What is it?   

The IRS sends almost 220 million notices to taxpayers each year.  Some notices can provide taxpayers important information about their tax situation.  Most IRS tax enforcement (audits, collection, penalties, delinquent return investigations, etc.) occurs through IRS notices.  Taxpayers who receive a notice need to understand their notice and take appropriate actions to resolve any disagreements or issues with the IRS.

What do you need to know about IRS notices and enforcement actions?

Most IRS notices are automated.  Notices are sent from central IRS campuses (i.e. “Service Centers”) that process returns, adjust taxpayer accounts, and conduct most of the routine enforcement actions at the IRS (audits, underreporter notices, collection, penalty issuance, and unfiled return investigations).

Each type of IRS enforcement action has a “notice stream” that provides insight to next steps and timing in resolving a tax issue.  Each of the major areas of enforcement issue a series of notices. These notices request actions from taxpayers, give a deadline before further enforcement action occurs,  and provide information on taxpayer’s rights. 

Background on IRS notices and enforcement

How often do taxpayers get notices?  The IRS issues 220 million notices a year.  10% of taxpayers receive an IRS notice- of which, approximately 2/3rds are related to enforcement issues.

How often do taxpayers have a problem or issue with the IRS?  Approximately 20 million taxpayers each year have a notice or a tax issue/problem that need to be resolved.  Specifically, for the major areas of enforcement, the number of taxpayers affected are:

Collection enforcement:  there are 19 million taxpayers who owe back taxes to the IRS.  About 1/3rd of these taxpayers are in active IRS collection enforcement.

Audit enforcement:  in 2018, the IRS audited a little less than 1 million returns.  In prior years, the IRS has audited as many as 1.7 million returns.

CP2000 underreporter enforcement: the IRS know that 27-28 million taxpayers each year do not report all of the income on their Forms W-2 and 1099. In 2018, 3 million taxpayers received a CP2000 notice.   The IRS has issued as many as 5 million in a year.

Penalty assessments:  27 million taxpayers were assessed a penalty in 2018.  Many of these taxpayers can qualify for penalty relief.

Delinquent return investigations:  the IRS knows, from Forms W-2/1099, that there are about 7.5 million nonfilers each year.  In fact, if you consider taxpayers who do not receive information returns – like small businesses, the numbers are even higher.  Many taxpayers can receive a delinquent return inquiry or investigation.

Questions we hear often:

Understanding your notice and IRS actions

The IRS has automated notice streams that provide a series of notices that are used in most of the major compliance enforcement activities.  These notices provide for the sequence and timing of enforcement actions.  Some notices provide appeal rights that may be critical to resolving the tax issue.

Audit notice stream:  it begins with a notification to the taxpayer of an audit and concludes with the tax being assessed (if any).  The notice stream provides for critical appeal rights when the IRS auditor proposes an adjustment to the return (called a 30-day letter).  Here is the normal notice stream for audits:

  • Audit notification letter – Letter 566/566-S or Notice CP 75 (mail audits), Letter 2205/3253 (office/field audits):  this letter notifies the taxpayer of the years and forms under audit and the audit issues.
  • 30-day letter – Letter 525:  this letter provides the taxpayer 30-days to appeal the determination with the IRS Independent Office of Appeals.
  • 90-day letter (Statutory Notice of Deficiency) – Letter 3219:  this letter starts the taxpayer’s 90-day deadline to appeal the determination with the US Tax Court.
  • Tax assessment notice – Letter CP 22E:  this letter notifies the taxpayer that the tax, penalties, and interest have been assessed.
  • No change letter – Letter 590:  if the audit concludes with the IRS accepting the return as filed, the taxpayer will receive a no-change letter indicating the conclusion of the audit.

CP2000 Underreporter notice stream:  underreporter inquiries often begin with the CP2000 notice. However, in certain circumstances, this notice stream can begin with a CP2501 (for example, high underreporting from substantial stock sales or income from a partnership/S corporation).  Here is the normal notice stream for underreporter inquiries:

  • Underreporter inquiry and proposed adjustment notice  – Letter CP2000:  this notice provides the analysis of the IRS matching of information returns (Forms W-2, 1099, etc.) with your return and shows the omitted items.  The notice proposes additional taxes (and potentially penalties) and provides the taxpayer 30-days to respond. If the taxpayer does not respond, this letter serves as the taxpayer’s 30-day letter.
  • Letter considering taxpayer’s response – Letter CP2000 (recomputed) or Letter 2625/2626/2627/1802C:  recomputes tax and/or penalties based on the taxpayer’s response to the original CP2000 notice.  Taxpayer has 30-days to respond.  This letter also serves as a 30-day letter (i.e. 30-days to request an appeal).
  • 90-day letter (Statutory Notice of Deficiency) – Letter CP 3219:  this letter starts the taxpayer’s 90-day deadline to appeal the determination with the US Tax Court.
  • No change letter – Letter CP 2005:  if the audit concludes with the IRS accepting the return as filed, the taxpayer will receive a no-change letter indicating the conclusion of the underreporter inquiry.

