For most of us, if we open our mailbox and find a letter from the IRS, we immediately become alarmed. Don’t sweat it just yet. As part of its plans to increase audit coverage, the IRS is doing more correspondence exams. They will initiate a correspondence exam by mailing a notice (for individuals, this is usually a CP2000) which contains proposed adjustments to your income tax return. This is not a bill – it is simply an adjustment notice, based on a comparison of the information reported on your tax return with documents provided to the IRS by third parties such as employers, banks, businesses, and other payers. Correspondence exams can be as simple as asking you to verify tax return data discrepancies or requesting a missing form.
Responding to an IRS notice can be relatively painless although may take some time on your part. Each notice will give specific instructions on what needs to be done to satisfy the inquiry. Don’t automatically assume that the IRS is right, take the time to review the correspondence and compare it with the information on your return. If you agree with the correction, usually no reply is necessary unless a payment is due. If you do not agree with the IRS correction, it is important that you respond as requested. Write to the IRS to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
If you owe, failure to respond by the deadline will result in a second notice, and if there is no reply to that notice, the IRS will issue a statutory notice of deficiency or a 90-day letter. Penalties and interest will be added on to the deficiency. If you are not sure whether the notice is correct, don’t pay any proposed adjustments without contacting your CPA or tax advisor. Your CPA can study the IRS notice along with your tax return and supporting documents and advise you as to whether you should sign the agreement sent with the letter and pay the deficiency.