What do you do when you get a tax notice from the IRS or a state tax agency? Step one is simple, take a deep breath and relax. Take several deep breaths if needed. The notice will give you some time to figure out what to do before replying.
The Government Accountability Office (GAO) estimates that IRS only collects about half the tax they propose in notices. While part of this is because people do not pay or cannot pay, the opposite also happens where people pay what they do not owe. At least half of IRS notices are completely wrong or partially wrong. From my experience, the states are a little better but not a lot.
Steps to follow
- Take the deep breath or deep breaths mentioned in the opening paragraph to calm down.
- Get out the copy of the return referenced in the notice.
- Read the tax notice with the return in front of you and see if you can figure out what the tax agency is trying to say. This is not always clear, especially if this notice refers to an earlier notice you never received.
- Do NOT ignore the notice expecting it to just go away. This almost never happens and could result in you having to pay taxes you do not owe because you did not dispute the notice timely. If nothing else, it makes clearing up the issue more difficult and time-consuming.
If you prepared your own return
- Consider whether or not it is time to contact a tax professional. You should ask the following questions:
- Is the notice clear and do you understand it?
- How much additional tax do they want or how much refund are they proposing? Yes, IRS gets refunds wrong also and they will penalize you for cashing a refund check they sent you that you were not entitled to receive. If the tax agency wants $10 it is cheaper to pay them than hire a tax professional. If the tax agency wants $10,000 the story is different.
- Do you have the time and patience to deal with the issue?
- Do you have the tax knowledge to deal with the issue?
- Consider the deadline for responding. Can you meet it without help?
- If the notice is clear and you can prove the tax agency is wrong, then a letter is in order. A phone call might work with a state but IRS telephone hold times are very long and quite often you need to send IRS something to prove your point so the phone call doesn’t resolve the issue.
- If the notice is correct, send a letter agreeing. Only send a check if the agency asks for one in the notice. Sometimes no letter is needed because the agency billed you for the change as part of the notice. Send them the money and sign any requested statement agreeing with the change.
- Be polite if you call the tax agency. Yelling, complaining about the unfairness of the tax law, and name calling do not help and sometimes hurt your situation.
- Mail anything to the tax agency certified mail or registered mail. Registered mail is the gold standard but it cost more. You can track certified mail for free on the Post Office’s website so return receipt is not necessary. Besides, in my experience you only get the return response card back about half the time.
If someone else prepared the return
- Call your preparer and ask them how they want to receive a copy of the notice.
- Ask them how they charge for this service. I include an hour in my income tax preparation fees to read and respond to notices. This covers most notices but not all of them. You can find out more here.
- Do not assume it is something the preparer did wrong. We are all human and the preparer could have made a mistake but most of the time the tax agency made a mistake or the taxpayer did. It is amazing the times I have heard from someone how they forgot their $100,000 W-2 from their old employer.
- Yelling or arguing with your preparer does not solve the problem. The golden rule applies here, treat your preparer with the respect you expect from them. Besides, if the preparer bills for their time you will be paying for them to listen to you complain. It is a lot cheaper to take a friend out for a drink or two if you need to blow off some steam.
- Ask the preparer when you can expect to hear back from them about the next step.
- Share any future correspondence with your preparer and ask her or him to do the same.
- Followup with your preparer. How often depends on the type of notice and the tax agency involved. Ask your preparer when you should hear back. It usually takes at least three months for IRS notices. It is getting worse as Congress continues to cut the IRS’ budget.
Now take a few more deep breaths and then go on with your life. Heck, if you like a drink now might be a good time to text or call your friend.