What to Do If You Receive IRS Proposed Changes

Receiving a notice from the IRS about proposed changes to your tax return can be unsettling, but addressing such notifications promptly is crucial. These proposals often arise from discrepancies found during routine audits or data matching processes. Ignoring them can lead to penalties or interest charges.

Understanding how to navigate these situations helps taxpayers protect their financial interests. Here’s how to respond if you receive a notice of proposed changes from the IRS.

Common Discrepancies

When the IRS proposes changes to a tax return, the issues often stem from discrepancies in the filed documents. Identifying these common problems can help taxpayers respond effectively.

Unreported Income

Unreported income is a frequent issue, occurring when taxpayers fail to include all sources of income on their tax returns. The IRS cross-references forms like W-2s, 1099s, and K-1s against reported income. For example, freelance work or side jobs generating 1099-MISC or 1099-NEC forms must be reported. Overlooked income from investments, partnerships, or trusts is another common cause. To prevent such errors, taxpayers should maintain thorough records and familiarize themselves with relevant forms and deadlines, like the March 15 deadline for S-Corporations and partnerships.

Incorrect Deductions

Claiming deductions incorrectly is another source of discrepancies. Taxpayers may claim ineligible deductions or miscalculate amounts, particularly with itemized deductions such as medical expenses, which must exceed 7.5% of adjusted gross income. Similarly, home office deductions require precise calculations of workspace proportions. Misunderstanding these rules can lead to errors. To avoid this, taxpayers should consult IRS Publication 529 or a tax professional to ensure compliance with deduction rules and limits.

Inaccurate Filing Status

Errors in filing status can significantly impact tax rates, standard deductions, and credit eligibility. Common mistakes include filing as single instead of head of household, which has specific criteria, or incorrectly choosing between ‘Married Filing Jointly’ and ‘Married Filing Separately.’ Reviewing IRS Publication 501 helps clarify filing status requirements, ensuring compliance and optimizing tax obligations.

Calculation Mistakes

Calculation errors, such as arithmetic mistakes or improper application of tax rates, are another frequent problem. Errors in calculating capital gains taxes or credits like the Earned Income Tax Credit (EITC) are common examples. While tax software reduces errors, manual entries still require careful verification. Reviewing tax tables and worksheets in IRS Form 1040 instructions and conducting a thorough audit of the return before submission can help ensure accuracy.

Reviewing the Details

After receiving a notice of proposed changes, the first step is to compare the IRS notice against your records. The notice outlines the discrepancies and proposed adjustments. Carefully reviewing this information helps determine whether the changes are accurate or if there is a basis for disagreement.

Gather all relevant documentation, such as income statements and receipts for deductions, to support your original tax return. Organizing these records systematically facilitates a thorough analysis and prepares you to address the IRS’s concerns. Understanding how the adjustments affect your tax liability, including penalties or interest, is critical. Consulting a tax professional can provide additional clarity, especially for complex cases.

Agreement Procedures

If you find the IRS’s proposed changes accurate, the next step is to agree formally. Follow the instructions in the notice, including completing and returning the response form by the specified deadline. Timely responses prevent additional interest or penalties.

Update your financial records to reflect the adjustments and maintain copies of all correspondence with the IRS. If the changes result in additional taxes owed, explore payment options like the IRS installment agreement. Understanding the terms and fees associated with payment plans ensures effective financial management. A tax advisor can help identify the best payment option for your situation.

Contesting the Changes

If you believe the IRS’s proposed changes are incorrect, contesting them is necessary. Start by drafting a clear and evidence-backed response. Include supporting documents such as receipts or bank statements and reference relevant sections of the Internal Revenue Code to strengthen your argument.

The appeals process begins with a written protest, outlining your position in detail. Follow the guidelines in IRS Publication 5, which explains how to prepare for an appeal. For disputes involving $25,000 or less, a Small Case Request offers a simplified approach. Be aware of the 30-day window to request an appeals conference, as missing deadlines can forfeit your right to appeal.

Additional Charges

Proposed changes often result in additional taxes, along with penalties and interest charges. These can significantly increase the total liability if not addressed promptly. Understanding how these charges are calculated helps taxpayers manage their obligations.

Penalties may include the accuracy-related penalty, which imposes a 20% charge for negligence or substantial understatement of income tax, and failure-to-pay penalties, which accrue monthly at 0.5% of the unpaid tax, up to 25% of the total liability. Taxpayers can request penalty abatement for reasonable causes, such as illness or incorrect advice, but must provide documentation.

Interest charges, calculated daily based on the federal short-term interest rate plus 3%, begin accruing from the original filing deadline. Unlike penalties, interest is rarely abated, making prompt resolution essential. Taxpayers should consider the compounding nature of interest when evaluating payment options.

Deadline Awareness

Timely action is critical when responding to an IRS notice. Each notice specifies a deadline for agreeing, contesting, or providing documentation. Missing these deadlines can result in automatic assessments, additional penalties, or collection actions like liens or levies.

For example, a CP2000 notice typically allows 30 days for a response. If no response is received, the IRS may issue a statutory notice of deficiency, granting an additional 90 days to petition the U.S. Tax Court. Understanding and adhering to these timelines is essential to avoid escalation.

Plan ahead to allow time for gathering documentation, consulting a tax professional, and preparing your response. If you cannot meet a deadline, request an extension before it expires. While extensions are not guaranteed, providing valid reasons and demonstrating good-faith efforts improves the likelihood of approval.