Ten Things to Know about IRS Notices and Letters

Clients, ALWAYS call us FIRST if you receive a letter from a taxing authority! 

Issue Number:    IRS Tax Tip 2014-60

Inside This Issue

Each year, the IRS sends millions of notices and letters to taxpayers for a variety of reasons. Here are ten things to know in case one shows up in your mailbox.

1. Don’t panic. You often only need to respond to take care of a notice.

2. There are many reasons why the IRS may send a letter or notice. It typically is about a specific issue on your federal tax return or tax account. A notice may tell you about changes to your account or ask you for more information. It could also tell you that you must make a payment.

3. Each notice has specific instructions about what you need to do.

4. You may get a notice that states the IRS has made a change or correction to your tax return. If you do, review the information and compare it with your original return.

5. 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.

6. If you do not agree with the notice, it’s important for you to respond. You should write a letter to explain why you disagree. Include any information and 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. Allow at least 30 days for a response.

7. You shouldn’t have to call or visit an IRS office for most notices. If you do have questions, call the phone number in the upper right-hand corner of the notice. Have a copy of your tax return and the notice with you when you call. This will help the IRS answer your questions.

8. Keep copies of any notices you receive with your other tax records.

9. The IRS sends letters and notices by mail. We do not contact people by email or social media to ask for personal or financial information.

10. For more on this topic visit IRS.gov. Click on the link ‘Responding to a Notice’ at the bottom left of the home page. Also, see Publication 594, The IRS Collection Process. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Additional IRS Resources:

IRS YouTube Videos:

If You Receive an IRS Notice, Here’s What to Do

Issue Number:    IRS Summertime Tax Tip 2013-22

Each year the IRS sends millions of letters and notices to taxpayers. Although some people may feel anxious when they receive one, many are easy to resolve. Here’s what to do if you receive a letter or notice from the IRS:

1. Don’t panic. Follow the instructions in the letter.

2. There are many reasons the IRS sends notices to taxpayers. The notice usually covers a specific issue about your account or tax return. It may request payment of taxes, notify you of a change to your account or ask for additional information.

3. If you receive a notice about a correction to your tax return, you should review it carefully. You usually will need to compare the information in the notice to the entries on your tax return.

  • If you agree with the correction, you usually don’t need to reply unless a payment is due.
  • If you don’t agree with the correction the IRS made, it’s important that you respond as requested. Respond to the IRS in writing to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left corner of the notice. Allow at least 30 days for a response from the IRS.

4. There is no need for you to call or visit an IRS office to answer most IRS notices. If you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the notice available.

5. Keep copies of any correspondence with your tax records.

(You can also contact a qualified tax professional!)

For more information about IRS notices and requests for payment, see Publication 594, The IRS Collection Process. For information about penalties and interest charges, see Publication 17, Your Federal Income Tax for Individuals. Both are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Additional IRS Resources:
Understanding Your IRS Notice or Letter

Publication 594, The IRS Collection Process

Publication 17, Your Federal Income Tax for Individuals  

IRS YouTube Videos:
Received a Letter from the IRS? – English  | Spanish  | ASL

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Congress inaction risks 2013 tax “disaster”: IRS chief

WASHINGTON (Reuters) – The commissioner of the U.S. tax-collecting Internal Revenue Service warned on Thursday of “a real disaster” for taxpayers next year should Congress miss a December 31 deadline to decide on billions in major tax provisions.

Congress is expected to wait until after Election Day, November 6, to take up whether to extend the individual income tax cuts passed under former president George W. Bush that expire at the end of 2012.

Most Democrats and President Barack Obama want to extend all but the top two tax brackets, allowing taxes to increase for high-income earners. Republicans want to extend the lower rates for all income groups.

A 2010 “lame duck” session deadlock to extend the Bush tax cuts delayed the start of the tax filing season in early 2011.

Allowing the pending tax decisions to lapse into 2013 will cause confusion for taxpayers, said Douglas Shulman, IRS commissioner, speaking at the National Press Club in Washington.

“We’re going to have real risk in the system” if Congress delays, Shulman said.

“You could have a real disaster in the filing season where there’s total confusion,” especially for the alternative minimum tax “patch,” he said.

The alternative minimum tax is a parallel tax system that applies to higher-income taxpayers. A legislative fix to index it for inflation must be approved before year’s end to prevent the tax from hitting taxpayers in lower income brackets.

In the absence of congressional action by January 1, the IRS might be forced to delay the tax-filing season, which begins promptly with the new year, Shulman said.

As it is, Congress faces a huge workload for the two-month lame-duck period after the elections when about $650 billion of tax and spending provisions expire.

Shulman, appointed by President George W. Bush and now in the last year of a five-year term, defended IRS’s regulation of 501(c)4 groups, including Tea Party organizations, which have received IRS letters asking questions about their political work.

For any non-profit groups that raise red flags, the IRS will “go out and do an audit and gather more facts,” Shulman said in response to a question about IRS investigations into the non-profit groups.

Shulman also touted stronger IRS international enforcement efforts for businesses and individuals.

The agency has hired private-sector experts to better catch businesses that aggressively shift assets and profits offshore.

The new enforcers will help the IRS keep pace with corporations’ evolving tax strategies, Shulman said.

Tax professionals have doubted whether the IRS has the muscle to enforce these “transfer pricing” disputes.

Transfer pricing is a booming field of global tax law. It involves multinational corporations moving goods, services and assets from one subsidiary to another in different countries and how they account for these “transfers.”

(Reporting by Patrick Temple-West; Editing by Howard Goller and Philip Barbara)

Red flags that tempt the tax auditor

By Kay Bell • Bankrate.com
 

It is the most dreaded letter a taxpayer can receive.

