Over the next couple of posts I am going to talk about the IRS examinations (audits) and collections process. These are IRS initiated compliance efforts, unlike my previous post when I discussed the OVDI, a self-reported initiative the IRS is currently offering.
A good place to start this series is to talk about what to do when you receive a letter from the IRS. The audit and collections process usually starts with a letter and these rules will help to insure the best possible result in your IRS dispute.
In my next post, I will talk about the more common IRS letters sent and what to expect after you receive the letter. If you receive a Statutory Notice of Deficiency, do not ignore this letter! This is your last chance to contest the IRS tax assessment. You have 90 days to respond to this letter and the only response is a petition to the US Tax Court.
I know a couple of these rules sound obvious but ignoring them cause of many of the problems that tax attorneys regularly have to resolve. The rules are: Don't Panic, Read the Letter; Check the Deadlines; Confirm the Statements are Correct; and Don't Sign unless you are sure.
1a) Don't Panic
Don't panic, letters from the IRS are common and are often quickly and easily resolved. Before you start to hyperventilate, read the letter and see what it actually says.
1b) Read the Letter
I know this sounds obvious but this rule and rule number 2 are easily the most important rules on this list.
The letters you receive will tell you what the IRS is claiming; make sure you read it carefully. The letter will say what type of letter it is (this matters and will be discussed in more detail in a later post), how much the IRS claims you owe, it will include dates to respond by, and usually a place to sign if you agree to the changes made. If you do not carefully read the letter you can easily miss an important detail.
2) Check Deadlines
Missed deadlines are the easiest way to sabotage a positive outcome of your IRS dispute. Every letter includes respond by dates. Do not ignore theses dates; especially if the letter is a Statutory Notice of Deficiency!
If you do not respond by the dates listed the IRS will assume that you agree to the changes and proceed to the next step of the process. The next step can include the wrongful denial of deductions and credits, and the assessment of taxes and penalties.
3) Confirm the Statements are Correct
If the letter you received is from Automated Collections Systems (ACS), the letter will have a list of items changed. The easiest way to explain ACS is that it is a computerized audit. ACS will compare the items reported on your tax returns versus what was reported to the IRS via W-2s, 1099s, if multiple people claimed a dependent, etc... If there is a discrepancy, a letter is automatically generated and sent to the tax payer. Check these statements against what you reported. If you are sure that the IRS is correct, or if you made a simple computational error, just pay the tax and the issue is over. If not, get your records in order and call the IRS or contact a tax professional.
An initial examinations (audit) letter will request more information for the tax year and list the forms/schedules in question, but generally will not include numbers. If you receive an audit letter, you should contact a tax professional immediately.
4) Don't Sign Unless you are Sure
This one is pretty self-explanatory: make sure you know what you are signing. Most of the signature lines in IRS letters provide that you consent to the changes made to your taxes and agree to pay the liability. Do not sign the letter unless you are sure it is correct.
As with everything related to the IRS, it is difficult to provide comprehensive information related to taxes on the web. Please do not rely on this article without consulting your tax professional. If you have received a letter from the IRS or have questions about a letter received, contact a tax professional.