It’s the end of the week and it’s a beautiful day outside.
You go to check the mail as usual.
Junk. Bill. Junk. Then boom.
You see you’ve gotten mail from the Department of the Treasury… aka the INTERNAL REVENUE SERVICE.
Your seemingly great day just got turned upside down because now Uncle Sam is knocking at your door.
You’re not alone. No one, and we mean, NO ONE likes letters from the IRS.
Well, what should you do?
One thing’s for sure. You have to respond.
But how? When? What do you say?
Today, we are going to break down what you should do if and when you receive an IRS letter.
Plus, we’ll share the number 1 best thing you can do to reduce your chances of receiving any more IRS letters in the future.
In this post, we’re going to outline what you should do if you receive an IRS letter and how to best handle the situation.
Now, remember, this post is for informational purposes only, and by no means are we giving you legal or tax advice.
Different IRS Letters You Could Receive
First, you should know the IRS assigns a number to every letter that leaves its office.
Usually, located at the top right of the letter, is a code that starts with CP or LT, followed by some numbers.
It helps them track the thousands of letters they send out to taxpayers.
The code number is important because it tells you what type of notice they are sending you.
There are over 75 different notices you could receive from the IRS.
In most cases, they fall in 1 of these categories:
- You have a balance due.
- You are due a larger or smaller refund.
- They have a question about your tax return.
- They need to verify your identity.
- They need additional information.
- They changed your return.
- They need to notify you of delays in processing your return.
Please keep in mind that a letter is the first way the IRS will contact you.
Any ‘seemingly’ correspondence from the IRS via email or social media is NOT actually the IRS and is in fact a scam.
The IRS can also call you but it definitely would not be a surprise. You will always receive a letter first before a phone call from them.
What You Should Do When You Got an IRS Letter
So if you do receive a letter, don’t be too alarmed. Not every letter means you owe more taxes. In fact, most are routine and can be resolved quickly.
The first thing you should do is, of course, open the letter and address what the letter says.
Read it in its entirety. Usually, when you receive an IRS letter, it is not going to be in reference to all of the tax returns you ever filed.
It is going to be very specific. Right underneath where your letter number is in the top right, is going to be the tax year it is in reference to.
So if it says ‘tax year 2018’, there’s no need in worrying about 2017 or 2020, 2021, etc.
If action is required by you, there will be a section called, “What you need to do.”
That will specifically state what your next steps should be.
If you need to provide additional information, it will say what information you need to provide and where to send it to.
IRS Letter Type #1
For example, they may want more information to determine the accuracy of your tax refund.
So they may request information like copies of your pay statements, a letter from your employer confirming your employment, or bank statements.
You may not need to provide every piece of information they mention.
A lot of times, they’ll word it like, “Send up additional information that supports what you reported. This CAN include….XYZ”
IRS Letter Type #2
You may receive a letter stating that additional tax is due, which is not exactly good news but could be worse.
In this case, the best thing to do is pay the amount due. The letter will state your payment options which include paying the tax online at irs.gov or mailing in a check.
More than likely, there are going to be penalties added to the amount that is due. The common ones are the failure to pay penalties and interest charges.
If it is your first time owing additional taxes, you can actually call the IRS and request a first-time penalty abatement.
This would eliminate the tax penalties they added to your account.
You would need to provide your name, notice number, and other information confirming your identity to the IRS agent.
From there, they can look up your account and remove the additional fees.
The tax itself would still be due but at least by removing the penalties, you could save a few hundred or even thousands of dollars
IRS Letter Type #3
Another common IRS letter is proposed corrections to your tax return.
As you may know, when you receive a 1099 or W2 from an employer or third party, the same form is also reported to the IRS.
If your tax return does not exactly match what was reported to the IRS, you will receive a letter with the proposed changes to your tax return.
It will say something like this: “We received information from third parties such as employers that doesn’t match the information you reported on your tax return.”
Then it will show a summary of the proposed changes and if any tax is due.
In these circumstances, the IRS will give you the option to agree or disagree with the proposed changes.
If you agree, you’d have to pay the amount due.
If you don’t agree, they’ll detail what your next steps should be, which oftentimes includes a signed statement explaining why you disagree.
And also, attaching documentation that supports your claim, and mailing it to the address on the letter.
Tips When You Respond to IRS Letters
Tip #1: Stick to the specific issue at hand.
Don’t bring up 2020 tax concerns when 2019 is the tax year in question. Even if your 2020 return has the same issues as 2019, only address what their letter addresses.
There’s no need to open up a bunch of new doors when dealing with the IRS.
Just remember why they sent a letter in the first place and stick to that.
If you’re confused by the letter or unsure of how to respond, the IRS can answer your questions by phone. There should be a phone number directly on the letter for you to call.
Just keep in mind that though the IRS can help clear up your questions, their main job is to collect taxes on behalf of the US government.
So again, stick to the specifics of your letter and do not provide more information than necessary.
Tip #2: Don’t miss the deadline to respond.
If action is required by you, there will always be a respond-by date or due date. Honor this due date.
The IRS is pretty good at giving taxpayers ample time to respond to a letter. Usually at least 4 weeks.
Now let’s just say life happens and you need more time, the letter will have a number for you to call to request additional time.
However, if you completely miss the deadline, the IRS will add more penalties and interest to your account. In which case, you can expect another letter from them.
If you continue to miss deadlines and are not responsive, the IRS will eventually send you an intent to levy your property such as your bank accounts, vehicles, or even garnish your wages.
You definitely don’t want it to get to this level.
Do yourself a favor and respond timely to the letter.
If you don’t have all of the funds to pay at once. You can call them to set up a payment plan.
The Scariest One of Them All
In a more serious case, you may receive a letter that your tax return is being audited.
An IRS audit is an examination of your tax return to ensure that the information reported is correct according to the tax laws and to verify the reported amount of tax is also correct.
Similar to other letters, an IRS audit is usually very specific and may only include a few line items on your tax return.
This means the IRS may only audit your home office deduction or just your travel expenses.
Stick to that.
Provide the supporting documentation for just the items being audited.
They’ll instruct you on what type of documentation they are looking for which could be in the form of receipts or bank statements.
Remember again to be timely. The last thing you want is to end up in a tax court against the United States government.
If you feel overwhelmed by the audit, you should consider the help of CPA services or lawyer.
Just keep in mind that you’ll still need to provide documentation that supports what is being audited.
And if you don’t have support, the IRS will deny the deduction in question and re-calculate the taxes owed.
How to Avoid IRS Letters
Now how can you avoid this altogether?
Well, you can’t really control if the IRS selects your return to be audited BUT as reassurance only about .6% of tax returns are audited each year.
Your chances are even less if you earn under $500,000 per year.
But the very best thing you can do to avoid IRS letters is to file an accurate and complete tax return each and every year by the due date.
Make sure to include ALL of your tax documents from third parties on your return and actually pay what is owed.
Sounds simple right? Well, a lot of taxpayers receive letters simply because there is a typo or careless error on their return.
To reduce the chances of errors, consider hiring a tax professional or CPA to prepare your tax returns.
They have the most experience in preparing tax forms and can also advise you on what should or should not go on your return.
Or, contact us today to talk to one of our tax experts!