Collection notice stream:  the collection notice stream starts with the assessment of the tax (CP 14 for a filed return with a balance owed) and concludes with a Final Notice of Intent to Levy (usually IRS notice LT11 or L1058).  The collection notice stream is usually 5 IRS notices, but the IRS can omit the 2nd and 3rd notice if the taxpayer has other issues (i.e. owes for other years, has unfiled returns).  The full 5 notice collection notice stream for a balance due filer who does not pay:

  • Balance due notice – Letter CP 14:  notifies the taxpayer that the tax has been assessed and the balance owed. 
  • Balance due – 1st reminder notice – Letter CP 501:  payment has not been received and the taxpayer is requested to pay.
  • Balance due – 2nd reminder notice – Letter CP 503:  payment has not been received and the taxpayer is again requested to pay.
  • Intent to levy notice – Letter CP 504:   payment has not been received and the taxpayer is again requested to pay.
  • Final notice of intent to levy – Letter LT11 or L1058:  the taxpayer is notified that the IRS will garnish wages or levy other sources of income/assets if the taxpayer does not pay or enter into a collection alternative.  This is usually the last notice before a levy is issued.  It also provides the taxpayer an opportunity for a Collection Due Process hearing to appeal any collection alternative disagreement or to contest the tax and/or penalties assessed.
  • Notice of Federal Tax Lien (Letter 3172) and Passport Restrictions (CP 508):  IRS tax lien filings usually occur if the taxpayer does not respond during the collection notice stream.  Also, if the taxpayer does not enter into an agreement to get in good standing and owes more than $53,000 (adjusted annually), the IRS can start passport restrictions by certifying the amount owed as “seriously delinquent tax debt.”  This certification notifies the State Department who can restrict the use of the taxpayer’s passport for travel.

Delinquent return notice stream:  if a taxpayer does not file a required return, the IRS may request the taxpayer to file.  IF the taxpayer does not file, the IRS can proceed with a delinquent return investigation and ultimately file a return for the taxpayer if the taxpayer refuses to file (called a substitute for return).   The typical delinquent return notice stream:

  • Request for return – Letter CP 59:  after the return due date has passed, the IRS may send a request to file.  If you do not file or respond with a reason that you are not required to file (or have filed already), the IRS may proceed to the next letter and a delinquent return investigation.
  • Request for return – 2nd reminder notice (optional) – Letter CP 516:  this optional letter may be sent as another reminder to file.
  • Request for return – Final notice – Letter CP 518:  this is a final warning before the IRS proceeds to file a return for you (called a substitute for return).
  • Substitute for return proposed assessment – Letter 2566:   this letter proposes additional taxes and penalties owed as a result of the IRS filing a return for the taxpayer.  The taxpayer can appeal the decision within 30 days.
  • 90-day letter (Statutory Notice of Deficiency) – Letter CP 3219:  this letter is your final letter to appeal the substitute for return filing before the tax is assessed.  Taxpayers must appeal to the US Tax Court to contest the return filing.
  • Tax assessed – Letter CP 22:  the IRS has assessed the tax, penalties, and interest due from the SFR.
  • Taxpayers can file an original return at any time during this process and the delinquent return investigation notices will terminate.

Questions we hear often:

Steps to resolve a notice or enforcement action

Here are the steps to follow when a taxpayer gets an IRS notice or has an IRS enforcement issue.

#1:  Understand the notice and determine if action is needed.  If you are confused by the notice, skip to step #3 and #4.   Some notices are informational in nature (i.e. confirming a payment, requesting added time to process a return, etc.).  Others indicate a tax problem or issue that needs to be resolved.

#2:  If the notice is related to a tax problem(s), noncompliance issue, or IRS enforcement, familiarize yourself with the process and options to resolve the issue.   Review the steps to resolve the major IRS enforcement issues:

  • Tax debt and IRS collection solutions  (link to pillar page)
  • IRS audits  (link to pillar page)
  • CP2000 Underreporter inquiries  (link to pillar page)
  • IRS penalties and penalty relief  (link to pillar page)
  • Unfiled past-due returns  (link to pillar page)

#3:  Consider engaging a qualified tax professional.   In many cases you can get better results in less time by engaging a tax pro who is experienced in resolving tax problems.   Tax pros can you better understand the options that are best for your situation.  They also have special hotlines and online tools to better navigate the IRS.  Also, they will know your rights and protect them if the IRS does not follow the rules properly.

