Understanding IRS Notices and Letters
12/10/2021
While no one wants to receive an IRS notice, it is important to understand the appropriate steps to take and what is required of the taxpayer.
Most notices from the Internal Revenue Service (IRS) are automated and, in recent years, the organization has been underfunded and understaffed. Because of this, automated notices are sent out to taxpayers after the IRS’s system determines a triggering event (discussed below). Once the initial notice is sent, the automated system will send additional notices to the taxpayers (30 days, 90 days, etc.) until a response from the taxpayer is processed by an IRS agent.
Even though most taxpayers try to respond to notices quickly, the IRS may not process the response prior to another notice being sent due to the funding and staffing issues that face the agency. Long lag times between the mailing of the taxpayer response and the response being processed has caused many taxpayers to become even more concerned regarding their notices. As long as the taxpayer’s response is in accordance with the notice response instructions provided by the IRS, there is nothing additional for the taxpayer to do until the response is processed by the IRS.
To assure the taxpayer response is in accordance with the notice response instructions provided by the IRS and avoid any issues, it’s good to know exactly why the notice was received from the IRS and how to handle it. With any kind of IRS notice or letter, the taxpayer needs to read the letter thoroughly and respond as requested. These types of correspondences can often be handled without ever making a phone call or visiting an IRS office.
Why Did You Receive a Letter from the IRS?
The first question to ask is “Why did I receive a notice?” Although there are many reasons why the IRS seeks out correspondence, here are a few of the more common ones:
- The IRS made changes to the return due to a miscalculation
- The taxpayer has underpaid and owes additional taxes
- The IRS has received information that was not included on the tax return
Changes to the Return
When the IRS makes changes to a return due to a miscalculation, a few things can happen. The taxpayer may owe additional taxes, the taxpayer may be entitled to an additional refund, or the overpayment that the taxpayer elected to be applied to the estimated taxes for the upcoming year may have been modified. With each of these scenarios, the taxpayer’s response will vary.
If the taxpayer agrees with the changes and an additional refund is to be received, no action will be required. However, if additional taxes are due, the taxpayer will be required to make a payment by the indicated due date to avoid any additional interest or penalties. In the case that a modification to the overpayment applied to the taxpayer’s estimated tax has occurred, the taxpayer may not be required to make an additional payment, but it should be noted in the taxpayer’s records that the adjustment will have to be reflected in the following year’s tax return filing. When a taxpayer disagrees with the changes made by the IRS, the taxpayer can begin the appeal process by following the specific appeal process instructions indicated on the notice or letter.
Underpaid Taxes
When the IRS notifies a taxpayer due to underpaid taxes, the taxpayer should read the notice carefully and determine whether they agree or disagree with the notice. If in agreeance, the taxpayer should pay the balance due amount by the due date indicated on the notice.
Interest will accrue on the balance due if not paid by the due date, so it is very important to act quickly to resolve the issue.
Information Not Included on Tax Return
When the IRS notifies a taxpayer because information was received that was not included on the submitted tax return, the taxpayer may or may not owe additional taxes. The IRS receives tax forms from the payers/providers, such as an employer or a bank, just as a taxpayer does. When a return is submitted with a discrepancy between what was received by the IRS and what was filed on the return, a notice will be generated requesting the taxpayer to explain the discrepancy. In cases such as these, the taxpayer should complete the response form regardless of whether they agree or disagree. This will start the process for correcting the return or appealing the proposed changes.
Do You Need to Respond?
The second question to ask is “Should I respond?”. Not all IRS notices require a response. The IRS will indicate in the notice or letter whether or not a response is necessary. If a response is in fact requested, it is in the best interest of the taxpayer to respond by the due date noted on the notice or letter.
A timely response is important for two reasons. The first being, as mentioned above, by responding timely, the taxpayer can avoid any additional interest or penalties that would result from a late or non-response. The second reason that a timely response is so important is because a taxpayer may lose the right to appeal the changes indicated on the notice if the IRS does not receive a response from the taxpayer by the requested date.
What If You Can’t Pay the Balance Due?
When a notice is received that is determined to require an additional tax payment, it can come as a surprise to most taxpayers. Sometimes a taxpayer can be left asking “What if I can’t pay?” The IRS advises taxpayers who cannot pay the entirety of their balance due to pay as much as they can. Unfortunately, a taxpayer who cannot pay their balance in full will be subject to both late payment penalties as well as accruing interest on the balance due. If this occurs, the taxpayer can apply online for a payment plan called an “Installment Agreement” through the IRS.
Applying and being approved for an IRS provided payment plan does not mean that interest will cease to accrue on the balance due. Applying for a payment plan only informs the IRS of the taxpayer’s intent to pay the balance based on an agreed upon schedule and term. If a taxpayer takes part in an IRS provided payment plan, it is important that the taxpayer stay current on their taxes as this could trigger the payment plan to be placed in a state of default, and the IRS could place a lien on the taxpayer’s assets.
Common IRS Notices
Here are some of the more common IRS Notices based on the Notice Number:
- CP10: Changes have been made to a taxpayer’s return because of a miscalculation. The suggested changes will impact the amount that was requested to be applied to the taxpayer’s estimated taxes for the following year. A possible adjustment to the taxpayer’s estimated tax payments to avoid underpayment penalties may be needed.
- CP11: Changes have been made to a taxpayer’s return because of a miscalculation. The suggested changes will require an additional tax payment. It is important for the taxpayer to respond to this type of notice regardless of whether they agree or disagree with the changes.
- CP12: Changes have been made to a taxpayer’s return because of a miscalculation. If the taxpayer agrees with the changes, then no action is required of the taxpayer.
- CP14: This type of notice explains that the taxpayer owes money on unpaid taxes. The taxpayer should make the requested payment by the indicated due date.
- CP2051: The IRS has received information from a payer/provider that was not included on the tax return submitted. On this type of notice, the IRS will explain the information they have received. The taxpayer should contact the IRS as soon as possible to remedy the matter.
- CP2005: The IRS has accepted the information that the taxpayer has provided with their appeal to the IRS suggested changes and the IRS is not going to adjust the taxpayer’s return.
- CP523: This type of notice explains the IRS’s intent to terminate the taxpayer’s payment plan (Installment Agreement) and levy the taxpayer’s assets due to the account going into default. The taxpayer will want to make the payment outlined within the notice to avoid the termination of the plan.
Consult a CPA for Clarity
With any IRS notice or letter, it is important for the taxpayer to read the document carefully and completely, being sure to respond and pay if it is required. Just as with all tax matters, it can be helpful to consult a CPA or other tax advisor to help clarify and understand the implications of an IRS notice or letter. Contact 415 Group today for more information.
