How to Handle IRS Notices and Tax Bills

Gray Reed
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Gray Reed

The multiple rounds of stimulus checks as part of the COVID-19 relief legislation may have people believing that mail from the IRS is not always bad news. However, aside from isolated situations, most people still flinch at the sight of a letter from the IRS. If the IRS sends you a tax bill, the process and timing of the response is very important.  Here are some tips for how to handle an IRS notice or tax bill.

You may never meet, or even talk, with an IRS employee.

Many audits are resolved with correspondence between you and the IRS. For example, the IRS may send you a notice that its review indicated that it received a 1099 indicating unreported income or they discovered an error on the tax return. Usually the notice will explain what was found and the proposed changes, along with a form for you to sign and mail back if you agree. If you agree, this is likely a simple process. If you disagree, the notice will explain how to provide your explanation along with deadlines. If you want to contest the change, pay close attention to these deadlines. The IRS can be very unforgiving with missed deadlines.

All IRS notices are not created equal.

As a general rule, taxpayers should answer all correspondence sent by the IRS. Failure to respond could result in another notice, but it could also lead to more aggressive collection action or remove rights to contest the amounts. For example, a proposed notice will usually be followed by an examination report if no response is received and will have what tax professionals call a “30-day letter.”  This is because it sets a 30-day deadline to file an administrative appeal.  The Independent Office of IRS Appeals resolves many cases without the need for litigation in tax court or United States district court. However, they will not consider your case if you do not file a timely protest. If you miss the appeals deadline, then you will usually receive a “90-day letter”, which is the Notice of Deficiency (i.e. no more proposed deficiencies) and the only option at that point is to file a petition in Tax Court. More information is available from the IRS online or you can always contact a tax professional with questions on a specific notice.

There are options beyond enforced collection (i.e. liens and levies).

If you receive a bill you can’t pay there are options before the IRS starts filing liens or levying your bank accounts or other assets. Again, the process and the timing are important. The first option is to request a payment plan from the IRS. Although you will continue to accrue applicable interest and penalties, the IRS will generally not pursue collection action while the payment plan is in place. There are short-term plans (i.e. less than 180 days) and long-term plans (i.e. 72 months or longer). If the amount owed is low enough (usually around $50,000) you may be able to apply online for a payment plan. However, larger amounts due will require more extensive financial information and potential negotiations with the IRS before approval is received. You may also be able to settle for less than the amounts owed if certain conditions are met through the Offer in Compromise. However, this requires a showing that the amount offered is the most the IRS can expect to collect within a reasonable time. If you have significant collectible assets (including equity in your home) then this might not be a good option for your situation.

Some situations require professional help.

If the amount of the tax dispute is small, and the issues involved are not complicated, then you may be able to resolve matters by dealing with the IRS yourself. However, if a large amount is involved or the issues are complicated you may need to hire a tax professional. Once you have decided you need a tax professional, they will require an IRS Form 2848 (Power of Attorney) to speak and act on your behalf with the IRS. This authority will also give them access to the records available at the IRS that might also help provide insight into the problem you have.

Ignoring correspondence from the IRS is usually a bad idea with potentially dangerous consequences.  Therefore, take a deep breath, review the IRS notice or tax bill carefully and decide how to handle the response. If it appears too complicated to handle on your own, get professional help from a trusted tax professional.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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