If you receive a notice from the IRS – or from a state revenue agency – you should know that you’re not alone.  For a variety of reasons, both federal and state notice activity is up significantly in recent years, and we’ve seen a definite increase in both legitimate and erroneous notices for our clients.  If you do receive a notice, there are several things that you should keep in mind:

• Don’t panic.  The IRS generates notices using computer matching programs, and sometimes these programs don’t recognize that the income they’re looking for has, in fact, already been reported on your return.  Worse still, the notice is generated based on the limited knowledge that the IRS has.  As an example, if you sold a $100,000 bond with a basis of $100,000, you’d have no gain and no tax on the transaction.  The only information the IRS would receive would be the sales price, and they would generate a notice assuming a zero basis and a $100,000 gain.  They’d add in interest and penalties, and you’d be looking at a notice with a staggering tax bill, all of which would disappear once explained.
• Don’t wait.  Notices typically come with deadlines for a response.  If you miss the deadline, you can be looking at increased penalties and interest, as well as significantly more aggressive – and scarier – enforcement actions.  Even if the notice is wrong, and you shouldn’t have to pay any additional tax, waiting too long to respond can compromise your position and limit your options.
• Tell your accountant.  In some cases, it’s perfectly reasonable for you to deal with the IRS yourself, especially if you’re looking at a notice with a small amount due, and the notice is written clearly enough for you to determine whether it’s right or wrong.  In those cases, it’s still important to send us a copy of the notice because any change to your current year return can affect amounts that carry over to next year’s return.
• Let us help.  When you’re dealing with a more substantial or less comprehensible notice, give us a call right away.  We have the experience necessary to help you decipher a notice, determine whether and to what extent additional taxes are legitimate, and reduce or eliminate any accompanying interest or penalties.

If we’re dealing with the IRS on your behalf, we will likely begin with a written response.  In many cases, that will solve the problem, but if it doesn’t, we’ll ask you for a limited power of attorney because the IRS won’t talk to us without one.

Dealing with tax notices requires both persistence and patience.  Although the IRS typically has deadlines for hearing from you (or us, on your behalf), it can take months for them to consider a response and come to a decision.  It can be a very frustrating process, but we’ll do everything we can to minimize your aggravation – and your tax bill.