A letter from the IRS?

No need to panic. Here’s how to respond.

Consumer Reports Money Adviser: March 2010

Put away the hazmat suit. That letter from the Internal Revenue Service in your mailbox is not radioactive. In fact, it’s probably harmless, so don’t be afraid to open it and see what it says.

“You have no idea how often people rush into my office without reading it,” says Eric Green, a tax attorney with Convicer & Percy in Glastonbury, Conn. "Then they look at it more carefully, and it says they owe three bucks."

Dealing with an IRS notice is never painless, but it’s often less traumatic than you think. Open and read IRS mail as soon as you get it. Let your tax preparer know about all but minor issues. Respond within the prescribed period, usually 30 days, and put your answer in writing. Include photocopies of your evidence.

Those are the basics for dealing with any IRS notice. Below, we offer advice on dealing with some common ones, from easy fixes to Excedrin headache No. 1040.

Name misspellings or wrong Social Security numbers

Check your return and call the IRS with the proper information. Then refile your return.

Overpaid taxes

Notice CP 49 tells you when the IRS applies any overpaid taxes to other taxes you owe. It requires no action on your part unless you disagree with the amount.

Mismatched information

If the interest reported on your 1040 isn’t what your bank or brokerage reported, you’ll get Notice CP 2000, outlining the discrepancy. If you sell stocks at a loss, you may have assumed that you didn’t have to report the transaction because you didn’t profit. But the IRS sees only the brokerage’s record of sale and assumes the entire amount is taxable until you prove otherwise.

If your claimed estimated tax payments differ from the amount the IRS received, expect to get Notice CP 23,"Estimated Tax Discrepancy, Balance Due."

To correct those errors, write a letter explaining the snafu and attach the evidence, such as W-2s, canceled checks for estimated payments, and bank and brokerage statements. If you find you’re wrong, send the signed notice back with your check.

Correspondence audits

If the IRS sees a red flag on your return—say, a questionable business deduction or big increase in charitable donations over last year—it will request detailed backup information. For example, if your business mileage is questioned, send pages from a mileage log to support your claim. Respond to the IRS within 30 days or you’ll lose the deduction.

Balance-due notices

If you receive CP 14, "Balance Due, No Math Error," the IRS is claiming you underpaid your tax bill. "This is your first warning that the IRS is looking for money," notes Karla Dennis, an enrolled agent with Cohesive Tax in Cypress, Calif.

Responding on time won’t reduce your tax liability or the interest accrued since the filing deadline, but it may eliminate penalties. If you don’t respond, you’ll get CP 501, "Reminder—Balance Due," marking the start of the IRS’s seizure process.

Dennis recommends calling the agency immediately to set up a payment plan if you can’t pay the money all at once. Otherwise, expect CP 504, "Urgent Notice—Balance Due," the last one before the IRS begins to levy your accounts. You have 10 days to respond before the IRS can start taking action.

Audit request

About 1 percent of filers get this, says the IRS. Take the notice to your tax preparer or find a qualified CPA through www.aicpa.org or an enrolled agent at www.naea.org. Either can represent you before the IRS. One common audit trigger is underpayment of quarterly estimated taxes by the self-employed. To avoid it, pay roughly what you paid last year split into four payments, recommends Patrick Astre, founder of Astre Planning, a tax and financial planning firm in Shoreham, N.Y.

Notice CP 90

"Final Notice—Notice of Intent to Levy and Notice of Your Right to a Hearing" is serious business. The IRS is telling you it plans to hold your bank account hostage. You’ve got 30 days to file an appeal. Again, turn to an expert and provide all the records you can find. "You’ve got to cooperate," Astre says. "You stop a train by getting onboard and applying the brakes, not stopping in front of it."

Don’t respond to so-called IRS e-mail

If you receive any e-mail messages that purport to be from the Internal Revenue Service, do not respond. They are most certainly scams. The IRS says it does not send unsolicited e-mail messages about tax matters to taxpayers. The IRS recently warned of a new type of e-mail scam in which people receive messages addressing them by name and suggesting that they are candidates for a tax audit. The message instructs them to click on links and fill in account information. Scam artists use the data for identity theft.

Other e-mail cons come with very official-looking letterhead and advise recipients that they are eligible to receive refunds. The scams include instructions to click on a link to a new Web page and provide certain bank information. Again, the IRS doesn’t correspond with taxpayers that way.

If you receive e-mail that says it’s from the IRS, report it to phishing@irs.gov. For details of other common scams, go to www.irs.gov and seatch for "Phishing and e-mail scams." Then scroll down to "Additional resources."


This article appeared in Consumer Reports Money Adviser.

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