What to do if you or your company gets an IRS notice

When you get an IRS notice for yourself or your business, you’re likely to think: They want to audit me. But audits aren’t actually that common, and they’re becoming even less frequent under the IRS’s current budget constraints.
A majority of notices relate to tax returns you filed one or two years ago, but it can be good or bad, says Frank Taylor, tax senior director at BDO USA LLP. Perhaps you made a mathematical error and are due more of a refund, or a 1099 didn’t get to you and now the IRS is proposing an adjustment for additional tax due.
“If you’ve prepared your own tax return, just read the notice and determine what the IRS is doing,” Taylor says. “If you haven’t prepared your return, most people generally forward the notice to their accountant to review and resolve for them.
“The worst thing you can do is to ignore the notice. Do what you can to resolve it.”
Smart Business spoke with Taylor about how to resolve these tax issues.
What’s the first step after receiving an IRS notice?
When you review the notice, locate the tax year and try to hone in on the problem. Most notices begin with the designation CP and then a number. The IRS has been revising its notices in an attempt to make them easier to understand, but you can find detailed descriptions of notice numbers at www.irs.gov under ‘resolving issues.’
The IRS generally mails a notice of an exam or of a correction to a return filing. Never respond to an IRS email or an unsolicited phone call, unless the IRS has already contacted you and you recognize the contact. If you receive what you believe to be a false email, forward it to [email protected]. Be aware numerous scams in the form of false IRS emails or calls are carried out each year during the tax-filing season.
If the notice is for a mistake you made years ago will you need to pay a penalty?
That depends, but you can request abatement from the IRS. For example, if you never received a tax document because you moved, that may be reasonable cause and the IRS might abate the penalty. The IRS also has a first-time administrative waiver program, where if you’ve never had any prior issues it generally takes the penalty off.
What red flags cause a return to get selected for audit by the IRS?
The IRS has different ways to classify returns for audit. Some triggers are if you:

  • Amend a return.
  • Are an individual and have significant losses in relation to your total income from a Schedule C business or a pass through like a partnership or Subchapter S corporation.
  • File a return after a lengthy period in which you haven’t filed.
  • Have international filing issues or financial accounts.

Various IRS programs also can get a return selected for audit. Over the past few years with its bonus depreciation program, the IRS has audited businesses with large fixed asset additions that claimed a significant amount of bonus depreciation, which is 50 percent of those fixed asset additions. The IRS wants to verify that the bonus depreciation is being correctly claimed.
How can you avoid getting an audit notice?
File your returns and pay your tax in a timely fashion. If you claim items of deduction, have the proper documentation. Any large or unusual item will peak the interest of the IRS when it compares your return to everyone else’s. So, if you have a large charitable contribution, even though it’s legitimate, it might trigger an audit.
How long does it take to resolve IRS issues?
It’s going to be very difficult to contact the IRS because of its lack of resources and manpower, which will be frustrating this busy season. The IRS has cut back on the people that answer phones — a recorded voice may want you to hold for a significant length of time before they answer your call.
If you can’t reach the IRS by phone, the next best thing is to write a letter. But it’s going to be a lengthy process. The IRS usually responds by sending a letter that says it’s reviewing your correspondence and will respond back to you in another 30 days.

Basically, send in the IRS correspondence and keep copies of what you send in. Then, follow up as necessary to show you’re actively trying to resolve the issue.

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