Why You May Get a Letter From the IRS & What to Do
Don’t panic: Receiving a letter from the IRS isn’t necessarily a bad thing, but it definitely can’t go unnoticed.
Getting a letter actually addressed to you personally is becoming a thing of the past, what with email and social media taking over a lot of our correspondence.
Nonetheless, you still received a letter addressed to you from the IRS. Your first reaction may be to wonder what you did wrong.
The IRS doesn’t always deliver bad news by mail. The agency may want to inform you that you have a larger refund than you expected, or that it simply needs some additional information or some extra time (if the processing of your return is delayed). Sometimes, you don’t have to take action on the notice, but sometimes you do. The IRS will send you a letter through the U.S. Mail if:
- You owe more than you submitted,
- You need to answer a query about your return, or
- You must verify your identity or provide more information.
If you get a message that claims to be from the IRS in email or on social media, it’s not. The agency only communicates with taxpayers via U.S. Mail. Go to this page to see how to report the fraudulent note.
Letters from the IRS, though, need to be responded to in a timely manner. If you are given a deadline, you must answer within that time-frame. If you don’t, you may incur additional interest and penalty charges. You may also put your right to appeal in jeopardy.
Money you owe needs to be submitted as soon as possible. If you absolutely can’t pay in full, at least pay what you can. Payments can be made online. You can also request an Online Payment Agreement or Offer in Compromise. Please contact us if you have any questions regarding tax payments as we can tell you more about these options.
Here are some other tips from the IRS:
Read through the entire letter at least once and make sure you understand what is being said. Let us know if you are at all unsure of the situation. Your return may have been changed by the IRS, in which case you should compare the modifications to your original return.
The agency may also believe that the return was submitted fraudulently and not by you. You’ll be asked to verify your identity if identity theft is suspected.
Contact the IRS immediately if you don’t agree with its findings or if you have questions. There should be a phone number in the upper right-hand corner of the letter. Before you call, gather together your return and any other documents that relate to it. You can also respond in a letter of your own, but know that it can take at least 30 days to get a response from the agency.
Of course, you will also be contacted by the IRS through the U.S. Mail if you’ve been selected for an audit. Again, this doesn’t mean that the agency suspects that there are errors in your tax return. Some taxpayers are selected randomly. However, you don’t want to go through an audit alone.
We are very familiar with the IRS and letters sent to taxpayers, so we can assist you throughout the process.
Whether you get an audit notice from the IRS or any other kind of correspondence that concerns you, let us help. Call the office today!
Questions and Answers: IRS Audits and Your Dental Practice
Being selected for an audit doesn’t mean that you’re suspected of incorrectly reporting your taxes for your dental practice.
There’s no getting around it: The prospect of being audited by the IRS is unnerving, but the agency chooses to audit individuals and businesses for a number of reasons, including:
- Mismatched documents. If numbers from forms like W-2s and 1099s don’t match what was reported, a taxpayer may be targeted.
- Proximity. When someone has a business relationship with someone else who’s being audited, like a partner or investor, an audit may be ordered because of shared issues and/or transactions.
- No reason at all. Some are selected for audits simply because a statistical formula was applied and they came up.
What is an IRS audit?
The goal of an IRS audit is to determine whether the taxpayer has paid the correct amount of money in taxes. This is done by examining the taxpayer’s accounts and financial information.
How will I be contacted?
You’ll receive a phone call and/or a letter. The initial contact is never made via email.
Where will the audit be held?
There are many options. An audit may occur at an IRS office, or it may be at your home, your place of business, or at an accountant’s office. It may also be done through the U.S. Mail.
How long will it take?
There are many factors that have impact on the length of an audit, including complexity of the issues and availability of both the necessary records and the involved parties. An audit will of course take longer if the IRS and the taxpayer(s) have difficulty agreeing on the results.
How long after I’ve filed a return can the IRS still order an audit?
Audits are usually conducted within three years from the date a specific tax return was filed, so you should keep supporting documentation for at least that long. You should keep payroll records for a minimum of four years. In some cases, a longer period of safekeeping is needed. We can help you determine what should be stored and for how long.
What are my rights as an audited taxpayer?
There are many. The IRS has a publication called Your Rights as a Taxpayer. These include the right to:
- Courteous, professional treatment by IRS representatives.
- Confidentiality and privacy.
- Representation, either by you or by an authorized representative.
How is the outcome of an audit determined?
