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.”  

Don’t You Dare Deduct These Expenses!

By Kay Bell | Bankrate.com – 18 hours ago
 
 
Every tax-filing season, the great quest by filers is to find the most tax deductions. But there are some deductions you should steer clear of.

If you claim these wrong write-offs, you’ll deduct expenses that don’t meet Internal Revenue Service guidelines.

And that means you’ll end up spending time with a tax auditor and paying more in taxes, penalties and interest.

Bankrate doesn’t want that to happen to you, so we’ve put together this list of expenses you might be tempted to claim. Don’t you dare!

But don’t get too upset. We’ve also provided some related tax breaks that do pass IRS muster and will lower your tax bill.

Don’t deduct homeowners insurance, but …

The hazard policy you bought to cover damage from fires, tornadoes, hurricanes, winter storms and other disasters, as well as for more-routine mishaps, offers peace of mind. What it doesn’t provide is a tax deduction for the insurance premiums.

But if you meet some tax law guidelines, you can deduct private mortgage insurance, or PMI on your 2011 tax return. PMI is the insurance your lender requires you to buy if you don’t put down a big enough down payment. PMI premiums are deductible as an itemized expense (it goes on Schedule A with your mortgage interest claim) as long as the mortgage insurance policy was issued between 2007 and 2011.

You also must meet income requirements. If your adjusted gross income is $100,000 or less (or $50,000 and you’re married and filing separately), your full PMI premium amount is deductible. If you make between $100,001 and $109,000, the amount of PMI that you can deduct is reduced. And if your income is more than $109,000 ($54,500 married filing separately), you can’t deduct PMI at all.

You can figure your allowable PMI deduction using the work sheet in the Schedule A instructions.

Don’t deduct a telephone land line, but …

You can’t deduct the cost of your main home telephone land line, even if you primarily use that phone for your business. The IRS says that the first hard-wired phone line in your home is considered a nondeductible personal expense.

But you can deduct as a business expense the cost of business-related long distance charges on that phone.

If you are an employee, they would be claimed as an unreimbursed business expense on Schedule A.

If you are self-employed, you would count the phone calls as an expense on your Schedule C or C-EZ.

And if you install a second telephone land line specifically for your business, its full cost is deductible.

Don’t deduct commuting costs, but …

The cost of getting to and from your workplace is never deductible. Taking public transportation or driving to work is a personal expense, regardless of how far your home is from your office.

And no, you can’t deduct commuting expenses even if you work during the commute.

But you might be able to deduct some commuting costs if you work at two places in one day, whether or not for the same employer. In this case, you can deduct the expense of getting from one workplace to the other.

You also can deduct some expenses related to other work-related travel, such as visits to clients (current and potential) and out-of-office business meetings.

If you’re self-employed, these expenses would go on your Schedule C or C-EZ.

If you’re an employee, travel costs must be claimed as unreimbursed business expenses. As such, your business and other miscellaneous itemized expenses must exceed 2 percent of your adjusted gross income.

Whatever your business travel situation, be sure to keep good records.

You also could encourage your employer to establish a commuter savings account program. This employee transportation fringe benefit lets workers use pretax dollars to purchase mass-transit passes and pay for parking near work.

Don’t deduct your pet, but …

Yes, your dog or cat is a family member. And yes, some insurance companies now include coverage for Fido or Fluffy in auto policies.

But your affection for your pet or an insurer’s willingness to pay for some of your domesticated animal’s care doesn’t carry any weight with the IRS. So don’t dare try claiming your pet as a dependent. Yes, it has been done. And yes, it is disallowed by the IRS when the furry facts are revealed.

You can, however, deduct as itemized medical expenses the costs of buying, training and maintaining a guide dog or other service animal to assist a visually impaired or hearing-impaired person, or a person with other physical disabilities.

Don’t deduct Social Security taxes, but …

You lose a lot of income each payday to Federal Insurance Contributions Act, or FICA, taxes, the money withheld from your checks to pay for your future Social Security benefits. The debate as to whether Social Security will be around when you retire is still raging. But one thing is sure: Don’t even think about trying to deduct these taxes.

