How to Respond to IRS Notices

Every tax year the IRS receives over one trillion information reports regarding individual taxable income such as interest income paid by banks, corporate stock dividends and distributions made by mutual funds. The IRS matches all of these reports to individual tax returns to determine if the income was properly included. If it appears that a tax return is missing some income, the IRS sends a notice to you with a proposed tax adjustment. Read on to learn more.

Difficulty: Moderately Easy

Instructions

1. Verify that the IRS notice is accurate. You may have reported the item or items in a manner which is not obvious on the tax return such as netting income against expenses.

2. Review how the IRS adjusted the sale of stocks or mutual funds that were omitted from your return. The IRS uses the total sales price as income without an offset for the cost or basis of the investment.

3. Respond with a detailed explanation if you do not agree or partially agree. If the adjustment involves the sale of stocks or mutual funds, include your cost or basis in the adjustment items to reduce the proposed tax increase.

4. Send in payment equal to the additional assessment if you agree with the adjustment of unreported taxable income as shown in the notice.

Tips & Warnings

• File an amended return if you find that an information report was inadvertently omitted from the income in the original return. By filing an amended return before the IRS sends you a notice, which can be a year or more after the tax return was filed, you can usually avoid penalties.