Succeeding in Your Business: No need to panic when the IRS sends you a letter

Cliff Ennico 

Few things in life are more unsettling than getting a letter from the IRS — especially if you don’t think you did anything wrong.

The recent Inflation Reduction Act allocated nearly $80 billion to the Internal Revenue Service to close the enforcement gap between what the IRS is collecting and what it should be collecting. Right now, even as you are reading this, the IRS is mass-recruiting people with little finance or tax experience as junior auditors. And it’s giving them small-business tax returns to cut their teeth on.

But don’t panic. Most of the time, there’s nothing to worry about. In the vast majority of cases, either:

• The IRS computers picked up inconsistent, incomplete or contradictory information on your tax return (for example, you reported gross income for your business that was less than the total amount reported on the 1099, W-2 and K-1 forms you attached to your return) and the IRS wants more information to see if you calculated your tax correctly.

• Your return has been selected for a “random” audit based on any number of factors (most commonly, being too aggressive in taking travel, entertainment and other “lifestyle” deductions that are difficult to support without tons of backup).

When the IRS sends you a letter, here’s what you do:

First, contact your accountant and send them the letter.

If you used an accountant or other paid tax preparer, you should scan and email the letter promptly to him or her. They are extremely well informed about the latest IRS scams and can tell you if your letter is genuine or not. Also, by virtue of helping you prepare your tax return, they are duty-bound to help you respond to the letter (although they may charge a fee for doing so if the problem was not their fault).

Make sure the letter is not a scam.

But let’s say you prepared your own tax return without outside help (not really a good idea, as tax returns are much less likely to be audited if you used a tax preparer). Your first task is to look over the letter carefully and make sure it’s genuine. It’s no secret that there are plenty of bad people out there looking to steal your identity, and some of the scam letters purporting to come from the IRS are extremely convincing. Even professionals get fooled by them sometimes.

Here are some signs your letter may be phony:

• You can’t find the form number listed on www.irs.gov.

• The letter has poor spelling and grammar.

• The letter asks you to respond by phone or email (The IRS almost always requires you to respond in writing by snail mail.).

• The letter asks you to respond to an address that is not listed as an IRS office on www.irs.gov.

• The letter directs you to mail or wire payment to an address outside the U.S.

• The letter threatens to send an agent to your home if you don’t pay the amount due promptly.

• The letter offers to settle for a fraction of the amount the letter says you owe. The IRS never, ever offers to settle for a lower amount than the tax due, although they might be willing to agree to a settlement if you request one.)

If you’re still not sure your letter is genuine, call your local IRS office and ask for taxpayer assistance. They can look up your tax file online (you will have to give them your Social Security number or federal taxpayer identification number) and tell you if there’s a copy of the letter on file in your record. If there’s a copy in your file, the letter is genuine.

Look up the form number on the IRS website.

Every IRS letter is a “form” letter. Look for the form number on the letter; it’s usually in the upper right-hand corner. Then go to the IRS website at www.irs.gov and use their search engine to look up the form number. There will almost always be a webpage dedicated to that particular form that will tell you what the IRS is looking for and how to respond. If you can’t find the form number on www.irs.gov, that’s a telltale sign the letter may not be genuine.

Respond to the letter promptly.

Do not procrastinate! Make sure you respond by the date required in the letter. If there is no “response date,” respond within 30 days. If the letter gives you the opportunity to request a hearing, say yes; this may be your only chance to tell your side of the story to a “live” IRS agent. Be sure to keep a copy of your response and any documentation you include in your letter to support your position.

Don’t say too much.

Do not overrespond to the letter. Most IRS letters request very specific information, and you should provide them with only the information requested. Sending the IRS five years of QuickBooks files may well lead to a fishing expedition that will uncover additional problems and perhaps lead to a multiyear audit of your business.

When speaking to IRS personnel, remember the World War II saying that “loose lips sink ships.” If you are worried you may get chatty and volunteer too much information, consider hiring an accountant to appear on your behalf in meetings with the IRS.

And while you’re at it, ask him or her to prepare your tax return next year.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”

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