent out a notice which was improperly addressed and the taxpayer still wound up paying the amount due stated on the notice, despite the delivery problems.
You see, it’s not the notice. It’s what you do with it. For example, simply ignoring it is the worst possible choice. It exposes you to the following problems:
- The amount due as defined by the IRS begins accruing penalties and interest, regardless of whether or not the amount is correct.
- You are exposed to IRS collection actions: wage garnishment, bank account freezing, and all the other collection tools the agency has at its disposal.
- The IRS can file a lien against your real and personal property.
Here is what you should do, step-by-step, when you receive any IRS notice:
- Make certain it’s actually related to you by making sure the name, social security number, tax form, and period, are all correct.
- Check the response due date to determine how much time you have to respond. This is important because all notices are time-sensitive and need to be responded to within the time-frame set forth in the notice.
- Contact the tax professional who prepared the tax return in question and forward him or her a copy of the notice. With this notice, your preparer should be able to review and check your return. In addition, your preparer would be able to contact the IRS on your behalf, at no cost to you, and find out about the notice.
If you prepared your return yourself, the steps will be slightly different:
- Check your tax return for accuracy, and find out the item you had missed or under-reported.
- If you can’t figure out what is wrong with your return, get a professional tax preparer to look at the return.
Whether you had the return prepared or did it yourself, there is one key thing to recall about responding to an IRS notice: DO NOT PANIC! Remember, all that is required is a timely response by either you or your tax preparer. (I recommend you have a tax professional respond, but you can make the initial inquiry yourself.) You should also follow up with your tax professional about the status of his or her response to the notice.
Hidden Perils of Failing to File a Tax Return
Taxpayers who fail to file their tax returns do so for many reasons. For some, knowing they will owe money they don’t have is the reason. For others, it’s about not wanting to take the time to assemble all necessary tax information. Still more people simply procrastinate: they file an extension, put off filing, and after the extension deadline passes, they just don’t file.
Failing to file is a perilous choice. If you have failed to file, and if you have ignored the IRS notices you’ve received about filing to file, the IRS has a surprise for you. The agency will file your tax return on your behalf, based on the tax information reported by third parties. What’s really bad about this is it adversely affects your tax liability. Here’s why: under our tax laws only revenue is reported to the tax agencies by third parties. And when the agency uses the information to file a tax return on your behalf, there are no allowable deductions taken into account when your tax liability is calculated. It can be horrible.
To make matters worse, the agency will enforce collection actions based on that amount. You will encounter liens on your real and personal property, garnishments of both your wages and your bank accounts.
If you did not file your prior year (s) tax returns, this is the time to get it done! It doesn’t matter whether you owe taxes or are entitled to a refund, you need to get them filed. In fact, if you expect to get a refund based on your unfiled taxes, waiting more than three years to file from the prior year’s due date will be costly: your refund will be forfeited. For example, if you wait until 2016 to file the 2013’s return, you will lose any refund you might have otherwise gotten back.
Here are some valuable tips for filing your taxes:
- ALWAYS file your tax return on a timely basis.
- If you think that you are going to owe taxes, and don’t have money to pay, file your tax return, with the maximum amount you can possibly pay. At the time of filing, complete the IRS installment agreement form, Form 9465. (Filing this form is much better than simply not filing, and far less costly when you consider some of the unpleasant outcomes.)
- To file your tax return on time, plan ahead. Make it your top priority. Make the time to gather all the tax information. Schedule your tax appointment, remembering earlier is always better because it will give you time to review your tax return with your tax professional. This review will help with the accuracy and completeness needed to reduce the chances you will be audited.
- ALWAYS make sure to ask for an e-file acceptance acknowledgement. If either you or your tax preparer does an e-filing of your return, make certain you ask for an e-file acceptance acknowledgement. Keep a copy of the acknowledgment for your records.
- If you mail your tax return, ALWAYS send it through a registered mail with return receipt requested. (This means you cannot get in the line with all the other cars late at night at the post office on April 15 th.)
ALWAYS keep your tax return information (along with the copy of your tax return) somewhere that is both secure and easily accessible. You should plan to hold onto this information for three to six years.
Doing all the things I have suggested will give you considerable peace of mind over the course of any interactions you may have with the IRS or any other governmental taxing agency.
Stay in compliance!
( The author has been serving small to medium size businesses and individuals in their accounting and tax needs for over 21 years. He can be contacted via email at firstname.lastname@example.org or phone at (714) 896-0366)