But if you overpaid this tax, you can get a credit for your Social Security overwithholding. There is a limit on how much FICA taxes can be contributed each year. The tax is withheld on up to the Social Security earnings base, which is adjusted annually for inflation, and which for 2011 is $106,800 and for 2012 is $110,100.

If you had multiple jobs and your combined earnings exceeded the wage base, you probably had too much FICA withheld. You can claim the excess Social Security tax as a credit when you file your tax return.

Don’t deduct plastic surgery, but …

If you simply are following your inner Joan Rivers, the IRS definitely won’t let you deduct the costs of your nips and tucks.

The IRS specifically says you generally cannot include in deductible medical expenses the amount you pay for procedures such as face lifts, hair transplants, hair removal (electrolysis) and liposuction.

But if a surgery is medically prescribed, for instance, a nose job to treat respiratory issues, and you just happen to like the look of your new sniffer, then that’s OK. The doctor’s decision makes it a medical deduction.

The IRS says: “You can include in medical expenses the amount you pay for cosmetic surgery if it is necessary to improve a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma or a disfiguring disease.”

Remember, all your medical expenses, including any allowable plastic surgeries, must come to more than 7.5 percent of your adjusted gross income before you can claim them.

Don’t deduct dry cleaning, but …

Looking sharp at work rests totally on your shoulders. A recent U.S. Tax Court ruling reaffirmed this tax law when the judge disallowed a television anchorwoman’s deductions for tens of thousands of dollars in clothing she bought to wear on air.

But you can deduct the cost of dry cleaning or laundry of business uniforms. Under the tax code, that means attire you can’t wear anywhere else, although with the ways some folks dress today, that designation could be hard to nail down.

When an outfit is “not suitable for everyday use,” the IRS says the costs of upkeep for the apparel can be claimed as an unreimbursed business expense on Schedule A.

Also deductible are the cleaning charges for nonprofit uniforms, for example, an outfit required of hospital volunteers or Boy Scout or Girl Scout troop leaders. Here the costs of the uniform and its maintenance would count as charitable deductions, also claimed on Schedule A.

Don’t deduct time for volunteer services, but …

Your time is valuable, but that doesn’t matter to the IRS when it comes to volunteering at a charity.

You can’t claim the value of your wages for the hours spent helping out at your favorite nonprofit. Neither can you count as a deduction the value of a project you created, such as a poster that you, a graphic artist, designed for the charity.

But you can deduct other costs associated with your charity work. This includes your mileage in connection with the group’s work, which can be claimed on Schedule A at the rate of 14 cents per mile.

You also can claim as a charitable deduction unreimbursed out-of-pocket expenses.

As with all things tax, keep good records. Track your charitable travel and hang on to the receipts for the poster board and special markers you bought just for the nonprofit’s poster project.

Don’t deduct OTC medication, but …

Headache and cold treatments from your neighborhood pharmacy shelves have never been tax deductible. There was some confusion here because for a while, the IRS allowed owners of medical flexible spending accounts, or FSAs, to use money in those pretax accounts to pay for over-the-counter drugs.

That option ended when 2011 began. Now you must get a doctor’s prescription for OTC medications before the purchase can be reimbursed with FSA funds.

But you still can deduct diagnostic tests, such as store-bought tests for pregnancy and diabetic blood sugar levels.

And the IRS says moms get a tax deduction on breast-feeding supplies, including pumps and bottles, because, like obstetric care, “they are for the purpose of affecting a structure or function of the body of the lactating woman.”

Don’t deduct kids’ overnight camp costs, but …

When school lets out for the summer, working parents face a child care dilemma: what to do with the youngsters while Mom and Dad are at the office.

Some families send the kids off to summer camp. That’s a great experience for the kiddos and eases, at least temporarily, parental child care concerns.

But sleep-away camps, in the summer or any other time of the year, are not tax deductible.

