What Is LTR 105C and How Should You Respond to It?

LTR 105C is a notice issued by the IRS in response to specific issues with a tax return. Receiving this letter can be concerning, but understanding its purpose and knowing how to respond can help resolve potential problems efficiently. Ignoring it may lead to delays in refunds or additional tax liabilities.

Handling this notice requires reviewing its details and gathering necessary documentation.

Typical Issues Linked to the Letter

LTR 105C is sent when the IRS disallows a claim due to discrepancies in reported income, deductions, or credits. A common reason is the denial of tax credits like the Earned Income Tax Credit (EITC) or Child Tax Credit (CTC) if eligibility requirements are not met. This can occur if income exceeds limits, dependents do not qualify, or documentation is insufficient.

Another trigger for this notice is the rejection of an amended return. If a taxpayer submits Form 1040-X to correct a previous return, the IRS may disallow changes if they conflict with existing records or fall outside the amendment window. Generally, taxpayers have three years from the original filing date or two years from the date of tax payment to amend a return.

Errors in reported income can also lead to this letter. If third-party sources, such as W-2s or 1099s, report different income than what was filed, the IRS may reject deductions or credits. For instance, underreported self-employment income could result in disallowed business expense deductions and a higher tax liability.

Required Evidence or Paperwork

To address LTR 105C, taxpayers must provide supporting documentation to substantiate their claims or correct errors. If a deduction was denied, records such as receipts, invoices, or bank statements can verify expenses. For business deductions, proof of payment and an explanation linking the expense to business operations can be helpful.

If the issue involves dependents, documents like birth certificates, school records, or medical statements may be needed to confirm relationship and residency. If head of household status is questioned, utility bills or lease agreements can serve as proof.

For income disputes, taxpayers should compare their earnings with IRS records. If discrepancies exist, obtaining corrected W-2s or 1099s from employers is essential. If self-employment income is at issue, profit and loss statements, client invoices, or bank records can clarify the matter.

Adjustments to Filed Returns

LTR 105C often means the IRS has modified a return based on its findings. These adjustments can affect taxable income, filing status, or deductions, potentially leading to a higher tax liability or the loss of certain benefits.

One common adjustment comes from IRS data matching. If reported figures conflict with financial institutions, employers, or other sources, the IRS may revise the return. For instance, if capital gains are misreported, the IRS may adjust the taxable amount using brokerage-provided 1099-B data, potentially increasing taxes owed or reducing a refund.

Changes to filing status can also result in modifications. If the IRS determines a taxpayer does not qualify for a chosen status, such as Married Filing Jointly or Head of Household, it may reassign them to a different category. This can raise the tax burden by altering deductions and tax brackets. Taxpayers who believe the reclassification is incorrect may need to provide supporting documentation or file an appeal.

Refund and Payment Implications

LTR 105C can impact tax liabilities and refunds. If a claim is disallowed, the IRS may reduce or eliminate a refund or demand repayment of any excess funds already issued. This could result in a balance due, subject to interest and late payment penalties under Internal Revenue Code (IRC) 6601 and 6651(a)(2).

Refund delays are common when adjustments are made. If a refund was scheduled for direct deposit but the adjustment results in a balance due, the IRS may offset the amount against outstanding tax liabilities through the Treasury Offset Program. Federal obligations like student loans or child support arrears can also reduce refunds.

If additional tax is owed, taxpayers may set up installment agreements under IRC 6159, allowing payments over time. Interest accrues at the federal short-term rate plus 3%, updated quarterly. Failure to arrange a payment plan can lead to collection actions, including liens or levies.

Responding or Disputing the Notice

Taxpayers who agree with the IRS’s adjustments should follow the notice’s instructions, which may include paying any balance or acknowledging the changes. Payments can be made through the IRS Direct Pay system, EFTPS, or by mailing a check with the provided payment voucher. Those unable to pay in full should consider installment agreements or penalty relief under reasonable cause provisions in IRC 6651.

If a taxpayer disagrees with the IRS’s determination, submitting a dispute is necessary. The notice typically includes a deadline, often 30 or 60 days from issuance, to provide supporting documentation or request an appeal. Responses should include a written explanation and relevant evidence, mailed to the address on the letter. If the issue remains unresolved, a formal appeal with the IRS Office of Appeals may be an option. In significant financial disputes, litigation in U.S. Tax Court could be considered.

Record Management After Receiving the Notice

Maintaining organized records is essential when dealing with LTR 105C. Taxpayers should keep a copy of the notice and any correspondence with the IRS for at least three years, in line with the general statute of limitations for tax assessments under IRC 6501. If a credit or deduction was disallowed, retaining related financial records, such as receipts or bank statements, is advisable in case the issue arises again.

For those who successfully dispute the notice, obtaining written confirmation from the IRS ensures the matter is resolved. This prevents future misunderstandings and confirms any adjustments made to the return. Taxpayers should also update their personal records to reflect changes, ensuring future filings comply with IRS guidelines.