You may receive correspondence from the IRS that contains an error. What should you do?
Quotes from actual IRS correspondence received by clients:
“Our records show we received a 1040X for the tax year listed above. We’re sorry but we cannot find it.”
“Our records show you owe a balance due of $0.00. If we do not receive it within 30 days, appropriate collection steps will be taken.”
“Payment is due on your account. Please submit payments on or before June 31 to avoid late payment penalties and interest.”
It’s pretty tough to pay a balance due of $0.00 or submit a payment on June 31 when June has only 30 days. The message should be clear. If you receive a notice from the IRS, don’t automatically assume it is correct and then submit a payment to make it go away. The same is true for errors in any state tax agency notices. They are often in error. So what should you do?
Stay calm. Try not to overreact to the correspondence. This is easier said than done, but remember, the IRS sends out millions of notices each year. The vast majority of these notices attempt to correct simple oversights or common filing errors.
Open the envelope. You’d be surprised how often clients are so stressed by receiving a letter from the IRS that they cannot bear to open the envelope. If you fall into this category, try to remember that the first step in making the problem go away is to open the correspondence.
Review the letter. Make sure you understand exactly what the IRS thinks needs to be changed and determine whether or not you agree with their findings. Unfortunately, the IRS rarely sends correspondence to correct an oversight in your favor, but it sometimes happens.
Respond in a timely manner. The correspondence received should be very clear about what action the IRS believes you should take and within what timeframe. Ignore this information at your own risk. Delays in responses could generate penalties and additional interest payments.
Get help. You are not alone. Getting assistance from someone who deals with this all the time makes going through the process much smoother.
Correct the IRS error. Once you understand the problem, a clearly written response with copies of documentation will cure most IRS correspondence errors. Often the error is due to the inability of IRS computers to conduct a simple reporting match. Pointing the information out on your tax return might be all it takes to solve the problem.
Certified mail is your friend. Send any response to the IRS via certified mail. This will provide proof of your timely correspondence. Lost mail can lead to delays, penalties, and additional interest on your tax bill.
Don’t assume it will go away. Until you receive definitive confirmation that the problem has been resolved, assume the IRS still thinks you owe the money. If you don’t receive correspondence confirming the correction, send a written follow-up.
Getting audited by the IRS is no fun. However, your chances of being audited are probably lower than you think. A look at the latest IRS statistics for 2016 reveals some interesting and reassuring facts about the risk of an IRS audit.
Audits are becoming less common. The number of individual tax returns the IRS audited fell to a 12-year low last year, to just above 1 million. Audits have been steeply declining over the last five years, a trend which the IRS commissioner said was due in part to declining budgets and a smaller workforce.
Audits target the rich. It’s a fact: IRS audits target the super-rich. The statistical chance of being audited increases dramatically for people of higher income levels.
Missing data can get you audited. High income isn’t the only thing that gets you audited. Any missing data on your return can also trigger an audit.
Standing out gets you audited. The IRS takes a close look at business expenses, charitable donations, and high-value itemized deductions. They have statistical data on what amounts are typical for various professions and income levels. If your return stands out from what is “normal,” it may be flagged for review by the agency’s computer system.
More audits are done by mail. If you face an audit, most likely it will be done by mail. Only about one in four IRS audits are field audits conducted in person by an IRS agent. The most common issues, such as math errors or missing data, are done through mail correspondence.
If your issues are more complicated, you may face a field audit – and you may owe more to the IRS. The average field audit recommended the individual pay an additional tax of nearly $19,000, while the average correspondence audit recommended a payment of less than $7,000.
Few entrepreneurs launch their small business as an incorporated entity. That’s fine while you’re just getting started, but a year or two down the road it’s often wise to incorporate. Here are some reasons you may want to consider incorporating your growing business.
Protect your personal assets from creditors. When you operate your business within a corporation, creditors are often limited to corporate assets to satisfy a debt. Your home, savings, and retirement accounts are no longer fair game.
Provide a personal liability firewall. The corporate form can help protect you against claims made by others for injuries or losses arising from actions of your business.
Issue shares of stock. You can help build your business by issuing shares to new investors, or by offering stock options to key employees as a form of compensation.
Gain tax flexibility. A corporation can provide you with more tax flexibility. Deliberate planning can help optimize the taxable division between corporate income, dividends, and your personal wages.
Enhance your business presence. Being incorporated sends a signal that your business is a serious enterprise and it could open doors to opportunities not offered to sole proprietors. Consumers, vendors, and other businesses often prefer to do business with incorporated companies.
If you are still going over the pros and cons of incorporating your business, pick up the phone. Together, we can complete a thorough tax review that will help shed light on the impact such a move will have on your business situation.