Is this your situation? Just
when you thought tax season was over, you receive a
notice from the IRS. Don't panic -- you're not
alone. The IRS sends millions of notices and letters
out each year. Many are computer-generated, because
these days, the IRS relies less on employees to get
directly involved in issues including collections.
Many state and local governments are following suit
and sending out more notices to taxpayers.
notices are sent to mailboxes through the U.S.
Postal Service. The IRS never contacts taxpayers via
telephone, e-mail, text message or social media to
ask for personal or financial information. An IRS
solicitation in any format other than a letter sent
through the U.S. Postal Service could be a ploy to
steal your personal information or access your
Making IRS notices clear and efficient is one of the
agency's top priorities. Starting in 2010, the IRS
began redesigning notices to look less like legal
documents. The language is generally easier to
understand than in the past, but it's natural to
worry when you receive a notice. If you receive a
notice and want more information about how to
respond, contact your tax adviser right away.
More Notices, Fewer Agents
The IRS ramped up its collection efforts after a
2001 study revealed that a $345 billion "tax gap"
existed between the amount owed by taxpayers and the
amount the IRS actually collected. The study
pinpointed a complex and ever-changing tax code that
is ripe for abuse.
IRS enforcement staffing levels have decreased in
recent years. In 2013, there were roughly 14 percent
fewer enforcement officers and agents than in 2010.
Many IRS notices are computer-generated. In fact,
when you open a notice from the IRS, you might be
the first human being to read it.
Many notices are routine and can be resolved with a
few simple steps. For example, you may need to file
an additional tax form. The IRS may have been unable
to make a direct deposit for your refund and,
instead, is sending a refund check. Or you might
have missed a small amount of interest from a bank
account. With more than 100 types of federal tax
notices (see "Common IRS Notices," below), the
possibilities for IRS inquiry are endless.
Case in Point: CP2000 Notices
One of the most common IRS notices is CP2000, a
notice of proposed adjustment for underpayment or
overpayment. Receiving one isn't always bad news --
some of these notices even propose a refund.
Here's what happens behind the scenes. IRS computers
compare information reported by employers, banks,
businesses and other payers on Forms W-2, 1098, and
1099 with personal information, income and
deductions you report on your income tax return. If
you fail to report any income, payments, or credits
(or if you overstate certain deductions) on an
income tax return, you may receive a CP2000
notice. It is not a bill. It informs you of the
proposed adjustments to income, payments, credits or
deductions. This may result in additional tax owed
or a refund of taxes paid.
The IRS also compares personal information, such as
the names, addresses and Social Security numbers of
you, your spouse and your dependents.
Inconsistencies between personal information on
Forms W-2, 1098, and 1099, and your personal tax
return also could result in an IRS notice.
A CP2000 notice will show the amounts you reported
on your original or amended return, the amounts
reported to the IRS by the payer, and the proposed
adjustments by the IRS. The notice also provides the
name of the payer, the payer's ID number, the type
of document that was issued (such as a W-2 or 1099),
and the tax identification number of the person to
whom the document was issued. Based on payer
documentation, the notice proposes either an
increase or decrease in your tax liability. Be sure
that you review this information carefully to verify
These notices are typically computer-generated and
may be erroneous. For example, one client received a
CP2000 notice because her 1099-INT didn't match up
with information reported on her tax return. The
1099-INT used the bank's full name. The tax return
used an abbreviated variation of the bank's name.
The IRS computer didn't know the banks were one in
If you end up owing additional federal taxes after
receiving a CP2000, consider the possibility that
you may also owe additional state and local taxes.
Handling Your Notice
The IRS recently issued tips on how to handle
notices. Here are some important points to bear in
notice relates to a specific issue and instructs you
about what to do. If the notice requires a response,
only address the specific questions the letter asks.
If you have other tax issues you'd like to discuss
with the IRS, send a separate letter.
If you agree with the notice, you usually don't need
to reply unless it gives you other instructions or
you need to make a payment. Pay close attention to
the proper mailing address for your response and
deadlines. Always keep copies of any correspondence
with the IRS. You may need to refer to it later.
Ignoring an IRS response will not make it go away.
Generally, if you receive a notice that you owe
additional taxes, the IRS perceives failure to
respond as admission of underpayment, starting the
your ground. You
may receive a notice stating that the IRS has made a
change or correction to your tax return. Review the
information and compare it with your original
return. If you don't agree with the notice, you
still need to respond typically within 30 days (or
60 days if you live outside the United States).
Don't sign the notice and never pay money that you
don't think you owe just to get the IRS off your
You have the right to dispute the notice. Contact
your tax adviser about composing a letter to explain
why you disagree, including any information or
documents you want the IRS to consider. Mail your
reply with the bottom tear-off portion of the
notice. Send it to the address shown in the upper
left-hand corner of the notice. Expect to wait at
least 30 days -- often 60 days or longer -- for a
response from the IRS.
promptly to minimize interest charges and
will be sent a bill from the IRS, if you owe
additional taxes. Pay balances due to the IRS
promptly, because interest and penalties quickly add
up. Interest will be charged on any unpaid tax from
the due date of the return until the date of
payment. The interest rate is determined quarterly
and equals the federal short-term rate plus 3
percent. Interest compounds daily.
If you file a return but don't pay all amounts shown
as due on time, you will generally have to pay a
late payment penalty of 0.5 percent for each month
(or part of a month) up to a maximum of 25 percent,
on the amount of tax that remains unpaid from the
due date of the return until the tax is paid in
full. The 0.5 percent rate increases to 1 percent if
the tax remains unpaid 10 days after the IRS issues
a notice of intent to levy. For individuals who file
by the return due date, the 0.5 percent rate
decreases to 0.25 percent for any month in which an
installment agreement is in effect.
If you owe tax and don't file on time, the total
failure to file penalty is usually 5 percent of the
tax owed for each month (or part of a month) that
your return is late, up to five months. If your
return is more than 60 days late, the minimum
penalty for late filing is the lesser of $135 or 100
percent of the tax owed.
The penalties for filing and paying late may be
abated if you have reasonable cause and the failure
was not due to willful neglect. In addition, making
a late payment as soon as you are able may help to
establish that your initial failure to pay was due
to reasonable cause and not willful neglect.
Generally, interest charges are not abated; they
continue to accrue until all assessed tax,
penalties, and interest are paid in full.
with your tax professional. Taxpayers
may be able to rectify minor IRS issues, such as an
inaccurate address, account number or Social
Security number. But other notices are better left
to a tax professional. Response forms typically
allow you to authorize someone other than yourself
to contact the IRS concerning notices. Never
hesitate to contact your tax adviser if you're
uncertain about how to handle a letter from the IRS.
The IRS made changes to correct a miscalculation on a return.
First notice that a balance is due.
A refund check was returned to the IRS. Need to update address.
The amount of a refund has changed because the IRS used it to pay a spouse's past due tax debt.
All or part of a refund was used to pay a tax debt.
Final notice -- notice of intent to levy and notice of the taxpayer's right to a hearing.
Final notice before levy on Social Security benefits.
Request for payment or notice of unpaid balance.
First reminder notice that there is a balance due.
Second reminder notice that there is a balance due.
Final balance due notice. If amount is not paid immediately, the IRS will seize (levy) a state tax refund and search for other assets to levy.
Notice of default on installment agreement and imminent seizure (levy) of assets.
Notice of proposed adjustment for underpayment or overpayment.
If you have received a notice from the IRS and are
in need of assistance call Boris Benic at 516-248-7361 or click
here to email Boris Benic.
Thomson Reuters/Tax & Accounting