One of the last things that taxpayers want to see is a letter from the IRS. However, there may come a time, when your “uncle” in Washington DC feels the need to contact you. If you receive such a notice, what should you do?
First, open and read the notice. I can’t tell you how many times a new client has come to me and plunked down unopened IRS or state tax notices. Like the ostridge who buries its head in the sand, they seem to believe that until they open the letter, it can’t hurt them. Nothing could be further from the truth. Every one of these communications comes with a deadline by which time a response is due. Ignore this deadline and the IRS will, at some point, assume they are right and act against you.
If after reading the notice you need help understanding it, and you often will, contact the person who prepared the return. I tell my clients to contact me in these situations and never charge for the initial discussion. If the preparer won’t work with you on this, you’ve been using the wrong preparer and should seek help from someone, such as an EA, CPA. Always get help quickly!
The response obviously depends upon the facts and circumstances. A tax professional is the best person to help you respond. It is not a good idea to try to do it by yourself unless you believe that it’s cut and dried and that a simple letter will clear everything up. If you have to meet with the IRS, it is usually better to have your representative go on your behalf. The EA or CPA has a better idea as to what the IRS is looking for and how to respond without raising other issues. Auditors are trained to listen and to treat anything you might say in what you perceive to be casual communication as a source of information and your comments may then be used against you. Remember, only an EA, CPA or attorney is recognized by the IRS as authorized to act on your behalf once they receive your signed power of attorney. With the proper help, many of the issues raised, can be resolved in short order.
Typically, the taxpayer thinks of an audit as being forced to come down to the IRS and sit though a grilling by the IRS In most instances, the first contact that the taxpayer has is typically a letter from the IRS. Some letters are more serious than others but all must be addressed promptly.
The majority of the letters that taxpayers get from the IRS fall into several categories.
- Adjustment notices – The IRS is correcting something on your return. An error may have been made, and the IRS believes it is correcting the problem. Sometimes, the IRS will actually correct the return in your favor. If you believe the IRS is correct, no action is required except perhaps to send them a check. Don’t assume, however, that the IRS is correct. There are times where your return was correct and the IRS needs more information to confirm that fact. In that case, a letter drawn up with the help of a tax advisor should resolve the issue.
- Missing items (CP 2000) – The IRS has received a copy of one or more 1099s from a bank, broker etc. and they don’t see them reflected on your return. You may have sold stock and failed to include it on your return or something may be included but not where the IRS is looking for it. Here again, the problem is usually involved via the mail although a phone call may be appropriate to inform the IRS if you feel you need more time to respond. It is almost always best to consult a professional in order to be certain what is being requested and how best to respond.
- Audits – The IRS may audit your return in using several different approaches.In a “Correspondence Audit”, the IRS may question specific deductions you claimed and request that you mail them documentation to support your claims. in an “Office Audit” the IRS wishes to meet with you or your representative in order to more fully explore major portions of the return. Finally, the IRS may wish to visit your business premises (Field Audit). This is limited almost exclusively to businesses.