You head to the mailbox, eagerly anticipating your favorite magazine or a birthday card. Unfortunately, what you find is a letter from the Department of Treasury, Internal Revenue Service, also known as the IRS. The questions likely racing through your mind may be: What do they want from me? Is there an issue with my tax return? How much is this going to cost me in time, money and stress?
First, don’t panic. Many of these tax letters and notices are informational; however, most of them request a response or additional information and should not be ignored.
The notices are time sensitive and can have serious consequences if a response is not prepared in a timely manner. If you decide to retain the services of a CPA, you will need to sign Form 2848, http://www.irs.gov/pub/irs-pdf/f2848.pdf Power of Attorney and Declaration of Representative, and submit it to the IRS. This authorizes the CPA to receive information on your behalf. Be aware that the IRS never initiates contact by email, so do not assume that communication in this manner is legitimate and DO NOT respond with your personal information or open an attachment. (Read the related news here: http://www.irs.gov/uac/Newsroom/IRS-Warns-of-New-Email-Phishing-Scheme-Falsely-Claiming-to-be-from-the-Taxpayer-Advocate-The IRS)
Some of the more common letters from the IRS include:
Request for a tax return:
Whether you properly filed a tax return that was not received by the IRS or you never filed a return, this type of notice requires you to submit the requested tax return. If you previously filed the return in question, in addition to the copy of the tax return, you should also include a copy of the certified mail receipt, if applicable, in order to prove that the return was timely filed. If you did not file the requested return, it should be properly completed and submitted by the requested date, and any applicable taxes due should be paid.
If you do not respond to this notice, the IRS will gladly prepare a return for you and assess the tax liability. Unfortunately, this can result in additional taxes due, as the pro forma tax return that they prepare will include all income reported to them, no itemized deductions, no personal exemptions other than yourself, and a single filing status. In addition, stock sales may be included without the applicable cost basis amount, which may reduce or eliminate any applicable gain, and may also be reported as a short-term gain, which can result in a higher tax rate.
Discrepancies in matching information reported to the IRS with information reported on your return:
This type of notice is generated after the IRS utilizes their computerized matching program in order to match the amounts that have been reported on your tax return with the information supplied by third parties. This does not necessarily indicate that your tax return was incorrect or that you owe the calculated tax, interest, and penalties, which are indicated in the notice.
The response to this type of notice depends upon the facts and circumstances surrounding your particular situation, and can generally be grouped as follows:
- If the items in question should have been reported on your tax return, and were not, you will be liable for the tax assessed. Depending upon the reason for the omission, you may be able to request abatement for the tax penalties, but the interest most likely will need to be paid.
- If some of the items should have been reported on your tax return, and were not, and some were either correctly reported or correctly not reported on your return, you will be liable for the tax on items that should have been included on your return. For those items that were either correctly reported or correctly not reported on your return, you should provide the applicable documentation to the IRS, in order to indicate why you should not be assessed additional tax. In this situation, you may want to consider filing an Amended U.S. Individual Income Tax Return, Form 1040X. http://www.irs.gov/pub/irs-pdf/f1040x.pdf
- If the items were correctly reported on your tax return, you should provide the applicable documentation and details. In many instances, these differences arise when they are reported on a different line of the tax return than the IRS.
- If the items were correctly not reported on your tax return, you should provide the applicable documentation and details that you may have. These situations can arise when income is incorrectly reported under your Social Security number by a third party (i.e. if they have mistakenly used your Social Security number or an identity theft issue). Either way, it should not result in any additional tax liability to you, but you must respond timely in order to let the IRS know about the discrepancy.
Request for additional information – correspondence audits:
Correspondence audits have increased in popularity over the past few years. They are significantly more cost effective for the IRS by using their computer technology to identify areas that may be susceptible to error or where the documentation may not support the applicable deduction. They have commonly been used to request supporting documentation for home mortgage interest limitations, charitable contributions, and employee business expenses. Generally, the IRS will disallow the deduction, unless supporting documentation is received by the requested deadline. Therefore, it is imperative that you comply with the documentation requests and timing, otherwise, the IRS will assess additional tax, interest and penalties.
Audit examination of your tax return:
This notice indicates your tax return has been selected for an audit. At this point, you may want to consider professional guidance with a CPA in order to properly prepare for the examination. Organization, preparation, and documentation are the keys to successfully completing the examination with the IRS.
If you are doing this without the services of a CPA, you will need to communicate with the Auditor directly and establish a mutually convenient time to meet. If you utilize the services of a tax professional, you may not have to meet with the Auditor directly. Typically, you gather the information and answer the questions that have been requested. Depending upon the issues and the complexity of the audit, they may be resolved in one meeting. Unfortunately, if there are complicated issues, or if additional questions arise, it may result in further document requests or meetings. Either way, it is imperative to respond in a timely manner and be courteous and friendly in all of your dealings with the IRS. This will result in a much smoother examination that will be less stressful for you.
Whether you are able to accurately respond to the IRS notice personally, or you require the assistance of a professional, it is imperative that you do not procrastinate and your response is timely.
If you cannot complete the requested response by the due date, you or your tax advisor should contact the IRS to request additional time. This will ensure the IRS is aware that the notice is not being ignored and that you limit any applicable penalties and interest.
What if I can’t pay the required tax due?
If you are unable to pay the required tax due, you should file Form 9465, http://www.irs.gov/pub/irs-pdf/f9465.pdf Installment Agreement Request, to request a monthly payment plan.
Tax notices and letters from the IRS will never be a welcome sight, but proper planning and preparation and the knowledge of the types of letters that may be received, can ease your level of anxiety.
For more information regarding our Tax Planning & Preparation service, contact Timothy W. Donovan via email email@example.com or by calling directly at 813-261-4713.
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