On Monday, I returned home from work to find a letter from the IRS in our mailbox. My heart sank. Fearing the worst, I opened the envelope and peered inside. What I saw wasn’t nearly as scary as I had feared. Yes, we’re technically being audited, but it’s just a “correspondence audit.” Moreover, it’s the byproduct of an IRS error, and we have the documentation to prove it.
What is a correspondence audit?
Before we go any further, I thought I’d define exactly what it is that we’re talking about… A correspondence audit is simply a letter from the IRS notifying you of a possible error on your return. The letter will contain details of the error, as well as information on how to make things right. They might ask for additional documentation, or they might simply recalculate your taxes for you.
In most cases, the IRS initiated contact because they think that you owe them additional taxes and/or penalties. That’s not always the case, though, as they once notified me that I had made an error in their favor and thus owed less than I though. Regardless, you have the right to contest their decision.
What triggered our audit
According to IRS records, we never made our final estimated tax payment for 2008. As such, they sent us a “CP 23” notice for underpayment of estimated taxes. This notice included a breakdown of the payments they had recorded on our behalf as well as a recalculation of our taxes — and a fairly hefty penalty.
The problem with all of this is the we did make this payment. In fact, if you’ve been reading along for the past few months, you might remember that I had a bit of a panic last January when I dropped the check in the mail a day late.
Note that the IRS notice wasn’t complaining about our payment being postmarked a day late. Rather, they have no record of our payment whatsoever. Once I realized what was going on, I hopped online and verified that the check had cleared within a week of me having mailed it. That’s the good news. The bad news is that the ball was now in our court, and I needed to contact them to get this all straightened out.
Straightening things out
While I generally prefer to handle important issues such as this in writing, the IRS instructions said that I should call if I disagreed with their assessment. And so I did…
After spending 30 minutes on hold on Monday night, I hung up and decided to try on Tuesday morning. Unfortunately, the IRS was “experiencing high call volume” when I called back, and I was thus advised to try again later.
When I finally got through, I got transferred around a bit as they tried to locate our payment. In the end, they couldn’t, so they asked me to fax them a front/back copy of the check along with a brief explanation and a copy of our “CP 23” notice.
Tips for dealing with the IRS
The biggest thing that I’ve learned from this experience is that you shouldn’t take IRS correspondence at face value. It seems that they’re just as prone to mistakes as everyone else, so don’t assume that you’re in the wrong. Be sure to investigate everything for yourself.
Another big lesson is the importance of keeping good records. I was able to get things sorted out on my end in a matter of minutes because I had a record of exactly when we sent our payments. I was also able to hop online and immediately pull up a scan of the mystery check from our online banking interface.
Beyond the above, be sure to take detailed notes when you’re on the phone with the IRS. This should include the name and ID number of the phone rep, the date and time of the call, and a synopsis of the discussion. If you’re unsure of anything, don’t be afraid to ask for clarification.
Finally, your best bet when dealing with the IRS is to go out of your way to avoid trouble in the first place. One change that I anticipate going forward is that I’ll probably start using the Electronic Federal Tax Payment System (EFTPS), as there’s a much lower likelihood of an electronic payment getting mis-applied.
Yes, for the past 5 years we have gotten the same letter, stating our W-2 and 1099 were not attached, which I know they were. I replied do not agree on their form and sent copies to them. Within 60 days I received another IRS letter stating case closed, due 0 balance. I feel the examiners are not doing their jobs keeping everything attached or if you e-file they are following the attachmentsame or do not trust what is entered.
I JUST RECEIVED A CP23 LETTER FOR NOT PAYING ENOUGH ESTIMATED TAXES IF I USE THEIR NOS THEY ARE CORRECT BUT I RECIEVED A 1099 FROM THE BANK SAYING I PAID THE AMOUNT OWED I E FILE .AND I DID NOT SEND THE IRS A COPY AS THE 1099 SAYS TO DO BUT I DID FILL IT OUT ON THE FORMS I E FILED IS ANY ONE ELSE HAVING THS AS A PROBLEM
i have one? do you still get your refund.
Terrifying! The IRS scares the bejabbers out of me, mostly because I’m practically innumerate and can’t even begin to understand a tax return form–it looks like a foreign language to me.
I hire a tax lawyer, who (believe it or not) charges less than the accountant who used to do my tax returns. The one time the IRS pestered me with a frightening letter, she knew what they were talking about (I hadn’t a clue) and also knew it was an error they had been making repeatedly and how to explain in their language what the issue was. That lady earns her pay every time I have to file a tax return… But isn’t it ridiculous that we have to hire professionals to pay our taxes?
I don’t object to paying the taxes we need to keep our country running. Most of the services the government provides are crucial to the operation of a civil society. But I do object to being tortured over it. The system needs to be decomplicated enough that the average moron like myself can understand how to pay up.
