Every year, millions of Americans get unexpected correspondence from the IRS.
Sometimes it’s a straightforward issue that can be resolved quickly. IRS notices can sometimes be misleading or even erroneous at times. The best course of action is to try to avoid receiving the warning in the first place. Here are five things you can do to maximise your chances of not receiving an IRS letter.
1. Enter the proper amount on the appropriate line.
Because IRS notices (such as the CP2000 Underreporter notice) can be computer-generated, many of them are the consequence of an overly-accurate matching algorithm. Even if you declare all of your earnings on your tax return, the IRS system may issue a notification if the earnings were reported improperly.
Non-employee compensation from a 1099-MISC, for example, is frequently reported as “Other Income” when it should be reported on Schedule C, Profit and Loss from a Business.
Ensure that amounts are reported in the relevant category on your tax return, which corresponds to the line item. See IRS Publication 525 for further information on income reporting, or better yet, see a tax professional.
2. Don’t group your revenue figures together.
Combining sums to simplify your tax return and save time may be tempting. Don’t. The IRS does not get information in this manner. Because IRS computers search for a precise match, this is another way to get an IRS notice. If you worked multiple jobs this year, you’ll need to submit each W-2 into your tax software separately.
Consider the following scenario: you have many stock trades on your Forms 1099-B. You must record each deal separately using one of the following methods:
- Each trade on Form 8949 that is transferred to Schedule D, or
- On your Schedule D, combine the deals for each short-term and long-term category. Include a separate spreadsheet with each trade as an attachment. The information asked on Schedule D must be included in the spreadsheet.
3. Include any payer papers that have been delayed or amended.
Make a note on your return if you receive any correcting information statements, such as a corrected W-2 or Form 1099. (tax filing software has a checkbox for this). If you receive a corrected statement after you’ve filed your tax return, make a change to your return and attach the updated statement.
You might be waiting for a delayed or updated information statement in some situations. To avoid hefty penalties and interest, file an extension and pay any tax you believe you’ll owe by the filing due date (not the extension date).
File an extension and contact the IRS in late July to acquire your wage and income transcript if you want to be sure you have all of your information statements. It could have W-2s and 1099s in it that you aren’t aware of.
4. Include schedules and information statements if filing on paper.
Electronic copies of your information statements (W-2, 1099, etc.) and your Form 1040 Schedules (Schedule C, Schedule A, etc.) are transmitted with your return when you or your tax pro e-file it. You must, however, enclose copies of these documents with your return before mailing it.
You don’t have to give copies of your receipts or other records to the IRS, but you should keep them for at least three years in case you’re audited.
5. Don’t add up the totals.
Unless it specifically demands the net amount, use gross income figures. Do not subtract sums owed to or paid to other sources from amounts owed to or received from them.
The best course of action is to be honest.
The IRS will send you a notice if they believe you did not report all of your income. Because notices might be perplexing, if you don’t understand why the IRS sent you one, call the IRS or take a closer look at your tax account. Begin by dialling the phone number listed on the notice. You can also hire a tax professional to assist you in determining whether the IRS was correct and providing the information required by the IRS to correct the error.
Even after the IRS has completed your return and provided your refund, more complications may arise. To receive the best result, always open IRS letters right away and react by the due date. Learn how to deal with an IRS CP2000 Notice.