Headlines and updates on sweeping changes to operations and staffing with regards to numerous federal agencies, and now implementing new tariffs, as we enter tax filing season may have people even more on edge than years prior at the sight of a letter from the IRS or any chatter about taxes in general. If the IRS sends you an official notice or a tax bill, the process and timing of the response is very important. If you are questioning the potential for an audit or believe you may have some outstanding tax liabilities that the IRS may reach out to you about, here are some tips for how to handle an IRS notice or tax bill.
First of all: check, check, and check again.
You may not have had any prior reason to know this, but the IRS website is actually a very informative resource for US taxpayers. For instance, we recommend as a starting point to any tax issue or dispute to check what information the IRS has about you or your tax account. To do this, you can simply visit IRS.gov (https://www.irs.gov/individuals/get-transcript) and find out for yourself. Reviewing your individual online account can allow you to view, print, or download transcripts, find out exactly how much you may owe, look at payment history, and view other tax records. Even if you aren’t anticipating any issues, this is a good tool for periodic checks.
You may never meet, or even talk, with an IRS employee.
Many audits are resolved with correspondence between you and the IRS. For example, the IRS may send you a notice that its review indicated that it received a 1099 indicating unreported income or they discovered an error on the tax return. Usually, the notice will explain what was found and the proposed changes, along with a form for you to sign and mail back if you agree. If you agree, this is likely a simple process. If you disagree, the notice will explain how to provide your explanation along with deadlines. If you want to contest the change, pay close attention to these deadlines. The IRS can be very unforgiving with missed deadlines.
All IRS notices are not created equal.
As a general rule, taxpayers should answer all correspondence sent by the IRS. Failure to respond could result in another notice, but it could also lead to more aggressive collection action or remove rights to contest the amounts. For example, a proposed notice will usually be followed by an examination report if no response is received and will have what tax professionals call a “30-day letter.” This is because it sets a 30-day deadline to file an administrative appeal. The Independent Office of IRS Appeals resolves many cases without the need for litigation in tax court or United States district court. However, they will not consider your case if you do not file a timely protest. If you miss the appeals deadline, then you will usually receive a “90-day letter”, which is the Notice of Deficiency (i.e. no more proposed deficiencies) and the only option at that point is to file a petition in Tax Court. More information is available from the IRS online or you can always contact a tax professional with questions on a specific notice. Additionally, if a suit in Tax Court is necessary, the US Tax Courts have a pro se manual that can be found here.
There are options beyond enforced collection (i.e. liens and levies).
If you receive a bill you can’t pay there are options before the IRS starts filing liens or levying your bank accounts or other assets. Again, the process and the timing are important. The first option is to request a payment plan from the IRS. Although you will continue to accrue applicable interest and penalties, the IRS will generally not pursue collection action while the payment plan is in place. There are short-term plans (i.e. less than 180 days) and long-term plans (i.e. 72 months or longer). If the amount owed is low enough (usually around $50,000) you may be able to apply online for a payment plan. However, larger amounts due will require more extensive financial information and potential negotiations with the IRS before approval is received. You may also be able to settle for less than the amounts owed if certain conditions are met through the Offer in Compromise. However, this requires a showing that the amount offered is the most the IRS can expect to collect within a reasonable time. If you have significant collectible assets (including equity in your home) then this might not be a good option for your situation.
Not getting the assistance you believe you need? Try the TAS.
If you believe your IRS matter isn’t going by the book, or that somehow you’ve been stonewalled or forgotten, there’s an office set up to assist you with that. The Taxpayer Advocate Service (TAS for short) is an independent organization within the IRS. Their role is to assist taxpayers in their problems against the IRS, and serve as a liaison to help protect taxpayer rights. Their website can be found here.
Still, some situations require professional help.
If the amount of the tax dispute is small, and the issues involved are not complicated, then you may be able to resolve matters by dealing with the IRS yourself or with the aid of the TAS as described just above. However, if a large amount is involved or the issues are complicated you may need to hire a tax professional. Once you have decided you need a tax professional, they will require an IRS Form 2848 (Power of Attorney) to speak and act on your behalf with the IRS. This authority will also give them access to the records available at the IRS that might also help provide insight into the problem you have.
Ignoring correspondence from the IRS is usually a bad idea with potentially dangerous consequences. Therefore, take a deep breath, review the IRS notice or tax bill carefully and review some of the guidance listed here to help you decide how to handle the response. If it appears too complicated to handle on your own, get professional help from a trusted tax professional.