Receiving a notice from the Internal Revenue Service is never pleasant and often brings with it stress and anxiety. Most taxpayers have difficulty understanding IRS correspondence, which tax year or years and what tax forms it relates to, or whether it is even addressed to them or a Company they own. The key to handling IRS correspondences is to stay calm, know that you have rights that protect you, and to slow down, read the letter in its entirety then contact your tax professional.
The first thing taxpayers should know about IRS communications, are the methods the IRS uses to contact taxpayers. All initial contact will be in writing with the official Treasury Department logo in the upper left-hand corner of the notice. Next to the logo will be the title “Department of the Treasury” followed by “Internal Revenue Service” and the address of the office issuing the notice. This is important, as this is the address the taxpayer should mail all written responses, unless informed otherwise by a revenue agent. A revenue agent will never reach out by phone, email or in person, unless the taxpayer has failed to respond to written correspondence, or in situations where dialogue has already been established and both parties have agreed to communicate by other methods.
Underneath the IRS’ heading will be the name and address of the taxpayer the correspondence is referencing. The upper right-hand corner of the correspondence lists the type of notice being issued, the tax period or periods involved, the date the notice was issued, the social security number or employer identification number of the taxpayer, the tax form in question and a contact phone number. You can use the internet to look up the notice number, which will tell you why the notice was issued. For example, a CP128 Notice is a statement of the remaining balance due on a tax period after an overpayment was applied to your account. This means the taxpayer had a refund, but it was applied to a balance owing from a different period, and there is a remaining amount still owing for that period. If there is still confusion as to whom the correspondence is referring, go by the social security number or employer identification number listed on the notice. If there are still questions, you can use the phone number provided to make general inquiries.
At this juncture, you should contact your tax professional promptly, as you usually have 10 – 30 days to respond from the “date of issue” listed on the notice. The time frame stated in the correspondence is a solid cutoff date that you do not want to miss.
It is important to know your rights and options regarding IRS correspondence. This is where an experienced tax professional is essential. Most liabilities, penalties and interest cannot be abated. That is, reasons for abatement are few, require strong substantiation, and must be accompanied by a well written abatement request. Even then it can take multiple communications before the issue is resolved. Nevertheless, there are acceptable reasons for abatement.
- An error in the original filing – If an error was discovered in the originally filed return then a letter should be drafted stating this and the appropriate amended return should be attached to the correspondence and signed by all parties involved.
- Error due to written or oral advice from the IRS – The IRS is required to abate any portion of any penalty resulting from erroneous advice by an agent, whether written or oral. To support the abatement, the taxpayer must clearly identify the agent involved, how the agent’s advice was erroneous, dates of the communication, and how the taxpayer followed the agent’s advice, which resulted in the assessed penalties. For this reason, you always write down the name(s) of the IRS agent(s) and their identification number(s) when you correspond with them.
- Erroneous advice from a tax advisor – This generally falls under the reasonable cause exception for tax abatement. This abatement request is generally limited to issues considered technical; such as, a tax advisor recommending one method of valuing inventory that the IRS determines is incorrect and subsequently resulted in unpaid taxes and associated penalties.
- Reasonable Cause – This is the common fallback for penalty abatement and is often overused and under substantiated. Sound reasons for abatement include; fire, casualty or other disturbances, inability to obtain records, death or serious illness, absence of taxpayer or immediate family member, or other reasons that show the taxpayer exercised ordinary business care and prudence but was still unable to timely file and pay the tax.
Establishing your narrative and timeline are only one piece of the correspondence. In order to be successful, the correspondence must include citations supporting the abatement and supporting documentation attached to the correspondence. It should also include your intent to appeal any decision the IRS provides sustaining the penalties.
If abatement is not possible, your tax professional can also help communicate options such as arranging full payment, establishing a payment plan, evaluating an offer-and-compromise, or other means to rectify the deficiency.
Communicating with the Internal Revenue Service can be a long and tedious process, but it is one that you do not have to do alone. As a taxpayer, there are many avenues of pursuit to take control of your tax situation. Our tax professionals are ready and capable of providing you with the help you may need.