How to Avoid an IRS Matching Notice
Every year, millions of Americans get mail from the IRS that they did not expect.
Sometimes it’s a simple matter and one you can figure out easily. Other times, IRS notices can be confusing or even incorrect. Your best bet is to try to avoid the notice in the first place. To increase your chances of avoiding an IRS notice, here are five actions that will work in your favor.
1. Report amounts on the correct line.
Since IRS notices (for example, the CP2000 Underreporter Notice can be computer-generated, many are the result of a too-precise matching system. Even if you report all income on your return, the IRS system may generate a notice if the income was reported incorrectly.
For example, taxpayers commonly report non-employee compensation from a 1099-MISC as “Other Income,” when it actually belongs on the Schedule C, Profit and Loss from a Business.
Make sure that amounts are reported in the correct category that matches the line item on your tax return. For more information about income reporting see IRS Publication 525, or better yet, see your Tax Pro.
2. Don’t group income amounts.
It may be tempting to combine amounts to simplify your tax return and save yourself time. Don’t. This is not how information gets reported to the IRS. This is another way to trigger an IRS notice because IRS systems are looking for an exact match. So, if you worked several jobs this year, you’ll need to enter each W-2 separately in your tax software.
As another example, let’s say you have multiple stock trades on your Forms 1099-B. You must report each trade separately by either:
Including each trade on Form 8949, which transfers to Schedule D, orCombining the trades for each short-term or long-term category on your Schedule D. Include a separate attached spreadsheet showing each trade. The spreadsheet must include the same information requested on Schedule D.
3. Include any delayed or corrected payer documents.
If you receive any correcting information statements, like a corrected W-2 or 1099, make sure that you notate that on the return (tax filing software has a checkbox for this). If you receive a corrected statement after you have filed your tax return, amend your tax return and include the corrected statement as an attachment.
In some cases, you may be waiting on a delayed or corrected information statement. File an extension and pay any tax you estimate you’ll owe by the filing due date (not the extension date) to avoid costly penalties and interest.
If you want to make sure you have all of your information statements, file an extension and contact the IRS in late July to get your wage and income transcript. It may contain W-2's and 1099's that you were not aware of.
4. If paper filing, include schedules and information statements.
When you or your tax pro e-file your return, electronic copies of your information statements (W-2, 1099, etc.) and your Form 1040 Schedules (Schedule C, Schedule A, etc.) are sent with your return. However, when mailing your return, you must attach copies of these documents.
You don’t need to send in copies of your receipts or other records, but these should be kept for at least three years in case you are audited.
5. Don’t net amounts.
Use gross income amounts unless it specially requests the net amount. Do not net amounts due or paid to other sources against amounts due or received from them.
Best course: Be upfront
When the IRS thinks you did not report all of your income, they will send you a notice. Notices can be confusing, so if you don’t understand exactly why the IRS sent you a notice, call the IRS or look closer at your tax account. Start with the phone number on the notice. You can also get a tax pro to help determine whether the IRS was correct and help respond with the information the IRS needs to correct the error.
Other issues can come up, even after the IRS has processed your return and issued your refund. Always open IRS letters right away and respond by the due date to get the best outcome.
Or, get help from a tax pro, who can help you get to the bottom of any missing refunds, and deal with the IRS for you.. Or make an appointment for a free consultation with a local tax professional.