It happens at least once a tax season. The client and I are working on the current year’s tax returns and they mention that that got a notice from the IRS. They’re fuzzy on the details but they went ahead and paid what the notice said they owed. The noise you hear is me beating my head against the desk.
Sometimes those notices are wrong and by paying what they say you owe you are agreeing with them. That makes it harder to fight the changes.
Most of the notices, like the IRS’s CP2000, are computer generated. They are the result of matching what is on your tax return with the info the IRS receives from payers. If they don’t match, you can get a notice. Forget to include a W-2 on your return and you will get a notice. The same goes for a property sale where a 1099-S was issued or stock sales reported on a 1099-B,
But, did you work for that job that year? Could the employer made a mistake? Or did you file an amended return for that W-2 and it wasn’t caught by the system? Taking a little time to check what the IRS/state says and get them the documentation they ask for is cheaper than just paying them.
There is no time this is more important that when the IRS asks about property or stock/mutual fund sales. You don’t pay tax on the sale price. The difference between what you sell the item for and your cost in that item can be a gain or loss. Sometimes the IRS has the cost info but they may not and you need to show them your cost.
When you get an IRS or State notice:
- Don’t panic too much.
- Don’t ignore the notice. Or if you do, put the notice up where you can find it. You will get more correspondence on the issue and the later notices won’t have the same information.
- Try to figure out where the problem is. This is where having a tax pro can help. There are also phone numbers on the notices if you DIY.
- If the notice is right, pay the bill. You can set up an installment agreement if you can’t pay it all at once.
- Get the documentation together and organized if you don’t agree with the notice. Remember you have the burden of proof. So if you took out from an IRA and used the money to start another IRA, you need to get documentation on when the withdrawal and contribution were made. The IRS will not take your word that the transfer was within 60 days. Telling them that your business lost money won’t cut it. They’ll want a profit and loss statement to start with.
- Once you have submitted why you disagree with some or all of the changes give them time to process what you have sent.
- If you get a second notice on the same issue, look at where they are still having an issue. Are they right? If you still want to fight their decision, I would suggest getting a tax pro to help.
A notice from the IRS or state tax authority is scary. But if you take the time to make sure that the proposed changes are correct, you might find you don’t owe as much (or any) as they say. Then it’s just doing the paperwork to prove your side.