IRS notices and letters have become significantly more common in the last few years, especially during the pandemic. This blog is going to break down why that is, what the different letters mean, what to do and if you should panic.

Common reactions from IRS letters + notices

First of all, the reaction that people tend to have towards mail from the IRS is complex and completely valid. We can also all agree that the feeling is always negative, it just depends on how negative. From minor irritation to fears of owing thousands of dollars, being audited or going to jail. It makes sense that people will generally jump to those conclusions because we hear absolute nightmares all the time. Then, throw in financial insecurity, how complex and confusing taxes are and that the IRS incredibly intimidating. Taxpayers are required to file forms they don’t understand, pay in taxes they don’t know how to calculate, on time, every year, always.

Having a professional on your team is ideal when it comes to dealing with the IRS, however that’s not always possible or necessary.

What is a letter vs a notice?

There is a difference between an IRS letter and Notice. The document will clarify in the header and the most common letter is a LTR12C and most common notice is a CP2000.

A letter is a request for information to confirm what you’ve reported. A common letter is to provide W2’s to prove your withholdings or information on your health insurance if you received a premium tax credit.

Unanswered letters, will result in a return to sit in limbo unprocessed. Therefore, if you have a refund it will be on hold OR could result in a failure to file penalty.

A notice is advising you of changes or a correction to your return.

Are notices the first pieces of mail before they audit me?!

No (at least not necessarily), this is common misconception. Audits actually have nothing to do with a notice. Notices are just corrections, audits occur due to random selection or based on suspicious activity. Although its unclear, many tax pros believe that not responding to notices could result in an audit. However, that is likely after months are years of no response and or repeated misstatements.

Also fun fact, if you are being audited the notice will say “WE ARE AUDITING YOU” at the top. Trust that there will be no confusion!

But why SOOOO many notices???

The IRS has one job: to enforce the tax law as passed by Congress and to “help” taxpayers abide by these laws. They create tax forms, set a “due date,” electronically review what we submit and then attempt to correct/collect based on the systems they have in place.

Before the reform in 2018, the IRS code didn’t change for 30 years and now its changed drastically in the past 5 years. Every form has changed (and did NOT fit on a postcard), the calculations changed, many forms were not even final while we were still required to file them on time. Yes you read that right – forms that the IRS had to finalize were not completed but we were still required to file with them.

We can expect this trend over the next 10 years as our two main political parties battle it out over who should be paying more in tax, the wealthy or the poor?

Furthermore, the IRS e-file system is to reconcile what your return says with the forms they’ve received from other sources (W2s, 1099s, etc.). When you think of the disconnect between these updated/draft forms to all the tax software and the humans on the other end keeping up with changes – you can imagine the cluster that happens and the computer generated notices and letters that happen. The checks and balances are far from being aligned.

You can tell a notice is computer generated by the codes at the top (typically CP2000) and the date issued will usually be a date AFTER you’ve received the notice.

Unfortunately due to all of this, it’s a constant raging river of computer-generated letters and notices being sent out with scary language, numbers and dates. More often than not, the returns are correct as is and the notice is incorrect.

Shouldn’t the IRS be better about this?

Addressing the imbalance of standards that the IRS has with our obligation to report and pay taxes is key when understanding why we have so many letters and notices coming to our door. Their resources, processes, systems, and staffing has always been far less than what is needed to support what they do, especially since the pandemic began. The other main ingredient in this is that their failure of standards doesn’t have real consequences or the resources to change.

It was released just last week that the IRS destroyed $30MIL pieces of incoming mail because the backlog was too big. Therefore, complying taxpayers and millions of hours of tax preparer work was just thrown away. So knowing that, we at least know there will be $30 million additional IRS notices that could have been avoided. The only reason that these were found is because of an IRS audit – we don’t even know what other things have happened or are happening.

Meanwhile, taxpayers must file, pay, and respond on the IRS schedule or else there are severe consequences. And as tax professionals, the complexity and work has skyrocketed all while additionally responding to all of these automated notices.

I could go on, but lets get back to notices…

What are the most common reasons to receive a notice?

There are several reasons people receive notices and many times they are unavoidable. The bottom line often comes down to your return showing something that doesn’t match with what someone else reported to the IRS on your behalf (W2s, 1099s, 1095s, etc.).

Real Estate Transactions – Whenever you sell a piece of real estate there is a form called a 1099-S that is reported to the IRS. The timing of when these forms are filed are not always inline with when tax returns are due. Many times a 1099-S will be received AFTER someone’s tax return was filed and a notice is issued. These ones usually issue scary numbers because they will assume you owe taxes on the entire sales price which is false.

