If you ever received one, you know the feeling: creepy! Many clients bring me those letters unopened – as if they expect some deadly white powder inside. Here is the right procedure: put the envelope on your desk, wait until your pulse comes down to under 200 beats per second, and then – slowly – open it. Now read. Chances are, the IRS wants something from you, usually money.
On their website, the IRS made an attempt to explain the purpose of various letters. However, as you probably expect, their explanations are not much help. For starters, there are harmless IRS letters, and there are serious IRS letters. Let’s discuss the difference.
Request for tax return.
This is just a friendly (really!) reminder that the IRS does not have your 2008 (or, for some investors, your 1999) tax return. Relax, you’re not in trouble. You simply need to prepare the missing return and submit it. Who knows, you may even receive a refund when you’re done.
We changed your account.
The IRS thinks that your tax return was incorrect, and they “fixed” it. It could go either way: sometimes, they will give you more money than you expected, but more often they want more money from you. If you agree with their changes, do nothing. But do not assume that the IRS is correct – especially if they ask for more money. They make a lot of mistakes on these notices.
Selected for examination.
Examination is a softer word for an IRS audit. Yes, sorry, you are being audited. The reality is that the IRS audits are not as scary as you may have heard. A large number of IRS audits are done simply by letter exchange. This is relatively painless if you have documentation that they are asking for. Of course, the most dreaded audit is the kind when you have to go to the IRS office in person. Actually, you do not have to go in person: you can hire a licensed professional (a CPA, an EA, or an attorney) to represent you. Whether or not you should hire a tax expert is the same question as whether or not you have to hire a Realtor to sell your property. Professional services are not free, but they usually end up saving you a lot of money and a lot of trouble.
Proposed changes.
Also known as Notice CP2000, this very common letter merely suggests (as in “possibly”) that your tax return did not include such and such items, and now you may owe more money. Maybe yes, maybe no. These notices are generated by computers that, for whatever reason, could not match your tax return with the IRS data. Sometimes, you really did miss some figures – such as a misplaced form 1099. Sometimes, the numbers were properly included on your tax return, just not where the IRS computer was expecting it. Often, you do owe some additional money to the IRS, but not as much as their letter says. If not sure – hire a tax professional. Warning: if you ignore this notice, the IRS will assume that you do owe and start collection.
Notice of deficiency.
This is the next step: a formal assessment. The IRS no longer suggests that you may owe extra, they now claim that you do owe, and they demand payment. Time to get serious, because collection will start soon. It’s not too late to prove them that they are wrong, but you need to take some action.
Collection notices.
There is a series of collection letters that start from a relatively friendly “Demand for payment” all the way to the “FINAL notice of intent to levy.” If that last title is not clear enough, let me translate it: if you do not respond right away, they will grab your bank account and your paychecks. Take my word: they will. This is not a joke, and you may need a professional help – immediately. Do not let the process go that far, please!
Whatever your letter says, make sure you follow these general rules:
- Never ever ignore the IRS letters. They will not leave you alone.
- Always respond to the exact address or phone number from your letter. The IRS has many different departments, and there is no “teamwork.” If you send it to the wrong place, do not expect any results.
- Pay attention to deadlines, especially on threatening letters.
- The IRS processing is notoriously slow. It’s you who have deadlines; they don’t. While your response collects dust on somebody’s desk, you can receive more demanding and threatening letters. Be patient.
- The IRS is quite often wrong. They may have wrong information, and they may misinterpret their own rules. Never rush to pay if you are not sure that their bill is correct.
- By law, they cannot remove interest from your bill. However, penalties are usually negotiable.
- Never lie to the IRS. This can easily result in a criminal case against you. As we learned from politicians, it’s ok to “not remember” but not ok to say no when you know it’s a yes – especially if the IRS also knows that it’s a yes. Unless, of course, you are a charming former President.
- Do not sign any paper if you are not sure about the consequences. Always find out what exactly you are signing and why. Do not trust the IRS agent who says “you must sign it today” or “it’s just a formality.” Could be a very costly formality.
Almost forgot: there is one more type of the IRS letters: a love letter. It says: “Since you have been such an exemplary citizen, we’re waiving all your income taxes, and we included a $5,000 bonus check to you.” Personally, I have not seen those yet, but how can you be sure if you did not open the letter? Open the envelope. And may the Force be with you!