Tax Tips: Three IRS notices to watch out for this summer

Last year, the IRS contacted about 10% of taxpayers. It’s usually in the form of an IRS letter or notice.

Some IRS notices just provide information about the processing of a tax return or payments, but a majority of notices require action by taxpayers to resolve an issue and get back in good standing with the IRS.

During the summer months, after most tax returns have been filed, there are three notices that you might encounter:

1. Refund hold/offset notices

Most taxpayers who file before the deadline get a refund. However, you might have your refund frozen or offset due to an IRS issue. The IRS could suspect that your return is fraudulent or there may be another issue that needs to be resolved, like filing an overdue tax return from a previous year.

Refund offsets sometimes happen if you have outstanding tax debt. The IRS can also take your refund to pay non-tax obligations like overdue child support or past-due student loans. In these situations, you’ll need to get to the root of the matter to get the IRS to release the refund or prevent the same thing from happening next year.

2. Past-due/collection notices

About 30 million taxpayers owe a balance when they file their tax returns. 4-5 million of those can’t pay with the return. If you don’t set up a payment arrangement with the IRS, you’ll receive a series of notices from the IRS throughout the summer. The first arrives in June (the CP14 notice), with the remaining four notices arriving about 35 days apart. The notices stop when you make arrangements with the IRS for the balance you owe.

If you ignore the notices, the IRS can move to collection tactics after the final warning notice (usually a Letter 1058 or LT11, the “final notice of intent to levy”). You can get an extension to pay (up to 120 days) or a payment plan if you owe less than $50,000 using the IRS online payment agreement tool at IRS.gov. If you owe more than $50,000 or have a hardship situation, you will need to contact the IRS directly to make arrangements. What isn’t a good option? Ignore it. That can lead to tax liens and levies.

3. Underreporter notices

The IRS is constantly reviewing returns to see if all income is being reported. The IRS has a program that matches up all tax returns with the tax information statements (Forms W-2, 1099, etc.) that are filed with the IRS. If there is a mismatch, the IRS can send a notice, called a CP2000. CP2000 notices show missing items and discrepancies and propose additional tax, penalties, and interest.

During the summer, the CP2000 notices don’t question the return you just filed, they question the return you filed the year before. If you receive this notice, you’ll need to brush off your old tax records and explain your discrepancies to the IRS. CP2000s result in an average of over $1,600 of additional tax owed.

The notice can also come with a 20% accuracy penalty on top of the tax. You can disagree with this penalty in your response to the IRS if you can show that you made a reasonable attempt to report all of your income.

The bottom line

Taxes aren’t over for millions of taxpayers each summer. Many have to provide more information to get their refund, address a balance owed from the IRS, or explain missing income items on a return they filed over a year ago. It’s easy to put off IRS notices, but doing so is dangerous. Missed deadlines don’t stop the IRS from collecting back taxes or assessing additional taxes and penalties.

How to get expert help

Navigating the IRS while you’re navigating your vacation plans and busy summer activities can be daunting. Tax pros who deal with the IRS regularly can help and they know the steps to resolve the matter and get the best outcome. If you don’t know how to proceed, enlist a tax pro to assist – and enjoy your summer!