The Internal Revenue Service’s (IRS) main form of communication with taxpayers is through the two types of notices, a CP (computer notice) and a LTR (letter notice). There are many reasons that the IRS will send notices to a taxpayer, a few including that there is a balance owed, the IRS has made changes to the return, additional information is needed, to verify the taxpayer’s identity, to assess penalties, or to notify that the return is under examination.
Two of the most common reasons that notices are received are due to the IRS assessing penalties or for a balance owed.
There are over 150 kinds of penalties in the US Internal Revenue Code. The most popular ones assessed by the IRS are penalties for late payment, underestimated tax payments, late filing, and accuracy related penalties. These penalties can get expensive - for example, penalties that are related to information returns are $290 per return for 2023, penalties charged for unpaid withholding taxes are 100% of the unpaid taxes, penalties for failure to provide foreign information are $25,000 per Form 5472 and failure to file FBAR penalties of $100,000 or 50% of the balance (whichever is greater) in the account at the time of the violation.
When a taxpayer has unpaid taxes, the IRS can issue liens and levies. A lien is a legal claim against property to secure payment of a tax debt. It protects the governments interest in your property when the tax debt is not paid. A lien is public record and appears on credit reports and can become a levy. A levy is the seizure of property to pay a tax debt.
Before a lien or levy is issued against a taxpayer, there will be a sequence of IRS notices that increase in intensity leading up to a final notice of intent to levy which is sent via certified mail. Once that final notice of intent to levy is issued, the IRS may issue a seizure of property, money, or assets. They can seize state refunds, bank accounts, and/or garnish paychecks.
In order to avoid a levy, it is important to promptly respond to any IRS notices or letters that are received and to stay current with tax filings and payments. To stay current with tax filings and payments, you should make sure that the current year tax return is filed or on extension, all prior year’s tax returns are filed, taxes are paid, withholding or estimated taxes have been paid, and any other taxes due to IRS are up to date or on an installment agreement.
Additionally, if you are an employer, it is important that all payroll taxes and returns are filed and paid. One area that the IRS takes very seriously is payroll taxes. An employer withholds the taxes from employee’s checks therefore, if an employer does not remit the tax to the IRS, there are serious consequences. A Revenue Officer may come to your place of business and the IRS will assess Trust Fund Recovery penalties. The IRS will do interviews and an investigation in order to determine who was responsible. Additionally, they will go after the missing payroll taxes in both the business and personally to all individuals the IRS has deemed to be responsible.
If a Revenue Officer comes to a place of business, you have the right to be represented and can tell the IRS you have a Power of Attorney and to contact your representative.
If you do receive an IRS notice or letter, you should review the notice to determine what it is saying and if it is correct. Is the IRS requesting additional information? Are they assessing penalties? If you need help, you can reach out to your tax return preparer or your payroll provider, if related to payroll forms, to help determine an action plan.
If a notice requires that a response be received by a specific date, it is important to comply in order to maintain your right to appeal and to prevent or minimize any additional penalties or interest from being charged.
If a notice is related to the IRS assessing penalties, there are a few options that a taxpayer has.
You should first verify that the penalty and interest is accurate and has been calculated properly. For example, due to the 2021 Texas Ice Storm, Texas residents were given an automatic extension for filing their tax return, but the IRS was not able tell their system. This resulted in many Texas taxpayers receiving inaccurate notices and penalties being assessed to their accounts. By sending a letter response or calling the IRS, mistakes can be corrected for taxpayers.
If the penalties are calculated correctly and are accurate, you can develop a strategy to get the penalty abated if possible.
The IRS offers some statutory exceptions, such as Rev. Proc. 84-35 which states that the abatement of penalties by reasonable cause will be assumed for failure to file a timely partnership return if the following conditions are met.
- The partnership had no more than 10 partners for the taxable year
- Each partner was a person (or the estate of a natural person)
- The partnership did not elect to be subject to the rules for consolidated audit proceedings
- All partners reported their distributive share of partnership items on their timely filed income tax returns
- Each partner's share of any partnership item is proportional to their share of any other partnership item
Administrative waivers also provide relief for taxpayers if certain conditions are met. The First Time Penalty Abatement is the most common administrative waiver and is for taxpayers who have a history of good compliance with the IRS for the prior 3 years.
Lastly, if there is a reasonable cause for not filing or paying on time, the IRS will waive penalties. There are many different types of reasonable causes, which include ignorance of law, death or serious illness, fire or natural disaster, reliance on advice from attorney, and CPA, EA, or IRS employee. In order to qualify for penalty abatement by Reasonable Cause, the taxpayer has to provide proof of their argument and show that it affected other affairs, especially financial. The request should show when the problem occurred, what was done to resolve it, and what is being done to prevent future issues.
If you need assistance to handle tax controversy issues, ADKF has a department to help you with issues from notices to audit representation. Our Tax Controversy Department has CPA’s and Enrolled Agents that are authorized to represent clients before the IRS and are also able to assist with state issues. Additionally, for more information, head over to our YouTube channel: https://www.youtube.com/watch?v=l_UgSQqogWI