However, if you decide instead to keep the kids at home and simply send them to day camp during the hours you’re working, that expense could qualify as a claim for the child and dependent care credit.

If your care costs are for one child, you can count up to $3,000 of care expenses each year toward the credit. The expense amount is doubled for the cost of caring for two or more dependents.

Your actual tax credit can be up to 35 percent of your qualifying expenses, depending upon your income. And while that might not seem like a large percentage, remember that since it’s a credit, you get to use it to offset your tax bill dollar for dollar.

9 Warning Signs You’re About to Get Audited

By Kimberly Palmer | U.S.News & World Report LP – Wed, Mar 7, 2012 12:58 PM EST
 
The IRS is on the prowl–possibly for you. Thanks to improved detection systems and computerized checks, the IRS can more easily identify red flags that trigger audits, says Joseph Perry, a partner at Marcum LLP, a public accounting firm. “They definitely contact taxpayers more frequently,” he adds.

Contact typically starts with a letter requesting more information and can lead to in-person meetings. Perry says it’s usually triggered by a tax return that contains something unusual, such as an above-average deduction or change in income from previous years. As long as the taxpayer can defend his filings with the proper paperwork and logic, Perry says he has nothing to worry about–other than the time it takes to respond.

Before you start looking anxiously at the mailbox, wondering if the IRS will be mailing you a letter, consider whether any of these nine signs that you’re about to get audited apply:

1. You made a lot less money last year. Perry says the IRS looks out for any major changes in income, which can signify that a taxpayer is under-reporting his earnings. Since the IRS tracks historic data, people who suddenly start reporting much less income can be flagged for an audit.

2. You lose or forget to file a form. Since employers send copies of all 1099 forms and W-2 forms to the IRS as well as to you, if you lose your version or forget to file it with your taxes, the IRS can flag your return for review. If you receive a form that looks like it has an incorrect amount or inaccurate information on it, Perry suggests talking to your employer before filing your taxes. You want to make sure the information you provide to the IRS matches up with any other information they are receiving about you.

3. You work for yourself. It might not seem fair, but being self-employed can raise red flags for the IRS, especially if you claim your home office and other costs as business expenses but don’t earn much income. “The IRS questions those type of businesses,” says Perry. His advice is to keep careful track of all paperwork so you can defend any deductions and credits you take.

4. You claim losses from a hobby. While writing off business expenses can be legitimate, it’s illegal to pretend a hobby is a business and then write off the related expenses. For example, if you enjoy woodworking, you might practice the craft on the weekends for fun. Doing so does not enable you to write off the cost of wood and tools. (If you were selling those creations online, that would be a different story.) The difference between a small business and a hobby, says Perry, is that a business “must be entered into and conducted with the reasonable expectation of making a profit.”

5. Deducing home office (or car) expenses. While plenty of people can legitimately claim home office expenses on their taxes, some people do so incorrectly. Merely checking email from home after work, for example, does not justify a home office deduction, says Perry. In order to qualify, the home office must be used for work only. Likewise, claiming a car as a business expense can also raise red flags; Perry urges taxpayers doing this to keep careful track of how much they use the car for business versus personal use.

6. You included expensive meals and entertainment costs among your deductions. The IRS often double-checks these types of claims to make sure they are legitimate business expenses, says Perry.

7. You were particularly generous this year. Perry says the IRS is on the lookout for people who inflate their charitable donations, and that the agency takes a close look at taxpayers who say they donated $500 or just under, since anyone who donates more than that amount must file form 8283. (And if you do donate more than $500, be sure to file that form.)

8. You maintain an overseas bank account. The IRS has added more reporting requirements this year for people with money in foreign accounts. Failing to report one could trigger an audit.

9. Your numbers don’t match. If numbers on various forms don’t match or add up correctly, the IRS is likely to notice and look into any disparities. So treat your taxes like a final exam in algebra and check over all the numbers before submitting.

As long as you know you filed your paperwork properly, you can sit back and enjoy any refunds coming your way.