Received an IRS Notice? When to Hire a Tax Professional

By Lawrence Do, EA | Former IRS Revenue Agent

Getting a letter from the IRS can be stressful. The envelope arrives, you see “Internal Revenue Service,” and it’s easy to assume something is seriously wrong.

But receiving an IRS notice does not automatically mean you’re being audited or that you need to hire someone to represent you.

The IRS sends notices for many reasons. Some are relatively simple and can be handled on your own. Others involve proposed tax changes, unreported income, documentation requests, penalties, collection issues, or examination of items reported on your tax return.

The first thing I recommend is simple: don’t ignore the notice, and don’t immediately assume the IRS is correct.

Read it carefully and figure out exactly what the IRS is asking you to do.

Why Did the IRS Send Me a Notice?

The IRS sends millions of notices and letters for different reasons.

You may receive one because:

• The IRS believes you owe additional tax

• Income reported by a third party doesn’t match your tax return

• The IRS changed something on your return

• Additional documentation is needed

• A payment wasn’t properly credited

• The IRS has questions about a deduction or credit

• There is an issue with a previously filed return

• The IRS needs to verify your identity

• You have an unpaid balance

The notice should explain why the IRS contacted you and what, if anything, you need to do.

Look for the notice or letter number, usually shown as a CP or LTR number. Also look for the tax year involved and, most importantly, any deadline for responding.

Do I Need to Respond to Every IRS Notice?

No.

Some IRS notices simply inform you of a change or provide information. If you agree with the IRS and the notice does not request a response, there may be nothing else you need to do.

Other notices require action.

If the IRS is proposing additional tax and you disagree, requesting documentation, or giving you a deadline to preserve certain rights, responding on time can be extremely important.

Don’t assume that calling the IRS is always the first step either. Depending on the notice, the appropriate response may be in writing or through an IRS document upload system.

Follow the instructions for the specific notice you received.

Is the IRS Always Correct?

No.

IRS notices are often generated using information available to the IRS, including information reported by employers, banks, brokerage firms and other third parties.

That doesn’t mean the IRS has all of the facts.

For example, the IRS may receive information showing proceeds from a transaction but may not have the correct information needed to determine your taxable gain.

Or the IRS may identify income that appears to be missing from a return when there is additional information that explains how the item was reported.

The important question isn’t simply whether the IRS sent a notice.

The question is whether the proposed change is correct based on the tax law and the facts of your situation.

What Is a CP2000 Notice?

One common IRS notice is the CP2000.

A CP2000 is generally issued when information reported to the IRS by third parties does not match information reported on your tax return.

For example, the IRS may have received a Form W-2, 1099 or other information return that it believes wasn’t properly reflected on your return.

A CP2000 is a proposed change. You should review the information carefully before deciding whether you agree.

If the IRS is correct, the matter may be relatively straightforward.

If the IRS is missing information, using an incorrect basis, overlooking expenses, or otherwise reaching the wrong result, you may need to provide an explanation and supporting documentation.

When Can I Handle an IRS Notice Myself?

Not every IRS letter requires professional representation.

If the issue is simple, you understand exactly what happened, you agree with the IRS, and the notice clearly explains what you need to do, you may be perfectly capable of handling it yourself.

For example, you may not need to hire a tax professional simply to respond to a straightforward request for a missing document.

I don’t believe taxpayers should pay for professional representation when they don’t need it.

However, the situation changes when you’re unsure whether the IRS is correct or when the amount of money or complexity involved becomes significant.

When Should I Consider Hiring a Tax Professional?

Professional assistance may be worthwhile when:

• You don’t understand why the IRS changed your return

• You disagree with the proposed tax

• The IRS is questioning substantial deductions or expenses

• The issue involves a business or rental property

• Cost basis or depreciation is involved

• Multiple tax years may be affected

• The IRS is examining your return

• You have significant unpaid tax

• Penalties are substantial

• You have already responded and the issue remains unresolved

• You received a notice involving appeal or Tax Court rights

• You’re simply uncomfortable dealing with the IRS yourself

The more complicated the underlying tax issue becomes, the more important it is to understand the entire return rather than just the notice sitting in front of you.

Don’t Automatically File an Amended Return

This is an important point.

Receiving an IRS notice does not automatically mean you should file an amended tax return.

The correct procedure depends on the type of notice and what the IRS is asking for.

Sometimes the proper response is to provide documentation or an explanation directly in response to the notice. Filing an amended return when the IRS expects a different type of response can complicate matters unnecessarily.

Before filing anything, determine what the notice actually requires.

What Documents Should I Gather?

If you’re going to review the issue yourself or take it to a tax professional, start by gathering the relevant records.

That will usually include:

• The complete IRS notice

• The tax return for the year involved

• W-2s and 1099s

• Brokerage statements, if applicable

• Business or rental records

• Receipts and supporting documentation

• Prior correspondence with the IRS

• Any amended returns previously filed

Don’t send original records to the IRS unless specifically required. Keep copies of anything you submit and maintain a record of when and how it was sent.

What Happens If I Ignore an IRS Notice?

Ignoring an IRS notice generally doesn’t make the underlying issue disappear.

Depending on the situation, the IRS may continue processing a proposed adjustment, assess additional tax, add interest or penalties, begin collection activity, or send additional notices.

More importantly, some notices contain deadlines affecting your rights to challenge an IRS determination.

If you’re unsure what a deadline means, that’s a good reason to get help before the deadline passes.

What Can an Enrolled Agent Do?

An Enrolled Agent, or EA, is a federally credentialed tax professional authorized to represent taxpayers before the IRS.

Unlike a tax return preparer whose work may be limited primarily to preparing returns, an Enrolled Agent can represent taxpayers in IRS matters, including examinations, collection matters and appeals.

When appropriate authorization is in place, a representative can communicate with the IRS on your behalf, obtain relevant tax information, discuss the issues involved, submit documentation, and advocate for your position.

That can be particularly useful when the problem is more complicated than simply answering a letter.

Should I Go Back to the Person Who Prepared My Return?

You can, but you aren’t required to.

If your original preparer understands the issue and is qualified to handle IRS matters, going back to that person may make sense.

But sometimes the notice reveals a larger problem with the original return.

If you’re concerned about how the return was prepared, getting an independent review can be worthwhile.

A good review should look beyond the notice itself.

For example, if the IRS is questioning something involving rental property depreciation, the real issue may have originated several years earlier. Fixing the immediate notice without understanding the underlying calculation may not solve the entire problem.

Don’t Panic, but Don’t Put It Aside

An IRS notice should be taken seriously, but receiving one doesn’t mean the worst has happened.

Start with three questions:

What is the IRS changing or asking for?

Is the IRS correct?

When do I need to respond?

If you can confidently answer all three and the issue is straightforward, you may be able to handle the matter yourself.

If you can’t, consider having someone review it before you respond.

Need Help With an IRS Notice?

Do Tax & Advisory Group, Inc. assists individuals and small-business taxpayers with IRS notices, tax return issues, amended returns and federal tax matters.

I am an Enrolled Agent with nearly 20 years of experience working for the Internal Revenue Service. That experience gives me an understanding of IRS processes from the other side of the table and allows me to help clients determine what a notice actually means and what should happen next.

If you’ve received an IRS notice and aren’t sure how to respond, contact Do Tax & Advisory Group, Inc. to schedule a consultation.

This article provides general tax information and is not intended as individualized tax or legal advice. Every tax situation is different.