As tax returns are processed by the IRS, some do not pass certain tests or meet specific criteria. IRS correspondence is initiated to obtain more information or clarify inconsistencies between information reported on the tax return and information reported by third parties, such as 1099’s, W-2’s, or 1098’s. Some new processing tests have been developed by the IRS to increase monitoring of identity theft. Receiving a Notice from the IRS can be somewhat overwhelming, but take a deep breath and follow these simple instructions:
• Read the Notice carefully to understand the reason for the correspondence
• Determine what tax return year is applicable to the information in the Notice
• Determine what specific information about your tax return is being highlighted or is in question
• Gather documents in your possession concerning the Notice information
• Determine if you agree or disagree with the Notice
• Provide Notice and materials to your tax return preparer (CPA)
• Determine your response options according to the Notice: telephone call, fax, or write a letter
The IRS has recently redesigned the format and content of their Notices to improve clarity, effectiveness, and efficiency. Each Notice the IRS issues is identified with a Notice number. A common Notice number is CP2000. This Notice identifies income and/or payment information the IRS has on file that doesn’t match information reported on your tax return. This circumstance could result in an increase or decrease in your tax or no change at all. Other common Notice numbers are the CP23, CP24, or CP25. These three Notices each deal with the IRS communicating changes they are proposing to your return because they found a difference between the amount of estimated tax payments on your tax return and the amount posted to your account in their records. The CP23 informs you of a balance due, CP24 informs you of an overpayment, and CP25 informs you of an account balance of zero; all due to the estimated tax payment inconsistency.
Generally, the IRS expects to hear from you within 30 days of the Notice date. Therefore, plan to deliver the Notice and supporting documents to the CPA within a week of receiving a Notice.
The IRS website www.irs.gov is a good resource to learn more about the specific Notice you have received. On the home page there is a link in the lower left corner for “Responding to a Notice”. That link takes you to a comprehensive listing by Notice Number and provides a description of the purpose of each Notice and identifies the Notice topic.
Several things to remember about IRS Notices:
• They are Notices and not bills
• They have been derived from third-party information provided to the taxing agency in many cases
• They have not considered detail/supporting information that the taxpayer has in their possession
• They have only compared data expecting an exact match; there may be good reasons for income or deduction amounts to be slightly different than amounts reported to the IRS
• We find that most IRS Notices warrant a written response and should not be paid as presented.
The moral of the story is to consider a Notice from the IRS as a request for more information. Respond promptly and be patient awaiting their next Notice in follow-up to your reply.
For more information about a Notice or this article, please contact Doug Parham, CPA.