What to do when an IRS (or any taxing agency) notice shows up in your mailbox
Words by: Bryon Gragg
Published September/October 2012
There are a variety of things that frighten people and send them into a state of shock; spiders, snakes and thunderstorms are common examples. Another thing that seems to strike terror in the hearts of many is the dreaded envelope from the Internal Revenue Service or State taxing authority. As when they encounter spiders and snakes, some people don’t want to touch the envelope; they just hope that it will go away. Unfortunately, this is not a successful strategy. This column will discuss some important dos and don’ts should you find yourself the recipient of such a letter or notice. Throughout this column we will refer to an IRS notice but the comments apply to a notice from any taxing authority or department.
Don’t be an ostrich
Like most issues, ignoring a notice from the IRS doesn’t make it go away. Sticking your head in the sand just won’t work. Open the letter and see exactly what is being asked. This is sometimes easier said than done because the wording can make it difficult to determine what changes are being proposed. The key word here is proposed. Most IRS correspondence is requesting information for clarification and the letter may propose additional tax provided the requested information isn’t received. If you don’t respond, the agency will go ahead and assess the additional tax.
A lot of correspondence is generated where items reported to the IRS don’t match what is reported on the tax return such as interest or dividend income or mortgage interest. Many times a brokerage firm may revise the Form 1099 and change the amount of interest, dividend or capital gain income reported for a year. If you filed your return using the original unrevised copy, there may be a mismatch which could trigger a notice.
Don’t assume it is correct
I once had a client who sent me the correspondence and said he was ready to pay the several thousand dollars of additional tax listed. We reviewed the notice and found that he didn’t owe the money at all and that a simple explanation and copying of some documents made the issue go away. He said he felt things had been going too well and just assumed the notice was correct.
Do respond quickly
The first step is to gather your tax returns and supporting documents and determine what information is needed to satisfy the IRS inquiry. Sometimes it is as simple as making copies of the documents and mailing them back with an explanation. Respond quickly so you don’t get a second notice. It makes it exponentially harder to clear up a situation when a second or third notice has been generated. In addition, other agencies (i.e. state taxing authorities) may receive information from the IRS and that will then generate correspondence from those agencies to you as well, so it is very important to respond quickly.
Do seek professional help
If you had someone prepare your tax return, make sure you contact your preparer before taking any action. Often times, the professional speaks the language and has most of the information necessary to prepare an appropriate response. But keep in mind the “respond quickly” advice above. Don’t wait until the day before the notice is due to contact your tax professional. If you prepared your own return and don’t feel comfortable responding to the notice, gather your tax return, all the supporting documents and the notice, then call a qualified tax preparer for an appointment.
Most correspondence from the IRS is requesting that information be verified or additional information be provided. Sometimes you just make a mistake and leave something off your return. When it is a rather simple item, it is best to nip it in the bud and get it out of the way quickly. If you ignore the problem, more notices arrive and what started as a rather simple matter can take an unreasonable amount of time to straighten out. It is also important to remember that the wheels of bureaucracy turn slowly and it may take a while to get things worked out.
But remember, while these wheels turn slowly at times, they continue to plod on making the timeliness of your response all the more important.