Thank goodness you’re in the right and have your documentation!
Never had an issue with IRS. I got one of these letters when I took a deduction I was not entitled to. They corrected it and just reduced my return by the 20 bucks.
Now State of California on the other hand is a nightmare. I made a mistake on my 2005 taxes as it was partial year, and there is a schedule S that needs to be filled out. A year later after I corrected the return, which shows that they owe me even more money, they still haven’t filed the ammendment right and I have to follow up with my accountant about every 3 months.
Glad it worked out for you. I second the recommendation to take good notes. I had a mix-up this spring with estimated taxes as well. I got a letter charging me penalties for a late payment, but it said I could write back if I disagreed, and if I had a good enough reason, the IRS might agree with me and waive the penalties. I could respond with specific details regarding the person I had spoken to in January at the IRS, when I called to ask why my check had not yet cleared, and the IRS did in fact waive my penalties — $100 or so.
I agree, a bigger govt. is not a good thing. And yes the IRS is hiring like crazy (my husband is a recruiter for the IRS). Then again, the IRS is the only part of the govt. that contributes to the bottom line. And they are hiring because there are many people and businesses that either don’t pay their taxes or have lousy bookkeeping or use what they think are “gray” areas or loopholes to evade taxes.
That’s why straightening out the tax code to something like Fairtax is such a great idea. Not only is it tax neutral but it would save the govt. so much money by not having to hire Revenue Agents, Tax Compliance Officers and Revenue Officers.
Increasing the size of the IRS or any other Federal agency is not the solution. Smaller gov’t and less spending is. Pretty soon, the number of people employed by the gov’t will outnumber the people who are employed by the private sector and that is not a good thing.
Plus, who’s auditing the auditors? No one.
It is important not to panic although it is hard to when you get that letter. Also, remember that the IRS does not want to throw people in jail. They are not there to harass you. They just want to ensure everyone pays their taxes.
It sounds like you did a great job of handling the situation and your advice about keeping records is great.
As taxpayers, we should expect more scrutiny. In fact, the IRS is hiring like mad. With the government needing every penny (so they can spend 10 cents), they are hiring more enforcers.
I would hit the panic button and contact a CPA but seems like you handled it pretty well.
Fairtax or some combination thereof and be done with it. It’s ridiculous that you did the right thing and followed all the rules yet YOU still had to waste your time and PROVE your innocence.
Please, please let’s give the Fed gov’t more power and make them even bigger. They’re so efficient.
I was a Revenue Agent with the IRS. One thing you may not know, contrary to one comment made, the burden of proof for expenses is on always on the taxpayer (within limits, the Cohen rule allows for approximation in some cases). However, the burden of proof for income is on the IRS. So the 1099 is their “proof” and you have to refute it.
Yes, the IRS does make mistakes…oh yes, there have been some real eye-rollers. But think about how much paperwork that has to be processed. Pretty much ever person and entity in the U.S. and then some!
So, honestly, they do a pretty good job with the resources they have. And the resources that they have are limited. I ended up having to purchase some of my own research material…
Just a bit of trivia. Thought I’d share.
I’ve gotten three of those letters for each of the last three years. First one was instant headache and darn near panic attack until we found the paperwork to prove we were in the right. (Husband got 1099 for $900 but it was reported as $90,000). Second one wasn’t as upsetting since we’d been through it before (issue with him and his mother selling co-owned stock). Third one was actually in my favor, H&R Block messed up and I was owed more of a refund than they calculated. Oh and their “maximum refund guarantee” turns out doesn’t mean diddly squat. Still, I hope to never see another letter from the IRS ever again.
Rachel brings up a good point: They mess up less frequently if you submit electronically. But please please please remember that they still make mistakes, and that you need to keep records. 🙂
I highly suggest submitting everything you can to the IRS electronically. I was controller for a restaurant with 60+ employees for 4 years. When we first opened we submitted everything to the IRS on paper and there were numerous mistakes/issues. Eventually I changed over to EFTPS and I do not think we had one issue after that point. The less paper the IRS has to handle the better things seem to go. Luckily even simple accounting programs like QuickBooks allow you to submit your 941 and 940 reports electronically (GA allows their reports and payments to be submitted as well). Now if QuickBooks would allow 1099 to be submitted electronically I would never have to send in paper reports to the IRS.
Yeah, stuff like this happens all the time. During my time as a tax accountant, roughly 50% of IRS correspondence was the result of an error on their end. State taxing agencies are worse (especially California).
Luckily the IRS is generally pretty reasonable. The people there know that mistakes get made, so as long as you have documentation to back up your claim, you’re fine.
What I’ve always found particularly interesting, however, is that–in contrast to our criminal justice system–when dealing with the IRS, you’re guilty until proven innocent. The burden of proof is on you.
I hope you dodge this bullet brother . . . I have heard many horror stories.