It’s that time of year, taxpayers. The administrative computers at the Internal Revenue Service are automatically cranking out and mailing tens of thousands of notices this summer.
If you are one of the “lucky recipients” of this form of correspondence, then please read on. If you’ve managed to “dodge the bullet,” you may want to continue reading as well – one never knows when one’s number will come up.
The most important thing to know in this situation was best provided by author Douglas Adams in his marvelous tome, The Hitchhiker’s Guide to the Galaxy. It simply advises: “DON’T PANIC!”
WHAT ARE THESE NOTICES?
The notices that I am referring to are the initial letters that taxpayers receive from the IRS. Generally speaking, something or someone at a Service Center has noted an alleged deficiency with a tax return that cannot be simply corrected by a reviewer.
Not all deficiencies are “bad news.” While some result in the assessment of additional taxes (and possibly the assessment of penalties and interest), others result in tax credits or larger refunds. The IRS notice simply lets the taxpayer know of the deficiency and any required steps that the taxpayer may need to take.
“The long and the short of it” is that the notice is something to read immediately (perhaps, twice or thrice) and take seriously. When it comes to IRS notices, delay is your enemy.
HOW’D THEY COME ABOUT?
In most cases, the discrepancy was identified by the IRS computer’s “matching routine.” This software routine is all-encompassing.
It checks the information provided by the taxpayer on his/her income tax return (and key-punched into the IRS’ automated revenue collection system by IRS employees) with information already on file with the IRS. Information from various forms (e.g., W-2, the 1099(series), etc.), as well as filing, withholding, and payment information, already resides in the system. The software routine matches it to the tax return.
“Mismatches” and missing information generate the discrepancy, and if it is reasonably minor, a notice of deficiency is automatically generated and mailed to the taxpayer, without human intervention. A copy is retained in the taxpayer’s IRS records for future reference.
The software routine also identifies computational errors, incorrectly claimed (or not claimed) credits or deductions, and a whole lot of other issues that could generate a deficiency. It also has a “doubt factor” – a substantial doubt will flag the tax return for human audit.
If all of this wasn’t enough, the software routine also randomly selects a very small portion of tax returns received for a casual audit. The only way that a taxpayer would know whether his/her tax return received a random audit would be if a discrepancy is found. Otherwise, the audited tax return continues successful processing.
WHY NOW, AND WHY ME?
Two reasons facilitate the “why now?” –
- All individual income tax returns or requests for an extension of time to file must have been filed by June 15th (taxpayers residing in the U.S.A. have the normal April 15th filing deadline, and taxpayers residing outside the U.S.A. have the automatic extension to June 15th); and
- Processing thousands upon thousands of tax returns does place a “little” burden on the IRS’ automated revenue collection system.
As a majority of taxpayers wait until the very last-minute to file their tax returns or extension requests, you can understand how #2, above, comes about.
The reason facilitating the “why me?” is a little more obvious – an alleged discrepancy was found on “me’s” tax return.
For many taxpayers residing outside of the U.S.A., the discrepancy that was discovered has timing as its root. Many taxpayers, overall, forget that all income taxes are due by April 15th, regardless of when the income tax return is filed. Taxpayers requesting extensions are required to estimate their income tax and pay the amount estimated when filing the extension request.
In any case, taxes paid after April 15th are subject to interest being assessed over the “late payment period,” and possibly being assessed a penalty for the late payment of taxes. Taxpayers outside of the U.S.A. enjoy a benefit of no penalties assessed if their payment of taxes is made by June 15th. They will still be assessed interest for each day that the payment is past due. Pay after June 15th, and penalties will be assessed.
Thus, in those many cases, the IRS notice received is simply a bill, stating what interest (and possible penalties) are due. If the taxpayer was to receive a refund, any interest and penalties due would be deducted from that refund, and the IRS notice serves to inform the taxpayer of that event.
OKAY, I RECEIVED ONE. WHAT DO I DO?
- First and foremost, do not ignore it. Many of the “IRS horror stories” have their origin in a taxpayer putting the notice off “until later” or simply ignoring it.
Hey! You’re dealing primarily with a “brainless computer”! You can’t fight it by ignoring it or putting it off until later. The notice will boldly state a “Response Due By” date. If the IRS doesn’t hear from you by that date, your case will escalate up a notch with a second, more demanding (but not heavy-handed) notice being automatically generated and mailed to you.
