What does my IRS notice mean?
You go to the mailbox and one of the letters has a return address that sends chills down your spine: IRS. While most people don’t like being contacted by the IRS, many of their letters are no cause for panic because they are not audit related. However, they should also not be ignored as some of them are time bound and require a response. This post will discuss some of the common notices the IRS sends and how to interpret what it means.
IRS notice types
The IRS sends notices for many reasons: bills for overdue taxes, requests for you to file a missing tax return, to request additional information about something, notify you of a pending deadline, etc. When the IRS sends a letter via certified mail, it’s giving you legal notice that they intend to levy you, file a lien against you, or that they will examine or audit you or your business. The notice will ALWAYS thoroughly explain why you are receiving it. READ IT.
The very bottom of this post list some of the many notices that the IRS sends and provides you with a brief explanation. If you click on the green notice number, you will be taken to the IRS site where you can read some further details about that particular notice. If you want to see examples of the notices listed, then click this link and sort the notices by name to find the one your’re looking for.
What IRS notices are particularly important?
Any of the notices that deal with collections, should be “handled with care” so to speak. Why? Because if one doesn’t address them, they could find themselves on the wrong side of the IRS pretty quick. What are these notices?
| CP503 | We have not heard from you and you still have an unpaid balance on one of your tax accounts. |
| CP504 | You have an unpaid amount due on your account. If you do not pay the amount due immediately, the IRS will seize (levy) your state income tax refund and apply it to pay the amount you owe. |
| CP504B | You have an unpaid amount due on your account. If you do not pay the amount due immediately, the IRS will seize (levy) certain property or rights to property and apply it to pay the amount you owe. |
| Letter 1058 | We haven’t received your payment for overdue taxes. We intend to seize your property or rights to property (levy). You must contact us immediately. |
What if you still don’t understand the notice after reading it?
We can help via our notice evaluation service. For a flat fee we will analyze your notice and provide you with a detailed explanation (in plain English) of what it means. We’ll also review your IRS account (with your consent and the filing of some paperwork) if you have debt and even provide your IRS CSED (the date your IRS debt will expire). Check out this post to learn more.
Call us at (773) 239-8850 or click our email address at the bottom of this screen to get started.
Common IRS notices
| Notice Number | Description |
|---|---|
| CP01H | You received a CP 01H notice because we were unable to process your tax return. The IRS has locked your account because the Social Security Administration informed us that the Social Security number (SSN) of the primary or secondary taxpayer on the return belongs to someone who was deceased prior to the current tax year. |
| CP04 | Our records show that you or your spouse served in a combat zone, a qualified contingency operation, or a hazardous duty station during the tax year specified on your notice. As a result, you may be eligible for tax deferment. |
| CP08 | You may qualify for the Additional Child Tax Credit and be entitled to some additional money. |
| CP09 | We’ve sent you this notice because our records indicate you may be eligible for the Earned Income Credit (EIC), but didn’t claim it on your tax return. |
| CP10 | We made a change(s) to your return because we believe there’s a miscalculation. This change(s) affected the estimated tax payment you wanted applied to your taxes for next year. |
| CP10A | We made a change(s) to your return because we believe there’s a miscalculation involving your Earned Income Credit. This change(s) affected the estimated tax payment you wanted applied to your taxes for next year. |
| CP11 | We made changes to your return because we believe there’s a miscalculation. You owe money on your taxes as a result of these changes. |
| CP11A | We made changes to your return because we believe there’s a miscalculation involving your Earned Income Credit. You owe money on your taxes as a result of these changes. |
| CP12 | We issue a CP12 Notice when we correct one or more mistakes on your tax return, and a payment becomes an overpayment, or an original overpayment amount has changed. |
| CP12A | We made changes to correct the Earned Income Credit (EIC) claimed on your tax return. |
| CP12E | We made changes to correct a miscalculation on your return. |
| CP13 | We made changes to your return because we believe there’s a miscalculation. You’re not due a refund nor do you owe an additional amount because of our changes. Your account balance is zero. |
| CP13A | We made changes to your return because we found an error involving your Earned Income Credit. You’re not due a refund nor do you owe an additional amount because of our changes. Your account balance is zero. |
| CP14 | We sent you this notice because you owe money on unpaid taxes. |
| CP14I | You owe taxes and penalties because you didn’t take out the minimum amount you had to from your traditional individual retirement arrangement (IRA). Or, you put into a tax-sheltered account more than you can legally. |
| CP16 | We sent you this notice to tell you about changes we made to your return that affect your refund. We made these changes because we believe there was a miscalculation. Our records show you owe other tax debts and we applied all or part of your refund to them. |
| CP19 | We have increased the amount of tax you owe because we believe you incorrectly claimed one or more deductions or credits. |
| CP20 | We believe you incorrectly claimed one or more deductions or credits. As a result, your refund is less than you expected. |
| CP21A | We made the change(s) you requested to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of the change(s). |
| CP21B | We made the change(s) you requested to your tax return for the tax year specified on the notice. You should receive your refund within 2-3 weeks of your notice. |
| CP21C | We made the change(s) you requested to your tax return for the tax year specified on the notice. You’re not due a refund nor do you owe any additional amount. Your account balance for this tax form and tax year is zero. |
| CP21E | As a result of your recent audit, we made changes to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of these changes. |
| CP21I | We made changes to your tax return for the tax year specified on the notice for Individual Retirement Arrangement (IRA) taxes. You owe money on your taxes as a result of these changes. |
| CP22A | We made the change(s) you requested to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of the change(s). |
| CP22E | As a result of your recent audit, we made changes to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of these changes. |
