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THE IRS NOTICE

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official-notice-of-lienIt’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.

How to Move to the Philippines Manual

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?” –

  1. 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
  2. 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!” 

 

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PaulK

Paul is a CPA and a retired tax accountant, having served companies and corporations of all sizes, as well as individuals, in public accounting practices. Prior to what he refers to as his "real job," he served a 24-year career in the U.S. Navy, retiring as a Master Chief Petty Officer. It was during this career that he met and married his OFW spouse of 40+ years, Emy, while stationed in London, UK. (Though he pleaded for the assignment, Paul never received orders to the Philippines.) A "Phil-phile" from an early age, Paul remembers his first introduction to the Philippines in the primary grades of a parochial elementary school where, one week each year, children donated their pennies to purchase school supplies, food and other necessities for Filipino children in need. That love for Filipinos continues to this day. Calling Pasuquin, Ilocos Norte--in the far northwestern part of Luzon--home (just about as far away from Davao as one can be while still being on one of the major islands) Paul prefers a more relaxed provincial life style, and willingly shares a different view of the Philippines from "up north"!

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Mike
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Mike

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… Read more »

Paul
Guest

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… Read more »

Tim Curtiss
Guest

If you are in the Philippines, how does the IRS know how much you make?

Bob Martin
Guest

It us not difficult for them to track worldwide income.

Freddo
Guest
Freddo

They have eyes & ears everywhere, funded by your tax dollars

Paul
Guest

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… Read more »

Ken Pilbrow
Guest

All countries linked now Internet

Joop
Guest
Joop

After reading all that, do you still want such citizenship??

John
Guest
John

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.

Paul
Guest

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… Read more »

Merlats
Guest
Merlats

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. ?

Paul
Guest

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… Read more »

Merlats
Guest
Merlats

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… Read more »

Oscar
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Oscar

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.

Paul
Guest

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… Read more »

Amery
Guest
Amery

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… Read more »

Paul
Guest

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… Read more »

Amery
Guest
Amery

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!

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