Does the IRS Disagree with Your Income Figures? 7 Critical Steps to Take Next
One of the scariest things that can befall a taxpayer is the dreaded notice from the IRS stating you owe them more money than you can pay. When you open up the mailbox and see the return address of the IRS staring back at you, your heart is bound to skip a beat (or two).
Few people look forward to communicating with the IRS, but many taxpayers receive these notices every year. Knowing what to do next could make all the difference and possibly save your bank account if you find yourself on the receiving end of such a notice. Here are seven critical steps to take if the IRS disagrees with the income (or expense) figures you have reported.
Note: If you fall behind on filing your taxes, you’re not alone. We can help. Reach out to our tax law firm. We can help you determine how many returns you have to file to get back into good graces with the IRS. It may not be as many as you think or did not file. We have helped countless numbers of clients. We can do everything from helping you file late tax returns and negotiate with the IRS if you owe back taxes.
1. Stop panicking. Getting a letter from the IRS is enough to send your heart racing, but it is not the end of the world, and panic will not help you. Staying calm and reviewing the communication will be critical, so settle your nerves and move on to the next steps.
2. Review the document carefully. The letter you received from the IRS should lay out where they disagree with your figures and what they used to come up with their own math. (Many times, the IRS is anything but clear.) Reviewing these figures is the critical next step, and it is one you should take your time with when you check it. After trying to understand what the IRS says if you don’t understand what the IRS is saying, get professional help.
3. Pull a copy of the tax return in question. The communication you received from the IRS will tell you which year’s tax return is in question, so pulling a copy of that return should be your next step. Once you have the document in hand, you can review the figures and see the discrepancies.
4. Find your supporting documents. In many cases, these discrepancies are caused by simple errors like transposed numbers, so compare the figures on the supporting documents to what ended up on your return. You may find, for instance, that you reported interest of $2,150 as $1,250, and the solution could be as simple as ponying up the extra tax.
5. Contact a tax professional in handling tax problems - a tax attorney experienced in tax resolution. If you used a professional tax preparer, you might be tempted to talk to them first. That might be ok, but if you owe a large amount of back taxes, they might not be able to help. That’s where a good tax law firm can help. Our firm routinely deals with this kind of problem. We can actually negotiate on your behalf with the IRS and find the best resolution for your tax situation. Sometimes we can settle for less than what you owe in taxes!
6. Review the letter from the IRS. Suppose you did make a mistake on your tax return. In that case, you can simply agree to the figures the IRS reported and pay the additional tax, along with any applicable penalties and interest. If you disagree, you can respond with the supporting documents that prove your case. We don’t suggest you do this yourself. Remember that whatever you say or provide is “on the record.” Call our tax law firm to make sure you investigate the issue in its entirety. Otherwise, you could land yourself in more trouble. Remember, IRS notices have short deadlines for you to respond. You can miss important deadlines if you don’t take immediate action. You don’t want to end up owing the IRS money you should not owe them simply because you didn’t review a letter from the IRS and didn’t take timely action.
7. Follow up. It can take some time for these discrepancies to be resolved, so you will need to bring a healthy dose of patience. If you agree with the notice and choose to pay the extra tax, you can see when your check is cashed or the money is taken out of your account, documenting the situation and keeping careful records. If you disagree, you will need to wait for the IRS to respond, but make sure you don’t assume the issue is resolved unless you have a written document from the IRS stating that. In many cases, these are situations where you should try to handle it yourself without professional help.
If you do need to contact the IRS, keep in mind that their phone lines are extremely busy. Many people who have been through this trauma recommend calling early in the morning, right after the phone lines open, so you can get in line and get your questions answered before the lines fill up.
We NEVER suggest our clients try to contact the IRS on their own. It would be like going to court without a lawyer. The IRS is not your friend. Their sole responsibility in these cases is to collect taxes they think you owe them. While they will be professional and polite, don’t think for a minute that they are looking out for your best interests or trying to be your friend. That is not their job. Their job is to collect money, not to represent you. Representing you is our job if you decide you want our help.
Hopefully, you will never be on the receiving end of a nasty letter from the IRS. However, it is important to be prepared. If you do find a letter from the IRS in your mailbox, following the seven critical steps listed above could save you from further trouble.
Which Tax Records to Keep and For How Long? Do This And NOT THAT With Your Tax Records to Avoid Tax Problems Later.
Whether you are expecting a nice tax refund or preparing to write a big scary check, you know that April 15th is the annual tax filing deadline. What you may not know or remember, however, is that every day is tax day at the IRS. The IRS is always reviewing the information taxpayers, and business owners have provided.
