So, you received a notice from the IRS telling you that you owe more tax for a previous year. DON’T PANIC!
Years ago, it was common for the IRS to “invite” a taxpayer to come into an IRS office for an audit of the taxpayer’s return covering a previous year. Often, the IRS was interested in looking only at a specific area of the return in more detail such as charitable deductions, travel expenses or the like.
In recent times, it has become more common for the IRS to mail a notice to a taxpayer, saying that an additional amount of tax is owed and they give a specific reason why. Then, it is up the taxpayer to either pay the additional tax or respond to the IRS with additional supporting information.
Here’s an example. Late in 2013, I received a notice from the IRS telling me I owed more than $3,000 in additional tax, interest and penalties for the tax year, 2011. The notice explained in reasonable detail why I owed this additional money. I was given a due date of about a month away to pay the additional tax. I was also told how to provide additional information if I felt the notice was incorrect.
It’s best to respond to these things ASAP so I read the notice in detail while reviewing my copy of my 2011 return. The notice indicated that the deduction for some IRA deposits I made in 2011 was being disallowed. The notice also indicated that certain forms had not been filed by my IRA trustee. The next day, I faxed copies of these forms to the IRS along with an explanatory letter.
About three weeks later, I received a letter from the IRS stating that they had received my material and that they would respond soon. A week later, another letter arrived stating that I owed no additional taxes after all.
Of course, not every situation like this turns out as well. In other years, I have had to pay additional taxes. I don’t fret about these things. I just respond accurately and quickly – sometimes it works out, sometimes it doesn’t.
So, that’s my advice you to if you receive such a notice. Here are some points to consider:
- Understand as best you can the IRS viewpoint on the issue
- Review why you filed your return as you did originally
- If you disagree with the IRS:
- Prepare a response laying out in straightforward, logical terms why you disagree (be professional about this)
- Collect all appropriate supporting documentation
- FAX or mail your response to the IRS. I recommend Certified Mail with Return Receipt Requested.
- If it turns out the IRS is correct, pay what you owe as soon as you can
- If you don’t have the money, work out a payment plan with the IRS
- Above all, ACT QUICKLY!
If you do have to pay additional tax to the IRS, be prepared to receive a notice from your state in a few months (if you filed a state return for the year in question). The state may want to collect additional tax as well.
Here’s a site that explains the different types of notices sent by the IRS:
Here’s advice about this topic from an expert in the field: