Why Did I Receive IRS Letter 106c and How Should I Respond?

Receiving a letter from the IRS can be an unsettling experience, especially if it’s unexpected. One such correspondence is IRS Letter 106c, which notifies taxpayers of a partial disallowance related to their tax return. Understanding why you’ve received this letter and knowing how to respond is crucial for resolving any discrepancies efficiently.

Reasons the IRS Sends Letter 106c

The IRS issues Letter 106c when there is a partial disallowance of a claim on a taxpayer’s return. This often happens due to discrepancies between the taxpayer’s reported information and IRS records. For instance, if a taxpayer claims a deduction or credit that the IRS cannot verify, such as charitable contributions, the claim may be partially disallowed. This can occur when documentation does not meet the substantiation requirements outlined in the Internal Revenue Code (IRC) Section 170.

A common scenario involves the Earned Income Tax Credit (EITC). The IRS may partially disallow this credit if reported income exceeds the thresholds established under IRC Section 32 or if there are discrepancies in dependents or filing status. Similarly, errors in calculating tax credits or deductions, such as those related to the Child Tax Credit under IRC Section 24, can result in adjustments. Missteps in accounting for income limits or phase-out thresholds often lead to such issues.

Documentation Requirements

When responding to IRS Letter 106c, gather all relevant documentation supporting your original tax return claims. This includes receipts, invoices, or other proof of expenses and income. For charitable contributions, detailed receipts from organizations should include the date, amount, and nature of the contribution. Contributions exceeding $250 require written acknowledgment as outlined in IRC Section 170.

For EITC-related issues, ensure income statements like W-2s or 1099s align with the IRS’s income thresholds for the relevant tax year. Documents proving eligibility, such as residency records for dependents or school records, can also be critical. If calculation errors are flagged, review your worksheets and ensure your figures conform to IRS guidelines. For example, when dealing with the Child Tax Credit, confirm your supporting documentation accounts for qualifying children and adheres to phase-out thresholds under IRC Section 24. Providing clear, organized records is key to addressing the IRS’s concerns effectively.

Addressing the Partial Disallowance

After gathering the necessary documentation, review the specific reasons for the partial disallowance outlined in Letter 106c. Understanding the IRS’s position allows you to tailor your response effectively. For deductions, ensure your documentation complies with IRS regulations. Consult resources such as IRS Publication 535 for business expenses or Publication 526 for charitable contributions for guidance.

Write a concise response letter explaining why your original claim was valid, supported by the gathered documentation. Include a summary table highlighting discrepancies and any errors in the IRS’s interpretation. This structured approach helps clarify your position and facilitates the review process.

Contact the IRS promptly if additional time is needed to gather documentation or seek professional advice. Engaging a tax professional can be beneficial, particularly for complex issues or large discrepancies. Their expertise ensures your response is accurate and comprehensive.

Adjusting Your Return if Necessary

If the partial disallowance is valid, you may need to amend your return. This involves filing Form 1040-X to correct errors or omissions. Clearly detail the changes being made and provide explanations for each adjustment. For example, if you miscalculated a deduction under IRC Section 179 for business equipment, the amended return should reflect the corrected depreciation schedule.

Recalculate your taxable income and account for any changes to tax credits or deductions. This may result in a refund if you overpaid or additional payment if taxes were underpaid. Address potential interest or penalties proactively when filing the amended return to avoid further complications.

When to Request Further Review

If you believe the partial disallowance was issued in error, you may request further review. This is appropriate when strong evidence supports your original claim, but the IRS has misinterpreted or overlooked critical information. Evaluate whether pursuing further review is likely to succeed, as it can require significant time and effort.

The first step is filing an appeal with the IRS Office of Appeals, which reviews disputes independently of the IRS division that issued the disallowance. Submit a written protest using Form 12203 or a detailed letter outlining your position. Include supporting documentation and explain why you disagree with the disallowance. For example, if a deduction for home office expenses under IRC Section 280A was disallowed, demonstrate how your home office meets the “exclusive use” and “principal place of business” requirements with records like floor plans and utility bills.

If the appeal does not resolve the issue, you may consider taking your case to the United States Tax Court. This step is generally reserved for significant disputes with substantial financial stakes. Consult a tax attorney or enrolled agent before proceeding to assess the strength of your case. Filing a petition with the Tax Court must be done within 90 days of the IRS’s final determination letter, so act promptly and stay organized.

Record-Keeping and Follow-Up

Maintaining thorough, accurate records is crucial for addressing IRS Letter 106c and avoiding future disputes. Proper record-keeping ensures you can substantiate claims on your tax return, reducing the likelihood of discrepancies. For instance, taxpayers claiming business expenses under IRC Section 162 should retain receipts, invoices, and logs of business activities to demonstrate that expenses are ordinary and necessary.

After responding to the IRS or submitting an amended return, monitor the status of your case to ensure resolution. The IRS typically provides updates through written correspondence, but you can also check your account status online or contact the agency directly. Keep a log of all communications, including dates, reference numbers, and representatives’ names, in case further clarification is required.

Conduct regular reviews of your tax records and filing practices to identify areas for improvement. For example, if you frequently claim charitable deductions, develop a system for collecting and organizing donation receipts throughout the year. Periodic reviews by a tax professional can help ensure compliance with evolving tax laws and minimize the risk of future issues with the IRS.