IRS Tax Problems

You Received a Notice from the IRS. What Do You Do Next?

by
William Ray
on
10/19/2016
You Received a Notice from the IRS. What Do You Do Next?

What feels worse than finding another bill in the mail? Going through the mail and seeing an envelope whose return address reads Internal Revenue Service. As frightening as it may seem, the truth is that there are plenty of good reasons for the IRS so reach out to you, so there’s no need to panic. In most cases, when the IRS sends a letter it is with a routine question that is easily answered, not the dreaded tax audit. By the same token, it is important to remember that not every letter that says it is from the IRS actually is: scammers are currently sending out fake IRS CP-2000 notices in the hope that they can fool a few people into sending them money. One way or another, the best defense is a good education on what to do when you get a letter from the federal tax agency.

Why Would You Get a Letter from The IRS?

First thing to do is take a deep breath and relax. There are a lot of perfectly good, non-troubling reasons for the IRS to contact a taxpayer – in fact, it does so millions of times per year. In many cases they just need to give you some information. In other cases, they have questions that you need to answer.  Though it’s not the first thing that crosses your mind when you see IRS on the return address, there’s a good chance that they are telling you that you are entitled to a tax credit. Of course, there’s always the chance that the questions they need answered are leading up to an audit.

Sometimes the IRS wants you to know that you made a math mistake on your tax return. This could mean that you owe them more money, or that they owe you a refund. Sometimes they just want you to know that you forgot to take a credit like the Additional Child Tax Credit or want you to update your mailing address.  Sometimes there’s an additional form that you didn’t know you needed to fill out, and they are sending you a copy.  The IRS has dozens of form letters – over 50 standard correspondence types – that they send out on a regular basis.

Here’s What to Do

Stop panicking and just open the letter. In most cases that is the hardest part, and what’s inside turns out to be no big deal. And if it is a big deal, there is still no need to panic. Here’s what to do:

  • Remember that whatever it is, you can deal with it – and you need to. Getting upset doesn’t get things taken care of, and that is what you need to do.
  • Most IRS letters that ask questions or demand corrections or payments also include a deadline. Make sure that you deal with the issue in a timely way, or else whatever the problem is will definitely get worse.
  • There’s no need to go beyond what the IRS asks you. Provide the information that they have requested and leave it at that. If you have questions or comments about another issue, raise them in a completely different correspondence.
  • Make sure that you pay attention to the directions that are provided and follow them exactly.
  • The IRS has a help line – 1-800-829-1040. The people who answer calls on those lines are able to answer most questions, so if anything in the correspondence that you’ve received is unclear, be sure to call them. If your question is complicated or the help line is not able to provide you with an immediate answer, you should put your question in writing.
  • Sometimes an IRS letter will simply be asking for more information. Even these letters will provide a specific deadline for answering, so make sure that you pay attention and get it to them on time.
  • If you receive a notice indicating that a correction has been made to your tax return, make sure that you look at your original to see what the corrections are and that you understand them. As long as you agree with the changes, you don’t have to do anything else (unless the notice includes a request for additional payment). If you disagree with the changes, then you need to provide written notification to the IRS as to why you disagree, and provide any proof that you feel backs up your viewpoint.
  • The IRS will always provide a specific address to which any documents that they have requested should be sent. Make sure that you use the right address when sending back documents and/or payments – it is usually the address on the top left-hand side of the letter you have received. That letter will also have a tear-off section at the bottom that cites your name, address and Social Security number – make sure that you include that piece with anything that you send back so that the agency can properly identify you.
  • Do not send anything to the IRS without first making a copy for yourself and putting it someplace safe.

How to Avoid Being Audited by The IRS 

Everybody fears being audited, and in most cases simply providing the information that has been requested is all that you need to satisfy the agency and have them move on. Of course, it is also important that the tax return that you file is filled out accurately and that you double-check to make sure that you haven’t made any mistakes that invite a closer look.  The IRS rules can be cumbersome, but they are relatively easy to follow, and as long as you do so, fill out the paperwork and sign your name to your return, you will probably be safe. In fact, IRS records show that only one out of every 100 tax returns that are filed in the United States are audited. There are several red flags that the IRS looks for in tax returns, and it is these things that you should work hard to avoid if you want to lower your risk of being audited.

  • Repeatedly losing money. When a business’ tax returns show losses every year without fail, the IRS is likely to take a closer look, and specifically to investigate whether the taxpayer is actually trying to run a business or is simply writing off the expenses of a hobby.
  • Two of the most frequently abused tax credits are the Child Tax Credit and the Earned Income Credit, so the agency tends to review returns that include these to make sure that there is no fraud evident.
  • It is becoming more and more common for people to work from home, and that means that they can take deductions for a home office. When a taxpayer claims that a suspiciously high percentage of their living space is being used for their business, the IRS is likely to want to know more.
  • The IRS will definitely take notice of tax returns that claim itemized deductions that come close to the taxpayer’s income.
  • Though taxpayers are permitted to claim casualty losses, there are certain calculations that are disallowed or make no sense and will inspire an audit. Take your adjusted gross income and subtract out any insurance payments you’ve received – if you casualty loss is less than ten percent of that figure, you can’t claim it.
  • Failing to report income is one of the biggest reasons for IRS audits. Whether you are earning through a W-2, a 1099 or a K-1, make sure that you are reporting it.
  • Don’t claim a Premium Tax Credit if you are not eligible to do so.
  • A noncash charitable deduction that is extremely high will definitely set off IRS warning bells.
  • Your mortgage company will report the amount of interest you pay on your mortgage to the IRS. Make sure that you don’t claim more than is reported, or more than $50,000.

If you have received an IRS notice that you either feel is beyond your ability to handle or states that you owe penalties or back taxes of more than $10,000, then it is probably a good idea for you to seek the assistance of a tax professional. Though it may be tempting to go to one of the storefront national chains, for an audit or complex situation you are probably much better off going to somebody who has a professional reputation and who has dedicated their career to tax issues.

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William Ray

William Ray

William Ray is a specialist in IRS tax resolution problems. His firm, NationStar Tax Advisors, LLC is based in Orlando, FL, but services clients throughout the U.S. NationStar specializes in Wage Garnishment,Bank Levy, IRS Audit Notification, Payroll Tax Relief, and State Tax Problems.

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