Nothing ruins a quick trip to your mailbox like getting a letter with a big I.R.S. stamped on the front. Your stomach drops as you rip that thing open, only to find a tax notice staring right back at you. Gulp. How do you know if the notice you’re holding is an urgent tax matter or just a friendly heads up?
Luckily, we’re here to help guide you through the process. In this article you’ll learn what steps to take and some of the most common notices you might meet in the mail.
Step 1: Don’t freak out
Take a deep breath. Every year the IRS and state tax agencies send millions of notices to businesses and folks like you, delivering little packages of panic in the mail — much like the kind you just unwrapped. In fact, the majority of notices sent are automatic, and don’t necessarily mean anything is wrong with your account.
Step 2: Read the notice!
Read it all, front to back and back to front. Make sure you study the entire document and understand what it’s about. Here at Gusto we service hundreds of calls from people who have received notices, and many picked up the phone before they looked it over thoroughly. Many times it’s just a notification and doesn’t require any action on your part at all. Keep in mind, the IRS uses mail as their primary form of communication to notify you of anything they feel you should know.
Step 3: Determine who the notice is from
Your notice is either from the IRS or a state tax agency: They can both send important information about your business’ tax accounts. All states have agencies that handle the taxes they collect, like income tax, state unemployment, and local taxes. Depending on the state, any one of those agencies could have sent that fun little panic party.
Step 4: Figure out what the notice asks you to do
There are lots of different types of notices. Some notices are just sharing information. You won’t have to take any action on these, besides keeping them safe in your records. Others are there to let you know about some type of change to your tax account; these may require you to take action to stay compliant. Other notices may arrive if you goofed up, like if you made a payment late or used the wrong account number. It’s important to respond to these right away and work with the agency to resolve the issue.
Step 5: Figure out the deadline and get ‘er done
Once you’ve figured out if you need to take action, see if the notice specifies a deadline. While the standard for the IRS is often 30 days, a good rule of thumb for tax notices is to handle them ASAP. If you still feel confused, write down your outstanding questions and give that agency a call. Usually the number is listed in the notice itself.
The most common notices you may encounter
Now that you know the step-by-step shuffle for understanding your notice, here are some of the common culprits that may dance towards your doorstep.
From the IRS:
- Deposit schedule change
The IRS sets your deposit schedule for Federal Income Taxes, based on your previous deposit amounts during the lookback period. (That’s right, the schedule is totally out of your control.) Your business can have a semi-weekly, monthly, or quarterly deposit schedule. If the IRS decides to change your schedule, they’ll send you a notice letting you know. Make sure to note when your new schedule is effective: It’s important to deposit your taxes on time to avoid penalties and interest.
- Refund or amount due
If you did any of the aforementioned “goofing up,” like underpaying or paying your taxes late, you may get a notice that you have an outstanding balance due. Make sure you resolve this in a timely manner, and if you have any questions, call the IRS for clarification. On the flip side, if you overpaid any taxes you may get a notice that you have a credit or will receive a refund.
From state agencies:
- Deposit schedule change
Just like the IRS, if a state agency wants to change your State Income Tax deposit schedule, they will send you a letter to let you know.
- Rate updates
Every year, your state takes a look at your state unemployment tax rate and decides if it lines up with your business’ history. If they make any changes to your rate they will send you a notice letting you know what the new rate is and when it will be effective. It’s important to withhold at the new rate whenever they tell you to, so you can stay compliant with your taxes.
- Refund or amount due
Just like the IRS, if you didn’t pay your taxes correctly in the past, you may owe more money or get a refund because of an overpayment.
Hopefully you can breathe a little easier now that you know just what do when a notice comes leaping into your arms. If we’ve done our jobs right, you’ll give that thing a hug instead of giving it the cold (and scared stiff) shoulder.
And last, keep in mind this article is informational and is not official tax advice. While this article provides general guidelines for handling tax notices, if you receive a notice, it’s always best to consult your tax advisor about your specific situation.