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What to Do If You Get a Letter From the IRS

Tobie Stanger

You've filed your taxes, and while the chance of being audited is slim, you still could get a letter from the IRS. 

More than 1.6 million taxpayers were notified of math errors alone last year, topping the 1 million who were audited, the IRS says. 

If an IRS missive lands in your mailbox, open it as soon as you get it. Let your tax preparer know about all but minor issues. Respond within the prescribed period—usually 30 days—and put your answer in writing. Include photocopies of your evidence.

If the notice mentions name misspellings or wrong Social Security numbers, check your return and call the IRS with the proper information.

Here are some of the notices you could receive:

Overpaid taxes. Notice CP 49 tells you when the IRS applies any overpaid taxes to other taxes you owe. It requires no action on your part unless you disagree with the amount.

Mismatched information. If the interest reported on your 1040 isn’t what your bank or brokerage reported, you’ll get Notice CP 2000 outlining the discrepancy. If you sold stocks at a loss, you may have assumed that you didn’t have to report the transaction because you didn’t profit. But the IRS sees only the brokerage’s record of sale and assumes the entire amount is taxable until you prove otherwise.

If your claimed estimated tax payments differ from the amount the IRS received, expect to get Notice CP 23, "Estimated Tax Discrepancy, Balance Due."

To correct those errors, write a letter explaining the discrepancy and attach the evidence, such as W-2s, canceled checks for estimated payments, and bank and brokerage statements. If you find that you made a mistake, send the signed notice back with your check.

Correspondence audits. If the IRS sees a red flag on your return—say, a questionable business deduction or big increase in charitable donations over last year—it will request detailed backup information. For example, if your business mileage is questioned, send pages from a mileage log to support your claim. Respond to the IRS within 30 days or you’ll lose the deduction.

Audit request. If you do get an audit request notice, take it to your tax preparer or find a qualified certified public accountant or enrolled agent, a professional authorized by the IRS to prepare tax returns. You can find someone to help you through the American Institute of CPAs or an enrolled agent at the National Association of Enrolled Agents. Either can represent you before the IRS.

One common audit trigger is underpayment of quarterly estimated taxes by the self-employed. To avoid it, pay roughly what you paid last year split into four payments, recommends Patrick Astre, founder of Astre Planning, a tax and financial planning firm in Shoreham, N.Y.

Balance-due notices. If you receive CP 14, "Balance Due, No Math Error," the IRS is claiming that you underpaid your tax bill. "This is your first warning that the IRS is looking for money," notes Karla Dennis, an enrolled agent and principal of Karla Dennis and Associates, a tax consultancy based in LaPalma, Calif.

Responding on time won’t reduce your tax liability or the interest accrued since the filing deadline, but it may eliminate penalties. If you don’t respond, you’ll get notice CP 501, "Reminder Notice - Balance Due," marking the start of the IRS seizure process.

Dennis recommends calling the agency immediately to set up a payment plan if you can’t pay the money all at once. Otherwise, expect notice CP 504, "Final Notice - Balance Due," the last one before the IRS begins to levy your accounts. You have 10 days to respond before the IRS can start taking action.

Final notice and intent to levy. Notice CP 90/CP 297, "Final Notice - Notice of Intent to Levy and Notice of Your Right to a Hearing" is serious business. The IRS is telling you that it plans to hold your bank account hostage. You have 30 days to file an appeal. Again, turn to an expert and provide all the records you can find. "You’ve got to cooperate," Astre says. "You stop a train by getting onboard and applying the brakes, not stopping in front of it."  

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