How to properly handle a tax notice

It is very common that at some point during a taxpayer’s lifetime they will receive a notice of some sort.

It is very common that at some point during a taxpayer’s lifetime they will receive a notice of some sort from a taxing authority.

As the tax returns for an individual become more complex, the likelihood of some type of notice or communication from a taxing authority also increases. Common examples are an estimated tax bill from RITA, to a request for further information for clarification from the IRS, to a variance notice from a taxing authority.

A taxpayer needs to be aware of several things regarding the receipt of communication from a taxing authority.

First among these is that they are often computer system-generated and a human being has not been involved. There is no need to panic or assume that you are being audited, or even that you did something wrong when a notice has been received.

The most important thing to remember is that these notices and communication need to be addressed and cannot be ignored. The notices become significantly more problematic if a taxpayer does not respond in a timely manner. The first thing to do when receiving a notice is to read it very carefully.

The notice will tell you what the issue is, what year is in question, how to respond and how to get more information.

The next thing to do is to review your records for the year listed in the notice, do they match the information on the notice? Read the notice carefully a second time.

Several examples of recent notices that my clients have received that I am working to resolve will help to illustrate the importance of dealing with these in a timely manner. It is also important to note that the IRS is not always correct when a computer-generated notice is sent to you.

I am working on a notice that was sent to a taxpayer who filed their return as married filing separately. This taxpayer has a joint investment account with their spouse. When filing the return, the dividend, interest, and capital gains income were split equally between the taxpayer and their spouse with each reporting 50 percent of the total. The notice was for underreporting on the part of the taxpayer because during the computerized matching the IRS system was expecting to see 100 percent of the investment income reported on his return.

The filing status was married filing separately; the IRS system does not automatically recognize that 50 percent of the income could be reported on her return. Once we communicated this information to the IRS this matter was resolved.

This was a system-generated notice based on matching of the investment income reported by the brokerage house to the IRS with that which was reported on the submitted tax return.

Another recent notice that a different taxpayer received was requesting supporting documentation for information submitted.

This can occur when there may be possible tax-related identity theft the IRS is reviewing, or it may be when the information reported does not completely correspond with corroborating information the IRS has available.

In either case, the matter can be clarified, but without responding and following up with the IRS the matter will continue to escalate.

One of the most common areas of communication from the various taxing authorities is when the reported estimated tax payments and carryforward amounts do not match the records of the taxing agency. This could be due to the taxing agency charging a penalty or changing an amount.

This is also a problem that can snowball from one year to the next if you do not address it and determine the cause of the discrepancy.

Communications and notices from taxing agencies are very common. They will not go away on their own. They eventually will have to be addressed. Ignoring them will create a very costly and time-consuming process.

If you do receive a tax notice, don’t panic, don’t assume you are being audited or that you did something wrong, but address it sooner rather than later.