Preface: “Don’t Panic.” – Douglas Adams, The Hitchhiker’s Guide to the Galaxy
How to Respond to a Tax Notice
There is never a reason to panic if you receive a tax notice in the mail from the IRS or from a state or local tax authority. Wisdom, caution, and deliberation are all warranted, but never panic.
First, never respond to an unsolicited phone call, email, or electronic communication from the IRS or other tax authorities. All communications from tax authorities are initiated by mail, as in the slow kind that comes on paper in an envelope to your home address. Communications initiated electronically that claim to be from tax authorities should be marked as spam. Preferably, they should be referred to law enforcement.
Second, not every written communication you receive from a tax authority necessarily means you’re “in trouble” or that anything bad will happen. The tax authority often informs you of slight modifications to your tax filing. This modification may even be in your favor. Other times, they may ask you for an additional document or an explanation of a particular line item. This missing bit of information may be something very straightforward. You will likely never hear anything more about it once you provide them with what they are asking for.
The Collections Process
If you are being contacted about a balance you may owe, you always have the choice of either paying the balance or disputing it. If you decide to dispute it, you always have a window to respond before any tax, penalties, or interest are assessed. The time window to respond before the issue escalates will be stated clearly on the notice, as well as the steps to be taken if you wish to enter a dispute. A first notice of adjustment usually has a 30-day window.
In this situation, time is of the essence. Whatever you decide to do, do it within the time window provided. You always want to stay caught up in the process.
Hiring a Tax Professional
You may respond to the IRS on your own. It may be far more straightforward than you expect and you will surely learn something. Hiring someone else to do it for you is not legally required. If you decide to refer the case to a tax professional, do so calmly and relaxedly, but do it immediately. The more time elapses from the date on the tax notice to the date a professional first sees it, the more you undermine that professional’s ability to help you.
While hiring a professional can provide many benefits, the process is more cumbersome. Remember that the tax professional is a mediator between you and the tax authority. The IRS and several states require you to sign a Power-of-Attorney authorizing the professional to discuss your tax issues with them. You will still need to sign the appeals and other tax documents necessary to resolve the dispute. If any tax or penalties are owed, they are owed by you and not by the professional.
Throughout the process, continue to provide your tax professional with every additional communication you receive from the tax authority every step of the way until the issue is resolved. Please do not leave any tax notice until you return from your vacation or file it with other tax documents you plan to bring in when the next tax filing season rolls around.
For every deadline missed, the amount of paperwork that must be filed increases, as do the financial and legal stakes. At some point, additional penalties and interest may be assessed. At some point, even if the dispute is ongoing and you expect to have the entire amount refunded to you, you may have to pay the outstanding balance to avoid a lien. At some point, you may exhaust the tax authority’s internal appeals process and have no option but to go to tax court to continue your dispute. Going to tax court will require an attorney. The point is that none of these things happen overnight, and usually, nothing gets that far.