Did You Get a Letter from the IRS? Don't Panic.
Article Highlights:
IRS Notices
CP Series Notice
Automated Notices
Frequent Errors
ID Theft
Penalties and Interest
What You Should Do
What We Will Do
Now that most tax refunds are deposited directly into taxpayers’ bank accounts, the dream of opening your mailbox and finding an IRS refund check is all but a thing of the past. However, since the IRS now does most of its auditing through correspondence, an IRS letter can likely increase your heart rate and, in some cases, even ruin your day.
CP-Series Notice – When the IRS thinks it detects a potential issue with your tax return, it will contact you via U.S. mail; this is done with a CP-series notice. Please note that the IRS’s first contact about a tax delinquency or discrepancy will never be a phone call or email. Such calls and emails are a common tool of scammers; if you get one, simply hang up the phone or delete the email. If you are concerned about the validity of a given message, please call this office.
Most commonly, CP notices describe the proposed tax due, as well as any interest or penalties. The notice will also explain the examination process and describe how you can respond.
These automated notices are sent out year-round, and they are quite common. As the IRS tries to close the tax revenue gap, it has become more aggressive in its collection efforts. In addition, as many taxpayers now use low-quality tax mills or do-it-yourself software, the number of notices sent because of preparer error have increased. Missed checkboxes, misunderstandings of available credits, and overlooked income all add up to more errors.
The first step the IRS uses in this automated process involves matching what you reported on your tax return to the data that third parties (e.g., employers, banks, and brokers) reported. When this information does not agree, the automated collection effort begins.
Don’t Panic – These notices often include errors. However, you do need to respond before the deadline specified on the notice (usually 30 days) or else face significant repercussions. The notice may even be related to suspected ID theft. For instance, someone may have gained access to your tax ID (or that of your spouse or one of your dependents) and tried to file a return using the stolen ID. The first step is to determine which type of notice you have received.
The IRS currently has over 150 varieties of CP notices. The following is a very small sampling of these notices. The IRS provides an online search tool that provides information on all of the CP Notices.
CP01C - The CP01C notice advises taxpayers that the IRS marked their account with an identity theft indicator and provides additional information and resources for identity protection.
CP05A - If you received this notice, the IRS is examining your tax return and needs you to send verifying documents.
CP05B - If you received this notice, the IRS is holding your refund because the income reported on your tax return may not match the income reported to the IRS by payers.
CP12 - This notice tells you the IRS corrected one or more mistakes on your tax return, and a payment becomes an overpayment, or an original overpayment amount has changed.
CP14 - If you received this notice, you owe money on unpaid taxes. Pay the amount you owe, establish a payment plan, or call if you disagree with the amount.
CP27 - You received this notice because the IRS records indicate you may be eligible for the Earned Income Credit (EIC), but didn't claim it on your tax return.
CP49 - If you received this notice, the IRS used all or part of your refund to pay a tax debt.
CP54E – Informs you that your tax return shows a different name and/or ID number from the information the IRS has for your account. Please provide the requested information.
CP59 - If you received this Notice, the IRS has no record of you filing your prior personal tax return(s). The Spanish version of this notice is CP759.
CP81 - Tells you the IRS hasn’t received your tax return for a specific tax year. The statute of limitations to claim a refund of your credits or payments (such as income tax that was withheld) for that tax year is about to expire.
CP112 - This notice tells you the IRS made changes to your return because they believe there’s a miscalculation. As a result, you are due a refund.
CP161 - If you received this notice, you have an unpaid balance due.
CP180 - If you received a CP180/CP181 notice your tax return is missing a schedule or form.
CP237 - Tells you the IRS sent you a replacement refund check.
CP237A - Tells you to call the IRS to request your refund check.
CP240 - If you received this notice, there's a discrepancy between information you reported on your employment tax return and figures submitted to the IRS from your W-2, W-2G and 1099-R forms. As a result of this discrepancy, you owe an additional amount.
CP501 - If you received this notice, you have a balance due on one of your tax accounts.
CP516 - This notice informs you that the IRS still has no record that you filed your prior tax return or returns.
CP521 - If you received a CP521, CP521 (SP) or CP621 Notice, the IRS is reminding you that you have an installment payment due. Send your payment immediately.
CP523 - If you received a CP523, CP523 (SP) or CP623 Notice, the IRS is informing you of the intent to terminate your installment agreement and seize (levy) your assets. You have defaulted on your agreement.
CP518 - The CP518 Business Notice is a final reminder that the IRS has no record that you filed your prior business tax returns. The Spanish version of this notice is CP618.
CP2000 - A CP2000 notice is very different from the other CP notices (which deal with issues such as identify theft, audits, and the earned income credit). The CP2000 notice includes a proposed—almost always unfavorable—change to your tax return, and it gives you the opportunity to dispute the proposed change. Procrastinating or ignoring this notice will only cause the IRS to ratchet up its collection efforts, which in turn will make it more difficult for you to dispute the proposed adjustment.
Sometimes, the IRS will be correct. You may have overlooked a capital gain or income from a second job. It is also possible that the IRS has caught someone else using your SSN in order to work or otherwise stealing your identity. Quite frequently, however, the IRS is incorrect, simply because its software isn’t sophisticated enough to pick up all the information that you report on the schedules attached to your return.
These notices of proposed change will also include penalties and interest. Even if you do owe the tax, this office may be able to get the penalties and interest abated for due cause.
When you receive an IRS notice, your first step should be to immediately contact this office and to provide us with a copy of the notice. If you are a current client, we will review the notice to determine whether it is correct, and then we will consult with you to determine how best to respond. For others, we may need a copy of the tax return on which the notice is based before being able to help.
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Frequently Asked Questions
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You can prepare your taxes yourself, especially if your business is simple.
But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.
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Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.
That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.
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Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.
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Possibly, if it was truly for your business and you have proof.
Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.
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Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.
The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.
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