James B. Urie, Esquire

What to expect and how to respond when the IRS says you owe more taxes

In a previous article, I discussed what preliminary steps you should take when you first receive any correspondence from the IRS. In this article, I want to discuss the different notices you may have received, and what each means to you. The two types of correspondence that usually illicit the most questions and concerns are letters alleging increase in tax, and collection notices for payment of tax due.

You Owe More Taxes
The IRS usually follows a three-step process when alleging an increase in tax originally shown on an individual's tax return

Step 1: Examination of Your Return
First the IRS mails a letter notifying you that they are examining your return. This letter will be followed up with several more letters requesting additional information. Most IRS tax disputes are resolved at this level, but in the event it is not resolved, the IRS will move into the next step.  

Step 2: Notice of Proposed Changes (30 Day Letter)
In the second step, the IRS will mail a letter entitled "Notice of Proposed Changes", which is more commonly referred to as a "30-day Letter" since the IRS requires a response within a 30 day period. The 30-day Letter places you on notice that after examining the return the IRS believes you owe additional tax. Once received, you will generally have three options: 1) pay the tax, 2) do nothing, or 3) protest the notice and request a hearing with the Office of Appeals.

Step 3: Notice of Deficiency (90 Day Letter)
If you decide to do nothing, the IRS will issue a "Statutory Notice of Deficiency", more commonly known as a "90-day Letter". The Internal Revenue Code requires 90-day Letters to be delivered via certified mail. This is primarily because a 90-day Letter is essentially a last chance letter, if you do not do anything within 90 days, it is assumed that you are in agreement with the additional tax alleged in the notice. However, once you receive a 90-day Letter, you will generally have three options: 1) pay the tax, 2) do nothing, or 3) file a petition with the United States Tax Court. Based upon which option you select, and the outcomes of such option, the amount of additional tax owed, if any, will be set. Now all you have to do is pay the tax.

Collection Notices
When you are no longer receiving notices for increases in tax, but are instead receiving notices that tax is due and owing, this means that you are no longer in the examination phase, but have entered into the IRS collection process. The collection process generally has two phases: serious and more serious.

Phase 1: Voluntary Collection
In the first phase, the IRS mails a series of computer generated letters, each stating that you owe tax and requesting payment in full. The letters will also provide IRS contact information in the event you are unable to pay the tax and desire to make other arrangements, which might include an installment agreement, an offer-in-compromise, or in the event there are no assets or a stream of income from which to pay, the IRS may declare the tax currently uncollectable. But if you continually ignore these collection letters, the IRS will begin to alter its tone. Instead of requesting payment, the letters will begin to demand payment. You will generally receive only one or two of these more demanding letters before receiving a more urgent letter indicating the IRS has switched gears from voluntary to involuntary collection.

Phase 2: Involuntary Collection
This switch in gears is the second phase of IRS collection efforts, and is effectuated by the IRS's mailing and filing of either a Notice of Intent to Levy or a Notice of Intent to File a Lien , or both. These notices are required to be delivered via certified mail. Once received, you will generally have two options: 1) pay the tax in full or 2) request a hearing with the IRS Office of Appeals. The time limit for requesting a hearing with the IRS Office of Appeals is 30 days from the date of the notice, so you need to respond quickly. In the event you decide to make up your own third option, i.e. ignore the letters and notices, the IRS, as always, has another form of notice for you, except this one will probably come in the form of a knock at your door.

Conclusion
Regardless of the type of notice you receive from the IRS, it is always prudent to respond in as complete and timely a manner as possible. Refusing to open the letters or respond to requests or notices does not make the IRS go away. Rather, it usually escalates the process to a more serious and more urgent level than is often necessary – resulting in more costly and more stressful consequences.

MacElree Harvey
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