Why Did I Receive an IRS Tax Letter and What Should I Do?

Receiving a letter from the IRS can be an unexpected and stressful experience for many taxpayers. These communications are important and should not be ignored, as they may contain critical information about your tax situation or require specific actions on your part.

Common Reasons a Letter May Arrive

The IRS sends letters for various reasons, each with unique implications and required actions. A common reason is discrepancies between the information reported on your tax return and the data the IRS has on file. For example, mismatches in income reporting, such as differences between your reported wages and the amounts reported by your employer on Form W-2 or inconsistencies in 1099 forms, may trigger a notice. The IRS uses automated systems to identify such discrepancies.

Another reason is the need for additional information to process your return. This could occur if certain forms or schedules were omitted or if clarification is required on deductions or credits claimed. For instance, if you claimed the Earned Income Tax Credit (EITC) but did not provide sufficient documentation, the IRS may request specific evidence. These requests detail the exact documents needed to resolve the issue.

Errors in calculations can also prompt a letter. While tax software and professional preparers reduce the likelihood of mistakes, they can still occur. The IRS may correct these errors and adjust your refund or tax liability accordingly. For instance, if your taxable income was miscalculated, the IRS will recalculate it and notify you of the resulting changes.

Categories of Notices

The IRS categorizes its notices into several types, each serving a specific purpose. Understanding these categories can help taxpayers identify the nature of the letter they received and determine the appropriate course of action.

Information Requests

Information requests ask for additional documentation or clarification on specific items reported on your tax return. For example, if you claimed a deduction for charitable contributions, the IRS might request receipts or acknowledgment letters from the charitable organizations to verify the amounts claimed. Taxpayers must maintain records of contributions, and failure to provide adequate documentation can result in the disallowance of the deduction. Responding promptly with the requested information can ensure your return is processed without delay. Keep copies of all correspondence and documents sent to the IRS for your records.

Review or Adjustment Notices

Review or adjustment notices indicate that the IRS has identified discrepancies or errors on your tax return. These notices may result in changes to your tax liability. For example, if the IRS finds an error in your reported income, they will issue a notice with the corrected figures and the resulting tax implications. Taxpayers have the right to contest these adjustments by filing a petition with the Tax Court within 90 days of receiving the notice. Carefully compare the notice with your original return to determine whether the adjustments are accurate. If you disagree, additional documentation or professional assistance may be needed to resolve the issue.

Payment Communications

Payment communications relate to outstanding tax liabilities and may inform you of a balance due, provide payment instructions, or outline the consequences of non-payment, such as penalties and interest. The IRS charges interest on unpaid taxes, compounded daily, and late payment penalties can accrue monthly, up to a maximum of 25% of the unpaid amount. If you receive such a notice, verify the accuracy of the amount owed and explore payment options, such as installment agreements or offers in compromise, if you cannot pay in full immediately. Timely communication with the IRS can help avoid additional penalties and interest.

Audit Notifications

Audit notifications indicate that your tax return has been selected for examination. Audits may be conducted through correspondence or in-person meetings, depending on the complexity of the issues. The IRS selects returns for audit based on factors such as random selection, document matching, and specific criteria outlined in the IRS Audit Technique Guides. If you receive an audit notice, gather relevant documentation, such as receipts, bank statements, and financial records, to support the items reported on your return. Engaging a tax professional, such as a CPA or tax attorney, can help you navigate the audit process and ensure compliance. Understanding your rights during an audit, as outlined in IRS Publication 1, can also help you manage the situation effectively.

Verifying Authenticity

Ensuring the authenticity of an IRS letter is critical to protecting your personal and financial information. The IRS does not initiate contact via email, text messages, or social media to request personal or financial information. Genuine IRS correspondence always arrives through the United States Postal Service.

Authentic IRS notices include your truncated tax identification number, such as the last four digits of your Social Security Number, and detailed information about your tax account. They reference the specific tax year and form in question, providing context for the communication. For example, a notice concerning your 2024 tax return might reference Form 1040. The letter will also include a contact number for verification, alongside a notice number that can be cross-referenced on the IRS website.

The physical appearance of the notice can also provide clues. Official IRS letters are printed on letterhead, feature the IRS seal, and include a notice number in the upper right corner. If details such as typographical errors or unusual language seem suspicious, it may indicate fraud. Cross-referencing the notice number on the IRS website can confirm its legitimacy.

Action Steps

Upon receiving an IRS letter, carefully read and understand its contents. Each notice outlines specific instructions or requests, so a thorough review is necessary to determine the exact nature of the issue. Pay close attention to deadlines for response or payment to avoid additional penalties or interest.

Next, gather relevant documents to support your response, such as W-2s, 1099s, receipts, or bank statements. If the notice involves a review or adjustment, compare the IRS’s figures with your records to identify discrepancies. Decide whether to accept the IRS’s findings or dispute them. For example, if the IRS recalculated your taxable income, ensure their computations align with the applicable tax brackets and rates for the tax year in question. Consulting a tax professional can be beneficial if the notice involves complex tax matters.

Possible Outcomes

Your response to an IRS notice can lead to various outcomes. If you provide the requested documentation and resolve the issue, the matter may conclude without changes to your tax liability. This is often the case with information requests where the taxpayer’s records substantiate the claims made on the return. Maintaining accurate and organized financial records can facilitate efficient responses and compliance.

If an adjustment notice results in a recalculated tax liability that you agree with, you may need to pay additional taxes or receive an adjusted refund. For example, if the IRS corrects an error that results in higher taxable income, you may owe additional taxes plus interest from the original due date of the return. Conversely, if the correction results in a larger refund, the IRS will issue the additional amount, potentially with interest if delayed.

If you disagree with the IRS’s findings, you can appeal the decision through the IRS Office of Appeals, which resolves tax disputes without going to court. This process requires a clear understanding of tax laws and evidence to support your case. If the appeal does not resolve the issue, you may pursue litigation in the U.S. Tax Court, where a judge will make a final ruling. While this can be a lengthy and costly process, it provides a way to contest IRS determinations you believe are incorrect.