Receiving a letter from the Internal Revenue Service (IRS) can feel intimidating, but it’s important to know that many of these letters are routine, and the information they convey can be dealt with quickly and effectively with the right strategy.
If you’ve received an IRS letter and are researching ways to react or respond, you’re in the right place.
This brief guide explains what these letters are, why they’re sent, and the actions you can take to eliminate the stress these letters can cause.
Why Does the IRS Send Letters?
The IRS issues letters for a variety of reasons, ranging from simple requests for information to notices of tax adjustments or balances due.
The IRS communicates primarily through mailed correspondence, not phone calls, emails, or text messages, which may seem strange given the modern era of digital communication.
The irony is that in many cases, an IRS letter will include a request for you to call a phone number or visit a webpage, putting the responsibility on you to communicate in a way the IRS chooses not to!
IRS letters serve specific purposes, such as:
Clarifying Information: The IRS may request additional documentation to verify income, deductions, or credits claimed on your tax return.
Reporting Changes: They might inform you of adjustments made to your tax return based on the information they have on file.
Providing Notifications: This could include notices about a missed payment, underreported income, or overpayment leading to a refund.
Enforcing Actions: If there are unpaid taxes or other compliance issues, the IRS may send notices to initiate a resolution or to warn of potential penalties.
Generally speaking, when you receive a letter from the IRS, it’s best to take it seriously. Do not ignore it!
[ Important: Many scams masquerade as formal communication from the IRS or other tax authority. Always validate the authenticity of your letter before sending any money to anyone or providing any personal information. ]
‘Soft’ Letters and Warning Letters
A “soft” letter from the IRS refers to a communication that is less formal and not as demanding as a notice or audit letter. Soft letters typically sent to inform or remind taxpayers of certain obligations or discrepancies without imposing immediate penalties or taking enforcement action.
The purpose of these letters is often to educate taxpayers, encourage voluntary compliance, or provide an opportunity to address potential issues before they escalate.
Common examples include:
Compliance Reminders: Informing a taxpayer about specific filing or reporting requirements they may have overlooked, such as foreign account disclosures.
Data Mismatch Alerts: Notifying taxpayers of inconsistencies in their tax returns compared to information the IRS has received from other sources, like employers or financial institutions.
Educational Letters: Addressing issues like underreported income, explaining why it’s important to correct errors, and how to do so.
Warning letters, on the other hand, are notices related to an action that must be taken to avoid negative consequences.
A great example of a warning letter is a CP503 Notice. This letter is sent when a taxpayer has an unpaid balance, and the IRS is reminding them to pay it to avoid further collection actions. While it doesn’t carry the same legal weight as a formal levy or lien notice, it serves as a warning of possible escalation if the taxpayer does not address the issue.
Warning letters are distinctly different from liens or levy letters.
Lien and Levy Letters
Among the most dreaded IRS letters are the Notice of Federal Tax Lien (NFTL) and the Notice of Intent to Levy.
The purpose of the NFTL is to notify you that the IRS has filed a lien on your property, whereas an Intent to Levy is to notify you that a legal seizure of your property is imminent unless you take action immediately.
Neither of these letters are good news, and depending on your circumstances, the best next step to take after receiving one of these letters will vary.
How to Respond to IRS Letters
If you’ve received a soft letter, there may not be any action required on your part. However, it may still be a good idea to read the letter in full and retain it for future reference.
If you’ve received a warning letter or a lien or levy notice, you need an action plan to avoid potentially negative consequences.
This plan should include, at a minimum:
- Reading the Letter Carefully. Understand the type of notice, the issue raised, and the deadline for a response. Look for key details like amounts owed, discrepancies, or actions the IRS is requesting.
- Verifying the information. Review your tax records to confirm the accuracy of the IRS’s claims. Cross-check income, deductions, and credits against the tax return referenced in the letter.
- Taking action depending on the letter type.
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- For discrepancy or mismatch letters (e.g., CP2000), sign and return the notice with payment, if required, if you agree with the IRS judgment. If you disagree, provide documentation supporting your position and submit a written explanation.
- For Payment Due Letters (e.g., CP503), Pay the amount due by the deadline. If you’re unable to pay in full, contact the IRS to set up a payment plan.
- For Intent to Levy or Lien Letters (e.g., CP504, Letter 1058), act immediately by requesting a hearing within 30 days if you disagree or need more time to resolve the issue.
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- Paying the debt (if you can). Pay the debt, set up a payment plan, or file for a hearing (Collection Due Process) within 30 days of the letter.
The #1 worst thing you can do in response to an IRS letter is to ignore it. If you do this, the IRS will only ramp up their collections efforts and make life progressively more uncomfortable for you. So make sure you have your action plan in place as soon as possible!
Never Underestimate the Power of Professional Help
The federal tax code is immensely complex. It’s no wonder that for taxpayers facing the prospect of liens and seizures from the IRS, the stress can build up fast.
How exactly do you respond?
What forms need to be submitted?
Who within the IRS can help you?
How long do you have to do all this?
These questions plague taxpayers every day, and the worst part of it is that the IRS doesn’t care how stressed you might be feeling. They just want their money. Period.
This is why Traxion Tax exists. We are IRS experts who know exactly what to do to resolve complicated tax situations and avoid potentially devastating collections efforts, mounting penalties, and snowballing fees.
Our Enrolled Agents and Case Managers work 1-on-1 with taxpayers to develop the best course of action that maximizes the likelihood of a positive outcome, reducing stress and restoring peace of mind.
If you’re feeling lost and confused about what to do next with the IRS, call us. The number is (303) 376-9797, or you can schedule a risk-free consultation by visiting this page now.