IRS notices

Reading an IRS notice without panicking

The envelope arrives, the return address says Internal Revenue Service, and your stomach drops before you have read a single word of it. That reaction is almost always out of proportion to what is inside.

I get the call the same day, usually within an hour of the post arriving. The client has not opened it, or has opened it and read the first line and stopped. People tell me they left it on the kitchen counter for a week. One client kept one in a drawer for three months, which turned a small correction into an expensive one.

The letter is not the problem. Not reading the letter is the problem.

A letter is not an audit

The first thing almost everyone assumes is that they are being audited. That is the word that comes to mind, because it is the only word most people have for contact from the IRS.

An examination is a specific thing. Someone is assigned to your return, they ask for records, and there is a process with a person on the other end of it. That is a small share of the mail that goes out. The overwhelming majority of what lands in a taxpayer's letterbox never involves a human being looking at the return at all.

What the letter actually is

Most notices are automated document matching. A third party reported a figure to the IRS, a brokerage, an employer, a payment processor, a lender. The system compares that figure to what appeared on the return. If the two do not agree, a letter goes out automatically.

That is worth sitting with, because it changes what the letter is. It is a proposal. It says, based on what we were told by somebody else, we think the number should be different, and here is what that would mean. It is not a finding, and it is not a decision.

Almost none of these are an audit. Most are a computer noticing two numbers that do not agree.

Every notice carries a type code, usually printed in the top corner or along the top right. That code is the first thing to read, ahead of the amount, ahead of everything. It tells you which kind of letter you have. A proposed change from document matching, a balance due, a request for a missing form, a notice that a refund was adjusted, and a genuine examination letter are all different animals, and they are distinguished by that code rather than by the tone of the text.

Clients read the dollar figure first and the code never. The figure is the part that frightens you. The code is the part that tells you what to do.

The range of outcomes

Where these land varies widely, and it varies by what caused the mismatch rather than by the size of the number in the letter. At one end, no change at all. The third party reported something that was already on the return in a different place, or reported it wrongly, and one letter back with the supporting document ends it.

In the middle, a partial adjustment. Some of the proposal stands and some of it falls away once the basis, the cost, or the offsetting item is supplied. A brokerage reporting gross proceeds without a cost basis is the classic version of this, where the proposed figure can be dramatically larger than the real one.

At the far end, a real bill, with interest and possibly a penalty, because something genuinely was missed. A meaningful share of these are resolved by a single well-documented letter and nothing more. But which end you land on depends on what the records show, and on responding inside the window.

What responding actually requires

The mechanics are unglamorous and they matter more than the arguing.

• Read the deadline before you read the amount. It is usually stated in days from the date of the letter, not from the day you opened it.
• Respond in writing, referencing the notice number and the tax year, on every page you send.
• Send documents that show the figure, not an explanation of the figure. A statement beats a sentence.
• Keep proof of what you sent and when. Certified post or the equivalent, and a copy of the whole package.
• Never ignore it. A notice that goes unanswered is treated as agreed, and the proposal becomes the assessment.

If you cannot meet the deadline, that is usually something that can be handled, but it has to be handled before the date rather than explained after it.

If it genuinely is an examination

There is no group of people this article does not apply to, because everybody eventually gets a letter. So use this section for the other case. Sometimes the code does say examination, and then the advice changes.

Stop handling it yourself. Not because you will say something incriminating, but because an examination has scope, and scope is negotiable at the start and very hard to narrow later. An answer given helpfully and informally can widen the years or the issues under review. That is the single most common way a contained examination becomes an uncontained one.

The other moment to stop handling it yourself is when the notice involves a year you did not prepare, an issue you do not understand, or a figure you cannot document. Those are not stubbornness problems. They are evidence problems, and someone who does this regularly will know which evidence the reviewer is actually asking for.

The window is the whole thing

Every notice has a response window, and those windows differ by letter type and change over time, so read the one in front of you rather than the one you remember. Some rights, including the right to dispute a proposal before it becomes an assessment, exist only inside that window.

That is what turns a small problem into a large one. Not the mistake. The silence. A letter answered in week two is a piece of admin. The same letter answered in month five is a collection matter, with interest running the whole time.

The point

This is a planning question as much as a preparation question. Most notices trace back to a document nobody matched during the year, a reporting form that arrived late, or a figure that was never reconciled. Charter works with owners through the year so the paperwork agrees with itself before anyone else compares it.

This is general information, not advice on your own situation. Whether any of it applies to you depends on facts this article does not know.