It's one of the least favorite things for someone to receive in the mail - the infamous tax notice.
Whether you're a business owner or an individual, if you live long enough, you can expect to receive at least one of them in your lifetime. They often send shear panic down the spine of the recipient, but take comfort that, in many cases, the notices are incorrectly generated by an automated system.
There are four primary types of notice. Let’s take a look at all four – listed below order of severity - and how they should typically be handled. Tax notices can be a serious matter, so it's often worthwhile to get a professional (i.e. CPA firm) who can represent you involved in the process. Often it's the first response that is the most cost efficient and easiest time to get the issue resolved.
Missing Tax Return
Whether it’s for income or payroll taxes, the IRS or state could send you a notice that you have not filed a tax return for a given time period. It's possible you did but the agency did not process the return correctly. We typically recommend e-filing to minimize the chances of misprocessing your returns.
With the missing return notice, research is needed as to whether the return was actually filed. If so, it's typically a matter of submitting a copy of the return again. If not, the return needs to potentially be prepared and definitely resubmitted to the agency.
There may be penalties and interest for late submission, depending on the return type. As a result, it can often be worth your time to dig up proof that the initial return was actually filed, either via electronic records or mail delivery documentation.
Another type of notice regards information on a return that does not match the agency’s records. These are most commonly CP2000 notices from the IRS. The IRS may assert that you did not include information previously reported to them or that the information reported does not match.
These CP2000 notices are the most common notices to be incorrect. They're machine-generated and errors often occur in the process. They're also the most common notices that we see.
Penalty and Interest Notice
If you late-filed a corporate or partnership tax return, you will be penalized $195 per shareholder/partner for each month you are late. You will also be assessed penalties and interest for late payment if you pay taxes beyond the tax filing deadline (not the extension deadline).
With penalty and interest notices, penalty abatement is often a solid option to resolve the issue. Using that option, a skilled tax professional can get the penalties waived. The agencies will typically not waive interest.
This is the most dreaded of them all - a notice that you are being audited by the IRS or state. Expect this to be a long, drawn-out process.
Given the potential tax impact, we insist upon getting a professional involved from the start. During the audit, the agent will ask questions the taxpayer may not understand. He or she may be asking as a way to get to particular indirect pieces of information.
One wrong answer could end up causing the taxpayer a lot of money. With the right professional, it is not uncommon for the result of an audit to be no change and no additional monies due.
My goal today was to cover the most common tax notices received and to encourage you to engage a CPA if you receive such a notice.
Adam Shay, CPA (N.C. License Number 35961), MBA, is managing partner of Adam Shay CPA, PLLC. He focuses on minimizing taxes and improving the financial results of entrepreneurs, and is actively involved in supporting the Wilmington entrepreneurial and startup community. For more information, visit http://www.wilmingtontaxesandaccounting.com/ or email him at [email protected]. He can also be reached by phone at (910) 256-3456.
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