You see, millions of Americans get letters from the IRS stating they owe back taxes or requesting more information about their tax returns. Their mistake is that they didn’t keep receipts, bills, mileage logs, or other documents they needed to prove expenses, deductions, or other items on their tax returns. Mileage logs are one of the first things the IRS asks for in an audit because most people either didn’t keep one when they drove the mileage or they didn’t keep it after their return was filed. (You have to keep one to be able to deduct mileage, no log, no allowable deduction.) That means that keeping tax records is more than just smart bookkeeping - it is essential self-defense with the IRS.
The fact is that the much feared IRS can request additional documentation for up to three years after the annual tax deadline has come and gone. However, there might be more bad news. If the IRS suspects you’ve committed fraud or they find a substantial understatement of income (understated by 25%), the IRS can look back at six years of your tax returns and require proof for anything on your tax return. It may be disconcerting, but the IRS has the right to request additional information months or even years after you filed your tax return.
There is another category of documents you should always keep, regardless of how many years have passed since you filed your tax return. I call this the keep them forever rule. These are documents that show what you contributed to your retirement account – IRAs or Roth IRAs. Keep all of your retirement account statements and other documents. If you make an IRA or Roth contribution, the trustee will issue you a Form 5498. Keep this form!
Also, in the keep them forever group are documents that show how much you paid for an investment or your home and any capital improvements (ex. expenses for kitchen or bathroom remodeling, etc.). When you sell your home, if you sell it for more than you paid for it, you will need these documents to show what you paid for them and any improvements made to the property. You don’t want to have a big tax bill because you didn’t keep those documents in your tax records.
We help people resolve their tax problems. Whether it’s defending people who are audited, solving back taxes that are owed, or representation in U.S. Tax Court, we need good records to protect you. That’s why saving your tax records is essential. It can be the difference between ending up not owing to the IRS anything, settling your tax debt, or facing a huge tax bill because you shot yourself in the foot by initially not keeping tax records and keeping them for the right amount of time.
As a result, it is crucial to retain your tax records and keep certain tax documents on hand, just in case the IRS asks for them. Here are the most common tax records and how long you should keep them around.
If you are being audited or owe back taxes, our firm can help defend you and negotiate with the IRS, and if you owe money, potentially settle your tax debt or work out a payment plan. Call us today. You can leave your worries at our door. Our law firm can navigate the IRS maze, so you don’t have to, and you can sleep at night. We have former clients who have told us after we started helping them, they felt at peace for the first time since their tax problems began. You don’t have to face the IRS alone.
Save The Tax Returns and Your Documents
You may think the tax year is over, but the final curtain does not fall for a full 36 months for the IRS. In most cases, the IRS will have up to three years to question the figures you reported on your tax return or otherwise challenge the information you provided. For this reason, it is generally a good idea to keep your old tax returns for a minimum of three years. However, as discussed above, there are other instances where you need both your tax returns and your proof for expenses and deductions much longer. Don’t forget about those documents you need to keep forever.
Pay Stubs and W-2 Forms
As with the tax returns themselves, it is generally a good idea to keep your W-2 forms for a minimum of three years. If you received 1099 forms, save them too. This will provide you with the documentation you need should the IRS find a discrepancy between the amount of income you reported to the IRS and the figures your employer sent to the IRS.
It is also a good idea to retain at least your year-end pay stubs, not only to help reconcile them with the W-2 forms but also for other forms of income documentation. If you are applying for a mortgage, for instance, the lender may ask to see several years worth of tax returns, pay stubs and other income documents, and having them on hand will make the application process faster and easier.
Income and Dividend Forms
The IRS looks at all of the income you report when you complete and submit your tax returns, but the IRS does not just take your word for the accuracy of those figures. Instead, the IRS uses sophisticated matching programs to compare the amount of income you reported from various sources with what they receive from third-party sources.
Those third-party sources could include your bank and credit union, your brokerage firms and mutual fund companies, and any other places that provide you with income. Therefore, it is a good idea to hold onto any income-related forms you receive for at least three years, and possibly longer if you run your own business or earn income from gig work or freelancing.
Once again, these income documents can do double duty, serving as a backup if the IRS questions the numbers on your tax return and giving you the information lenders and others might need down the road. If you store these documents electronically, you will not even need to worry about buying a file cabinet, so there is no reason not to keep them around.
Filing taxes can be a stressful experience, but the difficulty does not end when your return is filed. Even after that return has been filed and accepted, the IRS could still question or challenge your numbers, and that is why it is so important to retain the backup documentation until the challenge window has passed. Now that you know what to retain and for how long, you can rest a little easier when tax time rolls around.
If you run into tax trouble or the IRS states you owe back taxes, reach out to our law firm for a confidential consultation to fully explain all of your options to resolve your tax problem permanently.