Why Would I Get a Letter From the Alabama Department of Revenue?

Receiving a letter from the Alabama Department of Revenue (ALDOR) can be concerning, but it does not always signal a serious issue. Notices may request additional information or address matters like unpaid taxes or audits. Understanding the reason for the letter helps ensure an appropriate response and avoids potential penalties.

Request for Missing Data

ALDOR may reach out if a tax return is incomplete or missing required documents. This can happen if a taxpayer forgets to include schedules, supporting forms, or details about deductions or credits. For example, reporting business income without attaching Schedule C may prompt a request for the missing form.

Discrepancies between state and federal filings can also trigger a notice. If Alabama records do not match IRS submissions, the state may ask for clarification. This includes missing W-2 or 1099 forms, even if they were submitted federally. In such cases, ALDOR typically requests copies of the relevant documents.

Certain tax credits require additional proof. For example, those claiming the Alabama Accountability Act tax credit for scholarship donations may need to submit contribution receipts. Deductions for retirement income or education expenses may also require supporting statements.

Income or Filing Discrepancies

ALDOR cross-checks reported income against data from employers, financial institutions, and government agencies. If a taxpayer omits a W-2 or 1099, the return may be flagged for review. Even minor inconsistencies can lead to a notice.

Errors in calculations can also result in adjustments. If ALDOR finds a mistake in taxable income, deductions, or credits, it may correct the return and notify the filer. For example, Alabama’s standard deduction varies by income, and an incorrect application could change the tax bill or refund.

Incorrect filing status is another common issue. Alabama’s tax brackets depend on whether a taxpayer files as single, head of household, or married filing jointly. If the selected status does not align with available records, ALDOR may request documentation or change the filing category, affecting tax liability. For example, if someone files as head of household without meeting residency requirements for a qualifying dependent, the state may reclassify the return.

Unpaid Tax Obligations

ALDOR may send a notice for an outstanding balance from a previous year or an underpayment of current taxes. The letter outlines the amount due, including interest and penalties. Alabama law allows the state to impose interest at the same rate as the IRS, adjusted quarterly. A failure-to-pay penalty of up to 1% per month, capped at 25% of the unpaid amount, may also apply.

If taxes remain unpaid, ALDOR can take collection actions, including placing a lien on personal property or seizing financial assets. In severe cases, the state may garnish wages or intercept state tax refunds. These actions typically follow multiple notices.

Taxpayers unable to pay in full may qualify for an installment agreement. Alabama offers payment plans for balances of at least $50, with terms based on the amount owed. Interest continues to accrue until the debt is paid. Those facing financial hardship may request a temporary delay in collection, though this does not eliminate the debt. Ignoring notices can lead to more aggressive collection efforts.

Potential Audit Notice

An audit notice does not necessarily indicate wrongdoing. Audits verify tax return accuracy and compliance with Alabama tax laws. Certain deductions, credits, or business expenses may prompt a review if they appear unusually high relative to income. For example, a sole proprietor claiming excessive travel and meal expenses may face scrutiny.

Audits can be random or based on risk indicators. Businesses handling large amounts of cash, such as restaurants or convenience stores, are more likely to be audited due to the risk of underreporting income. Frequent amendments to tax returns or consecutive years of reported losses—especially for pass-through entities like LLCs or S corporations—can also increase audit likelihood. ALDOR collaborates with federal agencies and other states to identify discrepancies in multi-jurisdictional filings.

Adjusted Refund

A letter from ALDOR may indicate a refund adjustment due to errors in reported income, credits, or deductions. The notice explains the changes and any resulting balance adjustments.

One common reason for an adjustment is recalculating tax credits. For example, Alabama allows a credit for taxes paid to other states, but if the amount claimed exceeds state limits, ALDOR may reduce the credit and adjust the refund. Similarly, miscalculating the state’s dependent exemption, which varies by income level, can lead to a correction.

Refunds may also be reduced to cover outstanding debts. Alabama participates in the Treasury Offset Program, which allows the state to withhold refunds for unpaid child support, state agency debts, or certain federal obligations. If a refund is applied to an outstanding balance, the notice specifies the amount withheld and the agency receiving the funds. Taxpayers who disagree with the adjustment can appeal by submitting additional documentation or requesting a review within the timeframe outlined in the notice.

Verification of Taxpayer Identity

ALDOR may send an identity verification letter to confirm that a tax return was filed by the legitimate taxpayer. This helps prevent fraudulent filings, particularly when inconsistencies in personal information or unusual filing patterns are detected.

Taxpayers may need to complete an identity verification quiz based on personal and financial history, similar to the IRS’s system. In some cases, ALDOR may request copies of identification documents, such as a driver’s license or Social Security card, along with a copy of the tax return. Failure to respond within the specified timeframe may delay or reject the return.

If identity theft is suspected, ALDOR may place a fraud alert on the taxpayer’s account and require additional steps before processing future returns. Those who believe their information has been compromised should report the issue and consider placing a fraud alert with credit bureaus. Taxpayers can also enroll in the IRS’s Identity Protection PIN program to prevent unauthorized filings in subsequent years.