What Does IRS Letter 4364C Mean and How Should You Respond?

Receiving a letter from the IRS can be unsettling, especially when it’s unclear what it entails. Letter 4364C is one such correspondence taxpayers may encounter. Understanding its purpose is crucial for maintaining compliance and ensuring smooth communication with tax authorities.

Reasons the IRS May Issue This Notice

IRS Letter 4364C is sent when discrepancies arise between the information reported on a taxpayer’s return and data the IRS has on file. These differences often result from third-party reporting entities, such as employers or financial institutions, submitting conflicting information. This could involve discrepancies in wages, dividends, or other income types, prompting the IRS to seek clarification.

The notice may also address potential errors or omissions in a taxpayer’s filing. The IRS uses algorithms and data analytics to flag anomalies that suggest underreporting or misreporting of income. For example, inconsistencies in claimed deductions or credits that don’t align with a taxpayer’s financial profile or historical filing patterns may trigger the notice.

In some cases, the IRS issues Letter 4364C as part of compliance initiatives targeting specific taxpayer groups or industries. These efforts focus on areas with higher instances of underreporting, such as sectors with significant cash transactions.

Verification of Reported Income

Verification of reported income is a central aspect of IRS Letter 4364C. Taxpayers are often required to substantiate their income with documentation such as W-2s, 1099s, or other financial records. The IRS cross-checks these documents with third-party submissions to ensure consistency with the taxpayer’s return.

Taxpayers should gather all relevant documents to support their reported income. For self-employed individuals, maintaining detailed records of invoices, receipts, and bank statements is essential. These materials help reconcile discrepancies and confirm the accuracy of reported figures.

Adjustments to Refund or Balance

If discrepancies are identified, the IRS may adjust a taxpayer’s refund or balance due. Such adjustments can significantly impact finances, as the IRS recalculates the return based on verified information. This could result in increased tax liability or changes to a refund. For example, if unreported income is found, the balance due may rise, potentially incurring additional interest and penalties.

Interest on additional tax owed accrues from the original due date of the return until the liability is fully paid, as outlined in Internal Revenue Code (IRC) Section 6601. Penalties, such as the underpayment penalty detailed in IRC Section 6662, may also apply. This penalty can add 20% to the additional tax owed if underreporting exceeds certain thresholds.

Steps to Submit Requested Details

Responding to IRS Letter 4364C requires accuracy and organization. Start by carefully reviewing the notice to determine the specific information requested. Identify discrepancies and gather documentation to support the figures reported on your return.

Organize the documents to address each issue raised in the notice. A cover letter summarizing your response and referencing the attached documents can be helpful. Ensure all copies are legible and include your taxpayer identification number on each page for proper identification.

Possible Actions If You Don’t Respond

Failing to respond to IRS Letter 4364C can lead to serious consequences. The IRS may adjust your return without your input, a process known as a “substitute for return” (SFR). This adjustment typically assumes all reported income while disregarding deductions, credits, or exemptions, often resulting in a higher tax liability and additional penalties.

If the adjusted balance remains unpaid, the IRS may initiate collection activities, including liens or levies on assets. Under IRC Section 6321, a federal tax lien can attach to your property, while IRC Section 6331 allows for levies on wages, bank accounts, or other holdings. These actions can create immediate financial strain, damage credit scores, and limit access to future financing. Ignoring the notice may also increase scrutiny in future tax years.