Getting mail from the IRS can be nerve-wracking. Did you make a mistake on your tax return? Are you being audited? Will you have to pay hefty back taxes and penalties for an honest mistake? You might be tempted to throw the unopened envelope in a drawer and forget about it. But IRS notices aren't always bad news, and you should never ignore them.
When you receive a notice from the IRS, look at the top right corner. You should see a notice number and the tax year the notice applies to.
Here is a look at several types of IRS notices you might receive and how to deal with them.
Notice of balance due (CP14)
IRS Notice CP14 means you owe the IRS money. Usually, CP14 isn't the first you'll hear about owing the IRS. For example, you might receive a CP14 if you filed your tax return but didn't pay the tax you owe.
If you don't agree with the amount due, call the IRS at the number shown on the notice. Request an installment agreement if you agree with the assessment but can't afford to pay. By setting up a payment plan, you can avoid collection actions.
Notice of proposed adjustment (CP2000)
One of the most common notices the IRS sends is CP2000. The IRS generates this notice if there's a difference between the income or deductions reported on your tax return versus what your customer, financial institution, or another payer reported on an informational return (such as a 1099).
The difference isn't always in the IRS's favor. For example, if you made a typo on your return and accidentally reported $10,000 of interest income instead of the $100 shown on Form 1099-INT, you could be due a refund.
If you agree with the change, pay the balance due or accept the refund. But keep in mind, CP2000 notices can also be incorrect. So review the notice carefully to see what changes the IRS is proposing. If you don't agree with the notice, reply to the IRS at the phone number or mailing address shown on the notice explaining why you don't agree with the change.
Return selected for examination (Letter 2205-A or 2205-B)
The IRS uses Letters 2205-A and 2205-B to inform taxpayers that their returns have been selected for audit. Letter 2205-A is for individuals and Letter 2205-B is for businesses, but if your business is a disregarded entity, such as a sole proprietorship or single-member limited liability company (LLC), you might receive Letter 2205-A even if your business revenues and expenses are the reason for the audit.
The letter includes the auditor's name and contact information, a preliminary list of areas the auditor plans to review, and a list of documents the auditor wants copies of. While you can handle an IRS audit on your own, you're better off having a CPA, Enrolled Agent (EA) or tax attorney represent you. They have experience dealing with IRS auditors and can usually help you resolve the audit in the fastest and most beneficial way possible.
Examination report (Letter 525)
Depending on how an IRS audit goes, the auditor may determine that you owe additional tax. Letter 525 shows what the auditor believes you owe based on their audit findings.
You typically have only 30 days from the date of the letter to dispute the findings, so turn the letter over to your tax professional right away if you don't agree with the letter.
Notice of deficiency (Letter 3219)
IRS Letter 3219 comes in several different varieties:
- 3219-A or 3219-B. This letter usually follows a CP2000 notice. If the IRS doesn't hear from you after sending the CP2000 notice, it sends a notice of deficiency asking you to pay the balance due.
- 3219-N or 3219 (SC/CG). This letter means the IRS hasn't received a tax return from you, and it's calculated your tax, penalties, and interest based on the information they have available. This notice will usually show your tax liability as much higher than it should be because the IRS has information on your income from W-2s, 1099s, and other information returns, but very little information about your deductible expenses. The best course of action is to file your tax return as soon as possible.
Whichever version you receive, it means the same thing: you owe additional tax—and potential penalties and interest—to the IRS. Either pay the amount due or work with your tax advisor to dispute the assessment.
Information request (Letter 12C)
If you receive Letter 12C, the IRS needs more information to process your tax return. You might get this letter if you forgot to sign a paper-filed return, attach a schedule, or include other necessary information.
Usually, you can resolve this type of notice easily by sending the requested information to the address listed in the letter.
There are many different types of IRS notices. The methods and timeline for responding to these notices can vary, so be sure to forward them to your tax professional right away. Above all, don't ignore any correspondence from the IRS. Facing it head-on with the help of a professional can minimize your interest and penalties and help you achieve the best possible outcome.
Find out more about Managing Your Business