Think twice about automatically paying the amount due on a notice
Quotes from actual IRS correspondence received by clients:
“Thank you for your correspondence. We currently do not have a copy of the correspondence we sent to you regarding your child’s tax return.”
“Our records show we received a 1040X…for the tax year listed above. We’re sorry but we cannot find it.”
“Our records show you owe a balance due of $0.00. If we do not receive it within 30 days, appropriate collection steps will be taken”.
“Payment is due on your account. Please submit payments on or before June 31 to avoid late payment penalties and interest.”
It’s pretty tough to pay a balance due of $0 on June 31st when June only has 30 days.
The message should be clear. If you receive a notice from the IRS do not automatically assume it is correct and submit payment to make it go away. The same is true for any state notices. They are often in error. So what should you do?
- Stay calm. Try not to over-react to the correspondence. This is easier said than done, but remember the IRS sends out millions of notices each year. The vast majority of them correct simple oversights or common filing errors.
- Open the envelope. You would be surprised at how often clients are so stressed by receiving a letter from the IRS that they cannot bear to open the envelope. If you fall into this category try to remember that the first step in making the problem go away is to open the correspondence.
- Careful review. Review the letter. Make sure you understand exactly what the IRS thinks needs to be changed and determine whether or not you agree with their findings. Unfortunately, the IRS rarely sends correspondence to correct an oversight in your favor, but it sometimes happens.
- Respond timely. The correspondence received should be very clear about what action the IRS believes you should take and within what timeframe. Ignore this information at your own risk. Delays in responses could generate penalties and additional interest payments.
- Get Help. You are not alone. Getting assistance from someone who deals with this all the time makes the process go much smoother.
- Correct the IRS error. Once the problem is understood, a clearly written response with copies of documentation will cure most of these IRS correspondence errors. Often the error is due to the inability of the IRS computers to conduct a simple reporting match. Pointing the information out on your tax return might be all it takes to solve the problem.
- Certified mail is your friend. Any responses to the IRS should be sent via certified mail. This will provide proof of your timely correspondence. Lost mail can lead to delays, penalties, and additional interest on your tax bill.
- Don’t assume it will go away. Until a definitive confirmation that the problem has been resolved is received, you need to assume the IRS still thinks you owe the money. If no correspondence confirming the correction is received, a written follow-up will be required.
Tax Prep Deerfield Beach
To Amend or Not Amend?
Is it always a good idea to amend your tax return?
There’s usually an element of relief after your annual tax return has been filed. But what do you do if you find an error on your tax return? Should you always file an amended return? Here are some things to consider.
Errors in the IRS’ favor
Errors discovered that lead to an additional tax obligation are legally required to be fixed by filing an amended tax return. This is especially true if the discovered error is from missing information found on a 1099 form or W-2 reported income. Why? This information is being reported to the IRS and matching programs will typically catch the error. The sooner you amend your return and pay the tax the lower the possible interest and penalties.
Errors that result in lower tax
If correcting the error or omission results in a large additional refund the answer is usually obvious. File the amended return. But this is not always the case.
- Your tax return is now open to audit for a longer period of time. Federal tax returns are typically subject to audit for three years after the original tax return due date OR the date the return was filed whichever is later. If you file an amended tax return the audit clock resets based on the amended return filing date. So if you have other areas in your tax return that might be audit risks you may have second thoughts regarding amending your return.
- The amended return may become examined. Amending a tax return could put a spotlight on your tax return. The IRS has certain topics that could trigger individual examination when amended returns are requested. Amended tax returns based on things like the Earned Income Tax Credit, Small Business Income and the Research Tax Credit for small businesses, could result in a visit from your local IRS examiner. Do you have the necessary records to substantiate your amended tax return?
- Amending one tax return, may require amending a number of them. Making a minor change in one year may require you to make changes in other tax years. This could result in resetting the audit clock on as many as three to four tax years. Is it worth it?
- Don’t forget other taxing authorities. Making a change on your federal tax return may require you to file an amended state or local tax return. Do not assume that an amendment in your favor on the federal level will necessarily be in your favor on the state/local level.
- Don’t expect the refund to be timely. Amended tax returns can take a long period of time to be reviewed. There have been cases where the IRS has delayed initial review of an amended return for more than a year, then decided to examine the return. While not typical, the process could take up to 1 1/2 years to resolve.
- Timing is important. Remember there is also a time limit to request a change in your tax return and receive an additional refund. This is typically set to three years after the initial filing deadline of the tax return. Make sure you file these tax returns using certified mail. Should the IRS delay responding to your amended return, you may need to prove it was filed timely.
- You have a chip in your pocket. If the refund amount is not large enough to justify an amended tax return, still keep the documentation. Should you be chosen for an audit, you can often present your case at that time to offset any additional tax.
While finding an error or omission on your tax return can be unsettling, rest assured there are ways to fix the problem, but it is often worth taking a balanced approach to determine the best solution.