Money Matters: Respond right away to IRS correspondence

Peter G. Robbins, CPA, The Daily Record Newswire

Question: I recently received a letter from the Internal Revenue Service saying I did not report all my income. I know I reported everything, so can I just ignore the letter or do I have to respond? I really don’t want to deal with the IRS.

Answer: I have two rules for clients when they receive correspondence from the IRS. First, don’t panic! Often the IRS is just looking for clarification of some item, and there is no additional tax to be paid. This is especially true in our electronic world of computer-generated correspondence.

Even if you don’t follow the first rule and do panic when you see the IRS logo on the envelope in your mailbox, you must follow the second rule: Review the notice carefully and, unless the letter indicates that you do not need to take any action, respond promptly and completely to the notice.

The IRS has an extensive system for notifying taxpayers of errors and questions on tax returns. Generally, the initial notice you receive will identify the tax year and the issue, and request that you respond within 30 days of the date of the notice. If you do not respond within the 30-day period, there will be a follow-up letter. This follow-up letter may be in the form of a “Notice of Intent to Levy,” and eventually, if you have not responded or if the matter is not properly settled, you will receive a “Statutory Notice of Deficiency.” Sometimes called a “90-day letter” this notice gives you 90 days to pay the tax or petition tax court. This is the last step in the normal correspondence routine, and you most likely do not want to get to this point.

So don’t ignore the letter you received. First, review the notice carefully and compare it to the tax return you filed. Also review the instructions included in the letter. If you agree with the notice, usually no reply is necessary unless you need to send a payment to satisfy the remaining tax obligation. If you do not agree with the notice, you should send a written response explaining the situation and include all pertinent information and documents. The IRS will respond, although it usually takes four to six weeks.

Finally, if you do not feel up to the task of dealing with the IRS, you can hire a professional with experience in IRS controversy. You will need to provide the professional with a power of attorney, which will allow your agent to discuss the issues with the IRS.

Don’t panic, but please do respond right away.

Question: I was not able to pay the taxes I owed on my last tax return, so I filed an extension, which gives me until Oct. 15. I should have most of the money then, but I am not sure I will be able to pay it all.
Should I go ahead and file my return anyway, or just wait until I have all the money together?

Answer: Definitely file your return when it is due. The IRS assesses a penalty for late payment of tax of 0.5 percent of the tax owed per month. But if you file your return late, the penalty is 5 percent of the tax per month, limited to a total of 25 percent of the tax. So you will accrue much less in penalties if you file your return on time, even if you don’t pay all the tax. Remember that even though you filed for an extension, the extension gives you more time to file the return, not more time to pay the tax. The penalties start accruing from the original due date of the return.

The IRS recommends various means of making payment, including obtaining a loan or paying by credit card, although usually these are not the best options economically. A better option is to request an installment payment agreement. A payment plan can be made online at irs.gov, via phone or by filing Form 9465. There is an associated fee, and you may be required to submit additional information. The IRS also has options such as the Offer in Compromise program if you do not believe you will be able to pay the tax in full even on an installment plan.

The taxes won’t go away, so be sure to pay as soon as you can to minimize penalties and work with the IRS to keep your account from moving to IRS collections. That is never fun!

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Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates.
To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.