Further delay in responding equals further escalation. Ultimately, when it gets to the level of an auditor’s desk, you’ll find that the auditor may not be as understanding as the “brainless computer.” Further escalation equals fireworks!
- Second, read the notice and try to understand just what the exact problem is. Compare the information in the notice with your tax return and with the information you used to prepare the return.
Make sure that the notice is intended for you (by matching your tax identification number – usually your Social Security number – with the tax identification number printed on the notice). Remember: “brainless computer.”
Too, make sure that the information you provided on your tax return is reflected in the notice (you’ll receive a comparison report in the notice showing what you reported and what information the IRS has in its records). Remember: key-punch errors by tired, overworked employees do happen.
If the notice is yours, and your information matches that reported in the notice, then follow the instructions that are included in the notice. There are instructions for what you should do if you agree with the contents of the notice, and instructions for what you should do if you don’t agree.
Most importantly, follow the instructions. Be honest with yourself, and don’t delay.
BUT I RECEIVED THE NOTICE AFTER ITS RESPONSE DUE DATE
This is frequently the case for taxpayers residing outside the U.S.A. whose mailing address is a “foreign address.”
IRS notices are sent to the taxpayer’s mailing address (as stated on the income tax return) via First Class U.S. Mail. That’s all good and fine for taxpayers with an U.S.A. mailing address. For taxpayers with foreign mailing addresses, there’s really no guarantee that you will enjoy timely receipt or even receive the notice at all.
Unfortunately, the system is archaic, and the IRS considers its actual mailing of the notice as its serving notice on the taxpayer. (This archaic serving of notice has been upheld by tax courts, and any defense citing “lack of receipt” is treated in a manner similar to “My dog ate my homework.” Sorry, but true.)
If poor postal service delayed your receipt of the notice, contact the IRS immediately at the telephone number provided in the notice. Be prepared for long “wait times” in the telephone queue. After all, with more taxpayers sharing your complaint of poor postal service overseas now than when the archaic system was set in place, the more telephone calls are being made. Couple that with smaller staffing levels at the IRS, and the result is chaos.
Whatever the situation, don’t give up – you’ll eventually get through. Then, explain your situation to the IRS representative – they’ll kindly let you “off the hook” for your missing the response deadline. They hear the same complaint many times each day, and they understand that using international mail systems is sketchy at best.
IN SUMMARY
If you receive a notice from the IRS, act on it immediately. If you find that you cannot possibly do so, seek the help of a tax professional. Keep in mind the “brainless computer” and the “tired, overworked employees” while you read and digest the notice’s contents. Most importantly, follow the instructions contained in the notice.
Above all – “DON’T PANIC!”
In my case the IRS was forgiving about the “slow mail”. Last year I filed after April 15 and owed tax. The IRS sent the notice for penalty and interest. The “respond by date” was only two days away so I knew there was no way my payment would reach them by the cutoff. I included a note with the payment explaining the postal problem, and told them I knew it would be late. I added that I was sending double the amount of the penalty and interest, assuming there was to be another penalty, and the extra payment would be sufficient to prevent an exchange of mail that may go on and on because of slow mail service. I was pleasantly surprised when the IRS sent me a refund check for my extra payment. Worked for me, so it may work for others who run into the same problem.
Hi Mike – Thanks for sharing your experiences with us. The IRS really isn’t the terrible monster that it makes itself out to be. Unknowingly, you may have been the beneficiary of one or more of the IRS’ lesser-known programs that benefit the taxpayer.
One of those lesser-known programs is First Time Abatement – a taxpayer with a “clean record” (i.e., tax return filings and related tax payments have been timely made over the past 7 tax years, no discrepancies or deficiencies were found, and no penalties and/or interest were ever assessed) may have penalties, being assessed for the first time, abated (removed). The IRS does have leeway with penalties.
Interest, on the other hand, is specified by statute and extremely difficult to abate.
If you are in the Philippines, how does the IRS know how much you make?
It us not difficult for them to track worldwide income.
They have eyes & ears everywhere, funded by your tax dollars
Hi Tim – The answer to that question could fill a book. There are several “methods of discovery” available for each of the numerous types of income that a taxpayer may receive.
The short answer is: “Reporting.” Income received by a taxpayer can be “self-reported” or it can be reported by the income’s payer. In the first instance, its a matter of honesty. In the second instance, its usually a matter of incentive or coercion.
