What Happens If You Receive an IRS Letter?
Did you recently receive an IRS letter? The IRS is increasing its compliance checks due to nearly $80 billion in new funding, which means you have a higher chance of receiving a letter.
There are dozens of reasons you could be receiving a letter, from forgetting to file a tax return and misclassifying an employee to misunderstandings and errors on the IRS’s part.
This makes it important to complete extensive due diligence before you open your checkbook and pay stiff fines and penalties. Let’s go through the steps you should take once you receive an IRS letter.
Step #1: Understand the Letter
First, you want to understand what the letter is telling you. Is the IRS requesting supporting information for a tax return or are they changing a past return? You might receive an IRS letter for the following situations:
• You never paid the balance due on your tax return.
• The IRS needs to verify your identity.
• The IRS changed your return.
• The IRS needs additional information.
• The IRS has a question about the information on your return.
• You are receiving a different refund amount.
On each letter, the IRS will either have a notice (CP) or letter (LTR) identification code in the upper right corner followed by numbers. This tells you the exact letter type you are dealing with. It’s important to know that the IRS will never call you about issues with your tax filings. If you receive a call from someone claiming to be with the IRS, it is a hacking attempt.
The letter should outline information on what the IRS is requesting or telling you and the next steps you need to take to remedy the situation. Sometimes, the IRS is simply informing you of a change and there is nothing you need to do.
Step #2: Contact a Professional
When you receive an IRS letter, it’s best to contact a professional right away. The right professional can help you decipher the letter, prepare a response, and minimize the interest and penalties paid. Most IRS letters come with deadlines that you need to respond by, which is why you need to make it a priority to locate a qualified professional as soon as possible.
When evaluating different accounting professionals, there are a few criteria you should look for. First, you want to be sure the professional has experience dealing with the letter type you received. In addition, if your IRS inquiry is more substantial, your prospective accounting professional should have the ability to represent you in an audit.
Another important component is ensuring that your professional can obtain Power of Attorney authorization. The IRS does not discuss sensitive tax information without an authorization form on file. Generally, licensed CPAs and tax preparers can obtain this authorization and work on your behalf.
Step #3: Make a Game Plan
Now, it’s time to make a game plan. With the right accounting professional on your side, you can dive into what the letter is telling you and how you will respond. If the IRS is requesting more information, you can begin compiling documentation or if you believe the IRS is misinformed, you can prepare a response letter.
You do have some leeway with assessed fines and penalties if this is your first issue with the IRS. The IRS allows penalty abatement in certain scenarios, which removes interest on back taxes owed and eliminates penalties associated with the letter. You do need to write a response letter requesting these items as they are not automatic.
The game plan that’s most beneficial will be based on the specifics of your IRS letter. For example, if the IRS is informing you about an upcoming audit, you will need to prepare documents in your office. On the other hand, if the IRS is simply informing you of a change on your return, you can respond with a letter agreeing or disagreeing.
Step #4: Know Your Payment Options
If the letter is legit and you do end up owing back taxes, interest, and penalties, you don’t always have to pay the full amount upfront. The IRS has an Offer in Compromise program that allows you to settle incorrectly assessed tax debts or those you can’t afford to pay. Under this program, you can pay pennies on the dollar to remedy your tax debt, which is critical if you are tight on cash flow.
Even if you don’t qualify for the Offer in Compromise program, there are other options. One option is to set up a repayment plan with the IRS. Although penalties and interest will continue to accumulate on unpaid balances, this can be a great way to spread out the amount due instead of compromising your cash levels with one large payment.
Step #5: Make Sure Compliance is a Priority Going Forward
Odds are you don’t want to go through this process again, which is why it’s important to evaluate how the mistake happened in the first place. What areas does your business need help with? Is it staying up-to-date with bookkeeping or filing returns?
If you owe back taxes from falling behind on filings, reach out to an expert that can keep you on track throughout the year. Other letters, like employee misclassifications, incomplete filings, and late payments can also be solved by partnering with the right accountant.
Once you are on the IRS’s radar for non-compliance issues, your filings are more likely to be picked out and reviewed. Preventing the issues from happening again is key to minimizing your correspondence with the IRS.
Receiving an IRS letter is never fun, which is why it’s important to work with an expert. Not only can you find the most favorable outcome, but you can ensure that you respond timely, minimizing the risk of receiving additional letters and penalties.
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