How to Translate Your IRS Notice

Goodbye holiday cards… ’tis now the season for a very different type of mail: tax documents. Most of them are merely tedious while others — particularly those from the Internal Revenue Service — may be enough to strike terror in your heart.

As a CPA, I have seen HUNDREDS of IRS notices, and even I get some anxiety whenever I see one. It’s perfectly natural. But if you take nothing else from this article, remember this: The most important thing to do when you receive a letter from the IRS is to open the envelope.

I can’t tell you how many people I’ve encountered who receive these notices, assume they portend disaster, and simply refuse to open the envelope.

Well, I’m here to tell you that ignorance is not bliss. If what’s inside truly is bad news, neglecting the letter will only compound the problem, and you’re in for months of sleepless nights. The good news is that in the majority of cases, the letter it contains is pretty harmless.

Part of the problem is that the IRS uses cold, dry, and scary-sounding language … even for good news! In some cases, you actually may need to reread it a few times to discern its meaning. The majority of notices issues are pretty innocent and will have little impact on you as a taxpayer. Others aren’t quite so lucky, but you’ll never know unless you open the envelope.

Though the IRS issues a myriad of possible notices, the following are the ones I see most often.

CP 2000: This is the notice most commonly received by my clients. It’s issued when your income or payment information doesn’t match the information on your tax return, and it doesn’t necessarily mean you owe anything. This is a fairly recent problem having to do with technology and the advent of e-filing. Over the last 10 years, the IRS has made a huge change to the way it reviews tax returns — its computers are programmed to match what has been reported to the IRS against what has been reported on your tax return.

Based on my experience, people often underreport their income not because they’re trying to hide anything but because they forget about certain receipts of money or they haven’t received a necessary form. When a mismatch happens between the IRS records and the tax return, the IRS  will generate a CP 2000 notice. For example, this could include pension distributions, Health Savings Accounts, the sale of stocks, or the sale of a home.

Unless the receipt of sales proceed is reported on  tax return, the IRS will assume that any money was taken as income and therefore taxes the entire amount.

Another issue that a CP 2000 may be pointing to could be payment information. Some people simply aren’t clear on what they’ve actually paid for what year. I recommend creating a method for reporting and tracking what exactly you’ve paid to the IRS and when. For example, a payment made around April 15 doesn’t necessarily mean you’ve paid for the current year — it could be for the previous year or for the first estimated payment of the current year.

To correct a CP 2000 error, an accountant can simply put together a letter showing that the amount is not taxable. In about one-third of cases, there is no additional payment needed. The bottom line is that if the IRS says that it knows something you don’t, don’t ignore it.

CP 14: In short, this notice states that you owe unpaid taxes. There are a couple reasons why you might receive it, especially this year. In the past, when one filed an electronic tax return but sent a paper check, the IRS was pretty quick at matching payments to electronic returns. But for obvious reasons, 2020 was unusual and drastically slowed the inner workings of the IRS. As a result, a lot of people received CP 14 notices, even though they made payments. The department processing installment plans in particular seems to be behind in this regard.

As the specter of 2020 lingers, if you receive a CP 14, you likely have a little time. Just wait a couple weeks. In fact, we’ve been advising clients to do nothing until the following month.

However, if you filed a return and didn’t pay, it’s time to decide what to do. There are payment plan options, so you’ll need to work with the IRS to come up with a payment plan. We are happy to assist clients in setting these wheels in motion.

CP 504: If you ignore a CP 14 long enough, you’ll receive a CP 504, otherwise known as a Final Notice Intent to Levy, or a Third and Final Reminder of Past Due Taxes. Most of my clients who receive these got to this point not because they were intentionally disregarding the law but because they didn’t work with the IRS, didn’t respond, didn’t open the envelope, or didn’t receive it due to a change of address. If you receive a CP 504, don’t wait; call us or email us immediately. Timing is of the utmost importance in a case like this.

CP 501/502: Ignoring the IRS won’t make it go away. If you receive this notice, a tax lien can be imposed on your assets. We’ve successfully helped many taxpayers remove these liens, but it can take a long time — even if you contact us right away. Just avoid getting to this point in the first place, and if you have, contact us right away.

CP 16: This notice indicates that a change was made to your tax return that will affect your refund. It usually means that either a miscalculation was made or you owe other tax debts and they are being applied to your refund. This could be a result of a payment not being credited to your account, so be sure you look into the reasoning. In fact, I recently helped a client who made a payment to the IRS of $45,000, and the IRS didn’t credit it to the account at all! In other cases, I’ve seen payments being credited to the wrong taxpayer. And in others, the taxpayer overpaid previously and the refund was increased. Notify your tax professional immediately if you receive this notice, so we can address the issue.

CP 49: This is a sad notice indeed. It means you will not receive your expected refund because the IRS is using some or all of it to pay off outstanding tax debt. Any overpayments are applied to remaining balances first, so if you’re expecting a refund, be sure you know whether you owe from previous years. If there is any money left after the debt is paid, you will be refunded the difference.

In general, my advice for avoiding these notices is keeping careful track of payments owed, being clear about what debts you’d like payments applied to, and making sure to carefully report changes of address to your tax professional. Contact us now to discuss how to mitigate your risk and ensure as smooth a tax-preparation experience as possible.