By Jim Buttonow, CPA, CITP
You've finished the bulk of tax preparation. Sit back and relax.
But don't get too comfortable, because you can also expect the IRS to start studying the accuracy of returns and taking action on misreporting, underpayments, and errors. The IRS sends most notices to taxpayers within eighteen months after they file.
Here are the most common notices practitioners can expect to see this year just after filing.
Error notices from paper returns
More than 20 percent of paper returns have errors, according to the IRS. If your client's return has an error, the IRS will send your client a notice with its changes after processing the return. Check these notices carefully, because they don't always describe the error clearly. Such notices often require a closer second look at the return and a call to the IRS Practitioner Priority Service line at (866) 860-4259 to determine the cause.
Math error notices
In 2011, the IRS sent out more than five million math error notices. Under the IRS' math error procedures, the IRS is allowed to adjust tax returns, reducing taxpayer refunds. But math errors can be more than just addition and subtraction. The IRS often disallows credits and reduces refunds. For example, during 2009 and 2010, the IRS pre-emptively disallowed almost a quarter million homebuyer credit claims under its math error procedures.
Best-in-Practice Tips to Better Serve Your Clients Who Receive IRS Notices
- Be proactive
- Check the notice for accuracy
- Respond quickly and well before the due date
- If you need to respond in writing, use the IRS's accepted format
Balance due notices
In 2009, twenty-two million tax returns were filed with a balance due. Most taxpayers pay their balances when they file their returns. When taxpayers don't pay, the IRS sends a CP14 balance due notice about four weeks after return processing. This is the first notice to pay. If your client can't pay in full, immediately get your client into an installment agreement or request up to 120 days to pay. The IRS will allow streamlined installment agreements for up to $50,000. Establishing an installment agreement also reduces the failure-to-pay penalty.
Late-filing penalty notices
Look for penalty notices if your client owes taxes and the IRS processed the return late. In these cases, you should provide proof of filing to the IRS, or, if it was your client's first instance of filing late, request first-time abatement of the penalty.
Estimated tax penalty assessment notices
IRS records from 2009 suggest that almost thirty million taxpayers could be making estimated tax payments for self-employment, retirement, or investment income – but that only about ten million taxpayers actually make the payments. Taxpayers who fail to make required estimated tax payments could face an estimated tax penalty. Fortunately, most tax software proposes this addition.
Missing return notices
In 2011, the IRS investigated more than 3.8 million returns that were never filed. Most taxpayers in this group file when they discover the error or when they receive notification from the IRS that the return wasn't processed. About a month after returns are due, the IRS starts gathering data on taxpayers who haven't filed. Several months later, the IRS starts sending CP59 notices to taxpayers who the IRS thinks should have filed. The IRS will pursue taxpayers it thinks will owe additional taxes based on information statements it has on file, such as forms W-2 and 1099.
Notices are inevitable in any tax practice. The IRS sent more than 201 million notices to 155 million taxpayers in 2009 alone. Best-in-practice firms employ simple methods to serve their clients in this area:
Be proactive. Use Form 8821, Tax Information Authorization, to be copied on your client's notices, rather than relying on the tax return designation or waiting for your client to give you the notice. The IRS will not automatically send notices to the tax return designee. Listing your firm as the appointee on Form 8821 will allow anyone in your firm to contact the IRS for information on behalf of your client. Most notices sent just after filing are not audit notices and can be easily handled by a staff member with a firmwide Form 8821.
Check the notice for accuracy. Verify the notice against your client's records, the filed return, and IRS records. You may need to match your client's payments to his or her IRS transcript. If the IRS posted a payment incorrectly, you would need to request that the IRS repost the payment to the correct year. This often occurs with estimated tax payment discrepancy notices (CP23, CP24, and CP25).
Respond quickly and well before the due date. Don't let deadlines slip. Missing a deadline can be detrimental to you and your client. For example, you must reply to a math error notice within sixty days, or the adjustment is considered final, without the right to appeal. At that point, your only option is to file an amended return with the IRS and wait. If the response requires documentation, send it well before the due date, because the IRS is overloaded with correspondence processing.
If you have to respond in writing, use the IRS' accepted format. Writing and communicating with the IRS has always been a challenge, but simple techniques go a long way:
- On every page, list your client's Taxpayer Identification Number and the page number (e.g., Page ___ of ___), especially if you're faxing the documents. The IRS receives more than twenty million pieces of correspondence annually; if your documents get mixed up and can't be sorted, they may end up in the shredder.
- Add a cover letter with the year, tax form, and a list of attachments to all correspondence. Make the cover page like an IRS form that the IRS representative can easily process.
- Be clear about what you want in the letter. If appeals options are available, indicate that you want an appeal if the IRS disagrees with your conclusion.
The period after tax prep season is a good time to attract new clients - but it can also be a time to lose a client because of an IRS notice. Be proactive, efficient, and effective when your client receives a notice. You'll ease your client's concerns, and your client will tell others about your services as his or her trusted advisor, all year long.