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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.
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!”