Do you know what to do when you receive a letter from the IRS? Your first reaction may be to panic, but your letter is most likely one of millions that the IRS sends to taxpayers every year. So, wipe the perspiration from your forehead, take a deep breath, and calm the shaky hands. The first thing to remember is that an IRS letter does not necessarily mean you are being audited. Most letters are not audit notices. To know how to respond, it is important to read the letter carefully and understand exactly why it was sent.
Once you understand what triggered the letter, you can go about deciding if it is correct. These letters are frequently incorrect, and may only require an explanation to clear things up.
The following are some of the most common reasons for IRS letters:
Payments do not agree.
When the payments you claim on your tax return do not agree to the payments the IRS has on file, you will receive a letter. If the IRS is missing a payment you made, you would simply respond to the letter with a copy of your cancelled check to show that you really did make the payment.
It is not uncommon for the IRS to notify you that they have more payments on file than you claimed. Taxpayers sometimes forget to include all their payments and then are pleasantly surprised with a larger refund.
Income matching scenarios.
When you receive a W-2 or a 1099, the IRS receives a copy from the person who paid you. They match these forms against the income that is reported on your tax return. If they show more income than you reported, you will receive a letter.
There could be a legitimate reason the income is not matching with their records. Maybe the income is reported in a different section on your tax return, or lumped with other income so the IRS could not easily identify it. You would simply respond to the letter explaining the discrepancy.
Late or underpayment penalties.
If you filed your return late, paid late, or did not make large enough quarterly payments, you will receive a letter detailing penalties and interest that may be due. If you agree that you paid or filed late, then you should go ahead and pay these types of notices.
Request for Payment.
These letters are typically sent when there is no response received from an initial letter. If no response, the IRS will assume the changes they propose are correct, and start sending bills.
Payments. It is important that you do not pay without understanding the changes that have been proposed. Once you pay, the IRS will believe you have accepted the changes and it is very difficult to have that money refunded.
Disregarding Notices. Ignoring an IRS letter is the wrong approach. The letters will escalate in severity, and will eventually lead to a Notice of Levy if the issue is not addressed. If you determine that your letter is correct and you are unable to pay the amount due, the IRS can help you with a payment plan.
Create a File. You should keep a copy of the IRS letter and your response to them. Also, be careful to provide ONLY the items the IRS is asking for, to avoid new questions or new issues being raised.
Beware of Fraud. Be aware that the IRS does not correspond by email about taxpayer accounts or tax return issues. If you receive an email that appears to be from the IRS, this is not legitimate and you should not respond.
Consult a Professional. Many taxpayers prefer to have their tax preparer deal with IRS letters. Your tax preparer can help you identify and understand the reasons behind your letter and can assist with tedious follow up. Even if you choose to handle the issue on your own, you will want to make sure your preparer has copies of all correspondence.