Personal Finance

Michelle Singletary: Don’t duck an IRS notice

Singletary
Singletary

I can start my summer vacation with some good news from the Internal Revenue Service.

I was so thrilled to see these words on a letter from the IRS: “Amount due: $0.00. We’re pleased to tell you that the information you provided resolved the tax issue in question.”

Hallelujah.

In March, my husband and I got what’s called a “CP2000 Notice” from the IRS that said its “automated underreporter” program had found a discrepancy in our 2013 federal return. It wasn’t an audit, we were told. Still felt like one, nonetheless.

The IRS has a system designed to compare what it receives on documents such as W-2s or 1099s with what people report on their tax returns. When an inconsistency is found, the IRS sends a notice that makes adjustments that could result in a refund or additional tax owed. We fell into the latter category.

As the program combs through past returns, you may get such a letter. Our notice said the IRS had received a 1099 for the 2013 tax year showing $25,000 in income we hadn’t disclosed. I wish I had gotten that money, but we hadn’t. The notice said we owed $12,255 in back taxes, including interest and penalties.

After my heart stopped racing, I did some sleuthing and found the mistake. A media company that I had done some freelancing for had a glitch in its internal accounting system and as a result incorrectly generated a 1099 under my name and Social Security number that was meant for someone else.

But even after I sent documentation about the error, I received a few more notices from the IRS a few weeks apart with scary language that, if I owed the money, interest was still accruing. Feeling confident, we waited for vindication.

It just came in a new “CP2005 Notice.” The letter told us our case was closed and we were clear. If we had panicked and sent a payment, the IRS promised a refund within four to six weeks as long as we didn’t owe any other tax or debts the agency was required to collect. For more information we were directed to visit www.irs.gov/cp2005.

Here’s the lesson if you ever get a notice from the IRS: Act quickly. This is not something you want to procrastinate about. Even if you think you owe the money and don’t have it, call anyway. If you are put on hold a long time, and you probably will be, wait it out.

And unless you have a complicated problem in which you need to hire a tax professional to represent you before the IRS, don’t ever mess with the companies you hear on the radio or on television commercials promising they can get the agency to significantly reduce your tax debt.

Spend some time reading online consumer complaints about these tax-relief companies. People have forked over thousands of dollars – typically starting at about $1,000 – for so-called help that ended up being the establishment of a payment plan they could have set up themselves.

You might hear an ad mention the IRS' “Fresh Start Initiative.” The IRS did announce changes to qualify for its Offer in Compromise program. An OIC allows a taxpayer to settle tax liabilities for less than the full amount owed. But such an offer is extremely difficult to get if the IRS thinks it can collect what you owe in full as a lump sum or through a payment plan. Without mentioning it specifically, it’s the OIC that the tax-relief companies are using to lure people to call. So they are peddling relief that’s unlikely to happen.

If you think you might qualify for an OIC because of a financial hardship, use the IRS “Offer in Compromise Pre-Qualifier.” If you don’t make the cut, you'll be directed to information about an installment agreement.

Ironically, the Fresh Start Initiative the tax-relief companies cite – to make it sound as if only they know something that can help you – is an IRS effort to make it easier for individuals to address their tax debts and avoid tax liens. Find out how to help yourself by going to irs.gov. Search for “Struggling with Paying Your Taxes? Let IRS Help You Get a Fresh Start.”

The tax relief ads run all year long because the companies know the IRS' document matching system can take months or years before it catches discrepancies. They know people can’t pay their taxes and are looking for a savior. Save your money. Use it to help reduce your tax debt.

By the way, we were encouraged to keep all our documentation. You bet we will.

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Hear Michelle Singletary’s personal finance reports on www.npr.org. Readers may write to her c/o The Washington Post, 1150 15th St., NW, Washington DC 20081.

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