Ed note: Getting a letter from the IRS after you file a tax return can be terrifying. It’s also not that uncommon. Learn more about the typical reasons you might hear from the IRS and how to go about handling it.
Most people only think about taxes sometime between January and April, when they file an annual return. So it may come as a surprise that 43% of taxpayers have to interact with the IRS outside of filing.
Post-filing issues can be anything from a simple informational statement to a notice about an audit or tax return discrepancy. These issues often show up in the form of an IRS notice. With better, automated information systems, the IRS is sending out more notices to taxpayers. In fact, between 2001 and 2009, while the number of taxpayers increased by only 11%, the IRS sent out 570% more notices.
Here are the six most common post-filing issues you may experience after April 15:
Audits
The majority of audits are more limited than many taxpayers think. Most audits are completed by mail, meaning the IRS is just asking for documents proving a credit, deduction or other item on your return.
However, if you get an audit notice that assigns you a specific IRS employee in your area, it means the audit will be more comprehensive. Keep in mind that the IRS conducts more comprehensive audits on certain types of taxpayers, such as small businesses, businesses that deal heavily in cash or take losses, taxpayers with rental property and high-income earners.
Some taxpayers handle their own straightforward mail audits, but if you have a more complicated situation, you should always contact a tax professional for help.
Penalties
In 2014, the IRS issued 40 million penalties, totaling more than $25 billion. Excluding the estimated tax penalty (which is almost always handled at tax filing), individual taxpayers see three common penalties:
- Failure to file
- Failure to pay
- Accuracy
While penalties are common, so is penalty removal. The IRS will remove penalties for a variety of reasons. The two most often used are first-time penalty abatement, which rewards past good behavior, and reasonable cause, which is a valid excuse for penalty removal. If your circumstances fit, you or your tax professional can request penalty removal from the IRS.
Underreporting/matching notices
The IRS sends underreporter notices (also called CP2000 notices) when it has your income information on file (from an employer, for instance), and the information doesn’t match what you reported on your tax return. These notices might seem like an audit, but they’re actually sent automatically from IRS systems. If you realize that you might have made a mistake on your original return, consult your tax professional for help. Your tax professional can help with a response to address penalties.
Unfiled returns
This is probably the most serious problem you could have with the IRS. For example, if you were to file your return five months late, you would owe a penalty equal to 25% of the taxes due with your return. The IRS can pursue unfiled returns with notices and, ultimately, the IRS can file a return for you, with no credits or deductions in your favor – and with expensive penalties. It’s best to file the return to get in back in good standing with the IRS. Your tax professional can help you gather your records, file your return and address the penalties.
IRS tax bills
At some point, many taxpayers face a tax bill that they can’t pay. There are many options available in this situation, including IRS payment plans, offers in compromise and a temporary reprieve for people in tight financial situations. In reality, most taxpayers who can’t pay right away take advantage of much simpler options: a streamlined payment plan that can be set up online or an extension of up to 120 days to pay. Your tax professional can help you evaluate which option is best for you.
Account corrections
Issues such as identity theft, payment postings, refund holds and other tax return adjustments can be a headache. Understanding why you got the unexpected notice is the first step. You or your tax professional will need to call the IRS, ask the right questions and then respond in the best way. This can be hard to do if you can’t get through to the IRS, if you’re routed among departments or if you’re just not sure what to ask. If you’re having trouble getting help from the IRS, it’s a good idea to contact the Taxpayer Advocate for help.
When a tax issue comes up after filing, it’s important to proactively address the issue so that it doesn’t get worse, and so you can maintain any appeal rights you have with the IRS. But sometimes, that’s easier said than done. With fewer employees, IRS service levels have dropped off since 2011. In 2014, the IRS answered less than 40% of taxpayer calls, and more than 53% of taxpayer correspondence went more than 45 days without a response. The IRS has also closed many of its assistance centers for taxpayers to get in-person help.
The moral of the story: If you get an IRS notice, act early to respond to the IRS and contact your tax professional for help.
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