The IRS mission is to "provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all."
The IRS is a bureau of the Department of the Treasury and one of the world's most efficient tax administrators. In fiscal year 2012, the IRS collected more than $2.5 trillion in revenue and processed more than 237 million tax returns.
The IRS role is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.
The tax gap is the amount of taxes that should have been reported and paid on time but were not. This gap is comprised of three parts: under reporting, underpayment, and non-filing. According to the IRS, the largest part of the tax gap is individuals under reporting their income tax by, for example, omitting taxable income or claiming erroneous or inflated deductions or credits.
From 2008 through 2012, the IRS conducted 5.7 million correspondence exams, resulting in $40.4 billion in additional taxes. Each year, the additional taxes collected from these exams exceeded the total for the previous year. This is certainly a good incentive for the IRS to continue to increase the number of letters and notices.
Types of IRS Letters and Notices
There is a long list of standardized IRS letters. Each form letter has a code such as CP012.
The most common is Form letter CP2000. With this letter, the IRS lets you know that the information they have on file doesn't match the information you reported on your tax return. This could affect your tax return; it may cause an increase or decrease in your tax, or may not change it at all.
In 2011, the IRS received more than 1.8 billion information statements for items on Forms 1099, 1098, and W-2 and other similar annual statements. With these statements, the IRS matched income and deductions against 141 million individual tax returns filed. The IRS found almost 20 million discrepancies and issued notices to 4.7 million taxpayers. Approximately 31 million taxpayers receive some form of correction notice annually. Keep in mind it is estimated that approximately 40% of these notices are found to be incorrect.
"Your return has been selected for examination"
This letter, CP75D, is just another way of saying that you are being audited. There are three types of audits: correspondence, office and field audits. The majority of audits are correspondence audits. In this type of audit, the IRS is looking at just one item on your tax return and can usually be resolved by mail. The office and field audits are comprehensive and time-consuming. In the office audit, you go to the IRS office with all of your records, whereas for the field audit, the IRS comes to you. In 2010, the IRS audited more than 1.4 million individuals.
How to Prevent an IRS Letter
Maintaining adequate records is your best defense
The most important step in preventing an IRS letter is good record-keeping. If you maintain adequate records throughout the year, and provide your accountant with that information, you can avoid errors on your tax return that can result in a letter from the IRS. Even if you do receive a letter, you have everything you need to respond in a quick and accurate manner.
Good record-keeping helps you to include every tax item in your tax return. It can be easy to forget a one-time event that occurred in June when you are gathering tax documents in February of the next year. There are many transactions that are taxable income, deductions or tax credits. Since the IRS matches your tax return to the information provided by sources such as your bank, your employer, or your investment firm, any mismatch will generate a letter to you.
Keep a record of your estimated tax payments including the date and amount paid. Any discrepancy between what you reported and what the IRS has on file will start the IRS letters coming your way.
Gather and keep required receipts for the tax year. Make sure you have all of the required documents to support the numbers on your tax return. Store these records in a safe and secure place. For example, keep detailed receipts of business expenses, charitable donations, and college tuition payments.
Steps to take if you receive an IRS letter
Below are some common-sense steps you should follow if you receive an IRS letter:
o Open and read the letter right away.
o Pay attention to the deadline. You usually have 30 days or less to respond.
o If you are a client, send us a copy of the notice right away!
o Be careful what you sign, and don't just automatically pay the amount on the notice. In approximately 40% of the cases, no additional tax is owed. You may even receive a refund.
o Respond to the exact address or phone number on the notice.
o Make a copy of your response.
o Mail or fax your response. If you mail your response, send it return-receipt requested, or any method where you have proof of the date of delivery.
o Do not expect a quick resolution, it can take weeks or months to receive a reply from the IRS.
The worst thing you can do is to do nothing. If you ignore a notice for taxes due, the IRS will assume that you owe and will start collection proceedings. Even if you open the letter and it says, "You owe the IRS $26,700," do not panic! The problem could be that the income was reported but not where the IRS was expecting. Or maybe an estimated tax payment was not properly processed. Also, keep in mind that 40% of the IRS notices are generated by their computers in error.
The IRS is currently sending letters for tax years 2014, 2013 and 2012. Some issues can be addressed simply and quickly. Others require extensive research, analysis, and representation.