In our Houston-based CPA practice, we understand the anxiety a business owner feels when an unexpected letter from the IRS arrives. It’s a common experience, but approaching the situation with a calm, methodical strategy is essential.
An IRS notice is not an accusation; it is a formal communication that requires a professional response. Most of these letters are computer-generated and relate to specific, often correctable, discrepancies. This guide provides a framework for how we advise clients to respond effectively.
A Framework for Action for Your First 24 Hours
The initial response sets the tone for the entire process. The first step we always advise is to resist the urge to either panic or ignore the letter. Ignoring the notice will only lead to escalating penalties and interest, as the deadlines are firm. Instead, take a moment to read the entire notice carefully.
Pay close attention to the notice number (e.g., CP2000) and the response date listed in the top right corner. This information is critical for determining the nature of the inquiry and the required timeline.
How to Interpret the IRS’s Request
IRS notices typically fall into a few distinct categories, and understanding which one you have received is the key to formulating the right response.
Proposed Adjustments (e.g., a CP2000 Notice)
This is one of the most common notices for business owners. It is not an audit or a bill. It means the income reported to the IRS by a third party (like a client who issued a 1099-NEC) does not match the income you reported on your tax return. The notice proposes a change to your tax liability and gives you the opportunity to either agree or provide documentation to dispute it.
Balance Due Notices (e.g., a CP14 Notice)
This is a direct bill stating that the IRS calculates a balance owed on your account. The notice will clearly state the amount due, including any penalties and interest, and provide a payment deadline.
Requests for Information or Verification
These notices are not proposing changes but are seeking clarification. The IRS may be requesting documentation to verify a specific deduction, asking you to confirm your identity to prevent fraud, or simply informing you that your return is under a general review.
A Strategic Approach for Formulating Your Response
Once you understand the notice, the next step is to craft a response. While simple math errors or small, undisputed balances can sometimes be handled directly, a professional approach is often warranted.
A written response, sent via certified mail to create a verifiable record, is almost always the preferred method. In our experience, verbal communications can lead to misunderstandings. Your response should be direct, factual, and only address the specific issue raised in the notice. Providing extraneous information can unnecessarily widen the scope of the inquiry.
Dealing with the CP200 Notice
A recurring situation we encounter involves a business owner receiving a CP2000 notice because a client filed a 1099 for the wrong amount. Recently, we assisted a contractor whose client had accidentally included reimbursed material costs on the 1099, inflating their reported income. Our guidance involved helping the client gather the original contract, invoices, and bank statements to clearly document the discrepancy between the 1099 figure and their actual service income. This documentation, submitted with a clear explanatory letter, resolved the issue without further escalation.
Structuring a Payment Plan for a CP14 Notice
A small business entrepreneur residing within the vicinity of Houston received this CP14 balance due notice. It carried a tax liability of more than $12,000 owing to underreported income. While the client agreed with the IRS assessment, he did not have the money to pay in full.
Our CPA-led professional tax compliance services in Houston, TX, helped him avoid penalties by helping him in the rapid submission of a written request for an Installment Agreement. The request included a breakdown of current cash flows and a suggestion for a realistic monthly payment schedule. The extreme measures taken before the deadline for payments secured the client from enforced collections and offered a reprieve toward debt repayment without obstructing operations.
The case proved how timely taking actions and documentation can prevent a manageable situation from growing when agreeing to the notice.
It’s a tough judgment call on when to get professional help. Certainly, if a notice involves a significant proposed tax liability with a complex issue, such as payroll tax or passive income, and the term audit or examination is used, then it is prudent to hire a CPA. Protection of your rights, assistance with a response, and help with communications with the IRS are some of the benefits you stand to gain by hiring a professional.
The Bottom Line
An IRS notice is a manageable business event when met with a prompt and professional strategy. The key is to understand the nature of the request, formulate a direct and documented response, and recognize when professional support is needed. By taking a measured approach, you can navigate the process effectively and maintain your focus on running your business. At Dabney Tax & Accounting Services, our role is to provide the CPA-led guidance necessary to help you understand and respond to these communications with confidence.
Frequently Asked Questions
- Does responding to an IRS letter increase my chances of a full audit?
No, this is a common misconception. In fact, providing a timely, accurate, and well-documented response is the best way to resolve a specific issue and prevent it from escalating. Most notices are designed to close a specific discrepancy, and a professional response often achieves that goal efficiently.
- I agree with the notice but cannot pay the full amount immediately. What should I do?
The IRS has established processes for taxpayers who cannot pay a liability in full. You may be able to arrange a short-term payment plan or a longer-term installment agreement. In certain circumstances, an Offer in Compromise (OIC) may be an option. It is advisable to consult with a CPA to understand which path is most suitable for your financial situation.
- Should I call the IRS agent listed on the notice?
While calling is an option, we generally advise clients that written correspondence sent via certified mail is superior because it creates a clear and indisputable record of communication. If you must call, be sure to document the date, time, agent’s name, and ID number, and a detailed summary of the conversation for your records.
- How does a CPA provide support when handling an IRS notice?
When you engage a CPA, you gain professional support who can first interpret the technical aspects of the notice. From there, they can guide you in gathering the precise documentation needed, help you draft a formal response letter, and, if necessary, assist you in communicating directly with the IRS. This way, you can create a strategic response, relieving you of the stress and burden of managing the process alone.
