Letter from the IRS – What You Should Do

by Neal Frankle, CFP ®

Getting a letter from the IRS is almost never a pleasant experience. Even though I run a pretty tight ship when it comes to my tax return, I’ll admit that I get a little nervous when I see that the Treasury department wants to have a word or two with me. I do my best to avoid IRS audit flags, but sometimes they contact me anyway. There is an alternative to curling up in the fetal position and crying “mama” when you get a letter like this. Here’s how to handle a letter from the IRS:

Understand What’s Going On

In most instances, if you receive a letter from the IRS, they need clarification. It could be that a number they show on your file doesn’t jive with the tax return you prepared. This is called a “correspondence audit” and it’s a simple matter to resolve, but don’t ignore it. If you do, you run the risk of an eventual IRS wage garnishment or worse. Take care of business.

Simply supply the appropriate information and support documentation. If you end up owing more income tax than you reported, there will be penalties and interest charges…but you won’t be going to “the big house.” Don’t get excited. This happens all the time. There…I told you it wouldn’t be that bad.

If the situation is a bit more involved, you may be asked to come in for an office audit. If this happens, they’ll tell you when to come visit and what to bring with you. The IRS boys are going to go through your records very thoroughly, but it will typically be for only one part of your return. Sometimes during this process, the IRS agent will start quizzing you on issues they didn’t spell out in the IRS letter they sent. That’s a dirty trick and you don’t have to fall for it. Tell the agent they didn’t notify you there would be questions on those items and ask for a postponement. Then come back prepared. By exercising your rights this way, you can avoid IRS trouble down the line.

The third type of audit is a field or home audit. This time the IRS is going to come down to see you. These are pretty serious adventures. The IRS sends out their top guns to these audits, and you’re going to need extra protection too.

Should you call in a tax professional?

I must tell you that when it comes to the IRS, I am a chicken. I don’t respond to anything they send me without my CPA first reviewing it. Even if I get a correspondence audit (a simple letter requesting information), I fax it to my CPA and he takes care of it. You better believe that if I got a letter asking for an office or home audit, my CPA would hear about it.

Does it cost money to have a CPA help out with an audit?

Yes. But it’s the best money you could ever spend. The IRS employs some tricky people. They make money by tripping nice people up. I want a seasoned professional when I’m going up against these brutes.

Is having a good CPA to deal with IRS letters enough?

Sadly, no. In order to shield yourself from the wrath (deserved or not) of the IRS, you have to put a few other precautions in place:

1. Keep meticulous records. Have all your tax records, investment statements and cancelled checks (including the cancelled check showing you paid your taxes) for at least 10 years.

2. Take notes on all conversations with the IRS. That includes who you speak with, their identification number and what the recommendations are. Note the date and time you spoke with this person.

3. Avoid problems. More and more people are filing their taxes electronically, and you should do so as well. This is going to reduce the number of times human IRS eyes (is that an oxymoron?) actually review your document. That provides fewer opportunities for them to make a mistake. Also, since your payments are made electronically, it’s less likely that they will misplace your documents.

Have you ever received a letter from the IRS? How did you respond?
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{ 1 comment… read it below or add one }

Pollyanna February 7, 2012 at 6:29 AM

I have received the dreaded IRS letter a few times, all were reconciled with additional paperwork, and once a check for $ due. We shared a vacation home with another couple and had a written agreement we would share in financials – mortgage, interest, etc. but only one soc sec # went to IRS on the bank mortgage interest statement (and it wasn’t ours). Once I supplied IRS with the shared owner agreement nad a detailed letter, they were satisfied. Another time my husband’s former employer sent to IRS a wage tape that was for an old year, so it looked like he had earnings from them (he did not). That was corrected with supporting documentation from the former employer (obviously many people were affected). It is totally intimidating to receive the letter, but keep a level head and provide deep documentation and explanation. That has worked for us.

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