An IRS audit can conclude in one of three ways. There can be no change, which means that you have provided information that the IRS accepts as valid, and the return does not have to be modified. In an audit that is agreed, the IRS has recommended changes based on the information provided. You understand them and agree with them. An audit can also be disagreed. The IRS has proposed changes, but you don’t agree with them. In a case like this, the IRS may call in a manager to review the findings. You also have the right to file an appeal.
Is there any way to avoid being audited?
Since some audits are selected randomly, there’s always a chance that you’ll be audited. However, there are red flags in tax returns that sometimes prompt the IRS to order an audit. We can tell you what these are, and we’ll prepare your return accurately and thoroughly to minimize your chances of being singled out.
Tax Audit Red Flag – Money Losing Business(es)
The fifth article in our series about IRS audit red flags focuses on claims about businesses losing money. It’s one thing to have an occasional loss, especially during economic downturns when businesses everywhere are losing money. Rest assured, however, that the IRS knows the current trends of businesses and industries on a local and national level. If something smells rotten in the state of Denmark, or Small Town, USA, they are sure to do enough digging to get to the bottom of the story.
If your dental practice fails to turn a profit for three of the past five years, IRS professionals are going to want more than a little evidence of efforts to turn a profit. It’s a huge red flag to wave and a serious indication that perhaps there are ulterior motives for owning and operating your practice.
And watch out if you claim a business that is really a hobby. The IRS isn’t keen on the idea of taxpayers writing off expenses for their hobby that they label as a “business.”
A start-up business may not make a profit in Year One or perhaps even in Year Two, but when no profit is made in the third year or succeeding years, the IRS will begin to think that this “business” is really a hobby because it is not making money. The IRS offers more insight into the determination of a business or hobby here.
Other things that get extra scrutiny from the IRS for small businesses include putting relatives on the payroll, over-estimating business expenses and using a company car for personal reasons.
In the event that this red flag triggers an audit for you, be sure to keep meticulous financial records. In addition, do other things, such as having business cards and a business license, to demonstrate that you own and operate a real business.
Avoiding these red flags is not always possible, but you can minimize them by giving the IRS fewer flags flying and making your business a less attractive target for their further inspection.
Tax Audit Red Flag – Forgot to Report Income
Well, to put it bluntly, you can get caught. And when you do, the tax man will force you to pay back taxes, in addition to penalties and interest.
So, why is forgetting to report all of your income a tax audit red flag? Because computers are very adept at matching all the income earned documents the IRS receives with what you report on your Federal Tax Return (Form 1040), that’s why. These documents include your employer’s W-2 and 1099s (whether they are bank, brokerage or independent contractor 1099s).
Even if it was a completely honest mistake or oversight in forgetting to report some of your income, the IRS has little tolerance for mistakes – and even less of a sense of humor about those mistakes.
They have zero tolerance policy for human error, so it’s always wise to consider investing in a tax preparer or other tax professional in order to make certain no numbers get left behind on your next tax document.
What’s the lesson here?
• Avoid the fairly common mistake of forgetting or failing to report a portion or portions of your income for the previous year.
• Keep accurate records.
• Take a note from Santa and check your list of income twice.
• Make sure the numbers are recorded correctly and double check for simple math errors in order to hopefully keep the powers that be at the IRS playing nice.
• If by chance you receive a 1099 that lists incorrect income earned or is clearly not yours, contact the issue to have the form corrected and refiled with the IRS.
Tax Audit Red Flag – Exaggerated Charitable Donations
For the average person, there’s nothing more terrifying than the thought of getting an IRS audit. For some people, it ranks right up there with fears of dentists, flying, and clowns.
This installment of tax audit red flags focuses on charitable donations. No, this is not to say you shouldn’t give to charity. It’s just to remind you that if you aren’t careful in your giving, you could be bringing a little undesired attention upon yourself by the IRS. Continue reading
Tax Audit Red Flag – Your Ex-Business Partner Sends Letters to IRS.
While there is no sure way to avoid an IRS tax audit, paying attention to these tax audit red flags can decrease the chances of your dental practice receiving unwanted attention from the IRS. Continue reading
Tax Audit Red Flag – You Have Assets Overseas.
Most people would rather pay a visit, fee and all, to the proctologist’s office than endure an IRS audit. In fact, many would agree that proctologists are kinder and friendlier than the average IRS auditor. Knowing the red flags that trigger audits may not prevent all audits, but it can help you invite less IRS scrutiny or unwanted attention.
In recent years, the IRS has turned its focus to US accounts in foreign banks. Where US citizens once set up tax shelters by banking in places like Switzerland or the Cayman Islands, new laws now levy substantial fines for failing to report holdings in foreign banks. Continue reading