When You Should Worry About an IRS Notice — and When You Shouldn’t
Few envelopes inspire anxiety quite like one from the Internal Revenue Service (IRS). But receiving an IRS notice doesn’t necessarily mean you’re being audited or even in trouble. Some notices simply correct a mistake or request information, while others come with deadlines that can affect your appeal rights, bank account or wages.
The key is knowing which kind you received, what the IRS is asking you to do and how quickly you need to respond.
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First, Find the Notice Number and Deadline
Before focusing on an owed dollar amount, Herns Pierre-Paul, a certified public accountant (CPA) and owner of H&S Accounting & Tax Services said to look for the notice or letter number, tax year and response deadline. While a dollar amount owed “can be frightening,” the notice number can help you determine what the IRS is contacting you about, while the deadline often tells you how urgently you need to act.
Logan Allec, CPA and owner of Choice Tax Relief, agreed and suggested taxpayers look up the notice on the IRS website first, then read the entire letter to understand what the IRS is communicating.
These IRS Notices May Sound Scarier Than They Are
Some relatively common IRS notices can look intimidating without necessarily signaling a major tax problem. A CP12 code typically means the IRS changed a return or refund because of an error, while a CP2000 generally proposes additional tax because information reported to the IRS doesn’t match the tax return.
A CP05 generally means a refund is being reviewed. Allec also pointed out that CP71 notices are annual balance-due reminders rather than new collection threats.
While some items are not an emergency, this doesn’t mean one should ignore these notices either. Taxpayers should first compare the notice with their records, then decide how to proceed, Pierre-Paul said. Never pay a notice without first double-checking.
These Words or Notice Numbers Are Serious
While most IRS notices allow time to correct an issue, certain language should immediately get your attention. According to Lea D. Uradu, a tax attorney at FileTax.com, you should look closely for the phrases “final notice,” “intent to levy,” and “notice of deficiency” or instructions for requesting a collection due process hearing.
A "collection due process" hearing notice, Allec said, “is typically the last notice you will receive before the IRS takes forced collection activity against you.”
In that case, failing to act within the applicable 30-day window for a collection due process hearing can leave wages and bank accounts vulnerable to levy.
Don’t Ignore an IRS Notice Even If You Think It’s Wrong
If the IRS says you owe money you don’t believe you owe, compare the notice against your tax return, W-2 forms, 1099 forms and other relevant records. Follow the response instructions on the notice, provide documentation supporting your position and keep copies or proof of anything you send.
Pierre-Paul said, setting that letter aside for too long can lead to missed deadlines and “narrow the available options, even when the underlying tax amount is wrong."
However, missing an initial deadline doesn’t necessarily mean all options are gone, Uradu added. Depending on the situation, taxpayers may still be able to pursue a payment plan, appeal or otherwise address the issue.
Know When It’s Time To Call a Tax Professional
A straightforward correction or single-issue notice may be manageable on your own, particularly if you understand the issue and agree with the IRS. Consider getting help from a CPA, enrolled agent or tax attorney under the following circumstances:
When the facts are disputed.
Multiple tax years are involved.
The IRS proposes a substantial adjustment.
The notice mentions a levy, audit or tax court deadline.
Get help sooner than later because, according to Uradu, “the price of early assistance is typically far less than the price of an error committed in an attempt to save yourself.”
Make Sure the IRS Notice Is Real
Finally, verify that you’re actually dealing with the IRS before providing personal information or sending money. Uradu noted that the IRS generally initiates contact by mail, not unexpected email, text or social media messages. It most certainly will not demand payment using gift cards, wire transfers or cryptocurrency.
She said all legitimate notices “are informative, rather than alarming, and clearly outline the change and what should be done about it."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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