Jul
23

IRS Letter in the Mailbox!

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A friend of mine from the West Coast called last night, and mentioned during our conversation that he had received a letter from the Internal Revenue Service. According to that letter, he owes the IRS a tax bill of $942 due to unemployment he failed to report on his tax return – from 2009.

My friend sold his home in the Midwest and moved to the West Coast over a year ago. All of his tax records and receipts are still packed away in moving boxes, and at this point he has no idea if the IRS is correct in their tax assessment or not. It may or may not be a mistake – the IRS does make mistakes, believe it or not.

There is a reason your Social Security number is required when you open any sort of bank account, or when you start a new job, or file for benefits such as Unemployment Compensation, Social Security, or Medicare. Anytime anyone pays you money through the calendar year, whether that be wages, interest on a time deposit account, a check for contract work done as a 1099 contractor, barter exchanges, sale of a residence, unemployment, sick pay, a sale of stock, the closing of a retirement fund (and many more not listed here) that income is reported to the IRS.

The IRS has a record of your income for any given year, and it comes from every source that paid you money and was required to report that income to the government. How does the IRS keep track of all of this money and who it was paid to? By a Social Security Number!

When you file your tax return for the calendar year, it is very important that you furnish your tax preparer records of ALL of the income you received. Err on the side of caution and give your tax gal anything and everything – a good tax preparer knows the difference between types of income and what needs to be reported and what doesn’t.

The IRS selects filed tax returns and compares the income that was claimed on that return against what is showing in the IRS records for that year. If there is a discrepancy and it looks like you didn’t report all of your income, the IRS will calculate the bill and mail it to you. Usually, along with the difference in tax you owe, penalties and interest are also added. If you’re looking at two or three years worth of interest, as my friend is, the bill can add up fast.

When an IRS letter is sent to a taxpayer, it will cover a specific subject and tell you exactly what you need to do to resolve the situation. Maybe you can clear things up with a phone call, or a fax, or a visit to a field office in your area. Perhaps you’ll need to write a check – the important thing is to never, ever ignore IRS Correspondence. Give any letter your prompt attention, and resolve the issue as quickly as possible. Keep all IRS Correspondence in your tax records, even after the situation is resolved. You may need that documentation in the future.

In the case of my friend, he needs to do a few things before he simply writes that check to the IRS.  He should:

  • find his Form 1040 U.S. Individual Income Tax Return for 2009
  • locate the state issued 1099-G showing total Unemployment Compensation paid to him that year
  • compare the 1099-G amount to what was entered on the tax return
  • compare how much Unemployment Compensation was claimed on the return to what the IRS says was reported to them

(Note: In 2009, due to the American Recovery and Reinvestment Act (ARRA), the first $2400 in Unemployment received by an individual was not taxable. Usually, all Unemployment is 100% taxable – in 2009, there was a temporary exemption granted as part of the government stimulus package. My friend needs to take that calculation into consideration when he is comparing those numbers)

If my friend can clearly see that he is wrong and the IRS is right, there isn’t much he can do other than pay the bill.  If his numbers do not agree with what the IRS states in the letter, he will call and speak to an IRS telephone agent.  Hopefully the situation can be resolved with one phone call, but it might not be.  Whatever the case, he will have to follow through and take care of the situation before it  turns into a bigger issue.

This is also a lesson in why it is very important to save all filed tax returns and the supporting documentation.  My friend has no idea what box this paperwork is in, or if that box is in his garage, or his sister’s basement – he may end up paying the bill because he can’t easily find what he needs to prove his case in the timeframe he is allowed.

In 2009, my friend prepared his own tax return using a software program.  If he had used a paid preparer, he may have been able to go back to that person and retrieve copies of the return and the supporting paperwork.  Depending on the preparer, they might have taken over at that point and called the IRS on his behalf.  At the very least, the preparer should be able to look at the IRS letter, look at the return in question, and explain the situation to the client.

If you receive correspondence from the IRS:

  • Don’t throw the letter away.  Open it, read it, and follow through in the time frame specified.
  • IRS correspondence will give you a specific reason why the letter was issued, and tell you what you need to do to resolve the situation.
  • In the case of a bill received, if you agree with the IRS you may not have to reply at all, you may simply need to write a check and mail.
  • If you do not agree with the IRS, call or write to the IRS as soon as possible, and tell them why you don’t agree.
  • Keep copies of all tax returns and all supporting documentation.
  • Keep all IRS letters received, and file them with your tax records.
  • If you receive an IRS letter and paid a preparer to complete your tax return for the year in question, contact the preparer and ask for their help.
  • The IRS will never send you an email.  All correspondence sent out by the IRS is sent regular snail mail.

 

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Categories : Form 1040, IRS

Comments

  1. GHarkness says:

    Excellent tips! As a person who has spent a lot of time on the phone with the IRS on behalf of clients, (let’s not even GO THERE with the on-hold music!) I’ll have to say that 99.9% of them are very easy to talk to and they are very well trained to handle your problem (just be sure to call the number listed on the letter, not some other IRS number). In fact, there have been some agents that I truly mourned the loss of when the IRS did its periodic switcheroo and changed the service center for certain types of calls.

    I know how scary it can be to get that distinctive letter in the mail, but you are right that, even though it LOOKS like a form letter, it’s not. As you said in your bullet points: read the letter carefully because it will tell you exactly what you need to know about the problem and how to resolve it.

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