Why Is the IRS Sending Me a Letter and What Should I Do?
Understand why the IRS may contact you and learn the steps to address their inquiries effectively.
Receiving a letter from the IRS can be an unexpected and often stressful experience for many taxpayers. However, such correspondence doesn’t necessarily imply wrongdoing or penalties. These letters serve various purposes, from simple clarifications to more complex inquiries. Understanding why you’ve received a specific notice is crucial to addressing any potential issues effectively.
Identity Verification Requests
Identity verification requests from the IRS are increasingly common as a safeguard against identity theft. These requests ensure the person filing the return is the rightful owner of the Social Security number or taxpayer identification number being used. Letters like the 5071C or 4883C may ask you to verify your identity before processing your tax return.
Respond promptly and accurately by following the IRS’s instructions, which may include using the Identity Verification Service website or calling a designated number. You’ll need documents like your previous and current tax returns, along with supporting forms such as W-2s or 1099s. This process prevents delays and secures your personal information. If online or phone verification fails, the IRS might require an in-person visit to a local office, which can be scheduled in advance.
Be cautious of scams—the IRS will never ask for personal information through email or text.
Adjustments in Filings
IRS notices about adjustments often stem from discrepancies between your tax return and data reported by employers, financial institutions, or other third parties. For example, if your reported wages differ from what’s on your W-2, or if interest or dividend income doesn’t match Form 1099, the IRS may issue a CP2000 notice outlining proposed changes. This isn’t a formal audit but a request for clarification or correction.
Review the notice carefully and compare it with your records. If you agree with the adjustment, follow the instructions to resolve it. If you disagree, provide supporting documentation to contest the changes. Adjustments can also result from changes in tax laws, such as modifications under the Tax Cuts and Jobs Act, which impacted deductions like the state and local tax (SALT) deduction cap. Staying informed about tax legislation and consulting a professional can help avoid such issues.
Clarification on Income or Deductions
IRS inquiries about income or deductions often arise when documentation is unclear or incomplete. For example, self-employed individuals may face scrutiny if their Schedule C income doesn’t align with IRS records or if deductions seem unusually high relative to industry norms.
Business expense deductions are a frequent area of review. Under the Internal Revenue Code, ordinary and necessary business expenses are deductible, but taxpayers must substantiate these with detailed records, such as dates and business purposes for travel expenses. Similarly, charitable contributions claimed on Schedule A may require receipts or appraisals, particularly for non-cash contributions exceeding $500. With fewer taxpayers itemizing due to increased standard deductions, those who do must maintain meticulous records.
Potential Payment Revisions
Potential payment revisions typically indicate a re-evaluation of your tax liability. These changes may result from new tax credits, miscalculations, or overlooked deductions. For instance, the enhanced Child Tax Credit or changes in tax brackets may lead to adjustments in the amount owed or refunded. Taxpayers who missed claiming credits or misunderstood eligibility criteria may see favorable revisions.
Discrepancies in estimated tax payments or withholding amounts can also trigger revisions. Self-employed individuals relying on quarterly estimated payments might face penalties for underpayment, while employees with incorrect Form W-4 withholding could encounter unexpected liabilities. Periodic review of withholding amounts, especially after significant life events, helps ensure alignment with current obligations.
Additional Documentation Inquiries
The IRS may request additional documentation to verify specific claims on your tax return, such as tax credits, deductions, or exemptions. These requests often aim to validate entries rather than address discrepancies. For instance, if you claimed the Earned Income Tax Credit (EITC), the IRS might ask for proof of qualifying dependents or income thresholds.
Significant business expenses or non-cash charitable contributions may also prompt documentation requests. For example, deductions for donated property valued over $5,000 require a qualified appraisal, and business meal deductions must comply with the 50% limitation under tax rules. Failure to provide proper documentation can result in disallowed deductions or increased liability.
Follow the instructions in the notice to submit the required documents, either by mail or through the IRS online portal. Keeping organized records throughout the year simplifies this process and reduces the risk of errors. If you’re unsure about your documentation, consult a tax professional for guidance.