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Got an IRS Notice? Don't Panic

Maurie Backman, The Motley Fool

You submitted your tax return back in April and thought you were done with all things IRS-related until the following tax season. But what happens when you get a notice from the IRS in the mail? Your initial reaction may be to panic, but don't. Chances are, the IRS simply has an adjustment to your tax return, and addressing it as soon as possible is the easiest way to avoid unwanted trouble with the agency.

When the IRS reaches out

Often, the IRS will reach out to taxpayers on an individual basis when the information it has on record doesn't match certain details of their return. It's known as a CP 2000 notice, and you can get one in the mail several weeks or several months after submitting your taxes.

A CP 2000 will generally propose a monetary adjustment to your tax return based on the information the IRS has on file. If you don't agree with that adjustment, you can respond and supply proof backing up your claim. If you do agree with the number the IRS is proposing, you'll need to sign that letter and submit whatever underpayment results from it. Unfortunately, you may be liable for interest and penalties in the event of an underpayment, as would be the case if you failed to pay your initial tax bill in full.

Woman covering her face while holding a document

IMAGE SOURCE: GETTY IMAGES.

Why might you receive a CP 2000? For example, if the IRS has information on file that contradicts what you included on your tax return, it will send you a notice. For example, if you failed to report interest income from your bank, but the IRS gets a 1099 form from that institution stating that you received $200 in interest, it will effectively ask you if the bank is correct. And if not, you'll need to offer proof to the contrary.

Keep in mind that it's important to respond to your IRS notice within the appropriate time frame -- usually 30 days from the date of the notice itself. If you're not sure how to respond, and the adjustment in question is substantial, contact your tax preparer, or find yourself a tax professional if you didn't use one initially.

Am I being audited?

When you receive a CP 2000 notice, you might assume that it's the IRS's way of telling you you're being audited. But actually, that notice isn't a formal audit notification. All it's doing is proposing a different tax liability than the one you initially presented. Going back to the above example, let's say you simply forgot to indicate that you received $200 in interest from your bank. If the IRS picks up on that error, and you agree to pay the tax difference, the agency should have no reason to audit you unless it spots something else suspicious on your return.

Finally, keep in mind that a CP 2000 adjustment can actually work out in your favor if the IRS sees that you overpaid your taxes, so don't flip out if you wind up with a letter in the mail, because there's a chance it'll save you some money in the end.

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