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Don’t ignore it. Don’t panic. Here’s what to do

August 13, 2007

A couple of months ago, everyone was talking taxes. Helpful filing hints were everywhere, including this column. All that talk has died down, but something new has taken its place. At this time of year, IRS sends out thousands of notices. Today we’ll talk about what you should do when you get an unexpected letter from the Internal Revenue Service.

Before we cover what you should do, there are a couple of things you absolutely should not do. Don’t ignore the letter and don’t panic. If you ignore a notice from IRS, more will come and they will get more adversarial as time goes by. If you panic, you may overreact and that isn’t good either. At any point in the process, you are entitled to hire representation. CPA’s, attorneys and agents enrolled with IRS are automatically qualified to represent taxpayers before IRS. If you do choose to do it yourself, you should know a few things about the process.

There are three basic types of notices you may receive. The first is a bill, or collection notice. If you weren’t able to pay the entire balance when you filed your return, you should expect a bill about now. The best response to a collection notice is to pay what you owe. If you can’t pay it all, you should make a substantial payment or request an installment agreement.

The second kind of notice you may receive is a change notice. Called a notice of proposed adjustments, IRS is saying there is a mistake or inconsistency in your return or they believe you failed to include some income that was reported to them by the payer. Sometimes, IRS is right and you made a mistake. If so, sign the form to agree with them and send in what you owe. Be sure to save a copy of what you send back. On the other hand, there are times when IRS is mistaken. The notice will have instructions about what to do if you disagree with their changes. Follow the instructions, but be prepared to do it again if the error isn’t resolved the first time around.

Finally, you may get a notice of examination (audit). It will either be a correspondence audit, handled through the mail, or an office audit. Office audits for this area are done in Downers Grove. The purpose of an audit is to make you justify something you reported on your return. Sometimes it’s because your deduction exceeds the range reported on similar returns and sometimes it’s because of one unusual item or an area where many people make errors. Whatever the reason, if you kept adequate records and can support the items on your tax return, the audit will not result in any additional tax.

None of us likes getting that letter from IRS. If it does come your way, read the notice carefully and if you believe they’re wrong, respond accordingly. If you’re being audited, prepare your documentation and be forthright. However you respond, do it promptly and completely, and it will be behind you in no time.

Ralph Mooney is a certified public accountant and a principal in Mooney & Thomas, P.C., an Aurora CPA firm. He can be reached at rtmooney@mooneythomas.com or (630) 844-5272.