Why an IRS Letter May Not Be as Scary as You Think

For some, receiving a letter from the IRS ranks right up there with a root canal. But it's not always bad news. Find out what you may be in for.
March 19, 2014

As you casually glance through the mail that arrived at the office, the return address on one particular envelope stops you dead in your tracks. Right there, in black and white, that little envelope is letting you know you've received correspondence from the IRS.

Now don't break out into a cold sweat or begin munching on antacid tablets. You can handle this if you keep a few things in mind.

"I've worked with thousands of new business owners and taxpayers who are scared to death of those three little letters—I-R-S," says Marquita Miller, an accountant and CEO of Five Star Tax & Business Solutions. "When I started my firm as an accountant, it was scary to me, too. But I help my clients handle their fear of taxes by getting them to understand the IRS is not a 'boogie man' waiting to take everyone to jail."

Even the IRS acknowledges how intimidating the agency can be. But administrators offer this advice on how to react if the agency gets in touch with you.

Don't Panic

Go ahead, and open the letter. The IRS reports that it sends millions of letters and notices to taxpayers and businesses each year and may just be looking for a very simple response from you. And don't ignore it either by burying it in the dark recesses of your desk drawer or laptop case. Instead, confront it head on by addressing the issue immediately.

Do What You're Told

The IRS isn't likely to send you mail about broad, sweeping topics and how they relate to your business. The letter is likely to be about a very specific issue with your account or your federal tax return. And the notices aren't the only things that are specific. It's very likely there are also precise instructions that will help you provide the agency with the information or documents it wants from you.

Making Corrections

Sometimes the IRS sends a letter to let you know it made a correction to your federal tax return. If that's the case, pull out your own copies of the return in question, and review the change or changes. If what the agency did seems fine to you, no response from you is necessary, unless the change increased your tax liability and you owe the IRS a check.

On the other hand, if you disagree with the change or changes, you'll have to send a written response stating your case and any supporting documentation.

Getting Audited

The IRS may contact you by either mail or phone to let you know you've been selected for an audit. During an audit, the agency reviews or examines specific annual returns and financial information of individuals or organizations to check them for accuracy.

If you receive notice of an audit, don't start to stress—it doesn't necessarily mean that the IRS suspects foul play. Sometimes a return is selected at random for an audit. Other times, documents and paperwork, like W-2s or 1099s, might not match what's been reported, and that triggers an audit. Another reason you might get audited is if your return is somehow related to the return of another individual who's currently being audited. For instance, if the auditors need more information from you that's related to an area of that person's finances the examiners want to know more about, you could be audited.

Be aware that the IRS only contacts taxpayers by mail or by phone. You will never receive notice of an audit via email. If you are audited, you'll be told what kind of documentation you need to provide, and an appointment will be scheduled if the audit is being handled face to face. (You can review an actual audit process by watching a video guide to audits created by the IRS.)

Audits end with one of three types of conclusions:

  • No change. Your records matched what was on your tax documents, and everything is correct.
  • Agreed. The IRS proposed a change to your return, and you agreed with it.
  • Disagreed. The IRS proposed a change to your return, and you have disagreed with it and are asking for further review.

Remember, a notification from the IRS may not be what you want to see in the mail, but it isn't always cause for alarm. So take a deep breath, and follow the policies and procedures that are in place to protect your rights as a taxpayer. It may not be as bad as you think.

Read more articles on taxes.

Photo: iStockphoto