What Is a Tax Notice and What Should You Do?
Decode and respond to tax notices effectively. Understand official communications from tax authorities and your next steps.
Tax authorities, such as the Internal Revenue Service (IRS) or state tax departments, use official correspondence called tax notices to communicate important information about a taxpayer’s account or obligations. While receiving a tax notice can cause concern, it is a formal communication requiring attention and a timely response. Understanding their purpose is the first step in addressing any issues.
Decoding Your Tax Notice
Each tax notice contains specific details, including a notice or form number (e.g., IRS CP or LTR series), often in the upper right-hand corner. This number helps identify the notice’s content. Notices also state the relevant tax year, any financial implications like amounts due or refund adjustments, and contact information for the tax agency.
Common reasons for receiving a notice include discrepancies between reported income and agency records (often from W-2 or 1099 forms), missing return information, tax underpayments, or refund adjustments due to calculation errors. Underpayment of taxes can lead to penalties and interest charges. The IRS assesses underpayment penalties, and interest accrues daily on unpaid balances. For individuals, the interest rate on underpayments is generally the federal short-term rate plus three percentage points, which for much of 2025 has been around 7% annually. Understanding these components allows taxpayers to begin investigating the reason for the notice and determine the appropriate course of action.
Common Types of Tax Notices
Tax notices vary in purpose and content. Common types include:
Balance Due Notices: Such as IRS CP14 or CP501, these inform taxpayers of additional tax, penalties, and interest owed for a specific tax year. They detail the amount and due date. Penalties for failure to pay can be 0.5% of unpaid taxes per month, up to 25%.
Requests for Additional Information: These are issued when the tax agency needs clarification or documentation to support claims on a tax return. This might involve verifying deductions, credits, or reported income.
Refund Adjustment Notices: Like IRS CP12, these indicate that the tax authority has changed the taxpayer’s refund amount. This occurs due to corrections or discrepancies found on the return.
Audit Initiation Letters: These formally notify a taxpayer that their return has been selected for examination. The notice specifies the tax year and the audit’s scope, which could range from specific items to a comprehensive review. Audits may arise from mismatches between reported income and third-party data.
Identity Verification Notices: Such as IRS Letters 5071C or 4883C, these confirm a taxpayer’s identity, especially if a suspicious return was filed in their name. They prevent fraudulent tax filings and require specific steps to confirm identity.
Responding to a Tax Notice
Upon receiving a tax notice, carefully read the entire notice to identify the notice number, the tax year it concerns, and especially the response deadline. Missing a deadline can lead to additional penalties, interest, or loss of appeal rights. Understanding the specific issue presented in the notice is crucial before taking any action.
Gather all relevant tax records and supporting documents related to the issue, such as W-2s, 1099s, receipts, cancelled checks, and previous tax returns. For notices concerning income discrepancies, collect all third-party income statements. If the notice involves deductions, ensure you have receipts or invoices to substantiate those claims.
If the notice is complex, involves a significant amount of money, or initiates an audit, consider consulting a tax professional like a Certified Public Accountant or an Enrolled Agent. They can help interpret the notice and guide your response.
When responding, adhere strictly to the stated deadlines. Many notices require a response within 30 or 60 days, while a Notice of Deficiency, for example, typically provides 90 days to petition the Tax Court. Response methods often include mail, though some agencies offer secure online portals for certain interactions. If communicating by phone, use the number provided on the notice and keep detailed notes, including the date, time, and the name of the representative.
Always send only copies of documents, never originals, and keep meticulous records of all correspondence, including a copy of what you send. Using certified mail with a return receipt for mailed responses provides proof of delivery, which can be important for dispute resolution. After submitting your response, processing times can vary, and further communication may follow until the issue is fully resolved.