Don’t panic and don’t ignore a tax notice sent by the IRS.
One of the great fears we all share is receiving an IRS notice in the mail, especially if it shows up requiring a signature. The fear and anxiety that these letters induce can be overwhelming, and that’s just from opening the letter without knowing the contents. Most notices from the IRS are computer-generated and have never been viewed or touched by an IRS employee. The IRS has lots of computers that work 24/7 with the sole purpose of analyzing all the information provided by the various sources that send info to the IRS. One such program matches W-2s and 1099s reported to the IRS to what you report on your tax return. If there is a difference, a form CP2000 is automatically generated and mailed to you. A real person never looks at the notice to see if it is reasonable or makes sense.
Real-World Example of Ignoring a Notice
A client of mine receives one of those CP2000 forms, and as usual, ignores it. Next, he receives another notice of assessment stating that he now owes the IRS about $178,000. He panics. After a couple of calls to the IRS, I find the problem. He works for a company that issued him duplicate 1099s for $366,000 each. One call and a faxed letter to the IRS, problem solved and now he owes nothing. This is not to say that all problems can be solved this easily, but many times it is as simple as just getting to the right section and person at the IRS. This is just one of the many facets of tax resolution.
Taxation and its compliance is not only complicated, but it’s very personal. One of the most common reasons people fall behind with filing tax returns is they miss one year of filing, and then are too afraid to file subsequent years. The cycle repeats and next thing you know, they start getting those nasty notices from the IRS. If you do not file a tax return and you have income reported to the IRS, after a while, will create a tax return for you. It is called a substitute for return (SFR), from which they will assess tax, penalties and interest.
Real-World Example of Selling an Asset
You sell your personal residence, and that is the only income you have for that taxable year. You say to yourself, “I meet the exemption for selling my house, so I don’t have to report it.” Guess what—you will get a notice a couple years later with a tax assessment based on the gross sales price, plus penalties and interest. The same goes for sales of stocks. Many believe that if all a person has is capital gain income, they have no taxable income and therefore they don’t need to file. Same scenario as before. You will get a notice based on the gross sales price of the stocks along with the tax, penalties, and interest.
My advice: if you receive a tax document in the mail, contact your CPA. You will most likely need to file a tax return for that year.