The Internal Revenue Services seems to be responding to the grim realities of the federal budget by auditing more taxpayers and especially sole proprietors and home businesses. This is not good news for family child care providers and other small business owners.
If you receive a notice from the IRS or your state tax authorities, remember this: It is quite likely that some or all of the proposed tax return changes are incorrect. Many notices are generated by computer and often they take away legitimate business deductions.
Quick action in responding to a notice is the best way to protect yourself against paying additional tax. If you receive a notice from the IRS or the California Franchise Tax Board, do not ignore it!
I cannot emphasize this enough. No matter what the notice says, you may not owe anything. If you fail to respond to the notice, however, the IRS will assume that you do owe the additional tax and they will move very quickly, within 30 days or less, to finalize the changes. After that it is not long before your "tax deficiency" is carved in stone. Then your only options are to pay the tax (plus penalties and interest), try to negotiate a settlement with the IRS (difficult these days), go to court, or wait for them to levy your bank account and place a lien on your home.
Halloween was last month, but can you tell that I'm trying to scare you into action? Believe it or not, the IRS wants your input. Every notice provides a contact number and a response due date. Either you or your official representative must make contact by that date and the earlier the better.
Contact your tax return preparer immediately and get their input regarding any notices you receive. Do not delay! I have seen notices with response periods as short as 10 days. If your tax preparer is an Enrolled Agent or a CPA (or a tax attorney), he or she can get your Power of Attorney and contact the IRS for you.
If you do not have a tax preparer, or they cannot do this kind of representation work, or you prefer to have someone else help you (a good idea if you suspect your preparer of making mistakes on your tax return): Find an Enrolled Agent to help you: NAEA Enrolled Agent Directory.
Most of my clients contact me right away when they receive a notice. Some, however, literally cannot open those IRS envelopes and prefer to hide them away in a drawer somewhere. If this is you, ask your tax advisor or a family member to open them for you! Ignoring notices for only six months recently cost one child care provider $30,000 in tax that she really did not owe.
We are going to see more and more tax return changes sent out by mail. Protect yourself by getting help and responding promptly.