If you receive an Internal Revenue Service notice, the first thing to do is OPEN it and then don't panic.
This may sound foolish, but I can't tell you the number of times a client has come in with letters from the IRS that have never been opened.
IRS notices have time frames to respond, and the more letters you have received, the shorter your time will be before the collection process begins.
Notices are not all bad news.
It may help to understand the types of notices the IRS sends. Not every letter from the IRS is an audit request, nor does it mean the taxpayer owes additional taxes.
The most frequent notice is the CP2000, informing a taxpayer that the return filed doesn't match the information received by the IRS. When this happens, the IRS issues a CP2000 informing the taxpayer that information is missing from the return.
So what do you do?
Review the letter and compare the proposed changes to the original tax return. The letter will break down what was originally reported and what additional information the IRS has received.
This is where the discrepancy occurred.
When you compare the changes, it is crucial to review your original return to ensure there are no tax credits that would adjust the IRS's proposed changes. Unlike deductions and exemptions, credits reduce your taxes directly, dollar for dollar.
After determining the total amount of tax owed, subtract the dollar value of the eligible credits.
For example, if a taxpayer took a Residential Energy Credit on the original return, this credit would have reduced the tax liability figured for the income initially reported.
If the IRS notice is reporting an increase of income, the notice may show an increase in the tax liability, but not the increase in a tax credit. If this happens, it is important to respond to the notice with information refuting the amount of tax owed.
After reviewing the IRS letter and the original return, it is essential to reply to this notice within 30 days. Even if you agree but can't pay the full amount, respond. The letter gives several options for paying any additional tax.
However, if the taxpayer doesn't respond within the 30 days, the IRS issues a 90-day Statutory Notice of Deficiency.
This letter tells the taxpayer that the proposed changes are considered accurate and the amount due must be paid within 90 days. It is always delivered certified. The notice is distinct in that it essentially says, "Agree or go to court."
For more information regarding IRS notices, visit www.irs.gov and type "IRS notice" in the search box.
Tracy Bunner is an enrolled agent and tax preparer with an office in Harrisville. She can be reached at 801-627-2212 or firstname.lastname@example.org.