Responding to the Notice You Receive from the IRS

A few days ago, I came across the article linked below regarding IRS notices many small businesses are receiving regarding potential income under-reporting. The gist of it is that credit card processing companies are now required to issue Forms 1099-K to businesses that accept credit and debit cards as a form of payment. The forms report the sales amount paid for via those cards, and the IRS is comparing those sales totals to the amounts reported on businesses’ tax returns. The IRS is then using assumptions regarding the percentage of sales that are typically paid for with credit and debit cards to identify businesses that may have under-reported their cash sales. The identified businesses are then sent notices asking them to explain their higher than expected (by the IRS) percentage of credit and debit card sales.

This technique dovetails nicely with the overall pattern established by the IRS in recent decades, when the number of notices sent to taxpayers has increased dramatically. The goal of the practice is to close the “tax gap,” or the difference between the tax that would be due if all taxable income was reported and the tax that is actually reported by taxpayers. The problem with the approach is that many taxpayers don’t understand the meaning of the notices they receive and don’t know how to effectively respond to them. In addition, as is true for the businesses identified in the article above, the assumptions underlying the IRS position can be incorrect, and it can be difficult to correct them via correspondence.

The first mistake that taxpayers often make when they receive an IRS notice is to ignore it. Typically a taxpayer is given a set time period within which they can respond to a notice, so acting in a timely fashion is key. The response required to a notice will vary depending on the item in question, but it usually involves a letter detailing the reasons why the tax return was actually correct as it was originally filed. Any available documentation substantiating that position should also be attached. Professional help can take much of the stress out of the process as well, so if you have concerns about a notice you’ve received please don’t hesitate to contact us.