We have been busy this summer responding to an extraordinary increase in correspondence from the IRS. With a tax gap of over $350 billion per year and increased congressional funding for IRS enforcement efforts, the IRS appears to be stepping up efforts to enforce collections and close some of the tax gap. According to an article in Accounting Today1, from 2001 to 2009 there has been a 670 percent increase in IRS notices. It’s also paying off for the IRS…78% of audits in 2010 collected an average $6,600 in additional taxes.
Updated IRS information systems are making it easier for them to match your sources of income from your employer and investment accounts. Income that is not accounted for properly will automatically generate notices from the IRS. Deductions that are excessive for your income level may be flagged and reviewed for further inquiry.
The most common notice is the CP2000 – Underreported Income Adjustment. This is triggered when the IRS computers find income listed with your Social Security number that wasn’t fully reported on your tax return. This could easily happen because:
It was an oversight by the taxpayer and the income was omitted
Someone else is using the taxpayer’s Social Security number
The income was reported in a different (or the wrong) place on the tax return
Other types of notices you may receive:
CP11 – Discrepancy in Earned Income or Other Credits
CP12/CP13 – Math Error Notices (IRS Adjustments)
CP14 – Changes in Return, Balance Due
CP23/24 – Estimated Tax Discrepancies
CP80/CP88 – Applied Credits or Refund Hold Do to Missing Tax Return
CP90 – Final Notice of Intent to Levy
CP91 – Final Notice Before Levy of Social Security Benefits
CP515 – Notice that a Return is Overdue
CP2501 – Income Verification Notice
You can find a complete list of IRS notices here
If you receive a notice, pay attention to the “Tax Year” shown on the notice. It is listed in the upper right heading of the notice just below the “Tax Form” in question. The IRS may be two or three years behind on issuing some notices.
Not all notices are accurate, and the IRS is prone to mistakes just as often as the taxpayer. But it is imperative that you (or your CPA) respond to the notice as soon as possible. Most issues can be solved by writing to the IRS. Expect several months to get a response (if you get one at all). Failure to respond will generate further notices, penalties and interest, and possibly a lien against your home or a levy against your wages or bank account, or even criminal action. If you do owe money, you can often set up an installment agreement with the IRS to pay your tax liability over time. There is an additional fee for this and penalties and interest will continue to accrue.
If you don’t respond to the first notice, you will receive a second notice, CP503 – Reminder of your Balance Due. A third notice, CP504, will be sent 30 days after the second. If you still fail to respond, a fourth notice will be sent by certified mail 30 days after the third notice is sent. This final and fourth notice also declares the IRS’s intent to levy and inform you of your right to a hearing. If payment is not received within 30 days of the fourth notice being received by you, the IRS has the right to seize your property or garnish your wages.
By signing a Power of Attorney form (Form 2848), you can authorize your CPA to represent you before the IRS on all tax matters. If you’re not sure how to deal with IRS notices, or if you get a letter requesting an audit, we are here to help. Just give us a call.
1 Source: Buttonow, Jim – Accounting Today: The Notice Boom, July 1, 2011