Receiving a tax notice from the IRS or a state department of revenue may not be what you were hoping for in the day’s mail. But in many cases the notice can be resolved both quickly and painlessly.
A taxing authority such as the IRS or the Illinois Department of Revenue will issue a written notice under various scenarios, some of which are discussed below. (Note that the initial contact is always by mail; if you receive a phone call purportedly from the IRS or other tax authority, it is fraudulent, and you should hang up without revealing any personal information.)
The notice will set forth the reasons for its issuance and, if applicable, the additional tax it asserts is due, often adding interest and penalties to the assessment. The notice typically also sets forth a due date for response from the taxpayer. They may also give a telephone number, but in our experience it’s preferable to respond to most notices in writing, both because of the written record it produces and to avoid long hold times.
An initial step in analyzing a tax notice is to determine its nature. Many propose an adjustment to tax, often an increase, but sometimes a decrease. The most common reason for adjusting tax upward is understatement of income. For example, the IRS may say it received information from a broker or other payor reporting income, which it believes the taxpayer did not pick up on the tax return.
Another frequent occurrence is a mismatch between tax payments on record with the taxing authority and payments reported on the tax return. While this will not change the tax computation, it will affect the refund or payment due. In these cases it’s usually a straightforward analysis as to whether or not the IRS is factually correct. Sometimes they are, sometimes not.
If they are correct, the matter is resolved by paying any amount due. But if the notice is erroneous, the most successful approach to challenging it is to write and submit a clear and succinct response explaining why you are contesting the notice and including supporting documentation backing up our position. That approach frequently succeeds in abating the assessed tax after a single letter. Occasionally the matter is prolonged and results in multiple communications. In the rare case where a satisfactory result isn’t obtained, you can address the available options with your client.
Other notices require a more comprehensive approach. For example, the notice may question the manner in which an item was (or was not) reported, and the response may require discussion of the tax code or regulations or other authority. Again, clarity of response is crucial. If the IRS representative doesn’t understand the position set forth in the response, they are unlikely to change their original assessment.
Still other notices are basically seeking information. For example, the State of Illinois does not receive copies of W-2s from employers, so they may ask for a copy of the W-2 to support the tax withholding claimed on the tax return.
In any event, if your client receive a tax notice it is important that they not disregard it, whatever the nature of the notice may be. They should not panic. If a taxpayer disregards the initial notice and there’s additional tax due, further notices will be issued. As time elapses the notices get more severe in nature, and will eventually result in a notice of lien or an intent to levy. Taxpayers do not want to find themselves in a lien or levy situation, and the best way to avoid those is to promptly address the initial notice.
Bruce Kreisman, a tax supervisor at Kessler Orlean Silver CPAs, has addressed many tax notices through the years. He can be contacted at bkreisman@koscpa.com or 847-580-4100, extension 139.