Scott Estill, an author, lawyer and speaker who draws on his experience as a former senior trial attorney with the IRS to educate consumers about tax strategies and planning. ScottEstill.com
You paid your taxes—but now the IRS says that you owe more. Each year, the IRS sends out millions of notices requesting additional payments from taxpayers who made math errors on their returns…neglected to report certain income…claimed tax credits or deductions that they were not entitled to…or made other mistakes.
But what if your tax return was right and it’s the IRS that’s wrong?
Taxpayers who receive notices from the IRS tend to just pay what they’re told they owe. But most IRS notices are generated by computers—computers that sometimes misinterpret data. And even if a notice was sent by an actual IRS agent, that agent might have misinterpreted the tax code.
Taxpayers truly can take on the IRS. In fact, this June the IRS adopted a “Taxpayer Bill of Rights,” a list of 10 rights—including “The Right to Challenge the IRS’s Position and Be Heard.”
Here, a five-step plan to fight an IRS notice that you believe to be wrong…
Step 1: Look for instructions in the notice itself about what to do if you disagree. Believe it or not, following these instructions often is all it takes to get a matter cleared up in your favor, particularly when the matter is fairly clear-cut—the IRS thinks you earned more from your employer than you actually did, and you have the W-2 to prove it, for example. But you should follow the instructions exactly.
Typically, you can check a box on the notice stating that you disagree…add a short note explaining why you disagree…attach copies of any supporting documents…then return this section of the notice to the IRS mailing address listed. Send these materials—and any other letters to the IRS—by the deadline via certified mail with return receipt requested.
A short, to-the-point explanation will be more effective here than a long one.
Example: “My total income from ABC Corp was $50,000, not $100,000, and was fully reported on my tax return. Enclosed is a copy of my W-2.”
Be sure to keep copies of all your correspondence with the IRS.
Step 2: Decide whether it’s worth hiring a tax professional to assist you. The key factor here is how much money is at stake. If the IRS is asking for a few thousand dollars or less, you’re probably better off not hiring an enrolled agent, CPA or tax attorney.
There’s a good chance that you would have to pay that tax pro a few thousand dollars to challenge an IRS notice—potentially more with a tax attorney—even if the case appears straightforward. It is not worth spending that much money unless a significantly larger amount is at risk.
Step 3: Request supervisor involvement. If you receive a notice that rejects your challenge and it mentions a specific IRS employee, call this agent and very politely ask to speak to his/her supervisor—there’s probably no point in discussing it any further with the IRS employee mentioned by name, because he is the one who already rejected your written explanation. Don’t tell this named IRS employee that you want to talk to his boss because you think his decision was wrong—that would only build antagonism. Instead, frame the situation as a disagreement between honest, well-meaning people, both of whom want the same thing—an “agreed case” where the taxpayer and the IRS see eye to eye about the situation. IRS agents are evaluated in part by their success in obtaining agreed cases, so this is to the agent’s benefit, too.
Example: You might say, “Listen, obviously we both think we’re right. Can we take this to your supervisor? Maybe we can get an agreed case so that we can keep this out of the appeals process.”
The IRS is particularly anxious to make cases go away when the dollar amounts involved are very small—less than $1,000 or so.
When you speak to the supervisor, present your case more or less as you did to the original agent. But if that original agent provided a specific reason why he disagreed with your position, you will also need to specifically explain why the agent was incorrect. (If the notice you receive stating that the IRS still believes you owe additional money does not mention a specific IRS agent’s name, send a certified letter to the address listed requesting that someone at the supervisory level reconsider your case.)
If the IRS doesn’t back down after your discussion with a supervisor…
Step 4: Take your case to the Office of Appeals. The Office of Appeals is an independent unit within the IRS. It will give your case a fresh and fair hearing.
By this point in the process, you might feel that you are presenting the same facts again and again, beating your head against a wall of bureaucracy. Well, that’s how you fight the IRS—you keep presenting your case to as many different IRS employees as possible until you find one who agrees with you.
The notices you received from the IRS should include instructions on how to take your case to the Office of Appeals. Otherwise, go to the IRS website (IRS.gov/appeals) for more information about filing this appeal.
Step 5: Take your case to the US Tax Court as a last resort. If $50,000 or less is in dispute, you can opt to represent yourself in a “small tax case” procedure. This is similar to small-claims court—there is no jury, and your inexperience with courtroom procedures will not be held against you. You just tell your side of the story one more time, present your evidence and answer the judge’s questions. The only real downside to a small tax case is that the decision of the Tax Court cannot be appealed.
There’s little reason not to go to Tax Court if you’re representing yourself and you believe you’re right. (If you hire representation, your costs could climb well into four figures, sometimes higher.) All you have to lose is a few hours of your time, travel costs to the closest city where Tax Court is held, a $60 filing fee and potentially some interest charges. But at this point, your matter might not even get to court—an IRS attorney might offer to settle for less than the full amount that the IRS claims you owe before your case is heard.
The notices you receive from the IRS should explain how to bring your case before the Tax Court. Or download the necessary form at USTaxCourt.gov (click on “Forms,” then “Petition”).
The IRS is especially likely to demand more money when…
It receives duplicate income forms. If your employer accidentally files two W-2 forms for you with the IRS (or one of your small business’s clients or one of your investment companies accidentally files two 1099 forms), the IRS probably won’t figure out what happened. Instead, its computers likely will add up the two W-2s and conclude that you earned twice your actual salary.
Investments are sold. Calculations involving cost basis—what an investment costs you—can be complex, and it’s not uncommon for the IRS to make mistakes.
Taxes are not paid on a state tax refund. If you didn’t itemize your taxes last year (or you itemized but deducted your state sales tax rather than your state income tax), any resulting state tax refund should not be taxable.
A 1099 form goes to you personally, rather than to your business. If you’re self-employed and a client accidentally sends a 1099 form to you personally rather than to your business, the IRS computers won’t work out that the income was reported on your business’s return. It will just say that you failed to report income on your personal return and demand more money. Similarly, if a client mails you a payment in late December but you don’t receive it until early January, the IRS won’t figure out that the money is properly reported on next year’s return—it will say that you underpaid this year.
The alternative minimum tax (AMT) comes into play. The AMT is so complex that anyone can make mistakes—even the IRS. If more than a few hundred dollars is at stake, consider paying a CPA or an enrolled agent to double-check the IRS’s AMT calculations before paying anything.
Taxpayers claim complicated tax credits. If you claim a relatively complex tax credit, such as the Earned Income Tax Credit or Child Tax Credit, the IRS might say that you were not eligible for it, even if you were.
IRS computers misread figures. IRS computers sometimes misread numbers or misunderstand where a decimal point is placed, turning $50,000 into $5,000, for example.