8 Ways To Deal With A IRS Notice

Most people tend to panic when they receive a notice from the IRS. Many, many people think that by stuffing that notice under the mattress, the problem will go away. Unfortunately, it doesn’t work like that. The best way to address a notice from the IRS is to deal with it immediately and head on. Here are some tips for what to do when you receive an IRS notice.

1. Don’t panic, and don’t shred it. Most IRS notices can be dealt with pretty simply. Not quickly, but simply.

2. Be sure you understand WHAT the notice is for. The IRS sends all sorts of notices — bills for overdue taxes, requests for you to file a missing tax return, to request additional information about something, notify you of a pending deadline, etc. When the IRS sends a letter via certified mail, it’s giving you legal notice that they intend to levy you, file a lien against you, or that they will examine or audit you or your business.  The notice will ALWAYS thoroughly explain why you are receiving it. READ IT.

3. Every notice from the IRS will explain what you need to do with it. If they want extra information from you, it will explain what information they need. If it’s a bill, well, then they just want your money.

4. If you receive a notice about a correction to your tax return, you should review the correspondence and compare it with the information on your return.

5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due. The IRS will just “fix” the issue and then send you a bill (if one is needed).

6. If you do not agree with the correction the IRS made, it is important that you respond as requested. IRS notices are typically time bound and failing to respond in time can cause you to forfeit some of your rights/options. Respond to the IRS in writing to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left corner of the notice. Allow at least 30 days (sometimes it can take up to 90 days) for a response from the IRS.

7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the correspondence available.

8. Keep copies of any correspondence with your tax records. Also keep record of who you talk to, including their IRS employee ID number (they’re required to give it to you), and detailed notes of your conversation.

Don’t understand your notice?

If you receive a notice that you don’t understand or don’t agree with, then obviously consider speaking to a professional (such as ourselves). Feel free to email us via the address below in the footer. We can review a copy of your IRS notice, tell you what it means, and tell what you need to do about it, in simple terms.

Understanding The “New” Form 1040

So, when lawmakers vowed in 2017 to simplify the tax code, one of their targets was the good ‘ol IRS Form 1040 pictured above. There was much hoopla about making it so taxpayers could file their taxes on something about as big as a post card. Well, the new Form 1040 is smaller than it’s predecessors. But will it make the filing process more simplified? We don’t think so. Read on to see why.

More Schedules. The new Form 1040 replaces the former Form 1040 as well as the Form 1040A and the Form 1040EZ. The new Form 1040 uses a “building block” approach, in which the tax return is reduced to a simple form. That form can be supplemented with additional schedules if needed. Taxpayers with straightforward tax situations would only need to file this new 1040 with no additional schedules. But what if you do need one of the additional schedules? Well, just know that there are six new schedules to accommodate this approach. What are these new schedules?

Schedule 1 Additional Income and Adjustments to Income. This schedule is used to report all of the income that was reported on lines 10 and 21 of the 2017 form. This includes income from Schedule C (business income), Schedule D (capital gains and losses), Schedule E (supplemental income and loss from rental real estate) and Schedule F (farm and ranch income). It also includes the reductions to income that that were formerly reported on lines 23 to 35 of the 2017 form.

Schedule 2 Tax. This schedule reports lines 45 to 47 of the 2017 form 1040, including the tax, alternative minimum tax and any excess premium tax credit.

Schedule 3 Non-Refundable Credits. This schedule contains lines 48 to 55 of the 2017 form, including education expenses, child and dependent care credit, foreign tax credit, retirement savings plan credit and child tax credit.

Schedule 4 Other Taxes. This schedule contains lines 57 to 63 of the 2017 form, including self-employment tax, additional tax on IRA and retirement plan withdraws, household employment tax and the individual responsibility payment for not having health care.

Schedule 5 Other Payments and Refundable Credits. This schedule contains lines 65 to 74 of the 2017 form, including estimated tax payments and amounts applied to the next year’s return, earned income credit, additional child tax credit, American opportunity credit (the amount of the education credit that is refundable), amount paid with a request for extension and several other credits.

Schedule 6 Foreign Address and Third-Party Designee. This schedule is used to report your foreign address or if you would like the IRS to be able to discuss the return with a third party (e.g. your paid preparer).

Why Was This Done? Keeping politics out of the conversation, we believe that this switch was done to fulfill a campaign promises. Why so?

