When you receive a plain brown envelope marked “Official US Business” from the Internal Revenue Service, it’s enough to strike terror in your heart.
Your first instinct to the deficiency notice inside might be to pay them whatever they want, but don’t do it.
There are four common notices that you might receive from the IRS.
The Math-Error Notice tells you that you made a mathematical error on your tax return, or you used the wrong tax tables. But those notices often result from keypunch errors at the IRS, resulting in a correct return appearing to be erroneous.
The Late-Filing Notice is generated if you miss the tax-filing deadline, which is April 15 for most returns. If you received an extension for filing, the IRS may not be correct when they assess penalties for late filing.
The CP-2000 Matching Notice is a notice that the 1099 forms and W-2s filed by your employer, bank, broker, and mutual funds don’t match the information on your tax return. But this notice can result if you reported the income elsewhere on your tax return, for example, commissions reported as “other income” rather than “business income.” It can also result if the payer has used your social security number in error.
The Estimated Tax Notice assesses a penalty if your tax payments during the year are less than 90% of the total tax due on your return. But there are several exceptions to the estimated tax rules, for example, generally you are exempt from penalty if you paid at least as much in estimated tax this year as last year’s total tax bill. If you qualify for one of those exceptions, it’s up to you to notify the IRS that their assessment notice is wrong.
Almost half the notices sent by the IRS are in error, at least in part. So don’t panic when the IRS writes to you. Read the notice carefully, then follow these five simple rules.
Rule 1: Don’t hide your head in the sand
Do not ignore the IRS – they won’t go away. The IRS computer is programmed to send you a notice every few weeks. Those notices will escalate, each one more threatening, until finally they put a lien on your bank accounts.
Rule 2: Sooner is better
The only way to stop the IRS notices is to respond, and the sooner the better. If you don’t respond within ten days, you’ll get another notice. If you telephone, be prepared for busy signals or a long wait on hold. And to be sure you have a record of your response, follow that phone call up with a letter.
Rule 3: Keep it simple, stupid
The IRS employees are overworked and not interested in reading a long, verbose explanation of your situation. Write your letter simple, grade-school terms, sticking to the facts and providing all the documentation needed.
Rule 4: Stay the course.
If at first you don’t succeed, try, try again. That applies in spades to dealing with the IRS. Your initial response may cross in the mail with the second IRS notice, so send them another letter with another copy of all necessary documentation. If you receive a third notice, it’s time to telephone the Problem Resolutions Office. Get the name of the person you talk to, and send them a copy of your correspondence and documentation.
Rule 5: Call out the big guns if necessary
If you follow these rules, but the dispute still escalates, it’s time to pay for some professional help. A tax adviser who works with the IRS on a regular basis can help you resolve your problems if you can’t get the IRS to understand and respond favorably to your communications.