What to do if you receive an IRS letter or notice

Did you hear the old joke about the taxpayer who called his accountant all stressed out because he just got a letter from the IRS?

“I got an IRS letter!  What the heck do they want now?” the taxpayer screams.

“I’m not sure” his accountant replies.  “Tell me exactly what the letter says.”

“I don’t know what it says!” says the taxpayer.   “Hold on; let me go open the envelope…”

It’s easy to be overwhelmed when something hits your mailbox from the Internal Revenue Service. Doing nothing won’t make the IRS go away, and destroying the letter won’t make the potential problem disappear. In fact, the longer you wait to respond, the more difficult it is to resolve the problem.

Here’s what to do if you get a notice in the mail from the IRS:

 1.   Don’t panic.  Open the envelope, and read the letter.  Also make note of the Notice Number that appears in the upper right hand corner of the letter. For example, a CP2000 is very common; a computer-generated mismatch notice telling you that some info on your return does not match up with the info provided by third parties to the IRS (such as your mortgage company or employer).  Other notices are less common: a CP 504 for example, threatens to seize property if your balance due to the IRS is not paid.  (This is typically preceded by several other notices, however).

2.  Respond.  Whatever the notice, respond quickly. The appropriate response depends on the letter itself.  Most notices adjust your tax return in some manner.  If you agree with the IRS’s change, there’s usually no further action required—unless you owe additional money.  If that’s the situation, simply send the amount to the address shown on the letter.  On the other hand, if you don’t agree, you must take action right away.  Failure to respond can lead to a Notice of Federal Tax Lien, or—even worse—a Levy, which allows the IRS to seize wages, bank accounts, or other property in order to fulfill the tax debt owed.  So, if you disagree, immediately send a written explanation of why you disagree, along with documentation that supports your position.  The IRS will then respond within 30 days to let you know whether they accept your position or they continue to dispute it.

3.  Appeal.  What if the IRS disputes your position?  Request a Collection Due Process (CDP) hearing if you really believe you do not owe. This achieves two things: first, it gives you opportunity to prove your position, and second, it stops the IRS from collection action while the appeal is being processed.

4.  Get professional help. If your appeal is denied, and you can’t pay the taxes owed, act quickly, because timing is absolutely critical at this point. The best course of action is to hire someone who is experienced in dealing with the IRS collections division.  IRS collections work is a specialty practice area; an Enrolled Agent specializes in representing taxpayers before the IRS and is authorized to do so in all 50 states.  On the other hand, most attorneys or CPAs who prepare tax returns lack the experience, the expertise, and the interest in dealing with IRS collection procedures. 

 Bottom line, receiving a letter from the IRS is scary, but don’t let it freeze you in your tracks.   If you are one of the 1.4 million folks getting a notice this year, be pro-active: open the letter, respond quickly, and appeal if warranted.  If the appeal is denied, secure the help of an Enrolled Agent to resolve the issue.

ANCHOR ON THIS:  The “ostrich approach” is never a good idea if you receive an IRS letter.  Ignoring an IRS problem will not make it better or disappear.