Dear Friends-

Congratulations! You completed your 2007 income tax return yourself using a software program and submitted it at 11:32 a.m. on April 15 -- about 12 hours earlier than usual. Your refund comes to $4,692; some of that will go toward bills, the rest for this summer’s family vacation. 

Weeks later an envelope arrives from the Internal Revenue Service. But instead of a check, it contains a letter with the message every taxpayer dreads: The IRS has “some questions” about your tax return--the one you filed for 2005.

Your mouth goes dry. Your chest tightens. Your palms sweat. Your spouse asks why you suddenly look so pale.

If you find yourself in this situation, the IRS offers this advice: “Don’t panic; Many of these letters can be dealt with simply and painlessly.”

Overall, last year the IRS audited almost 1.4 million tax returns filed by individuals -- a 7% increase from the previous year and the largest number since 1998. The biggest jump in audits occurred at the highest income levels, with those reporting income of $1 million or more facing a 1 in 10 chance of being audited.  
In terms of severity, a “Correction Notice” should generate the least anxiety: The IRS is simply telling you that its document-matching program found an error and your return has been corrected to reflect this. For instance, perhaps your bank reported you earned $38 in interest and you said it was $28.   

Take a deeeep breath. If you completed your return yourself, go back and check your records. Follow the instructions in the IRS letter. It’s should be very specific about the actions you have to take and what, if any, documentation you need to provide. 

According to the IRS, if you agree with the change being proposed, “usually no reply is necessary unless a payment is due.” 

If you disagree, make sure you respond within the time specified. Include an explanation, copies of receipts and other documents to support your position, and the tear-off bottom portion of the notice. Keep copies of everything. 

If a CPA or tax professional prepared your return, s/he should be expected to handle your response to an IRS inquiry. This is even more important if the issues involved are technical nature or if the correspondence from the IRS is an Audit Notice, which is more serious.

Give the IRS at least a month to get back to you.

Keep in mind that you’re not the only party who wants this settled quickly. Ian Comisky is an attorney with the Philadelphia firm Blank Rome who, for two years, worked the other side of the fence as a federal prosecutor. Comisky said IRS agents are assigned caseloads; part of their evaluation is based on how many cases they resolve.

If it doesn’t involve a significant dollar amount or allegations of criminal behavior, the matter can often be settled via the mail or over the phone. Last year, for instance, 77% of all audits were handled through what the IRS calls “correspondence”- mail or phone- as opposed to face-to-face meetings.   

On the other hand, what if there is a big discrepancy between the amount you say you owe the government and the amount the IRS wants you to pay and you can’t reach an agreement? This when you will receive a so-called “90-Day Letter,” which gives you three months to file an appeal.

The IRS booklet, “Your Rights as a Taxpayer” (appropriately numbered Publication 1), explains the appeals process. You can order, read, or download this by going to www.irs.gov. From the home page, choose “Forms and Publications.” 

Or, to view a video, click on the link “Appeal a Tax Dispute” at the bottom of the IRS home page.  [Note to videophiles: you can even download “The Appeals Process”- an entire collection covering this riveting topic! And it’s free.

The simplest and cheapest route is to ask the IRS Appeals Office to review your case. If accepted, an agent in a separate IRS department is supposed to take a “dispassionate” look at the evidence from both sides and make a recommendation.
 
You may also be able to get help from the Taxpayer Advocate Service, an independent arm of the IRS. The IRS describes the assistance of the Taxpayer Advocate office as “free, confidential, tailored to meet your needs, and available for businesses as well as individuals.”

You’re eligible for help from the Taxpayer Advocate Service if one of the following is true:

• You face imminent economic harm (e.g. your bank account has been frozen), or
• You’re incurring significant costs (legal fees, for instance), or
• Thirty days days have passed and your tax issue is still unresolved, or
• The IRS has not gotten back to you in the timeframe promised.
  

There’s at least one Taxpayer Advocate in every state, the District of Columbia, and Puerto Rico. Contact your local office by calling the number listed in the phone directory under “Federal Government” or the national one at 1-877-777-4778. You’ll need to file Form 911 (who says the folks at the IRS don’t have a sense of humor?).  Again, more information is available at www.irs.gov .

You also have the right to appeal your case to either Tax Court or the Federal District Court in your area.  At this stage, you’ll definitely want an attorney.

Hope this helps,

Gail

 P.S. Next week: what’s involved when an inquiry from the IRS turns serious.

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.