We all know that feeling when we get a piece of mail with a return address that puts a scare into us. If you’re a business owner, a letter that may incite fear could very well be one from the IRS. Whatever you do, don’t ignore it. Take a deep breath and follow these easy steps:
Open the letter and read it.
Sounds simple, right? But the truth is that too many taxpayers are fearful when they see that return address from the IRS on the envelope. So they leave the letter unopened, not really wanting to know what’s inside. They wait and wait until there’s a lien or levy against their bank accounts or property…and then it’s often too late!
Determine whether you understand the request — and if you can, respond.
To start, it is important to point out that not all letters and notices that you receive from the IRS are necessarily bad. It’s possible that the letter may simply be requesting additional documentation to support information in a filed return: a 1099, expense report, or payroll report.With this type of correspondence, the taxpayer receives a notice from the IRS saying that the agency is examining a tax return and has questions about specific line items. The purpose of the notification is usually to request supporting documentation for the line items being questioned. Or perhaps the IRS may be asking you to submit a tax return you previously sent, that they can’t locate for some reason. This is one of the reasons why it’s crucial for you to keep detailed financial records that are easily accessible, so that if further documentation is requested it won’t turn into a “wild goose chase” to find it. Once you submit the information to the IRS, the problem is resolved.
If it’s something to which you cannot respond – Contact a professional to assist you.
There’s a few things you might find upon opening the envelope which will require more than a simple response, primarily if the letter is a notice of an audit. There are four kinds of tax audits: field, correspondence, taxpayer compliance measurement program and office audit. In any of these cases, you’ll want to immediately contact a professional, such as an enrolled agent. In recent years, The IRS has been moving more toward correspondence audits, which can impact small businesses and sole proprietorships. Tax professionals generally advise against communicating directly with the IRS if you receive an audit letter. Often, business owners believe that if they have nothing to hide, they should call the IRS and let them know that, but that may not be the best idea, even if your return is all on the up and up. You should not represent yourself in a tax audit. Instead, provide your enrolled agent with a signed Power of Attorney form, authorizing them to contact the IRS and handle the audit, without you ever needing to be present, initially or down the line.
Another reason to pick up the phone would be if the letter is a demand for payment – specifically a payment that you disagree with for whatever reason. A demand letter is a notice from the IRS stating that you owe them a certain amount of money from back taxes, if you were not able to pay the full amount or haven’t made a payment at all. Receiving a demand letter is the first step that the IRS makes during the collection process. You may have received a letter with an “intent to levy” from the IRS.
Contacting a professional to negotiate on your behalf is a good solution in all of these cases.