How to Handle a Notice From the IRS

How to Handle a Notice From the IRS
Tip: Don’t Panic

The IRS sends millions of notices every year to U.S. taxpayers.  Don’t panic if you receive one.  Some notices are informational and require no action on the part of the taxpayer.  Other notices are sent to request more information. Read the notice carefully; it will have instructions on how to respond if a response is needed.  

The following are some of the reasons that the IRS may issue you a notice:

• You have a balance due.
• Your refund amount has been adjusted.
• They have a question about your tax return or need additional information.
• They need to verify your identity.
• They changed an amount on your tax return.
• They need to notify you of delays in processing your return.

Many notices from the IRS are to inform you that they have made changes to your tax return.  The changes may be due to mistakes you made on your return, additional income that was reported to the IRS by a third party, or a proposed change to your return after an IRS review or audit.  The notice will explain why a change is being made and, if penalties are being assessed, the reason for the penalties.

If you agree with the IRS notice and owe additional tax, pay the amount due by the date stated in the notice.  If you can’t pay the full amount, pay as much as you can.  You may qualify for a Payment Agreement or an Offer in Compromise, which can be requested online.  An Offer in Compromise allows you to settle your debt for less than you owe but is limited to certain circumstances, such as financial hardship.

Resolving IRS Disputes
If you disagree with the IRS notice, things can get a little more complicated.  There are multiple options for resolving IRS disputes including the following: 

1. Write a letter to the IRS

Write a letter explaining why you disagree with the notice.  It is important to respond promptly to help minimize additional interest and penalties on balances due and to help preserve your right to appeal.   Your letter, along with any documentation that supports your argument, should be sent to the address shown on the notice.  With proper documentation, issues can generally be resolved.  Allow the IRS a minimum of 30 days to respond to your letter.

If you wish to speak to someone at the IRS,  use the contact phone number provided in your notice.  Taxpayers have a right to know what they need to do to comply with tax laws and to receive prompt, courteous and professional assistance from the IRS. 

2. Contact Taxpayer Advocate Service (TAS)

TAS is an independent agency within the IRS.  They work on your behalf to try to resolve any problems you have with the IRS.  TAS can help in the following situations:

• Your problem with the IRS is causing financial difficulties for you, your family, or your business.
• You face an immediate threat of adverse action.
• You have tried repeatedly to contact the IRS, but no one has responded, or the IRS hasn’t responded by the date promised.

3. Appeal the IRS decision

If you are not satisfied with the IRS’ response to your letter, you have the right to appeal to the Office of Appeals.  This is an independent organization within the IRS that helps taxpayers resolve their tax disputes through an informal administrative process.  The goal of the Office of Appeals is to resolve tax disputes fairly and impartially without litigation.  Also, you have the right to request that the issue be referred to the national office staff for technical advice. 

Generally, appeals can be filed for the following reasons:

• You believe the IRS made an incorrect decision based on a misinterpretation of the law.
• You believe the IRS didn’t properly apply the law due to a misunderstanding of the facts.
• You believe the IRS is taking inappropriate collection action against you.
• Your Offer in Compromise was denied and you disagree with that decision.
• The facts used by the IRS are incorrect.

4. Request mediation

If there are issues that are unresolved after working with the Office of Appeals, you may request a non-binding mediation (where a neutral third party will help you try to reach a settlement) or binding arbitration (where you and the IRS will be bound by a third party’s decision). 

5. Petition the Tax Court

If you receive a statutory notice of deficiency proposing to adjust the amount of tax you owe, the notice will provide you with a right to challenge the proposed adjustment in Tax Court.  If you choose this option, you will not be required to pay the proposed tax liability unless the Tax Court renders a decision that is not in your favor. 

To take advantage of this right, you must petition the Tax Court within 90 days of the date on the notice (or 150 days if the taxpayer’s address on the notice is outside the United States or the taxpayer is out of the country at the time the notice is mailed). 

6. File an amended return

If you have already paid the tax that is in dispute, you may need to explore different avenues to resolve the issue.  The first option is simply to request a refund from the IRS.  This is done by filing an amended tax return for the year in question.  The amended tax return should include an explanation as to why you are requesting a refund and documentation to support your request.

7. File a claim in the U.S. District Court or Court of Federal Claims

If the IRS denies your request for a refund, you may file a protest with the Office of Appeals.  If you are not satisfied with the conclusion reached by the Office of Appeals, you may file a refund suit in court.  However, the Tax Court only has authority to settle disputes of deficiencies in federal taxes prior to their payment and will not hear a refund suit for taxes that were already paid.  Therefore, if you wish to file suit against the IRS to obtain a refund, you must file a claim with the U.S. District Court or the Court of Federal Claims.

There are several differences between these two courts including the ability by taxpayers to request a trial by jury in a U.S. District Court, but no jury is allowed in the Court of Federal Claims (or the Tax Court).

8. Appeal to a Higher Court

Decisions of the Tax Court, the U.S. District Court, and the Court of Federal Claims may be appealed to the Circuit Court of Appeals.  Circuit Court of Appeals decisions may be appealed to the U.S. Supreme Court.  As you work through the court process, there is no guarantee that the higher courts, after reviewing the decisions of the lower courts, will agree to hear your case. All decisions of the U.S. Supreme Court are final, unless the U.S. Supreme Court overrules itself. 

Other Things to Consider
There are many decisions to consider when choosing which direction to take to resolve a dispute with the IRS.  In general, it is best to try to resolve disputes with the IRS before going to court.  Litigating a dispute can be costly and information about your personal or business finances may become public knowledge if you take your case to court.  It is best to discuss your situation with a tax expert or legal advisor before deciding how to proceed.

You should also consider state implications when working through issues with the IRS.  A favorable resolution with the IRS may result in an opportunity to make a favorable change to your state tax return.  However, if the dispute drags out too long, the statute of limitations could make it too late to make changes to a state tax return. However, some states allow taxpayers to file a protective claim for refund regarding unresolved tax matters. This allows taxpayers the opportunity to amend state returns when tax matters are resolved even though the state statute of limitations has expired.  

If you have any additional questions regarding IRS notice process, please feel free to contact any Herbein tax team member. 

Article written by Michele Burkins. For additional information contact us at info@herbein.com.