This is a simple, complete, and free guide to understanding, dealing with, and responding to IRS letters of all kinds.
Responding to IRS letters – introduction
It’s often scary and stressful to receive a letter from the IRS. Many taxpayers (and even some tax professionals) do not know how to properly respond to these letters. The IRS might send you a letter for several reasons, and many are not so easy to understand. This guide will explain most IRS letters and how to respond to them.
Disclaimer: We strongly recommend that you hire a professional to deal with your IRS letter. This guide is only meant as a general introduction and it does not include all of the possible situations that might require actions specific to your situation. Failure to take the correct actions could result in a high tax liability, more interest, and greater penalties. If in doubt, hire tax pro.
First of all – watch out for “phishing” scams
There are multitudes of scamming organizations out there and they are very sophisticated and believable. If you get a call from the IRS and they are asking for money, it is almost certainly a total scam. These con artists can be extremely convincing. They know what to say to make you nervous and to where you will feel relieved by digging out your payment info. They use technology to make it look like they are calling from IRS phone numbers.
Do NOT give payment information to the IRS over the phone. If the IRS says you have a balance due, call them at 1 (800) 821-1040 and verify that it is true. Then write and mail a check made out specifically to the united states treasury and send it only to a published IRS address (here).
Responses to IRS letters claiming that you owe tax
There are several IRS letter that taxpayers receive that demand that they pay an outstanding tax balance, but the one we are talking about specifically here is for when a tax return was filed, it had a balance due on it, but the balance has not yet been paid.
This sounds stressful but it is actually a good idea to file on time, even when you can’t pay, because this generally avoids the large late-filing penalties (and it generally only exposes you to interest – which is small).
If this is your situation, click here for our complete guide to responding to IRS letters when you owe tax.
I didn’t get my (entire) IRS refund – I received a letter instead
When you are expecting a refund and it doesn’t come in on time, in full, or your didn’t receive any money at all, this could be for several reasons. Maybe you had an outstanding debt to an agency such as a student loan. Maybe you didn’t pay your child support. Perhaps you did not include all of your reported income on your tax return or made an error somewhere.
Regardless, when the IRS hangs on to your money in an amount other than as how you filed for a refund, they will send you a letter with an explanation.
It may take some time to receive this letter. If it is an automated letter, it may come as early as three weeks form when you filed. In some cases, even automated letters might take up to twelve weeks to receive (that’s three months!). If the reason for them keeping your requested refund requires a human to calculate and explain, it can take much longer. In the worst cases, I’ve seen clients sit in limbo wondering about there refund for over six months.
If you are facing a situation to where a “human” will need to process something and that your case is in queue, the IRS will likely send a quick letter explaining that they are processing the situation and will be back to you about it at some point in the future. Generally, the delays are caused by short-staffed agents dealing with the problems. If you talk to one of these agents, it pays to be patient and nice about it as they are totally overwhelmed by the amount of work in their queues and it’s not at all their fault.
Responses to IRS letters adjusting your tax return
You might receive a letter form the IRS explaining that they have adjusted your tax return. The first thing you want to do when you receive this type of letter is look to see what year they are talking about, because it sometimes takes the IRS 2 years or more to get around to making an adjustment.
IRS tax adjustments can be complicated, but read the entire letter slowly and line by line, trying to figure out just what it was that they thought needed to be changed. In most of these cases, the IRS is correct about their assessments, but not always. For example, stock trades and ROTH IRS distributions may be adjusted by the IRS to show tax due with no accounting for the basis in those positions, making it so that the tax owed is bloated and not accurate. The IRS is almost always right about things like”Cancellations of debt” or “unreported income” (such as from a forgotten W2 or 1099). It is possible that you have expenses to offset some of these surprise income types, so it may not be wise to simply agree with the assessment.
If you do not understand the letter, the reason for the adjustment, or how you could possibly offset the adjustment with legitimate deductions, then it makes sense to hire a tax professional to help you.
Responses to IRS letters asking for delinquent tax returns
If you have not been filing your tax returns on time, the IRS may write to you asking that you file. Getting caught up on your filing in these cases sound daunting, but it is really not too difficult, you just have to take the time to do it.
If you ignore these letters, two very bad things could happen. One is that the IRS could impose a giant tax liability to these years and not give you credit for ANY deductions (that’s because you didn’t bother to claim any). This is a terrible result as in many cases, such as with very small businesses and property rentals, there is no actual profit to pay taxes on in the first place. Don’t let them do this – file your delinquent tax returns and claim your expenses/deductions.
Another problem with not filing is that if you have income that you are not reporting – now you are committing tax evasion. This can be considered criminal and even lead to jail time.
If you have sophisticated taxes such as partnerships, corporations, foreign businesses, or payroll taxes, then the penalties can be massive and in some cases also considered criminal offenses.
If you have not been filing your tax returns, we can help you online. Please contact us on our home page – we can help you get caught up.
Responses to IRS letters asking for substantiation
The US tax system uses the honor system. They expect you to tell the truth. There are certain sections of the tax code in where taxpayers typically stretch the truth or outright lie. The IRS is very aware of these areas and they might apply a quick “audit” on your filings and ask you to substantiate, or prove, that you actually are entitled to what you are claiming. They do this by sending a letter, of course, asking for your this proof. If you do not respond, they will likely disallow your claim. In many cases, if you are expecting a large refund, the IRS will hold it until you respond to them.
Typical areas of the tax code that are flagged for substantiation to the IRS include:
-the MCC credit certificate
-Head of Household, Earned Income Credit, Child Tax Credit, and Child Dependent Claims
– charitable donations, employee business expenses
Responses to IRS letters when you are selected for audit
This is the “nightmare letter” for small business owners. A letter from the IRS comes in notifying you that you have been selected for “examination”. This means, sure enough, that your business is being audited.
Hopefully, you will have some sort of audit assistance coverage from your tax professional. If not, it is likely that you will want to hire a tax professional to handle your audit for you – or at least to guide you.
In this case, the IRS agent who is dealing with you will want to see all of your bookkeeping, bank statements, receipts, and other (all records). You may also have to explain/prove how and why each expense was an ordinary, necessary, and reasonable expense to operate your business.
We can help
Except during our busy tax season, we offer consultations to help you with your IRS letters. We do charge a fee for the consultation – though we apply it to any fees for amended tax returns, as needed. If you would like to hire us to help you with your IRS letter, or to complete your taxes online, please click here.