Avoid Stress by Never Receiving a Tax Agency Notice Again
Like many of you, this time of year is an opportunity to spend time with family and friends and to prepare mentally, emotionally, spiritually and physically for the New Year.
It’s a great time of the year to be stress-free. For me, receiving any communication from a taxing authority causes stress.
When we help our clients with their tax responsibilities, one of our goals is to help them avoid receiving notices from taxing authorities. These notices are sent by mail and generated for various reasons. Unfortunately, sometimes the proverbial lightning bolt strikes, and a client is selected for an audit. Other times, taxing authorities want to clarify items on a tax return or have noticed discrepancies between the agency records and the amounts reported on a tax return.
Nobody wants to receive a notice from the IRS or Franchise Tax Board (FTB) but rest assured, in situations where a notice has been received, we can assist clients with a response to the taxing authority.
Here are some of the most common reasons someone receives a notice from the taxing authorities:
Inaccurate Estimated Tax Payments -
When someone overreports the tax payments made, you are guaranteed a notice. It is never fun to have the IRS/FTB tell you that you owe more money via a notice. If the tax return overreports the taxes paid, not only will you need to pay the taxes, but you will most likely have penalties to pay as well.
Inadvertently Omitting Information -
The IRS/FTB receives a copy of all your Forms 1099 (reporting interest income, dividends, capital gains, etc.) and they will check to see if all of this income is reported on your tax return. If not, they will issue a notice identifying the missing items and request payment of the associated taxes thereon and, once again, possible penalties as well. If you use a tax organizer from JFA/your accountant, there are pages that list all your investment accounts reported on your prior year tax return. You can use this page to double-check that you have received all necessary forms. (Please also ensure that you provide all these forms to JFA/your accountant.)
Incorrect Information -
Avoid using estimated figures for your wages, interest, dividends, pension/IRA distributions, etc. This point is similar to those above. The IRS/FTB have the ability to compare the amounts reported on your tax return for interest, dividends, etc. to the figures provided directly by the bank, investment custodian, etc. If there are any inconsistencies, the IRS/FTB will most likely issue a notice.
Not Reporting Virtual Currency Transactions -
If you purchased or sold virtual currency (i.e. Bitcoin, Ethereum, etc.) you should report the activity on your tax return. The taxing authorities are cracking down on this issue. If you do not report these transactions, you will receive a notice from the taxing authorities requesting additional information.
Neglecting to File -
If you do not file a tax return, the taxing authorities will review the information they do have (i.e. W-2’s, Forms 1099, etc.) and will file a substitute return on your behalf. One of the negative results of this is the authorities lack details about your deductions (i.e. charitable contributions, property taxes paid, etc.) and will therefore file the return without deductions (most likely resulting in greater tax liabilities).
Proper maintenance of records will help taxpayers avoid receiving notices in the first place. Should you find yourself on the receiving end of a notice from the IRS/FTB, there is one key recommendation – don’t ignore it. Most of the time, the notice will not be too difficult to resolve. If taxpayers let time lapse and the taxing authorities send multiple notices, it will be more difficult to resolve the situation. If you ever receive a notice from the taxing authorities, you should promptly provide it to your tax preparer.
Wishing you Happy Holidays, a Happy New Year, and a stress-free/notice-free year.