You’ve gotten one. A letter from the IRS, CP XXX (you can find the codes and what they mean here), requesting more information, or telling you the IRS wants more money.
First of all, don’t panic. These “paper” audits are the new enforcement tool the IRS is using. They plan to send out plenty of these.
Secondly, if you submitted your tax return via paper and not electronically, there is a better than 50/50 chance, someone at the IRS did not encode your data properly. (This is one of the prime reasons why the IRS is “requesting” that tax preparers submit returns electronically. The other reason will be listed below.)
And, once you’ve calmed down, figure out what the complaint really is. Often, the issue is that a corrected 1099 was issued (by your stockbroker, for example- the biggest perpetrator of this problem). If the 1099 was corrected after you filed, then it’s pretty clear- whether you like it or not- the IRS will prevail.
If it is NOT a mistake you made (or, worse yet, your tax preparer), then respond to the IRS promptly. Pay the bill if they are right- and if, for example, it was due to a modified 1099, request that any penalties and interests imposed be abated. (Of course, if the 1099 was revised two years ago and you did nothing, then don’t expect the IRS to remove the penalties and interest.)
But, this could be a request for data for last year or the year prior to that. A demand for proof of deductions taken. Or, the denial of a position you took on the tax return. You need to respond promptly. Failure to do so could mean that you will not be able to prevail.
Gather up the information requested and/or the documentation justifying your position and submit it to the IRS. (Or, you could contact an Enrolled Agent, like us, that can deal directly with the IRS for you- and keep your emotional state away from the discussion. This is suggested since the IRS no longer assigns a single individual to an audit- each time you write or call, some new agent must examine the information on file and pick up the conversation from there.)
And, while the IRS may have given you 30 days (sometimes 10, if this is not the first correspondence on the issue), the IRS arrogates to itself a much longer time frame. Many of our clients have received (and some are still receiving) notices stating that the IRS is “reviewing the situation” and will hope to have a response in 30 more days. Repeatedly. (Too bad, we can’t tell the IRS that!) Some 47% of all the cases under review are beyond 45 days- compared to the heretofore (five years ago or so) situation of less than 12%.
The real issue is that, given the current financial situation, the IRS wants to collect money. And, given the current situation, the IRS is very short-handed. Nina Olson, the National Taxpayer Advocate (an IRS “ombudsman” of sorts) has complained about the tremendous imbalance between the IRS workload and its resources. (In other words, way too few personnel.) It’s why the IRS fails to detect fraudulent claims or flags non-existence mistakes- both.
Even with 95,000 employees and a nearly $12 billion budget, it’s not enough. The IRS was provided $ 300 million less this year than last. And, about 1.5 billion less than requested to insure the IRS is effective against tax cheats.
Part of this shortfall is the overall desire by certain parties to cut the budget. But, another part of this shortfall is the hidden desire to insure that the IRS is unable to police the requirements of PPACA (Obamacare), which will be a requirement within two years.
A few years ago we receive a “letter” in the mail – and I freaked! Fortunately, Robert is much more pragmatic (and very organized) and he responded immediately – he sent all the documentation the IRS needed and the issue went away.
Such a valuable post, Roy. Thank you.
Lori Ferguson recently posted..Build each other up.
Glad you found it of interest, Lori.
I love that resolution. It’s the one I work for each time for my clients.
Roy
There I was liking you thinking you were a good guy and you mentioned naughty letters like the IRS. Ick! Thanks for the heads up of information. lol
Shawn recently posted..Keep the Flame Burning in Your Relationship
Ah, Shawn. You propose (pun intended) that married life only works with eyes wide open. I believe that corporate and personal lives need to follow the same precept. Forewarned is forearmed (and I don’t mean tackled by the IRS 🙂 )….
Roy
FLAT SALES TAX! (oh, did I yell?)
Nicole Bandes recently posted..Tip 19 – Create a Life Goal List
Ah, the seduction of the lie.
I was a firm believer in the flat tax- before certain parties got behind it and molested the concept.
First of all, do you realize that a flat tax needs to be about 21% across the board- for corporations AND individuals. Which means most small corporations will need to pay more taxes than they currently do. Secondly, there still needs to be the equivalent of an “Earned Income Credit” to afford those in the bottom rung the ability to survive. Thirdly, the fat cats (the 1%) will scream bloody murder since the 15% tax will be elevated and the “carried interest rule” that lets them off without paying capital gains rates will disappear. Finally, the already beleaguered middle class will have no means to pay for their homes, since interest will not be deductible- which means a big increase in taxable income for them.
The best way to make it work is to incorporate it a smaller flat tax (15%) with a national sales tax of 5% on everything (yes, services, too) BUT food and drugs- so no “cash economy” cheats!
Be careful what you wish for- the results will not be as advertised.
Roy
Years ago, someone from the IRS called to ask about my seminar rates because she was considering hiring me to give an organizing seminar for her staff. I joked that I’d adjust my rates if they’d adjust theirs. She didn’t laugh. It’s a little unnerving to hear from the IRS. Thanks for the heads up and explanation.
Lisa Kanarek recently posted..How to Keep the Promises You Make
Actually, Lisa, they may have asked about your seminar rates for two other reasons. One- to see if you are reporting all your income. Or, two, to check on another consultant in the area to see if they are properly reporting income.
Thanks for the addition! I needed a laugh. (I can just see some IRS agent working naked…)
Roy
Great insight! I’ve had my various accountants file electronically for years. I received one of these “paper audits” in early 2010 for my 2009 tax return regarding my charitable contributions. The IRS alleged that the donation-to-earnings ratio was inconsistent with the norm and asked for paper documentation of all donations, which my CPA provided. About a month later they sent a follow-up stating that the supplied documentation was enough and that the matter was closed.
You are so lucky they followed up in 30 days or so. Most of our clients- unless I can meet someone in person- get a series of “we’re working on it” letters. Taht’s a real problem is you are planning to refinance or are going for a big corporate loan!!!
Thanks so much for your commment, Tor. I value your input.
Roy
Wow, that’s an awful lot of repetition! You should know it by heart, now!