Reporting the payment of money for labor, services, sales, etc. to an income tax agency will either provide a benefit for the report being made (incentive), or a penalty for a report not being made (coercion). Income tax agencies talk to each other (both domestically and internationally). Then, finally, there’s the “someone dropped a dime” method of reporting by which a third party informs an income tax agency of income alleged to be received by a taxpayer.
Many U.S. taxpayers living in the Philippines take the risk of not reporting income and not paying taxes on income they receive in the Philippines. In years past, “getting away with it” might have been easy. It’s becoming increasingly more difficult, these days, as communications among “all players” is greatly enhanced, and political incentives to encourage communications have increased.
I advise all U.S. taxpayers to be honest and follow all current IRS rules and regulations without regard to whether or not “they will get caught.”
All countries linked now Internet
After reading all that, do you still want such citizenship??
I was wondering if that IRS phone number on your notice is toll free from the Philippines or accept collect calls. If I have to wait on hold for an hour I would pay more in a phone call then I do in taxes.
Hi John – IRS notices generally provide a “1-800 toll free” number and a fax number for the taxpayer’s response via telephone; and for taxpayers whose contact mailing address is outside of the U.S.A., they include a separate number for overseas callers.
Phone calls placed to this separate number for overseas callers are “toll” calls (caller pays), however the IRS does handle these calls much quicker than calls received via other numbers.
As I’ve never tried to call the “1-800” number from the Philippines via regular landline services, I cannot say whether or not the “1-800” number will connect with the IRS toll-free. I doubt that an overseas call to the “1-800” number would make it through. You could try it, but don’t count on it.
Like most other government agencies, “collect calls” are generally not accepted by the IRS. The only exceptions are on a case-by-case basis where the taxpayer will be provided with the specific phone number to call (usually to a revenue officer handling the taxpayer’s case).
THE FAX NUMBER – This is the way you can respond to the IRS for almost no cost at all, if you have Internet access. There are various “free fax” services available (such as http://www.faxzero.com) that will allow you to fax your response (maximum three pages in either .doc, .docx, or .pdf format) to the IRS.
Hello Paul!
I hope you could help us figure out how to file electronically here in the phils. since we never have to before…until now. ?
Nothing to it, Merlats. You have plenty of options, which include:
1) Hire someone (like me) to electronically file for you 😉
2) Do it yourself with government help –
a) Go to the IRS website at https://www.irs.gov/
b) Click on the tab marked “Filing” (just below the IRS logo)
c) Within the box labeled “Your Filing Options,” click on the link that says, “Explore electronic filing options.”
d) Learn that you have three options for electronic filing – IRS Free File, Commercial Software, and item 1) above – and explore each one that is presented.
To those who ask me, I always recommend using the on-line tax software at TaxACT, which can be found at https://www.taxact.com/. You can prepare and e-file your Federal income taxes for free with this company. You will be charged for preparing and e-filing State income tax returns.
The reason for this recommendation is simple: I use the professional version of TaxACT software for preparing and e-filing tax returns for many of my clients. On the slight chance that someone following the recommendation has a problem with TaxACT, I can help.
Hello Mr. Paul
I was wondering if you could help me on this coz no matter how hard I read the IRS instructions I just couldn’t take them all in neither is my husband. Its too complex for my brain. You see, my husband and I never had to file electronically before coz we never get to reach the reportable amount of 10k USD. But last year I had to sell my small house I owned for many years here in the phils. for less than 500kphp and coz of that, we had to file electronically coz we reached the reportable amount. My question is what forms do we have to file aside from the 1040 and FBAR. Kindly help us how to go about these. I’m freaking out. We always file joint with me as a non resident alien.
I would appreciate your help very much. Thank you again and God bless.
Hi Paul,
I am a Filipino who is of DUAL citizenship now (Filipino and American). Currently based in NJ. I am wanting to open a consulting firm for business and I.T. registered in U.S., however, most of my market should be in the Philippines. What’s could be the workflow for this in terms of tax payments and social security contributions when my income is coming from the Philippines as I intend to do. I hope for your advice.
Hi Oscar – As I’ve said many times in both articles and comments, when it comes to taxes, there are no simple answers. That being said, I’ll pepper my response with generalizations for helping you, and other readers, receive some “value” from my response:
INCOME TAXES, Individual: As a U.S. citizen, you must report and may pay income taxes on all income you receive during a tax year from all sources, worldwide. As you are based within the U.S., you would not be eligible for excluding income earned in the Philippines from taxable income. Generally, any income you receive that was taxed by another country would generate a Foreign Tax Credit that can be applied against your income tax liability on a dollar-for-dollar basis (preventing double taxation on the same income).