Missing interest, dividends, or stock transactions – There has been a surge in people doing a lot of stock transactions throughout the pandemic. Every time you sell something it is to be reported on your tax return. The rules around stock transactions are also complex so its common for these to be misreported as well. These result in very common notices for tiny adjustments and 1099s are notorious for being late or corrected by the investment companies.

Retirement distributions and rollovers – with the pandemic causing many people to dip into their retirement or changing careers it led to many transactions being done. People can make the mistake of forgetting to include these because its out of the ordinary, or assume nothing is to be reported because it was nontaxable. However, its all reported to the IRS and they will bug you if you don’t include it.

Estimated tax payments/withholdings – if all estimated tax payments don’t line up with their system it will create an error. This occurs from inaccurately reporting your payment amounts or dates or missing withholding from a 1099. Another common issue is when couples get married and file joint for their first time, for some reason the payments associated with the spouse SSN may not get carried to the joint return in the IRS system. This just takes double checking what really happened and providing support.

Stimulus and child tax credits – specifically for tax years 2020 and 2021 there have been constant recalculations and errors within the IRS systems on these credits. Because most people were advanced some of these credits there was a reconciliation on every single return which was input by humans – therefore resulting in tons of errors.

If there was an error do I have to amend?

The proposal on the notice will always be worst case scenario. The reason to amend would be if you have write offs or adjustments that would decrease this worst case scenario, otherwise no need to amend.

Okay, so what do I do if I receive a notice?

Truly, there is only one thing you need to do: RESPOND.

To the IRS, no response equals admitting fault. If it turns out you owe the IRS, ignoring them will only make it worse and they want to work with you as long as you will respond to them. There are many options for payment plans, penalty abatement, offers in compromise, etc. but none of it can be done without a response.

The response can either be to:

Request an extension of time
Accept their changes
Disagree with their changes and provide support

If you have an option to fax your response, ALWAYS fax over mailing… since apparently, the IRS just destroys mail when they have a lot of it (eyeroll).

Calling is a thing everyone dreads to do, but it is the quickest way to clear up your issues IF you’re able to speak with a human. No one can call on your behalf (including your tax preparer) unless they have a power of attorney. Just make sure to be prepared – the worst part is their hold music, it haunts us all.

If you have to mail your response then I’ll be real with you, they may “lose” your response – so you send it again and include the date you sent the original. Sending certified is always a best practice so you have receipts.

But for real, even if you don’t have a penny to give them: respond.

I know I need to respond timely…but what if “hypothetically” I didn’t?

Listen, it’s not always easy to just respond on time. Mail could be sent to old addresses; you can have health issues preventing you from these matters or you don’t have the mental or physical resources to respond. These letters are not easy to read, many of our clients don’t understand what the IRS wants, and therefore it leads to panic/ignoring. Considering the uptick in notices being sent, there will be more people than ever in these difficult positions. It’s a very broken system that needs fixing, the IRS does have a free taxpayer advocate program if you don’t have access to a tax pro.

From the day you receive your first notice you can request more time, it actually takes a while to escalate to collections.

To illustrate what it can look like, here is a timeline of an unanswered notice.

What if I just can’t pay?

The collections process isn’t all that scary once you are cooperating (even if you can’t pay). Work with someone to get on some sort of payment plan or offer in compromise. Many times it can be worth hiring someone to represent you and reduce the balance you owe.

The IRS accepts income based payments over many years and if you can prove financial hardship you can pause collections entirely. However, if you try to just ignore them passed this point it just gets uglier and uglier. After a long period of no response things will lead to liens on property (aka if you sell your property the IRS will be able to take part of the proceeds to clear your title) and garnishments of wages, social security, etc.

In conclusion…

Notices are incredibly common and are not a reason to panic, if anything they are just annoying.

Always respond (or pay) timely.

The IRS needs to do better.

Need help?

The co-author of this blog post, Melina Hopkins of Wealth Tea Inc, is an expert at tax representation and has many success stories of offers in compromise (reducing tax liabilities entirely or less than what was originally owed). She does one off consulting if you need help specific to an issue or notice you’ve received.

Also, check out our AOC directory and filter for tax representation for others who also specialize in this service.

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Authors:

Kelli Loo owner of Kelli Loo CPA and co-founder of Accountants of Color

Melina Hopkins owner of Wealth Tea Inc.

notices + letters from the IRS: why so many and what to do