First Steps in Responding to an IRS Notice

In the last two years, many taxpayers have received notices from the Internal Revenue Service (“IRS”) that have left them scratching their heads. A taxpayer may receive a notice demanding the payment of tax even though a check was timely mailed when the return was filed. Or the IRS may inform a taxpayer that its return can not be processed because the IRS has the taxpayer classified as a different entity even though an entity classification election was timely filed. Whatever kind of notice a taxpayer receives, there are some basic steps that should be taken upon receipt to determine the problem and come up with a resolution.

Begin by Reading the IRS Notice

While it seems obvious that a notice should be read to figure out what it means, IRS notices can be notoriously long and often unnecessarily verbose. If you sort through the generic language, however, you should find the year at issue, the type of tax return filed, and the type of any penalties assessed.

Depending on the issue at hand, it can be many months, and even a couple of years, before a notice is received for a particular tax period. Therefore, finding out the year to which the notice relates is always the first step. This should be located near the top of the letter, either in the top right in small type, or in the middle with the taxpayer’s information such as name and employee identification number (“EIN”).

The type of tax return at issue should also be listed on the notice, often near the year. Because most taxpayers file multiple kinds of returns including income, employment, unemployment, excise, and other taxes, it is crucial to determine which return is the subject of the notice.

Finally, there are multiple penalties the IRS assesses against taxpayers, including the failure to file, pay or deposit, and the steps for resolving the particular penalties is often different depending on the type of penalty at issue. Sometimes a notice will cite the code section(s) that are the basis for the penalty(ies), and sometimes it will simply state what type of penalty is at issue.

Check Payments and Confirm Filings

Many notices are the result of missed or late payments or filings. Once you know the year, return type, and penalty at issue, you should check your own records to determine whether your information matches what the IRS has. For payments, make sure all payments claimed on the return were actually made and debited from your account. Occasionally payments get misapplied, but if you have the amount and date of any payment made, the IRS should be able to track it down in their system, even if it did not go to the account you thought it did.

For filings, confirm that returns were timely mailed or electronically filed. Taxpayers should always send mailings, whether payments, returns, or correspondence, via certified or registered mail or via an IRS  approved private delivery service with tracking capabilities. As long as a taxpayer can prove a return or payment was mailed on time, the IRS should abate any penalties, even if they don’t have the return or payment in their possession. Electronic payments and filings similarly have confirmations, and it is crucial to save these should the need to prove timeliness arrive.

Obtain Account Transcripts

Although notices will generally tell you what the IRS thinks happened, it is very helpful to obtain account transcripts in order to determine the exact status of all relevant payments, returns, or other items. Account transcripts are generated for each return period, so annual tax returns will have a separate transcript for each year, quarterly tax returns will have separate transcripts for each quarter, etc. Obtaining account transcripts for each year, return, and/or penalty at issue will help you see where all payments, returns, and other items have posted. For example, you may see that the IRS posted your payment mailed on April 15 with a date of May 1. With proof of timely mailing, any penalty related to the purported late payment can easily be removed.

Account transcripts can be obtained either over the phone by calling the IRS or online through the IRS’ transcript delivery service, as long as you have a registered online account. If seeking a transcript for another taxpayer (e.g., child, parent, business, trust), unless you are a person authorized to obtain tax information on behalf of this other taxpayer, you will probably need a Power of Attorney, Form 2848, to request account transcripts.  You can also sign Form 2848 to authorize your tax advisor to interact with the IRS on your behalf to obtain your account transcript and work to resolve the notice issue.

Talk to your Tax Advisor

Once you have read the notice to figure out what the IRS thinks has happened, gone through your records to determine what you think happened, and obtained account transcripts to confirm the relevant information, it is time to have a conversation with your Cherry Bekaert tax advisor to figure out the next steps. While many penalties have similar defenses, there are many specifics that need to be ironed out in order to determine the best way to proceed.