Dear Taxpayer,
Some of the information that you provided to us does not agree with the information we received from other sources.
– The Internal Revenue Service

You’ve just joined an elite club, one whose initiation ritual is an IRS audit. Unfortunately, you can’t refuse membership — and the dues could be astronomical.

 When the IRS Restructuring and Reform Act was enacted in 1998, lawmakers ordered the agency to focus more on taxpayer rights instead of collection activities. Not surprisingly, the number of audits — or examinations, as the agency prefers to call them — dropped dramatically.

The first year of the kinder, gentler IRS, about 1 in 79 tax returns was audited. By 2003, it was even easier for tax scofflaws; that year, according to IRS data, only 1 in 150 individual taxpayers was audited.

But the tax times, they are a-changing.

More audit attention

IRS Commissioner Doug Shulman says he wants to balance his agency’s enforcement and service responsibilities. To that end, he has announced programs designed to take into consideration the financial struggles that many taxpayers are encountering in today’s economy.

But balance doesn’t mean taxpayers are off the hook. Facing pressure from a Congress dealing with a growing federal deficit, the IRS has made it clear it takes the enforcement portion of its job seriously.

Audits have been increasing, although the pace was slow in fiscal year 2010. According to the IRS’ 2010 annual data book (the latest edition available), individual taxpayer audits last year were up slightly, just more than 1 percent. Of that number, says the IRS, individual income tax returns reporting higher adjusted gross incomes were more likely to be examined.

But the rich aren’t the only targets. Recent tax law changes, particularly when it comes to confusing tax breaks such as the first-time homebuyer credit, always prompt closer looks at returns. And if you’re a small-business person, either as a partnership or a Schedule C filer reporting self-employment income on your personal tax return, make sure you take extra care with your returns.

And those with lower incomes that make them eligible for the complicated earned income tax credit also face added scrutiny. Nearly 30 percent of audited returns claimed this tax credit.

What’s the DIF?

When it comes to avoiding prying IRS eyes, it’s best to be just one of the crowd. “Don’t draw any more attention to your return than you need to,” says Robert G. Nath, author of “The Unofficial Guide to Dealing with the IRS.” “Simple, plain-vanilla returns are fairly safe.”

The IRS says there are several ways a return can be selected for audit and the first is via the agency’s computer-scoring system known as Discriminant Information Function, or DIF. The IRS evaluates tax returns based on IRS formulas, and DIF is based on deductions, credits and exemptions with norms for taxpayers in each of the income brackets.

The actual scoring formula to determine which tax returns are most likely to be in error is a closely guarded secret. But Nath, a tax attorney in the Washington, D.C., area, says it’s no mystery the system is designed to screen for returns that could put more money in the government Treasury.

How do your deductions compare?

Tax experts believe one discriminant information function component looks at average deduction amounts. This allows IRS examiners to spot inconsistencies, such as a high mortgage interest deduction and low income.

Tax specialists at CCH Inc. examined 2009 return statistics, the latest complete data, and came up with the following itemized deduction averages. These are for illustrative purposes only. CCH experts note that the IRS takes a dim view of taxpayers who base their claimed deductions on these figures. The numbers can be useful, however, in giving you a general idea as to whether certain deductions on your return might seem out of line.

Check average deduction amounts
Income range Medical expenses Taxes paid Interest paid Charitable contributions
$15,000-$30,000 $7,783 $3,184 $8,434 $2,048
$30,000-$50,000 $7,028 $3,943 $8,699 $2,274
$50,000-$100,000 $7,269 $6,247 $10,133 $2,775
$100,000-$200,000 $9,269 $11,069 $13,456 $3,888
$200,000-$250,000 $21,599 $18,524 $17,572 $5,947
More than $250,000 $38,149 $48,317 $25,527 $18,488

Allison Einbinder, owner of Dollars & Sense, a tax and accounting firm in Oakland, Calif., recommends that all filers review the differential comparisons. How you stack up against a national standard, she says, will give you an idea of whether the IRS might take a closer look at your return.

So what is likely to trigger a discriminant information function red flag?

  • Higher incomes.
  • Income other than basic wages; for example, contract payments.
  • Unreported income, such as investment returns.
  • Home-based businesses, especially when in addition to salary income, and home-office deductions.
  • Noncash charitable deductions.
  • Large business meal and entertainment deductions.
  • Excessive business auto usage.
  • Losses from an activity that could be viewed as a hobby rather than a business.
  • Large casualty losses.

Returns claiming the earned income tax credit, designed as a tax break for lower-income wage earners, also catch IRS eyes. The credit’s complexity often results in legitimate mistakes on returns. Some filers, however, have been caught making false claims to increase the payment the credit provides.

Schedule C filers who report a business loss also are likely to face more questions from the IRS. The agency wants to be sure that it was indeed the economy, and not an effort to trim taxes, that produced the bad business results.

Don’t cheat yourself

But don’t let fear of a potential audit discourage you from filing for tax credits or taking legitimate tax deductions.

Although some tax return actions are likely to flag your return, Nath says that doesn’t necessarily mean you’ll be audited.

Even if your return is questioned, it’s not a foregone conclusion that you’ll end up owing the IRS. As long as your deductions and expenses are legitimate and you have documentation, Nath says, they will be allowed.

The groundwork you put into preparing your return will pay off in an audit situation. “Be confident in what you entered,” says Einbinder. “That’s easy when you have good records to support your tax return entries.”

And even if an audit doesn’t go your way, don’t despair. “You have rights to contest audits,” Nath says, “at every level of the process.”