INCOME TAXES, Business: Generally, income tax liabilities for businesses depend on the business’ entity type –
— Corporation – Pays corporate income tax on the business’ net income. Taxes on dividends distributed to shareholders are reported and paid by the shareholders.
— Partnership & S Corporation – Are “flow-through” entities, with responsibilities for any tax liabilities flowing through to the partners/shareholders. Generally, any taxes assessed against a partnership or S Corporation itself would be situational, with the partnership’s or S Corporation’s actions triggering the tax liability.
— Multi-Member Limited Liability Company – Can elect to be treated as either a partnership of as a corporation for income tax purposes.
— Sole Proprietor – Pays income taxes on the business’ net income, but at the lower individual tax rate.
— Single-Member Limited Liability Company – Can elect to be treated as either a corporation or as a “disregarded entity” for income tax purposes. (A “disregarded entity” is not considered to be a tax paying entity and stand on its own for income tax purposes. Generally, the net income from a “disregarded entity” is treated similarly to that of a Sole Proprietor.
SOCIAL SECURITY (FICA) TAXES: Generally, unlike income taxes, the payment of Social Security taxes is determined by 1) who the employer is; 2) where the work or provision of services occurs; and 3) the contents of any Social Security treaty that may be in force.
— Generally, an employee is responsible for paying 1/2 of the Social Security taxes, with the employer being responsible for the other 1/2.
— Generally, self-employed persons are responsible for 100% of the Social Security taxes. (Note: The IRS holds that a taxpayer cannot “work for him/herself,” and is deemed to be self-employed in situations wherein the taxpayer receives compensation – for labor or services rendered – from a business in which the taxpayer has an ownership stake.
— Certain types of income received are deemed to have been the result of self-employment (e.g., a “guaranteed payment” from a partnership) and the recipient is looked upon as being self-employed with respect to paying Social Security taxes on that income.
— Generally, U.S. Social Security taxes must be paid to the IRS on all compensation received by a taxpayer when the physical location of where any work or services rendered actually performed by the taxpayer was within the United States and its Territories and Possessions.
— Generally, Social Security taxes on compensation for work/services actually performed at a physical location outside of the United States and its Territories and Possessions fall under the jurisdiction of the country in which the performance of work/services actually took place.
— Social Security treaties overrule everything. If a treaty is in force, then the treaty’s contents rule every aspect of meeting Social Security tax obligations,
As you can see, no simple answers. Yet, you’ve received a couple of hundred dollars-worth of tax consultation/advice for free. Use it wisely. 😉
Hello Mr. Paul
I was wondering if you could help me on this coz no matter how hard I read the IRS instructions I just couldn’t take them all in neither is my husband. Its too complex for my brain. You see, my husband and I never had to file electronically before coz we never get to reach the reportable amount of 10k USD. But last year I had to sell my small house I owned for many years here in the phils. for less than 500kphp and coz of that, we had to file electronically coz we reached the reportable amount. My question is what forms do we have to file aside from the 1040 and FBAR. Kindly help us how to go about these. I’m freaking out. We always file joint with me as a non resident alien.
I would appreciate your help very much. Thank you again and God bless.
Hi Amery –
The “reportable amount of 10k USD” is the threshold for the FBAR. If the total value of all of your financial accounts here in the Philippines exceeds that amount at any time during the calendar year, you have file the FBAR. E-filing was mandated for FBARs a couple of years ago. So, as you know, if you meet the mandatory filing requirements, you’ll have to file the FBAR.
As for income taxes, if you and your husband file “joint” tax returns, the gross income thresholds for required income tax return filing are (based on age):
Both under age 65……………$20,700
One age 65 or older …………$21,950
Both age 65 or older…………$23,200
If your gross income does not exceed the threshold amount shown for your ages, then you are not required to file an income ta return. If the amount of your gross income exceeds this amount, the you’ll be required to file Form 1040 and any other associated forms and schedules required,
If you sold the house here this year, any profit that you’d generally file a Form
4797 to report the sale and to determine the gain or the loss you may have. If the house was “investment property,” then you’d file a Schedule C instead of the Form 4797. That about covers it based on the info you provided.
If you’d like, we can go over everything on require filing a little more privately. Send
me an email at [email protected].
Hi Sir,
I can never thank you enough for replying. And yes, I will send you an email as I can possibly can.
THANK YOU AND GOD BLESS! Mabuhay ka po!