What To Do Once You Receive an Irs Notice

When Dr. Dre said, “The only two things that scare me are God and the IRS,” he was speaking for many Americans. Most people feel a tinge of anxiety in their stomachs when they discover IRS notices in their mailboxes. That’s the most common reaction.

But that doesn’t mean it’s the right reaction.

IRS notices, unlike what you’d expect, don’t always come with bad news. Even if they do bear “bad news,” you can always lessen the impact by taking the right steps.

If you are wondering how this article is for you. Let’s dive deeper and explore what steps you can take after receiving an IRS notice.

Understanding your IRS notice

Not all IRS notices are the same. Therefore, you want to pay attention to what notice you receive before even considering what to do next. To give you an idea, you may receive notices in the following cases:

Balance Due

If you find a Notice of Balance issued in your name, you owe money on unpaid taxes.

Once received, you should pay your tax debt by the deadline. If you don’t agree with this notice (for example, you already paid, but it has not been processed yet), you can contact the IRS and explain your claim.

Please note the IRS always offers installment payment and OIC options in case you are in a bad financial situation. However, the IRS will escalate if you don’t offer any response in return.

Failure to file

If you run a partnership or S-corporation business, you might get slapped with a CP162 notice. Why? Because according to the IRS, any of the following happened:

• You owe a fine because your returns weren’t on time.
• Your returns were incomplete.
• You didn’t stick to the rules by not filing electronically.

Long story short, you can receive a notice because of not filling properly.

Information required

You can receive a letter or notice (for example, letter 12C)  if the IRS needs more information to process your tax return income. This information may include:

• Missing schedules on your Form 1040
• Verification of income and credit amount

To resolve the notice, you must send additional information with supporting documents to the IRS within the deadline.

Earned Income Credit

Any low-income taxpayer might receive notice if he/she qualifies for Earned Income Tax credit. We are talking about notices such as CP74, CP27 and CP09.

As mentioned above, if you are the recipient, your next step depends on the notice itself. For example, you don’t need to do anything if you get CP74. On the other hand, you must complete the eligibility form and send it to the IRS in the case of the other two.

Audit

If the IRS decides to audit (or has already audited) your returns, you might receive IRS notices or letters, too. Letter 566 is an example here. The arrival of this notice implies IRS auditors will examine specific deductions on your returns, and you need to provide supporting or relevant documents.

Some notices, like 531, may contain the IRS’s increased tax due proposal. In other words, auditors might think you should make changes to your return (and pay more than your initial tax calculation). If you agree with the new amount, sign the enclosed form and return it to the IRS. Alternatively, you can go for a negotiation. If you don't come to an agreement, you can file a petition with the U.S. Tax Court.

Note: You can receive IRS notices for other reasons too. Nonetheless, the point is your response to the IRS depends on what notice you have in your hand.

With that said, the following common steps apply to all IRS notice situations:

Step 1: Read the Notice Thoroughly

Call us Captain Obvious, but you will be surprised how many taxpayers march to the accountant's office without reading the content first. Do we even need to mention that it’s a complete waste of your money and gas?

Instead, you want to sit calmly and read the notice line by line. First of all, pay attention to the notice name, date, and taxpayer ID number (this is important). This information will be in the top right corner of the notice.

Once you go through the first few paragraphs, again zoom in on the “What You Need To Do Immediately” section. This section clearly communicates the IRS’s expectations and also lists the documents you must produce.

Ideally, you should go twice through the notice. The first time you gather the overall message. Pay extra attention to the following details on the second go:

• Key contacts and representatives.
• Specific Contact details.
• Deadlines and other important dates.
• Sections that cover what consequences might await in case of non-compliance.

Step 2: Gather supporting documents

When there is a mismatch between information on your tax return and information collected from other parties (your employer, for example), you may receive a notice CP2000.  If you don’t agree with the notice, you have to produce a corrected W-2, 1099 forms to support your claim.

That’s just one example. Many other IRS notices also require you to produce relevant documents. Even if you decide you want some professional help before writing back to the IRS, you should gather and organize your documents first.

Usually, notice deadlines are not super long. That’s why being on top of your books and keeping your document organized helps. You don’t want to frantically go through shoe boxes for month-old invoices, do you?

If you are a Fincent user, then keeping things organized is easy. Just keep saving your invoices, bills, and other documents– the platform will organize them automatically. Before responding to the IRS notice, you can find your documents on the Files tab.

Note: Never send your original documents to the IRS. Keep the originals for your own record-keeping and attach copies.

