The financial press is abuzz with all the latest announcements from IRS about calls for increased enforcement of the nation's tax laws.
IRS recently announced they have reviewed or audited nearly a third of all tax returns that reported income of $10 million or more in the past year. One may recall in the September 2010 issue of For the Record, IRS introduced the Global High Wealth Industry Group in 2009 - a specialized team within IRS to pursue a more unified approach to audits of wealthy individuals. With that context in mind, this is a good time to review the most common types of letters and notices that IRS sends taxpayers.
It is important to note that very few audits actually require a face-to-face meeting with an IRS agent. There are many issues that IRS can examine or question on a taxpayer's return via correspondence. Often, having a good understanding of what positions in a return are being examined as well as responding in a timely fashion to IRS inquiries can result in a quick resolution of the audit or examination. Here's a brief overview of the more common types of notices:
- Notice CP 30 Estimated Tax Penalty: This form is used to notify a taxpayer all or part of an overpayment has been applied to an estimated tax payment penalty. It will also advise a taxpayer that all or some of required estimated tax payments were not timely. It is important to double check your records to determine whether the payments were made on time. It is recommended that payments be made through the electronic deposit program, or alternatively, mailed in via certified mail.
- Notice CP 2000 Notice of Proposed Adjustment for Underpayment/Overpayment (aka the Matching Notice): Receipt of this notice is fairly common and is mainly due to the increased Form 1099 e-filing requirements for financial institutions. The notice will typically list out proposed adjustments to a tax return and indicate the total increase in tax based on the changes. Although it may look like a demand for payment, it is not really a final determination of changes to a tax return. IRS uses this notice to request additional documentation from the taxpayer to verify the income, credits and deductions reported on your tax return because they're different from the information received from other sources. This letter often includes a detailed description of the adjustments and the basis for IRS' position, which is presented in an Explanation of Items (Form 886-A). A typical Form 886-A will contain the issue, the facts, the IRS' legal position and the IRS' understanding of the taxpayer's position. Good recordkeeping is of the utmost importance when preparing a response to this type of notice. If the taxpayer can substantiate the rationale for the position taken, as well as provide adequate third-party documentation for the amounts in question, the taxpayer has a greater likelihood of obtaining a speedy and favorable resolution.
- Letter 525 General 30 Day Letter: Per IRS: "This letter accompanies a report giving you a computation of the proposed adjustments to your tax return. It informs you of the courses of action to take if you do not agree with the proposed adjustments." Basically, the letter outlines what to do if a taxpayer wants to appeal the findings within IRS. The taxpayer should submit a request for appeal/protest to the office/individual that sent the letter. The protest should be filed within 30 days from the date of the letter in order to appeal the proposed adjustments with the Office of Appeals.
- Letter 531 Notice of Deficiency: This is the letter advising a taxpayer of their last chance to appeal. Per IRS: "The Internal Revenue Code authorizes the Commissioner to send this notice. The letter explains how to dispute the adjustments in the notice of deficiency if you do not agree. To dispute the adjustments without payment, you file a petition with the Tax Court within 90 days from the notice date." If a taxpayer neglects to address this letter, the collection process can officially begin.
- CP 504 IRS Intent to Levy: This is a final notice of a balance that is due on the taxpayer's account. This is usually the fourth notice that is sent, and will inform the taxpayer that a levy will be issued against their state tax refund. It may also include details stating that IRS plans to search for other assets on which a levy can be placed. Additionally, a Federal Tax Lien may also be filed if payment is not made at once.
This article can only provide a sample of the more common types of IRS notices. It cannot be overemphasized that responding timely to IRS is critically important. IRS has many tools at their disposal that can quickly escalate the severity of the penalties that can be imposed for willful neglect or noncompliance. However, it is important to note that many IRS notices, especially matching and late payment notices, are erroneous or have a simple explanation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.