Keep Calm and Reply On

By Nathan Alexander, CPA, CFP(R)

Few experiences are as jarring as receiving correspondence from the Internal Revenue Service (IRS). Here are some tips on how to prepare an appropriate response and what to expect along the way if you get an IRS letter in the mail.

According to a report given to Congress on January 10, 2024 by National Taxpayer Advocate Erin M. Collins, as of October 2023 taxpayer correspondence more than doubled from 2019 levels, which equates to 4.3 million pieces of mail, and nearly 70% of pending cases exceeded normal processing times. In fact, the IRS decided to prioritize answering telephone calls over processing amended returns and correspondence. Clearly, the IRS resource allocation choices will have an impact on the public when it comes to an orderly settlement of a particular person’s tax issue.

The first thing to keep in mind is that your correspondence doesn’t necessarily mean you or your tax preparer did something wrong or you have a problem. However, you should absolutely take the notice seriously and assume there may be a time- sensitive reply needed after you have examined the document. Clients will often suggest calling the IRS first rather than taking the time to formulate a written reply. It doesn’t hurt to try to resolve the notice by calling the number listed. Unfortunately, however, resolving the issue that triggered a notice often requires written correspondence and a bit of patience as the IRS reviews your response. This is because there are limited issues that IRS customer service representatives may resolve over the telephone. Please also keep in mind that many notices are computer- generated and are unlikely to have been reviewed for accuracy before mailing. Also note that the IRS will send duplicate notices to both members of a married/joint household, but you do not need to reply twice.

When writing back to the IRS, here is how to organize your reply and what to include:

• Always send a full copy of the IRS notice along.
• Include your letter (or that of your preparer) indicating any relevant evidence you/your preparer believe will support your position, usually addressed to IRS at the mailing address found at the top left corner of the notice (respond to the service center that wrote to you).
• If the notice is a proposed assessment of additional tax, for example, you may need to include a copy of the pages of the return you filed if you believe you did report the income that the IRS is not recognizing.
• In your letter, ask the IRS “to please place a 90-day hold on any collection to allow time for this response to be reviewed and evidence considered.”
• Include copies of earlier responses if you have been communicating about the same matter in earlier letters to other service centers.

Once you send your reply, you can expect to wait up to 60 days to get a letter in the mail that says “we received your letter, but give us 60 or 90 days to get back to you.” This letter doesn’t require a reply, but should be retained as it is evidence that the IRS received the initial correspondence. 

During the 60-day (or 90-day) period after you first write to the IRS, if the matter involves a potential additional tax, the IRS will continue to bill you which is perhaps the most frustrating part of the process. These bills are computer-generated, and are not an indication that the IRS disagrees with your original response. Rather, the bills simply get mailed out while the IRS considers your first letter. Often we advise clients to reply to these letters with a copy of the first correspondence, but that can be optional.

Presently, we are finding it’s taking the IRS up to 9 months to provide a satisfactory response to the initial letter and evidence we provided, but it’s not uncommon that we must write to the IRS two or three times throughout as we respond to multiple bills.

Here are a few tips to reduce the risk of a notice in the first place:

• Electronically file tax returns as often as possible.
• We recommend that all correspondence and tax filings be sent via certified mail.
• Keep very good records of estimated tax payments to be sure you are claiming the correct payment on the correct return, as a large percentage of IRS correspondence deals with misapplication of estimated payment or payments claimed on the incorrect year’s return.

Be aware that the IRS has an independent arm called the Taxpayer Advocate Service (www.taxpayeradvocate.irs.gov) which is tasked with helping out taxpayers whose resolution has been lost in the shuffle, or where wait times are even greater than 9+ months. While not a guarantee of a positive outcome, it is easy to engage their help and saves paying the tax preparer to keep checking in with the IRS.

So, if you receive an IRS notice, don’t panic, but do start planning an effective response. While your tax preparer is always your first line of defense, as your trusted advisors we are happy to take a look at any correspondence you do not understand or offer some guidance as to the best way to formulate a reply.