Step 3 - Respond to your notice

Once you have followed the previous steps, you should be ready to get into the response part.

The first thing you should do is review your notice information side by side with your tax return. Did the IRS get your tax identification number and other details correct? Do the calculations shown in the notice match your tax form? Remember, the IRS is a massive organization, and small errors can creep in from time to time.

Once you are done reviewing, your response should be tailored based on your situation.

• If your notice doesn’t need any response(Letter 227 k, for example), you can just save your notice copy and call it a day.
• If you are asked to provide some information, just send them as per instructions.
• If you owe some money and agree with the notice, you want to pay it off before the deadline. You can pay electronically or use your debit/credit cards. However, when you are going through a financial hardship, the IRS allows you to pay as much as you can now and pay the rest in installments. In dire situations, you can even opt for an offer in compromise.

Whatever you do, please don’t sit idle and forget to send any response in case you don’t agree with that notice. IRS officials assume you agree with the notice if they don’t hear from you.

• If you don’t agree, send a letter to the IRS explaining your situation along with copies of the required documents and the notice. Usually, it takes 30 days before you hear from it. Most correspondence can be managed without calling IRS representatives. However, if you do speak to a representative, you want to document it properly.

Note: The IRS sometimes offers an extension if you need more time to respond to a notice. There are a few exceptions, such as a Notice of Deficiency (90-day letter) though. In case of a Notice of Deficiency, you must file in Tax Court within 90 days if you want to dispute the matter before paying, and this date can’t be extended.

Step 4- Seek professional help

If you are not a tax pro, it’s highly likely you will run into IRS notices that make you nervous. After all, federal tax is a vast subject with a lot of intricacies. Chances are you don’t know what you don’t know, and that can lead to trouble in the future.

Therefore, if you want to, you should seek out professional help.

For starters, you have the IRS tax assistance number. If you have trouble understanding any part of the notice or you want some info on IRS rules, you can always speak to an IRS representative.

For more complicated issues, you can try experienced CPAs and Accountants. They can analyze your tax situation and direct you to the right way of responding to the notice you have received.

Another option is the Taxpayer Advocate Service. This is an independent organization(within the IRS) with the goal of assisting taxpayers with their tax issues. You can use their Taxpayer Roadmap feature and Get Help pages to resolve the most common tax notice issues.

Step 5- Protect yourself from tax fraud and identity theft

Tax-related identity theft becomes a real issue during the tax filing season. Even in 2023, the IRS flagged more than 1 million tax returns for identity theft.

Now, many of these identity thefts are carried out by sending phishing emails and fake IRS letters. These traps often fool taxpayers into believing they are interacting with real IRS agents. And once someone shares their details, it’s game over.

This is partly why every taxpayer should read any IRS notice multiple times before submitting any detail.

Nonetheless, be suspicious of identity fraud when you see any of these signs:

• You failed to file a tax return because an alternative return has already been filed (and you have no clue).
• You received an EIN number, but you didn’t request any.
• You get a letter from the IRS inquiring about a suspicious tax return(that you didn’t file)
• You get an IRS notice that a new online account has been opened in your name.
• Your IRS records show you received wages from an employer you can’t identify.

If your suspicions turn out to be true, immediately take the following steps:

• Respond immediately to any IRS notice: Call the number provided.
• If your e-filed return is rejected because of a duplicate filing under your Social Security number, complete IRS Form 14039, Identity Theft Affidavit, and mail it.
• Visit IdentityTheft.gov for steps you should take to protect yourself and your financial accounts.

For an extra layer of security, you want to update your antiviruses and activate two-factor authentication on your tax filing software. Also, make sure you submit your information only to a legitimate encrypted site(a “https://” at the beginning of the url is a green flag).

Long story short, be on guard and pay attention to any tax-related notice you receive. If you have been deceived, don’t hesitate to contact the IRS.

Conclusion

IRS notices should not be anxiety-inducing. After all, the IRS communicates with taxpayers using these notices. If you receive one, take time to understand the reason and then respond. Once you mail your response, keep records of that notice along with other documents.

If you are thinking about not agreeing with the IRS notice, carefully consider your options. Yes, you can save a few dollars, but would it really be worth any potential hassle in the future? With that said, if you think challenging notice is the best course of action, please go ahead.

Also, proper bookkeeping practices can help you respond faster to IRS notices. We already touched on how Fincent can help. But it can bring way more to the table. Feel free to book a demo to learn more.