Well, April 15th has come and gone, and tax season is over ... which means you now have other things to worry about. One of the most troubling issues? IRS notices and audits will start to appear in mailboxes during the coming weeks and months. Although IRS audits and notices are not tied directly to filing season, almost 150 million taxpayers just finished sending their 2013 tax returns in to the IRS.
You might have heard the recent buzz in the media that the IRS is at a near 10 year low on individual tax audits. Good news, right? The recently reported 2013 audit rate of 0.96% for individuals was the lowest since 2005. Stated another way, the IRS only examined one out of every 104 returns filed. But even with that low percentage, about 1.4 million tax returns were examined. Of course, all the positive stats in the world mean very little if you are one of those 1.4 million taxpayers--even less if you received an IRS letter notifying you of a possible error on your return, or pending IRS interaction.
Here are some tips to consider if you find yourself under audit, or if you just want to know how to interact with the IRS during an audit.
First bit of advice when you receive an IRS notice of change or request for information: Don't panic! The IRS sent 1.1 million notices of change or request for information to taxpayers in fiscal year 2012 and upwards of 1.4 million in 2013. These notices usually cover a specific item on your tax return or tax account. The notices call attention to a possible error on your return, such as missing income or incorrectly reported income or deductions. Or, the IRS may be requesting additional information. In either case, don't be alarmed because in many cases these notices are often incorrect or result in no change to the tax account. The IRS may simply need to have an issue explained or clarified.
Let's look at six things you should do if you get one of these notices:
Read the notice - As simple as this sounds, many taxpayers destroy these letters in the hope that if they ignore it, the problem will disappear. The longer you wait to respond, the more difficult it is to resolve the problem. Delaying or ignoring the notice this will only make the problem worse, so don't do it!
Respond - IRS letters are not always correct--and for many reasons that range from mistakes by the taxpayer or the preparer to mismatched information in the IRS system. Simply said, IRS notices for a mismatch on a tax return occur for many reasons from real error to unclear information on any number of collateral systems. Regardless of the reason for the notice or IRS letter, you must respond to the letter if you don't agree or partially agree to any suggested changes, or if you are required to send additional information. If you agree with the letter, follow the instructions for sending payment based on the amount the IRS requests. If you partially agree or disagree, you should submit an amended return to explain why you disagree with the notice. In all cases make sure you mail your response, with a copy of the notice and any documentation requested or used to argue your position, to the address listed in the notice.
Gather the return in question and any associated records - Once you read, review, and understand the request or issue, gather together your tax return and all associated documents (including any previous letters or notices from the IRS). If the request is for more information, such as proof of marital status or verification of a dependent's relationship and residence, make sure to collect all information requested by the IRS. If the notice is a request for documentation, make copies and send the information along with a signed copy of the notice to the address listed. If the notice is for an error or omission on the tax return, check the return for the information. It is not uncommon for the information to be included in the tax return already or for the IRS to make a mistake when calculating an allowed credit or deduction.
Contact your tax professional - Don't pay the requested amount unless you are sure the notice is correct. As was noted above, not all IRS notices are correct and deserving of payment. The IRS may have mixed up information or a box may have been checked incorrectly on a tax return or other error made. Make sure you are confident the assessment is correct before you write a check. The IRS typically allows you 90 days to respond or challenge any assessment and IRS notices are generally confusing so even if you don't have a professional, contact one close to you right away. Tax professionals can generally determine exactly what the IRS is asking for or proposing and they know what is needed to resolve the issue in a timely manner. If you paid someone to prepare your tax return, they should stand behind their work and help you at least understand this issue or error. If not, consider getting another preparer next year and always ask about a service guarantee when you pay someone to prepare your tax return. Find the right help that suits your needs.
When to amend return - Only complete and submit an amended return if you disagree with an IRS proposed change. Do not send an amended return when you agree with all of the IRS proposed changes or when the IRS requests documentation only. Make sure you include the statement, "CP-2000" across the top of Form 1040X, Page 1.
What to do if you owe - If the assessment is true and correct, the best option is always to send your payment in full as soon as you can. Remember, the IRS compounds interest daily so the sooner you pay your tax bill, the less it costs. If you are unable to pay in full, you can either enter into an Installment Agreement with the IRS or an Offer-In-Compromise to reduce the amount owed.
To many people, right behind speaking in public, the second scariest thing on earth is receiving a letter from the IRS. A letter from the IRS, An audit of your tax return, or (or even worse) a notice of assessment does not have to end in a payment or penalty. In many cases, there is simply a need to provide additional information to the IRS or clarify a misunderstanding. In all cases, ignoring the issue will not make it better or disappear. So, if you are one of the 1.4 million folks getting a notice or audit this year, pay close attention and quickly respond to any IRS correspondence or communication. If you have additional questions, whether you completed the return in question yourself or paid a professional, be sure to reach out to a professional for answers or to help you respond.