If you receive a notice from the IRS, what do you do? What do they want? What can they do to you? How do I respond? Although it is best to talk to a licensed tax professional such as our experienced tax attorneys, we will briefly answer these questions and give you a short overview of the process.
STEP 1: DON'T PANIC
Receiving a notice from the IRS can be intimidating. Nowadays the IRS is seen as the big bad wolf that can legally ruin your life for breaking some tax law you were never aware of. However, this isn't exactly true.
The IRS does not have unfettered authority to do whatever it wants. The IRS is bound by the law just as much as you are. The only difference is, they know the process and you probably don't.
Just know, they cannot immediately repossess everything you own or throw you in prison for owing taxes without following proper time-consuming procedures and allowing you a chance to address problems.
Something important to remember is that this is not personal. Having to deal with actions form the IRS may feel personal, but the IRS agents are simply doing their job. They are not targeting you personally. It is normal to feel angry but try to keep your emotions out of your communications with the agents as this will help the process move much smoother.
Better yet, contact a licensed tax professional and let them talk to the IRS on your behalf. It can be beneficial to engage a tax attorney to communicate and negotiate a solution for you. An initial consultation can do a great deal to ease your mind and avoid the panic of not knowing what to do about your notice.
STEP 2: CAREFULLY READ THE NOTICE
The notice from the IRS more or less tells you why they are contacting you. When reading the notice, you need to ask the question, what do they want? The IRS will usually request one of two things from you: documents/information or money. However, before you provide anything, you first need to determine where you are in the process.
Some notices can contain hidden issues that you can miss if you don't know what you are looking for. To make sure you don't miss any of these issues, it's a good idea to have a licensed tax professional review your notice with you. That way you can be sure you are getting the best outcome possible.
STEP 3: DETERMINE WHERE YOU ARE IN THE PROCESS
There are two basic stages in the IRS process: 1) Audit and 2) Collections. If you are in audit, you still have a chance to contest the IRS's decision. If you are in collections, you will have to take care of the balance, but you still have options on how to take care of the balance.
In an audit, you do not owe any money to the IRS, at least not yet. A notice for an audit will either request information/documents or have the word “proposed” on the first page of the notice. For example, “Proposed Assessment”, “Proposed Amount Due”, etc.
Collection notices in contrast will inform you that a balance is due. It may even state what actions they will take to collect the taxes owed. However, just know that you do have options if you owe taxes. It may be a good idea to discuss these options with a licensed tax professional as some options are better than others depending on your situation.
STEP 4: RESPOND TO THE IRS NOTICE
If you receive a notice from the IRS, you cannot simply ignore it and hope the problem goes away. You can't just shred it and forget it. The earlier you can respond to the notice, the better your chances are of a positive outcome. However, make sure you take the time to include all the documents and information necessary in your response.
If you submit an incomplete response, you might have to respond a second time which will extend the process. Remember, if you do end up owing taxes, interest will continue to accrue until the balance is taken care of so, time is money.
Which documents to include or exclude with your response can be a bit tricky depending on your situation. An agent may request unnecessary or even damaging to your case. On the other hand, you may want to prove something specific with your case but aren't sure what documents to provide or how to present them.
An experienced tax professional, such as our tax attorneys, can review your notice and discuss how best to respond. Tax attorneys present your documents in a light most positive to your situation and write a compelling written response that is easy for the IRS agent to understand.
There are three stages of the audit process: 1) assessment, 2) proposed assessment, and 3) notice of deficiency. You can determine which stage you are at by the notice you receive. This is important to know as each of these stages must be handled differently.
If you are in the assessment stage, your notice will simply be asking for documents or information. Your notice will have a Form 4564 titled “Information Document Request” with a list of what the IRS agent is requesting.
In this case, simply provide the documents and information that the IRS agent is requesting. Make sure your documents are clean, neat, and organized. Include a cover letter with a list of the documents and answers to the questions. The easier it is for the agent to review your documents and answers, the faster the agent will be able to conduct the review.
In the proposed assessment stage, your notice will likely have the word “proposed” somewhere on the front page. At this stage, the agent has reviewed your matter and made a decision. However, the agent's decision is not final.
At the proposed assessment stage, you might need to hire a CPA, Enrolled Agent, or Tax Attorney to help you with your matter as some proposed assessments can be quite complicated. In any case, be sure to thoroughly review the notice. If the notice is correct, you can accept the changes. If it is not correct, you can contest the agent's decision.
