No one likes to get a letter from the IRS, unless it's with their refund check. But if you do happen to get a letter, what should you do?
Basically there are three types of taxpayers. When Taxpayer A receives a letter from the IRS, he can't imagine why, so he opens the letter, reads it, and takes appropriate action. Now Taxpayer B knows he's done something wrong, or knows he owes taxes or penalties. He immediately tosses the IRS letter aside when it arrives. Taxpayer C receives his letter, can't imagine why, so he opens it. He reads the letter, but it doesn't make any sense, so he just tosses it aside. Which taxpayer are you?
We all know we should behave like Taxpayer A. But what if it doesn't make any sense? Or when the IRS says you owe $90,000, and there are 14 encrypted pages of small print? That just can't be. Maybe if I just ignore it, it will go away. Maybe we intend to investigate later, but the days keep passing us by and we never get to it. It happens.
I had a client who received a letter from the IRS stating they thought she owed them $89,000+. Imagine getting that in the mail! She didn't ignore it. She brought it in and we figured out why they thought she owed that much. She had sold some bonds and other securities and did not report them on her return. IRS doesn't know what she paid for the bonds and securities (cost basis). Since you only have to pay tax on your gain on sales of securities, we figured that out, and reduced her $89,000 bill to a couple thousand dollars. I've seen other cases, particularly in this economy, when the sale is actually for a loss, and the taxpayer ends up getting a refund!
You should address any correspondence from the IRS They will not go away. It will just get worse and more difficult to resolve. Follow the steps below.
Step 1 - Open the letter.
Step 2 - Read it.
Step 3 - If it makes sense, take appropriate action. Generally this will either be to send them information or money.
Step 4 - If it doesn't make sense, investigate. Call the IRS and ask them to explain. Yes, you will have to wade through various menus to get to an actual person. If it still doesn't make sense, contact a professional. They should be able to tell you exactly what the IRS is looking for.
Step 5 - If you owe, pay it.
Step 6 - If you can't pay it, set up an installment plan. This is a crucial step! The IRS actually does have some sympathy for you when your chips are down. Call them. Depending on your situation, they might put your account on hold and stop bugging you for a while.
A last note on installment agreements. Your penalties and interest continue to accumulate while you have a balance due, but the IRS has different rates depending on your error. The lowest penalties are for those who set up an installment agreement. If you don't want to pay at all, why would you pay more than you have to? Set up the installment agreement, select an amount to pay that you can pay every month, and stick to it. It takes a phone call.