Got an IRS notice. Now what?

Caution; answer needed

Receiving an IRS Notice can be intimidating and confusing, many do not know what to do, and others simply ignore their receipt. However, not all notices are created equally, and talking to and providing simple documents to the IRS can save you lots of time and money down the road.

How does the IRS contact taxpayers?

In the last several years, scammers have utilized the fear that people have towards the IRS to take their hard-earned money. The IRS does not generally call you as its first means of contact. Rather they will send you a notice via regular mail, and they will never, ever demand that you pay them immediately over the phone using gift cards or bitcoin. IRS letters will contain contact information, usually in the form of a 1-800 number, a street address, and a notice type.

What’s a CP notice?

The first time most people hear from the IRS about a potential problem is via a CP notice. CP simply means “Computer Generated”, these notices are usually created by an automated system when the information the IRS receives from you does not match what they have on file for you. Remember that the IRS receives information about you from other sources. These notices do not mean that you owe more taxes, or that your assets will be seized. It is simply a notice from the IRS stating that some information does not match up. These notices will usually ask you to send in additional documentation, or to agree to a proposed assessment. You should never ignore these notices. Additionally, you do not have to agree to their proposed assessment. The IRS will allow you to appeal decisions they make internally, however staying in contact with them is key.

What’s a notice of deficiency?

Generally, after the IRS issues CP notices, and if they remain unconvinced of a position you took on your return, the IRS will issue a Notice of Deficiency. A deficiency generally refers to unpaid or underpaid taxes. This notice formally puts on notice, from the time you receive that notice you have 90 days to file a petition with the Tax Court, if you believe the IRS’ position on your taxes is incorrect. If you ignore that notice, and the 90 days pass, then you have given up your right to challenge the IRS on the substance of their claim. Too often clients come to us years after receiving this notice, when the IRS is trying to collect, and they bring up good points as to why the original assessment is incorrect. Sadly, at that point, the facts surrounding the assessment do not matter. Taxpayers give up their right to argue the facts and substance of the deficiency if they do not file a petition with the Tax Court.

Always respond to the IRS

Do not ignore any notices the IRS sends you. Sometimes, years can go by between CP notices, or after collection begins after you receive a notice of deficiency. This does not mean that the problem has gone away. A taxpayer is on the hook for penalties and interest on deficiencies, so ignoring a problem will simply land you a bigger bill, later.

Collections. Now what?

If you do not petition the Tax Court, or you agree with an assessment as proposed by a CP notice, then you move on to collections. I will once again state, that at this stage, the facts surrounding the original deficiency generally do not matter. The IRS is done looking at the factors behind what happened, and rather they have moved on to the matter of collecting on their debt. As I have mentioned multiple times throughout this article, do not ignore the IRS. Often times, Taxpayers can come up with a payment plan to pay off their debt over multiple years. Alternatively, if you become disabled, or there is doubt as to the collectability of the debt, the IRS may be prone to “settle” for a smaller amount. However, if you hold large assets, or have lines of credit, that may not be an option. The IRS can also put liens on your property and seize bank accounts. However, engaging the collecting agent and IRS will almost certainly get you better terms than simply ignoring their contact attempts.

Michael J. Faehner

Michael J. Faehner is the founder of Faehner PLLC in Oldsmar, Florida. Michael focuses his practice on estate planning, corporate,…

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