For example, exactly when is something income, even though you physically don’t have it? What type of proceeds
qualified for long-term capital gain rather
than ordinary income rates? What losses are
full write-offs, and which ones are limited to
offsetting gains? What assets can be written
off all at once, and what must be capitalized
and written off ratably over many years?
These and many other questions come
up at tax return time. You must have some
answers to be able to file, even if you are
leaving many of the details to tax return preparers. But once you sign your name and
file, what about the IRS notices that come?
How should you react, and in what order?
You can contest many IRS tax bills,
although there are times not to. When you
disagree with the IRS, procedure is important. You must pay attention to the order in
which notices arrive and the specific ways in
which you can respond.
Most Audits Are Via
Most audits do not involve sitting across the
desk from an IRS agent. Let’s say you file
your tax return and later receive a notice
from the IRS saying it has information that
you received $6,000 that you failed to report. It might be due to a Form 1099 you
mislaid, one that failed to show up in the
mail, or some other bit of information the
IRS has that does not match your return.
Usually such a notice will ask you to sign
the form and mail it back if you agree. Alternatively, the notice will ask for an explanation of why the information is incorrect. You
can contest it—if you do so promptly. You
can also agree if the IRS is right.
Don’t Fight Every
If you know the IRS is correct, don’t fight.
Likewise, if the IRS is seeking a small amount
of tax, you may be better off not fighting it,
even if you are right. Just consider whether
it is worth it if the dollars are small. Of
course, what is a small tax bill can mean different things to different people.
Sometimes, disputing something small
can end up triggering other issues that
might have best been left alone. So consider that too. But in most cases, if you get a
bill for additional taxes, you’ll want to preserve your rights. Timelines and procedure
Watch Out for
The notice described above is not a Notice
of Proposed Deficiency. Still, you should
answer it. An Examination Report may follow the first notice if you fail to respond.
Most tax lawyers call the Examination Report
and accompanying letter a “30-day letter.”
It will say you have 30 days to respond in a
so-called administrative “protest.” A protest
is just a letter.
Make Sure You Prepare
a Timely Protest
If you receive an IRS Examination Report,
make sure you prepare a protest and sign
and mail it before the deadline. Keep a copy.
Keep proof of mailing too, preferably certified mail to provide verification of mailing
and of IRS receipt. Explain yourself thoroughly and attach documents where they
will be helpful.
Your protest should analyze the facts and
the law. Put your best foot forward. The
IRS may review your protest and agree with
you. Even if they don’t, how you frame your
protest can help later. If you have protested
in a timely way, you will normally receive a
response that the IRS is transferring your
case to the IRS Appeals Division.
IRS Appeals Division
The IRS Appeals Division is a separate part
of the IRS. Its mission statement is to resolve
cases. By definition, these are cases in which
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Tax Notice Tips
When you disagree
with the IRS, procedure