You’re cruising along with everyday life, dealing with this, that and the other thing… then you go to the mailbox and there it is: A Notice From The IRS. <queue scary music here>
It’s a simple enough little envelope, much the same as a lot of other mail you might receive… but look at the return address. IT’S. FROM. THE. IRS.
ohmygoshohmygoshohmygoshohmygoshohmygosh!!!!!!!!!!!!!!!!!!!!
What should you do? (Other than sit down, of course, before you fall down)
Steps To Take
First and foremost: calm down. The IRS sends out literally millions of these notices, often for clarification of a minor item that was either entered incorrectly, or inadvertently omitted from your return. The point is, it’s not the end of the world. But there are some very important steps you need to take when you receive such a notice.
Read. It may sound like a ridiculous thing to say, but you’ve got to read what they’re telling you. You’d be surprised how many folks are terrified to even open the letter! Quite often all they’re asking for is clarification on your return, something didn’t match up in their records. It could be quite simple! Or it could be something more complicated, but you need to read and understand what the notice is about so you know what to do next.
Take action – don’t ignore it. The IRS has these wonderful computer systems in place that keep track of your situation, even when you’re not. Ignoring the situation will not make it go away – if they’re asking for more information, provide what they ask for. Start with the letter, and get figured out what you need to do to straighten things up.
Call the number. On your notice there should be a number to call if you don’t understand the notice, or if you have questions. Bear in mind that this first line of defense at the Service is mostly interested in collecting money – and if that’s what your notice is about, you need to be prepared to hold your ground if you disagree with the notice. Also, know that calling the number is not a five-minute affair. Especially in these days of reduced staffing, you should expect the phone call to take at least an hour if not more time to just get someone to talk to. You need to do this when you have plenty of time on your hands.
Keep records. Every notice you receive, every time you call, every time you write, keep a record of the interaction. When you talk to the IRS office, every person you speak with will give you his or her name and badge number. Write it down – along with everything you say, and everything the IRS agent says. This can be critical if something changes along the line, and you need to justify why you did one thing or another. You don’t need a complete word-by-word transcript, but make sure you have the important parts of the interaction documented – especially deadlines!
Don’t get in over your head. If you’re overwhelmed by the notice, the communication, and the whole process, get help. You can find experienced tax professionals in your area by looking on the National Association of Enrolled Agents (NAEA) website (or you can call me). These folks are ready and willing to help you through the maze of working with the IRS – even if you’ve already started the communications process and found out you’ve bitten off more than you can chew.
Don’t just give in. If the notice indicates that you owe the IRS some amount of money, don’t just pay it to get it over with. The IRS is often wrong – especially when it comes to missing tax forms or miscalculations. It may seem like the safest thing to do: give them whatever they’re asking for and get them off your back! But it can really work against you if you don’t know what you’re doing.
For example, if you had cashed in a bond and forgot to include that information on your return, the IRS is going to assume that you had a zero basis in the bond. If you purchased the bond for $10,000 and later sold it for $10,100, the IRS only knows about the $10,100 that you received when you sold the bond, and in their notice they’ll indicate that you owe tax on $10,100. But in the end, when you file your amended return with your basis properly reported on Schedule D, you end up only owing tax on the $100 gain. Big difference! And if you just gave in, you’d have given them far more than you really owed.
Work it out. If it turns out that you do owe additional money to the IRS and you just can’t swing paying it all at once, ask for a payment plan. It’s not cheap to do this, but it’s a whole lot better than just ignoring the IRS altogether. Because pretty soon after you do that, you start to notice how your entire wardrobe is made up of black and white striped clothes. (Hint: that’s what you get to wear in prison!)
Summing it all up
Okay – you’ve got the notice. It’s not the end of the world. By all means, take action, do something about it, and get help if you need it. (by the way, you can also call me directly if you need help with one of these.) Good luck!
Sterling Raskie, MSFS, CFP®, ChFC®
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I received a notice from the IRS a year or two ago, alleging that I owed extra money. I knew that I had clearly followed IRS processes and procedures, and that my tax return was correct. So I appealed the IRS’s findings, but that didn’t stop the IRS from denying my initial appeals. So I did what every taxpayer is entitled to do after an appeal is denied – I filed a case in Tax Court and prepared to contest the finding in front of a judge. (I chose to not use an attorney, and filed on my own.) Part of the standard Tax Court process is for the IRS to appoint an impartial mediator to try and reach a settlement before going into actual court, and when the mediator reviewed my records they immediatly found in my favor, and directed the rest of the IRS to drop their claim. My only point to this is to reinforce the author’s final message – don’t allow yourself to be intimidated and DON”T JUST GIVE IN.
Thanks for sharing your experience and the important message! Too often taxpayers are intimidated by the IRS and as a result, do just give in, even when there’s no wrong done. Huge mistake, as your case proves!
I had the experience of the IRS sending a check saying that I had overpaid on our minor son’s tax return. Luckily I had a lawyer friend who told me not to cash the check until I was sure that they were incorrect in their assessment. Sure enough, they had misplaced the part of his return that listed unearned income. If I had cashed the check they would have charged us interest and maybe penalties on the amount that they returned to us!
Good for you! That’s a great point to keep in mind regarding communications with the IRS.
Great post Jim! I agree with every point, especially “Don’t just give in”. Not only is the IRS often wrong, but it is staggering just how wrong they can be. My wife and I were married in the mid-1980s and eight years later the IRS sent her a letter telling her she owed a staggering amount of money, since she had not filed a return since the year before our marriage. I was dumbfounded, as I had prepared and filed our taxes every year. Phone calls and letters ensued, with several hours spent dealing with the issue. The difficulty was the IRS struggling over names and the concept of a joint return. My wife did not change her last name and apparently several well educated IRS employees could not understand, or perhaps did not like (all involved were male), that a spouse is not obligated to change their name and that joint return exist. The problem was resolved after some back and forth, but I still shake my head over this one.
Your guide on what to do is spot-on and I would suggest it is a good template for dealing with any federal, state or local government agency, or for that matter any organization with which you have a dispute.
Thanks for all your educational information.
Wow, that’s quite a story. I’ve heard some good ones – most recent was from the state of IL where a taxpayer’s return had a typo in the amount of tax withheld, which the state couldn’t match up with a W2, so they decided to credit him with ZERO tax withheld, and billed him accordingly. Nice.
Can someone require that all communication with the IRS be in writing? In other words, can you refuse to talk to the IRS by phone and require the IRS to respond to all questions and challenges in writing by mail? More importantly, does the IRS have to accommodate the timelines associated with a postal mail dialog? If I send a letter to IRS requesting that they explain or prove the basis for their letter, does the IRS have to adjust any deadlines in order for them to fulfill their response to my request for proof or explanation? If the IRS is slow or does not respond to a written letter, can the sender be penalized by the IRS? Finally, can the IRS be required to communicate by email? In short, is the IRS empowered to dictate the method and/or terms of dialog?
You can complete all of your communications with the IRS in writing, there is no requirement to call them. How that impacts the timelines is unknown to me, I believe the IRS will account for mailing time, but I wouldn’t push the issue if I were you. I do know that deadlines are often adjusted when new information is presented, but I don’t know about whether a deadline would be adjusted in the event of additional explanatory information requested from the IRS.
Lastly, I don’t know about email – I imagine it’s possible, but I don’t have any experience in working with the IRS in this manner.
… and I’m positive that the intimidation factor causes this to happen much too often!
I’ve found too many errors in documents from the IRS to ever just “take their word for it”. It is a government agency, after all!
jb