How to Respond to an IRS Demand for Money
One day you’re opening the mail and you see the dreaded “Official Business” letter from the IRS. Your heart sinks and you get a queasy feeling in your stomach. The IRS is asking for money.
What can you do?
First, you need to pay attention to what kind of notice you received from the IRS. This is vital. There are basically two ways the government attempts to squeeze additional tax from you, the taxpayer:
- Math Error Notices
- Notice of Unreported Income
Responding to Math Error Notices
Let’s first discuss the math error notice. The math notices typically lack clarity and make it extremely difficult for taxpayers to decide whether to accept the adjustment or request abatement. These notices are confusing and, candidly, unfair, often demanding that you pay thousands of dollars, yet the notice does not specify in sufficient detail the nature of the account change.
Below are a few examples of what’s contained in a math error letter. Again, as you can see, the explanations are vague and confusing,
Example One: “We limited your total itemized deductions on your Schedule A, Itemized Deductions, because certain deductions on Schedule A are limited, if your adjusted gross income is more than the maxim
um amount.”28 This explanation is too vague to be easily understood. It is unclear what on Schedule A is being limited— medical expenses on line 4, miscellaneous expenses, on line 27, or the total amount of itemized deductions, on line 29?
Example Two: “We refigured your tax on page 2 of your tax return using the tax table, tax rate schedules, or capital gains tax computations. Because of an error on another part of your tax return we were unable to compute your tax on Form 8615, Tax for Certain Children Who Have Investment Income.”29 This explanation lacks both clarity and specificity. It does not tell the taxpayer what the error is on the return or even on what part of the return the error is located, and thus leaves the taxpayer to review the entire return in order to locate the error the notice is referencing.
So you get one of these math error notices, what do you do? Very simply, file a written demand for abatement of the assessment. Use this language: “This is a notice under the provisions of IRS Code Section 6213(b) that you are to abate the tax liability shown your notice immediately.” Your letter will indicate that the IRS has failed to explain the reasons for the increase, and demand a notice of deficiency “pursuant to IRS code section 6213(a)” if the tax is not going to be abated.
In my experience, what will often happen after you make such a demand is the IRS will simply stop billing you for the alleged tax. They simply go away! However, if the IRS does send you a notice of deficiency, you can exercise your right of appeal, and resolve the matter often in your favor. The appeals process is discussed below...
Responding to a Notice of Unreported Income
Okay, so what do you do about a notice of unreported income? Well the first thing you need to know is that by the IRS’s own statistics, over two thirds of notices of unreported income are erroneous.
For example, let’s say the IRS claims you received a Form 1099 and the notice alleges that income was not reported on your return. The first notice you will receive will allow you 30 days to accept the proposed adjustment or request an appeal.
If you’re going to request an appeal, write a letter demanding abatement and write “As a matter of fact, all income from all sources were accurately reported on my return.” Mail your response before the deadline and keep a copy with proof of mailing, such as certified mail. At this point the IRS will transfer your case to the IRS Appeals Division, a separate part of the IRS. You can get an experienced tax lawyer to help you, or you can handle it yourself. Almost all disputed tax cases are resolved by Appeals.
So what happens if you fail to respond in 30 days or you don’t resolve your case by Appeals? You’ll next receive a Notice of Deficiency via certified mail. A Notice of Deficiency is also called a “90-day letter” because you have 90 days to respond. The IRS is required to prominently display on page one the deadline for you to respond.
This is where it’s wise to employ a tax attorney licensed in U.S. Tax Court because only one response to a Notice of Deficiency is permitted, and that’s by filing a Tax Court petition in the U.S. Tax Court clerk’s office in Washington, D.C. It’s vital you respond on time and you do it correctly because the U.S. Tax Court cannot hear your case if you miss the 90-day deadline. This deadline cannot be extended.
Okay, so what if you blow the 90-day deadline to appeal to U.S. Tax Court? Well believe it or not, all is not lost. While you won’t be able to go to Tax Court, you can challenge the taxes in federal district court or the U.S. Claims Court. However, generally you must pay the taxes first and file a claim for refund. If the refund request is not granted, you can sue for a refund. Sometimes you are required to pay only a portion of the liability, but you can still get into court.
I’ve just reviewed a few of the many IRS notices a taxpayer may receive. Whatever notice you receive, whether it’s a notice of federal tax lien or a notice to levy or a notice for you to pay additional tax, don’t be intimidated. The taxpayer has many opportunities to challenge and win against the IRS as long as you follow the procedures.
If you have an IRS issue, I would love to talk with you. Call me for free 800 659 0525.