PART IV: Computer Notices (Problems 11-13)
Each year, the IRS issues about one hundred million notices of every description, covering billions of dollars in account transactions and changes. Unfortunately, the United States Government Accountability Office's studies show that those notices are wrong as much as 50 percent of the time. The Taxpayer Advocate's annual report to Congress regularly places notices high on the list of the most serious problems faced by citizens. Tax professionals likewise rank these problems high on their own list.
And while the error rate is high, many people are intimidated by the IRS in general and its communications in particular and they believe it is just easier to pay than to fight back. What is more, even when people are willing to fight back, they are generally unaware of their right to fight back. When they seek help, either from the IRS or from tax professionals, they are left with the impression that the battle is either hopeless or far too expensive to undertake. As a result, the vast majority simply pay the bill even if they do not owe it.
- Problem 11 Erroneous notice received assessing additional taxes
- Problem 12 The IRS mailed a computer notice claiming I underreported my income
- Problem 13 Valid notice received demanding payment of taxes
If you ignore the notice or respond incorrectly, the tax is assessed and you must pay the tax with its accompanying interest and penalties.
Respond in writing demanding abatement. The IRS routinely sends out notices--tens of millions every year--claiming that citizens have made mistakes in their tax returns. The mistakes could be math errors, they might involve tax calculation problems or any number of other possible scenarios. The notice usually explains what the alleged error is and how the IRS recalculated your tax. It then asks you to pay the additional amounts, often with interest and penalties.
And while the agency is responsible to tell you clearly and simply what your rights are with regard to the bill, it rarely does so in an understandable manner. As such, too many people either respond incorrectly or not at all. This leads to a permanent assessment which the IRS is then entitled to collect with all of the enforcement tools at its disposal, including wage levy, bank levy, property seizure and tax lien.
When you receive a computer notice you do not understand or with which you clearly disagree, you have the right to challenge it. However, it must be done in writing and must be done within a set period of time. Failing to respond in a timely or proper manner ensures that you lose your rights.
The tax code affords sixty days from the date of the notice in which to respond. You must respond by explaining that you disagree with the tax calculation. You must demand that the tax be "abated," or canceled. When you do this, the IRS has no choice but to abate the tax. Do not phone or otherwise question the IRS, just respond in writing demanding the abatement.
If the IRS feels you legitimately owe the amount due, it must mail a so-called Notice of Deficiency. This is an itemized statement explaining exactly why you owe the tax. (More on the Notice of Deficiency in Part V of this Problem Solver and in Special Report on the Notice of Deficiency.) You have the right to appeal the Notice of Deficiency before paying the additional tax. In approximately half the cases, the IRS never mails the Notice of Deficiency because its initial tax calculation is bogus to begin with. As such, a simple letter and a postage stamp are all that are necessary to correct the problem.
For a comprehensive guide to dealing with IRS computer notices, please see chapters two and three of The IRS Problem Solver Book. These chapters take you by the hand through more than a dozen common IRS computer notices and explain exactly what they are and how to respond to each one.
If you ignore the notice or respond incorrectly, the tax becomes assessed and you must pay it plus interest and penalties.
Demand abatement of the tax. With over one billion information returns--Forms W-2 and 1099--filed annually, it should come as no surprise that many of them are in error. In fact, as many as 30 percent of all information returns could have some element of error to them. Thus, if an information return reports that you earned income you did not earn, the IRS is likely to mail a computer notice claiming you failed to report the income on your tax return.
Respond to this notice much the same way you handle the computer notice mentioned above. However, in this case, you should be more definitive about the alleged income and its source. Provide a concise notarized statement--an affidavit--claiming that you did not earn the income in question or that you did not work for the company in question. Make an affirmative declaration that all income earned by you during the period in question was reported on your return. If you know the company that issued the erroneous information return, contact them directly in writing and ask that it be corrected. Provide a corrected copy to the IRS. If you do not know the company or if the IRS made the mistake (as is common), your signed and notarized declaration should be enough to defeat the claim.
An exhaustive discussion on how to deal with the claim of unreported income is presented in my book, IRS, Taxes and the Beast. This book contains detailed guidance on how to cope with any IRS claim that you failed to report your income accurately.
- If the bill is not paid or satisfactory arrangements are not made, the IRS begins enforced collection action, including wage levies, bank levies, property seizures and tax liens.
- Respond to the notices timely and properly. Collection notices refer to taxes that are currently assessed. Generally, they involve back tax debts. You cannot ignore these notices. If you do not respond to the initial notice seeking payment, the IRS sends a series of further, more harsh demands. The culmination is a final notice, notice of intent to levy, IRS Letter 1058. This states you have thirty days to pay in full or enforcement may begin. The IRS is not kidding. It will enforce collection with all tools available if you do not address the problem.
Always respond to the first notice. Do not wait until the cycle has run to the final notice. Respond in writing, not by phone. Explain that you do not have sufficient income or assets to be able to pay in full. Explain that you need an installment agreement or even uncollectible status if you cannot afford any payment at all. Ideally, you should send a copy of Form 9465, Installment Agreement Request, with your letter. Enter the amount of monthly payment you can afford. As I explained in my discussion of Problem 5, this sets the wheels in motion to establish a formal installment agreement. Once that agreement is in place, the IRS is foreclosed from enforcing collection as long as you meet the terms of the agreement.
Chapters four and five of the book How to Get Tax Amnesty have a full and thorough discussion of all elements of the collection process and how to handle each notice in the collection cycle. Anybody with a back tax debt must read that book. Most people make their problem worse by ignoring it, hoping it will just go away. They do this because they do not know what to do to solve the problem and they cannot afford quality professional help--even if they can find it. But ignoring the problem does not help. The problem does not go away. If you have an outstanding debt now, do not wait a moment longer to deal with it.