A Letter From the IRS?

If you get an unexpected letter from the Internal Revenue Service it can be quite a shock. The only welcome news from the IRS is your tax refund check. Anything else could make your pulse race. So that's the first piece of advice: Don't panic! And the second piece of advice is: Don't ignore that notice!

The IRS sends out literally millions of letters a year to taxpayers (and never contacts you by phone or social media. Most notifications are not about an audit, but may simply ask for more information.Usually there was something left off your tax return, such as a W2 or 1099 income, that was reported to the IRS. The most common letter is a CP 2000. Here is a link to the IRS website for a list of the dozens of notices the might send out.

If the issue is simple or you think the notice was sent in error, respond in writing along with the tear-off bottom portion of the notice. A response could take 30 days, so you can try calling the number on the letter -- but be prepared to wait on hold. Call early. Start at 7:00AM.  Get the name of the person with whom you speak. But for significant issues you should seek professional help. 

1. Seek professional advice from an Enrolled Agent (EA) or CPA. Whether it's a demand for back taxes, or a notice of examination, you don't want to go into this without professional help -- even if you did your tax return on your own, with computer software. Some IRS agents are inflexible, but a professional can deal with these situations without emotion.

2. Examine the IRS letter carefully. It is more serious if an agent has been assigned to the case (as opposed to receiving an automated letter from the service center on a minor issue). When an agent is assigned, the scope of the audit is broader than a simple question.

3. Gather all documentation. The more supporting documentation you can present, the better your chances of making your point. This is a good reason to always keep your tax information for at least 6 years. And, of course, there's no statute of limitations on tax fraud.

4. Remember, the IRS is not always correct. The tax code is not always black and white. There is a lot of room for interpretation. So you don't want to takes the IRS' position at face value.  And even if they propose adjustments, you can always file an appeal.

5. There are options for resolution. If you owe money to the IRS as a result of an audit, payment can be made over time by requesting an installment agreement. Or you can make an "offer in compromise" which could reduce the amount owed. (Less than a third of these offers are accepted.) Going to tax court is a last resort.

Take the IRS seriously and respond appropriately -- or get professional help. That's the only way you stand a chance. And that's The Savage Truth.