  • The new building block approach doesn’t actually simplify anything. If anything, it makes one have to look at additional forms/pages when one only had to formerly look at a two page document (i.e. the old “long form” 1040) to see it all.
  • Only around 13% of tax returns are file via paper as opposed to being e-filed according to the IRS statistics. With that being said, who really cares if the Form 1040 is the size of a postcard? Most people who file are using software!
  • Schedules 1 through 6 are additional to the ones that existed prior to 2018 (e.g. Schedules A, C, D, E, F, H, SE and 8812). While taxpayers can ignore them if they don’t have any lines on those schedules to fill out, they still might have to review them to determine if they are required. Simplification? We’re not so sure.

The Result? While the new form is shorter, we can’t say that it will be easier for taxpayers to understand. We have already started preparing 2018 returns and we can say that it makes it “slightly” more challenging to review. Most professional software has a view/comparison mode/worksheet that allows us to analyze variances to ensure nothing is missed. But we can say that the building block scheme takes a little extra work.

To that end, don’t expect it to cost you any less to have your “simplified” tax return prepared when compared to years past. Most paid preparers, if anything, are actually raising their prices to accommodate the extra forms and other changes such as the 20% QBI deduction.

S-Corp Automobile Deduction

Who owns the vehicle matters!

You want your S-Corporation (S-Corp) to have a nice clean set of books, and the cleaner they are, the better.  Corporate payments of personal expenses either dirty up the accounting or can create a strong impression of impropriety.  The IRS is attracted to things that look suspect, which is an even better reason for you to make sure your S-Corp has a clean set of books.  So how does one go about deducting the expenses of a vehicle that is used by a S-Corp.  Well, the answer depends largely on who the vehicle is titled to.

Vehicle Titled In Corporation’s Name.  Corporations, S-Corps, and Partnerships may only claim actual expenses for vehicles.  Thus, your S-Corp may claim depreciation, fuel expenses, oil expenses, repairs, insurance, and so forth.  But what about mileage?  When the car is owned in the corporation’s name, it is not allowed to deduct mileage, just the actual expenses incurred for it’s use in business.

Vehicle Titled Personally.  To deduct the expenses of a vehicle that is owed personally by the business owner, the S-Corp can reimburse the employee expenses under an accountable plan or a non-accountable plan.  The expenses are deductible under either methodology, but the rules are different.

Accountable Plan
When an accountable plan is used, the business only reimburses expenses that are substantiated (proved) by receipts and other documentation.  The reimbursements are not taxable income to the business owner nor are they reported on their W-2.  What the owner needs to submit to the business depends on what expenses they will be reimbursed for.  In this post about S-Corp Home Office Deductions, we provide a sample accountable plan that will give you an idea of the reimbursement language.

  • Mileage Reimbursement.  The business can reimburse at the IRS standard mileage rate.  This rate includes allowances for depreciation (i.e. wear and tear), maintenance, repairs, gas, insurance, and a host of other things.  The proof the business owner would need to provide for reimbursement would be a mileage log.  This log would need to show the date, business purpose of the trip, miles driven and should be submitted to the business on a routine and timely fashion (e.g. once a month).  One important thing to note is that the standard mileage method only applies to passenger vehicles with a gross weight of less than 6,000 pounds.
  • Actual Expense Reimbursement.  The business can also reimburse for the actual expenses the business owner incurs.  The business does not have to reimburse for every expense, for example, you could reimburse gas and insurance and not tires and oil changes.  However, for any expenses the business does reimburse, it must have adequate proof.  Adequate proof means you need to see all the receipts for the expenses that will be covered.  In addition to the expenses, the owner also needs to supply the total vehicle mileage for the year as well as the mile log.  Why?  So it can determine the number of business miles and the number of personal miles to compute the percentage of business use.  This percentage is then applied to the total amount of expenses incurred to determine how much is reimbursed to the employee.

Non-accountable plan
If a non-accountable plan is used, then the business does not need to keep or see any vehicle records.  They can reimburse any amount, from below the IRS standard rate, or above the IRS standard rate.  They can reimburse for gas and insurance but not oil changes, or anything else that it wants to pay for (that is vehicle related).  But under this method, all the reimbursements get included in the employee’s box 1 W-2 wages and are subject to income and employment tax withholding.  The non-accountable plan is less beneficial to the employee because of the inclusion of the amounts on their W2 as income.