To contest the agent's decision, you will need to prepare a written response. Write a formal letter that explains why the agent's decision is incorrect. Include the notice you received with documents that prove your explanation is correct. Again, make sure your letter and documents are clean, neat, and organized to better help the examiner review your response.
Notice of Deficiency:
A notice of deficiency will say “Notice of Deficiency” somewhere on the first page of the notice. This is the agent's final decision on your matter. You will receive this notice by certified mail from the IRS.
Review the agent's explanation. If the agent's decision is correct, you can accept the changes and move into collections. If the agent's decision is incorrect, you will have to file a petition with the US Tax Court to get it resolved. At this point, you can represent yourself however, it is best to hire a licensed tax attorney to handle your case.
If your notice shows a balance owed, not merely a proposed amount due, then your case is in collections. At this point, it is no longer possible to contest the agent, appeals officer, or tax court decision. It may even be possible that a levy or lien action is being taken against you.
It is important to know in the case of a levy or lien that as soon as you take action to resolve the balance owed, the levy or lien action will pause or be removed. If your case is in tax collections, there are three options you can pursue. You can 1) pay the balance, 2) enroll in a payment plan or installment agreement, or 3) pursue an offer in compromise.
Pay the Balance
This is usually the best option for low tax balance amounts. It is important to remember that the longer it takes to resolve your tax debt, the more you will have to pay in interest. You can pay the balance through the mail by following the instructions on your IRS notice or pay online through the IRS website.
Be sure to keep any verification that you made your payments. If you pay through the mail, send the payment by certified mail and keep the receipt. If you pay online, make sure you print the payment verification page for your records.
Enroll In a Payment Plan or Installment Agreement
If you are like most people, you probably can't pay the entire balance in a lump sum. If this is the case, you can apply for a payment plan online or submit the necessary forms and documents for an income-based installment agreement. Your choice will depend on your financial situation.
A payment plan is a good option for those who do not have a very high balance or for those whose income is too high to qualify for an income-based collections solution. The process is pretty straight forward, you would simply go to the IRS website and apply for the payment plan. It is possible to stretch your payment plan to as many as seventy-two monthly installments but remember, interest will continue to accrue during the life of your payment plan so more time is more money paid.
If you have a high balance and/or low income, you might want to try applying for an income-based installment plan. If this is the case, I would suggest hiring an experienced tax attorney to complete the forms for you as they can be quite complicated. You will need to provide a “Collection Information Statement” for you and your spouse, a completed installment agreement form with the payment offer, and any relevant income documents needed to prove your financial situation.
Again, this can be quite complicated so it may be worth it to hire a professional such as a tax attorney to help you collect documents, fill out the forms, and submit them to the correct office at the IRS. This option is also not a guarantee and may take some time to complete as it's more a negotiation for an installment agreement rather than an application to be accepted or rejected.
Make an Offer in Compromise (OIC)
If you can pay a portion, but not all, of the balance in a lump sum, you may want to submit an “Offer in Compromise” (OIC) to the IRS Collections Department. An OIC is the tax equivalent of a debt settlement. You offer to pay a portion of the tax debt in a lump sum, or a few lump sums, and the IRS agrees to discharge the rest of the tax liability.
Similar to the installment agreement, the OIC is an income-based collections solution. It is only available to those who can show a low monthly net income and meet the requirements to apply for an OIC. These requirements are found on the IRS website. You will need to provide a “Collection Information Statement” for you and your spouse, a completed OIC form indicating the payment offer, and any relevant income documents needed to prove your financial situation.
Again, it may be worth it to hire a licensed tax attorney to handle the OIC for you. These forms can get quite complicated, and negotiations can be quite time-consuming if you don't know what you are doing. Also, an attorney can also help you determine the appropriate offer amount so you don't offer more than necessary to satisfy your tax debt.
Although it can be intimidating to receive a notice from the IRS there is no need to panic. As long as you read the notice carefully, know where you are in the process, and respond to the IRS appropriately your interactions with the IRS can go from torturous to pretty satisfying. Although in this life taxes are certain, unlike death, they are nothing to be afraid of if you understand the process.
If you would like help with your IRS notice, please don't hesitate to contact our office. Our knowledgeable staff has a great deal of experience and is ready to help. It is the mission of The Law Office of Pietro Canestrelli to take the fear and stress out of dealing with these taxing authorities so that our clients can move on with their lives.
We offer a free consultation, and we'll gladly discuss your case with you at your convenience.