In between a letter from grandma and your utility bill there is a letter from the IRS. You double checked: it definitely has your name on it, and it’s thick. You left it on your desk for a day or two, trying to decide if you should open it or just throw it away (hint: always open it). You had a seat, grabbed a stiff drink and a box of tissues, and went for it.
You were hoping that the letter would say that you are exempt from income tax for life, but it didn’t. Instead it’s a bill with a giant number, plus some penalties, plus some interest. What do you do now? Here are 3 steps to take:
- Check your records.
The IRS sends a lot of notices each year (approximately more than 200 million) and most of these notices are sent by IRS computers. Like humans, IRS computers make mistakes sometimes; maybe they doubled your income or missed a tax payment you made. This doesn’t always happen, but it happens often enough that the first thing you should always do is check the letter against your own records. If you paid someone to prepare your tax return for that year, send them the notice and ask them to take a look, most firms will do that for free.
If you checked everything and you know the IRS is correct (for example: if you notice you forgot to include some dividend income on your income tax return) then you should pay the notice by the due date (but consider asking the IRS to forgive [use the term “abate”] the penalties, especially if you have a good record of compliance or if this was an honest mistake. You’d be surprised how often the IRS agrees).
If you checked your records and you think the IRS is not correct, things get harder. You’ll have to prove your point to them, which is not easy. Think of this as a mini court case: you vs. the IRS. You’ll have to state your reasons for disagreeing, present your evidence, and offer your version of the story; maybe the IRS will counter and you’ll need to defend your position. Worse, since everything is done on a timetable, you’re probably only going to have one shot at this. If you want help doing this reach out to me, even if you aren’t a current Alfano & Company client.
- Act quickly.
A lot of the most common notices (such as the CP2000 series) are proposals, meaning the IRS thinks your tax return is wrong and is nicely (ish) informing you of that. If you wait too long the proposal becomes reality in the eyes of the IRS and they will send you a bill. If you don’t pay the bill, they’ll send a more urgent one, then they’ll levy your state income tax refunds, then they’ll levy your bank account or put a lien on your house. Don’t let it get that far, handle this problem at the beginning.
- Reach out for help.
The IRS is a big, complex organization with procedures for everything, some of which make sense and some of which don’t; I deal with them every day but it still gives me a headache sometimes. If you feel out of your depth don’t try to bluff your way through it, it just never works. Find someone who knows what they’re doing and ask them to help (OK, you’ll probably be paying them more than asking them, but it’s worth it). Be careful here: there are companies out there who prey on people in your position, be wary if anyone guarantees results or needs a really big retainer up front before they’ll do anything (but a retainer of 30-50% of the estimated fee is common in the industry, especially if you are a new client). If you’re sitting down with someone, ask them how much experience they have in dealing with the IRS, ask them if they’ve seen cases like yours before, and ask them for the realistic chances that they can secure a better outcome for you. If you get a bad feeling from them, take your business elsewhere.
Of course, solving tax problems is what I do so I hope I’m the first one on your list. Stay safe out there.
P.S. in this post I’m primarily talking about notices such as the CP2000, CP503, CP504, or Letters 1058/LT11/3172. If you’ve received a notice indicating the IRS is beginning an AUDIT (“Your Return has been Selected for Examination”) much of this post won’t apply, but I’m going to be covering what do to in that situation in a future post.