How to Respond to An IRS Notice In 4 Steps
Updated: Jan 13, 2019
Fantastic. Going through your mail and there lies the dreaded IRS logo staring you down in the pile. Initial reactions for me range anywhere from wondering what I did wrong, to mentally preparing fightin’ words. Or if I’ve already been arguing with the IRS on an issue, then I’m potentially happy they finally responded! But unsolicited IRS notices are the ones we dread most and what I’ll cover here.
Swear a little under your breath, or in your head if other people are around. Then breathe deep, recenter yourself, and maintain composure. You don’t know what it says yet, and the IRS loves to send notices, so it could be anything at this point - good or bad, right or wrong. Don’t assume it’s a full blown audit, it most likely isn’t.
2) Open It.
In the words of The Home Depot – let’s do this! Most potential problems are best faced head-on, so revisit step 1 if needed, and open the letter! Don’t let it sit on your desk out of fear or claiming you’re too busy. I guarantee it’s not a birthday card that can be opened later - IRS notices tend to be time sensitive, and if you do need to respond, you generally have a 30 or 90 day window to do it. If you ignore an issue where the taxpayer does owe, you’ll potentially miss your chance to petition, and owe penalties and interest on unpaid amounts due.
3) Read It Carefully and Determine if You Need to Respond.
Make sure to read through the entire notice and determine what they want. Identify which taxpayer, what tax year, what type of tax, and what their assertions are related to it all. If you’re interested, the IRS provides a lookup tool where you can search the notice and letter type, and gives basic information and guidance on each here.
One of the most common IRS notices is the CP2000 ‘matching notice’ that is sent out when a number on the tax return doesn’t jive with what the IRS has on file. The W-2 and 1099s that you get - the IRS also gets a copy, and obviously they have the estimated tax payments that were sent in during the year. In this type of notice, the IRS generally will lay out what they have versus what is reported on the tax return, so it’s easy for you to go down the line and see what’s off and dig into who is right.
Review your return workpapers to see if you made an error, such as transposing or doubling up a number, or accidentally leaving something out. But if your number seems correct and the IRS figure is larger, there may be information the taxpayer forgot to provide or didn’t get, so in this case you could request a transcript of what the IRS has on file if they’ve not detailed it out in the notice.
Other common types of notices might request a tax return form that was inadvertently omitted from the original filing, like the extension or an election, etc. Even if you actually did attach it, which you probably did, kindly send it again with the notice just to end the matter. We love to hate on the IRS, they are an easy target, but showing some grace will get you much farther in life and with them. I’ve become much nicer to the IRS since my sister work there! Makes family gatherings fun to complain about each other, and give little general insights.
Also, make sure this isn’t a scam, which is an unfortunate common incident these days. The IRS website has some information on scams here.
4) Respond, if Necessary.
In many cases, an IRS notice is not a bill, but a question asking if you agree or disagree with their proposed changes. If you agree and you owe, sign if there is a place to do so, pay if they aren’t reducing your refund, and mail back to the IRS by finding the given 'respond to' address that will be found on the letter. Sometimes they will make a change and you don’t need to respond if you agree, example here could be a change in carryforward of estimated payments when you were incorrect about the total of payments made on the tax return. If you agree, make sure to note your files and carryforward the revised estimated payment to the next year return, keeping the letter as a workpaper for the files.
If you don’t agree with the proposed changes, note on the form in the appropriate section that you disagree, and draft a formal response letter. I like to use a mix between kindness and an authoritative tone in the letter, keeping it concise, stating the facts clearly, and not getting emotional (that includes not being snarky, it doesn't win you points).
Lay it out like a normal business letter, and begin the body with referring to the attached notice and then clearly list why you disagree. Attach and mention all supporting workpapers which drew you to the conclusion that the IRS is not correct. Best to have your tax professional write this response, so they can throw in some code sections to support the position if things are looking bleak and it’s going to be a battle. Thank them for their attention to the matter and sincerely sign it, if you wish – that’s probably the only place in my responses where I don’t sound like a robot.
The IRS will review your response and either agree or disagree, and if they still disagree, you can appeal, but you’ll most definitely want the help of your tax professional from here on out. In this case it’s also worth noting that you might get penalty and interest letters piling up while the matter is being appealed, the IRS tends to take a long time. Just keep all the letters and make sure your tax advisor has them all in a timely manner as well so they can address, if needed. FYI the IRS will take from one tax refund to pay for another tax dispute for the same taxpayer. An example here is having an employment tax dispute ongoing and the IRS takes from the business income tax refund to offset perceived amounts due along with penalties and interest.
Keep copies of both the IRS notice and your response, including any attachments for your records, as you will likely need to refer back to them in an ongoing fight.
Also, if you realize you have made a mistake, it’s ok, it happens to the best of us! Here’s a potential out to be aware of: The First-Time Penalty Abatement. This guy is your friend, and here to help if you’ve been good little taxpayers before this error. Use this remedy if you’ve failed to file, pay, or make a deposit and you haven’t been assessed any other IRS penalties for the type of penalty you’re wanting to waive in the past three years. You must be up to date on all other filing and payment types with the IRS, and there are some other things to consider. You might initially get denied from being qualified for using the FTA, but if you have read the rules and feel you do qualify, keep trying. Here's the IRM on the matter, search for FTA, or a layman’s term article here if you’re interested.
In summary, take a deep breath and get going on it! Engage your tax advisor for help, especially if you aren’t certain what’s being addressed or how to respond.
If you happen to be selected for audit, get your records in order and call your tax advisor right away. I’ve seen audits that result in no change, or refunds for the taxpayer though, so if you know you have nothing to hide and have documented tax return figures and stances, don’t fret too bad. If you’re in the other moral and organizational boat, well, that’s another article!