It is important for taxpayers to carefully read each piece of mail that the IRS sends them. In the past, the IRS would often initiate contact with a taxpayer via a phone call. Due to numerous telephone scams, including some involving the impersonation of IRS employees, the IRS now initiates all contact by mail.
Most IRS correspondence, whether a letter or notice, generally falls into one of three categories.
- Examination (Audit)
Although many of the letters and notices have the same basic look and contain similar language, there are key distinctions that must be considered.
An examination is the IRS term for an audit; the IRS frequently uses these terms interchangeably. The examination notice or letter received should indicate the type of examination and the initial response requirement.
- Correspondence examination – respond by mail or fax
- Office examination – call the local IRS office to schedule an appointment
- Field examination – call the IRS agent to schedule the meeting time and place
The most important step to take when you received an examination notice or letter is to respond. Ignoring a letter or not responding in a timely matter always makes the situation worse. A taxpayer may choose not to respond, but the IRS will still conduct the examination using the records it already has or can legally obtain. In almost every case, ignoring an IRS examination notice will result in a higher tax assessment than would have been assessed if the taxpayer had responded.
Collection notices operate similarly to the way businesses send bills. When taxpayers fail to pay IRS debt, the language in the notices sent escalates over time from a routine initial notice (bill) requesting payment within 21 days to the taxpayer ultimately receiving a CP 504 notice indicating an intent to levy. A levy, also known as a seizure, is a collection step in which the IRS identifies certain taxpayer assets and moves to legally seize those assets to pay the delinquent taxes.
The IRS understandably prefers full payment, and many taxpayers find it best to borrow from a
bank or another lender to pay the IRS. It’s much easier to owe the local bank than the IRS. Another payment option involves an installment agreement in which the debt is paid monthly like a car loan. These plans can range from 120 days to 72 months.
If you receive an IRS penalty notice you are not alone. In 2017, the IRS sent almost 40 million penalty notices to taxpayers assessing over 26 billion dollars in penalties.
The IRS can reduce these penalty assessments. In 2017, the IRS reduced over four million penalties. Penalty decreases are made under two basic provisions.
- First Time Abatement – this the simplest to request and as the name implies it is for taxpayers who have not had IRS penalties in recent years.
- Reasonable Cause – when the taxpayer exercised ordinary business care and prudence but due to circumstances beyond the taxpayer’s control, was still unable to comply.