One of the worst items you can receive in the mailbox is a notice from the IRS informing you that you owe them back taxes.
Back taxes occur for a variety of reasons. Sometimes the claim made by the IRS is valid, and you have new tax debt. Other times, it is a mistake, or the agency needs more documentation to prove the reported income is correct. Here’s some essential information on how to correct underreported income before the IRS comes after you.
The IRS receives information from third parties, like your employer or financial institutions, that says how much income you earned, how much Social Security and Medicare tax was withheld, how much interest was collected on an IRS, and more.
If the information received from a third party does not match what you reported on your tax return, there is a discrepancy. The IRS uses an Automated Underreporter (AUR) function to identify potential discrepancies. When a discrepancy occurs, the IRS sends a Notice CP2000 to the address listed on your tax return.
It is important to remember that you shouldn’t always take the CP2000 as fact, as some CP2000s make incorrect allegations and you only need to submit proof to remedy the situation. However, if you know for a fact you underreported your income (by mistake or on purpose), you can correct the problem before a Notice CP2000 is sent to your address.
The IRS may take drastic measures to penalize people who evade taxes or commit fraud, but that doesn’t mean they are heartless. The agency is accepting of minor mistakes that are made on a return.
In fact, there are several situations in which the error is so minimal, the IRS will correct the return on its own and avoid sending you a Notice CP2000. Simple math errors usually don’t require any action from the taxpayer. Additionally, if the IRS simply needs more information, they may send a written request for the documentation before the CP2000.
Before anything else, you need to determine the severity of underreported income. If it is minimal, you should wait until the IRS fully processes the original return before submitting an amended return. Most federal tax returns are processed within 21 days of being filed.
However, if the underreported taxes are severe enough that you may owe more in taxes, you should proceed with an amended tax return. This could include dilemmas like changing the filing status, correcting major income differences, or changing deductions and/or credits.
The IRS has a helpful tool called “Should I File an Amended Return?” It can walk you through whether you should proceed with an amended return or not. Better yet, you can consult a tax pro to get their advice.
One inconvenience of amended tax returns is you cannot submit them electronically. The documents must be sent via standard mail, which creates a conflict where the IRS may have processed your first tax return and not yet received the amended return. This can lead to more confusion later on down the road.
Amended returns that add previously unreported income should be submitted before the April 15 deadline to remain in good standing with the IRS. Pay off the new tax debt before the standard deadline to avoid late charges as well as owing more in interest.
The IRS notes that amended returns can take up to 16 weeks to process, so it is wise to take the initiative if you know you made a major mistake.
If you already received a Notice CP2000, it is too late to file an amended return. Instead, you need to respond to the CP2000 in one of two ways: A) that you agree to the proposed changes or B) that you do not agree, and include a signed statement that explains why.
Did you realize you made a significant mistake on your tax return and want to fix it before the IRS comes after you with a Notice CP2000? Levy & Associates can examine your personal circumstances and advise you on the best way to correct underreported income.
Contact us today at 800-TAX-LEVY, or visit www.www.levytaxhelp.com.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.