#4:  Get all the facts – both from your perspective and the IRS’ perspective.  Good tax problem solving starts with good due diligence.  If the notice and your dispute with the IRS is clear, you need to next get your information from the IRS.  For example, if you are under an office or field audit, it is best to get your wage and income information from the IRS to make sure that you have reported all the income that the IRS has for you.  That is an early step in an audit that you will need to be prepared for to understand the IRS’ questions in the audit.  Another example: if you are seeking penalty abatement, it is best to research your account to understand if you qualify for first-time abatement or if you need to seek reasonable cause.

#5:  Develop a plan to resolve.  You may have multiple problems and urgent enforcement actions or deadlines.   You will need to develop a plan of action – and follow through on each step.  For example, if you have unfiled returns, tax debt, and penalties, you may want your plan to look like this:

  • Request collection hold to file returns.
  • Change withholding and/or make estimated tax payments to make sure you do not owe on future filed returns.
  • Obtain IRS wage and income information and account transcripts to file accurate back returns that pass IRS screening procedures for acceptance.
  • File prior year returns and monitor for acceptance.  Request additional collection holds while the IRS processes the returns in order to avoid collection enforcement actions (liens, levies, passport restrictions).
  • Get final balance owed and determine correct collection alternative (extension to pay, installment agreement, currently not collectible status, or an offer in compromise)
  • Execute the collection option selected and get it accepted by the IRS.
  • Determine if you qualify for penalty relief and request appropriate relief.  Be prepared to follow through on appealing any adverse penalty determination.
  • Put procedures in place to remain in compliance in the future – hire a tax professional, arrange for installment agreement to be paid by direct debit to avoid missed payments, make adjustments as needed to withholding/estimated tax payments.
  • Monitor IRS notices for any changes in compliance status.

#6:  Execute your plan.  Complete the steps – and make any adjustments based on new findings.  Make sure to monitor progress with the IRS and request enforcement relief as needed.

#7:  If needed, appeal any disagreements.  Understand your appeal rights if you have a disagreement with the IRS at any point in the resolution process.   If needed, timely request an appeal.  Be clear in your appeals request with the items of disagreement and the outcome you are requesting.

#8:  Finalize agreements.   Check and make sure that the agreement reached is processed by the IRS.  Also, complete any paperwork needed to finalize the agreement.  For example, if you agreed to an audit adjustment, you need to review the agreed adjustments before signing any agreement with the IRS.

#9:  Stay in compliance to avoid future issues.   Complete the terms of any agreement and monitor future notices for any compliance issues.

Questions we hear often:

Can you appeal IRS enforcement disagreements?

Most IRS disputes can be appealed.  Audits, CP2000 notices, and nonfiler assessments follow deficiency procedures which allow the taxpayer to have appeal rights within the IRS and the US Tax Court prior to any tax and penalties are assessed.   Collection disputes can be resolved with IRS appeals or in the US Tax Court after the IRS provides an intent to levy notice or files a notice of tax lien.   Penalty disputes have both informal and formal appeals rights, depending on the taxpayer’s circumstances.

Questions we hear often:

Best practices to deal with IRS notices and enforcement activity

A taxpayer should use these best practices  when getting an IRS notice or when facing IRS enforcement:

Don’t ignore an IRS notice.    You need to fully understand the reason for the notice and seek quickly to resolve it.    Ignoring IRS enforcement activity will not stop IRS enforcement actions.   Ignoring deadlines will result in adverse IRS determinations and lost appeal rights.

Understand your options by knowing where you are in the “notice stream.”  Each notice in the notice stream indicates where you are in the enforcement process.   Some notices indicate important appeal request timelines.  Always know where you are in the timeline to know next options and potential actions.

Respond before the deadline. A missed deadline means potentially adverse consequences.  For example, missing the deadline to get into a collection agreement may result in a levy, lien, and/or passport restrictions.

Know and use your appeals options.  Most IRS compliance actions and adverse determinations can be appealed by the taxpayer.  For example, a denied late filing penalty relief request can be appealed to a Service Center Penalty Appeals Coordinator.  If the taxpayer has not paid the penalty, they also may qualify for a Collection Due Process hearing to contest the penalty.

Check in often with the IRS.  It is important to get a status update with the IRS to make sure the IRS is working on your case and that they are not pursuing other enforcement action while they are considering your response.  Contact the IRS to make sure a hold is on enforcement and that your response is active and assigned to someone at the IRS to make a determination.

The Taxpayer Advocate Service can help in some circumstances. The TAS can help if normal IRS channels break down.   For example, if you request an appeal and the IRS does not offer the allowed appeal, the TAS can intervene.  However, TAS will not intervene on your behalf and overrule compliance enforcement activity.

Know when to get a professional involved.   More serious compliance enforcement issues, taxpayers with multiple issues, and issues requiring extensive IRS procedural knowledge are best left to an experienced tax pro who is qualified and authorized to represent a taxpayer before the IRS.  In these cases, a tax pro is much more likely to consider all options, recommend the best option, streamline the process, and obtain a better outcome for the taxpayer.

Questions we hear often: