How to Respond to a Tax Notice
Welp…you got a letter from the IRS.
Your first reaction is probably to FREAK OUT. We get it, taxes are scary and we all know what happened to Al Capone. Let’s assume that you didn’t commit massive tax fraud and there is simply some additional paperwork that the IRS would like you to upload to their online portal. While sometimes, a notice can be sent to inform you that you’re being audited, MOST notices we see are some version of “we didn’t receive certain documents so please upload them so we don’t have to change you a $100 penality.”
So let’s all agree not to go into a full panic meltdown and start with these three easy steps instead.
Stop, Drop, and Roll, OR, what to do when you receive a tax notice
1. Pump the “freak out” breaks and take it easy. You’re not ‘in trouble’ and the IRS often gets these notices wrong or is simply trying to communicate a simple request for more information.
2. Put on some fun upbeat 80s dance music and take five minutes to read the notice and determine where the notice came from – it may come from the IRS (which is where you pay federal taxes) or it may come a state or city where you also pay taxes.
3. Review what tax year the notice is referring to and reach out to the accountant that filed your tax return for that year. If Brooklyn FI prepared the return and you are a client, scan every page (please send us every page!) and send it over to your tax team.
So what exactly is a tax notice? Most of the notices we see are one of the following things:
1. Asking for more information about a previously filed return.
2. Letting you know they received additional information that wasn’t on the original return you filed which may result in additional tax owed or even an additional refund. The most common issue here is that a person forgot to report a 1099 (either for freelance work or for equities or bonds they sold).
3. Letting you know there is a delay in processing your return, audit, or refund.
What a tax notice is NOT
1. Evidence that the tax return was filed incorrectly
2. Evidence that you made a mistake or are in trouble
Important Things to Know
1. The deadlines provided are not often “real” deadlines. You should do your best to respond promptly but typically the deadlines are there to just get you moving. Notices are often missing recently provided information, so you may receive notices that are superfluous.
2. The IRS and state revenue agencies (like New York and California) are extremely understaffed and slow. They are often hard to communicate with so patience is key.
3. There isn’t always action required! Sometimes, the notice can be a small adjustment from a prior year. If it’s a refund due to you, there is often no action required. If you’ve ever played Monopoly, this is similar to the “Bank Error in Your Favor” Community Chest card.
4. Often the notices are about small adjustments of a few hundred dollars and there may be no action to take except to pay the additional tax. If you receive a CP501 notice, often your best course of action is to pay the tax (your tax preparer can help you determine if the IRS or the state made an error). The easiest way to pay the tax is online via the Payments portal.
5. Typically, you’ll find very clear instructions for any action you need to take. Typically, that requires you to upload a missing document to an online portal. Keep copies of the letter and all correspondence for your records.
6. The best way to check the status of your payments and other information regarding the notice is through the online portals for each jurisdiction.