November 1, 2011
Recently the IRS has been sending out their fair share of "love letters" to a variety of different taxpayers. If you happen to receive such a letter, I want to give you some basic tips that might help you in responding properly.
1. Breathe - These letters are never any fun to receive and they can stress you out before you even open the envelope. The first thing I recommend you do is breathe, calm down, and read the letter. Most of the time the notice that you receive is generated because something (Form W-2, Form 1099, etc.) was reported under your social security number or employee identification number and not reported on a corresponding tax return that was filed. These notices are typically CP2000 notices sent by the IRS.
2. Review - After you have read and can comprehend what your notice is trying to tell you, I recommend you dig out the tax return in question and compare it with the IRS notice. Sometimes the income in question might be reported on the tax return that you filed, but the IRS might need additional clarification of how it was originally shown on your tax return (Form 1099 income reported within another schedule). The discrepancy could also relate to income that was not reported on your tax return but has enough corresponding expenses or costs to reduce the income reported (Form 1099-B proceeds on sales of securities). Or, the discrepancy could relate to income that was just completely left off of your return in error (Form 1099 or W-2 never received and reported).
3. Respond - Once you have determined what the notice relates to and whether or not you properly claimed the income on the tax return in question, you have a variety of options on how to respond to the IRS about the notice that you received. You can respond to the IRS directly on the form that you have received, you can prepare an amended tax return to show the income that was not reported, or you can write a letter to the IRS explaining how the income was originally reported or why it should not be reported. Your response to the IRS should be carefully crafted to address the notice received, the income in question, and what the solution is.
Many people don't feel comfortable responding to an IRS notice without seeking the advice of an accounting professional first. If you are one of these people, I strongly recommend that you contact your CPA before you respond to the IRS notice. CPAs deal with the IRS on a regular basis and can be your guide to dealing with the notice that you received.
I enjoy helping people understand the "love letter" that they received and assisting them with a proper response. I hope you have not been on the receiving end of a recent letter...but in case you have, call or email me today so I can help!