| CP22I | We made changes to your tax return for the tax year specified on the notice for Individual Retirement Arrangement (IRA) taxes. You owe money on your taxes as a result of these changes. |
| CP23 | We made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You have a balance due because of these changes. |
| CP24 | We made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You have a potential overpayment credit because of these changes. |
| CP24E | We made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You have a potential overpayment credit because of these changes. |
| CP25 | We made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You’re not due a refund nor do you owe an additional amount because of our changes. Your account balance is zero. |
| CP27 | We’ve sent you this notice because our records indicate you may be eligible for the Earned Income Credit (EIC), but didn’t claim it on your tax return. |
| CP30 | We charged you a penalty for not pre-paying enough of your tax either by having taxes withheld from your income, or by making timely estimated tax payments. |
| CP30A | We reduced or removed the penalty for underpayment of estimated tax reported on your tax return. |
| CP32 | We sent you a replacement refund check. |
| CP32A | Call us to request your refund check. |
| CP39 | We used a refund from your spouse or former spouse to pay your past due tax debt. You may still owe money. |
| CP42 | The amount of your refund has changed because we used it to pay your spouse’s past due tax debt. |
| CP45 | We were unable to apply your overpayment to your estimated tax as you requested. |
| CP49 | We sent you this notice to tell you we used all or part of your refund to pay a tax debt. |
| CP51A | We computed the tax on your Form 1040, 1040A or 1040EZ. You owe taxes. |
| CP51B | We computed the tax on your Form 1040, 1040A or 1040EZ. You owe taxes. |
| CP51C | We computed the tax on your Form 1040, 1040A or 1040EZ. You owe taxes. |
| CP53 | We can’t provide your refund through direct deposit, so we’re sending you a refund check by mail. |
| CP59 | We sent you this notice because we have no record that you filed your prior personal tax return or returns. |
| CP60 | We removed a payment erroneously applied to your account. |
| CP62 | We applied a payment to your account. |
| CP63 | We are holding your refund because you have not filed one or more tax returns and we believe you will owe tax. |
| CP71 | You received this notice to remind you of the amount you owe in tax, penalty and interest. |
| CP71A | You received this notice to remind you of the amount you owe in tax, penalty and interest. |
| CP71C | You received this notice to remind you of the amount you owe in tax, penalty and interest. |
| CP71D | You received this notice to remind you of the amount you owe in tax, penalty and interest. |
| CP88 | We are holding your refund because you have not filed one or more tax returns and we believe you will owe tax. |
| CP90C | We levied you for unpaid taxes. You have the right to a Collection Due Process hearing. |
| CP120 | You need to send us documentation of your tax-exempt status. |
| CP130 | Your tax return filing requirements may have changed: You may no longer need to pay the Alternative Minimum Tax. |
| CP152 | We have received your return. |
| CP153 | We can’t provide you with your refund through a direct deposit, so we’re sending you a refund check/credit payment by mail. |
| CP166 | We were unable to process your monthly payment because there were insufficient funds in your bank account. |
| CP178 | Your tax return filing requirements may have changed: You may no longer owe excise tax. |
| CP180/CP181 | We sent you this notice because your tax return is missing a schedule or form. |
| CP231 | Your refund or credit payment was returned to us and we need you to update your current address. |
| CP259 | We’ve sent you this notice because our records indicate you didn’t file the required business tax return identified in the notice. |
| CP297C | We levied you for unpaid taxes. You have the right to a Collection Due Process hearing. |
| CP501 | You have a balance due (money you owe the IRS) on one of your tax accounts. |
| CP521 | This notice is to remind you that you have an installment agreement payment due. Please send your payment immediately. |
| CP523 | This notice informs you of our intent to terminate your installment agreement and seize (levy) your assets. You have defaulted on your agreement. |
| CP565 | We gave you an Individual Taxpayer Identification Number (ITIN). |
| CP566 | We need more information to process your application for an Individual Taxpayer Identification Number (ITIN). You may have sent us an incomplete form. You may have sent us the wrong documents. |
| CP2005 | We accepted the information you sent us. We’re not going to change your tax return. We’ve closed our review of it. |
| CP2006 | We received your information. We’ll look at it and let you know what we’re going to do. |
| CP2057 | You need to file an amended return. We’ve received information not reported on your tax return. |
| CP2501 | You need to contact us. We’ve received information not reported on your tax return. |
Understanding Box 9B on Form 1099-R
When a taxpayer retires, they will start to receive money from their retirement plan (e.g. pension or annuity). As the payments are made to you, each payment will consist of two parts. One portion will be the amount (if any) that you contributed to the plan and the second portion will be the piece the employer contributed (or the earnings).
You are not required to enter the total employee contributions or designated Roth contributions that are reported in box 9b. However, failing to do so may cause you to pay more tax than you should.
What does an amount in box 9b mean?
The amount shown is the total amount of after-tax contributions you paid to your retirement plan while working. It’s used to determine the after-tax contribution amount shown in Box 5. If you want to know what each field on Form 1099-R means, then check out this informative illustration.
Do you pay tax on this amount?
If you made post-tax contributions to your retirement account, you don’t pay income taxes on the portion of the distributions you receive based upon the amount for which you were already taxed. This is referred to as your “basis” in the plan. If the taxpayer didn’t make any after-tax contributions to the retirement plan (which is often the case), then the “basis” is zero, and each distribution from the retirement plan is 100% taxable.
So what do you do with this amount?
If you are using software, then you want to include it somewhere to indicate your basis. If you are doing your taxes manually, then there is an IRS Simplified Method Worksheet that determines the amount of basis that is included in each periodic payment. This worksheet will help you determine how much basis the taxpayer should spread out over the payments they receive. If you are using a professional, they should know what to do!
8 Ways To Deal With A IRS Notice
Most people tend to panic when they receive a notice from the IRS. Many, many people think that by stuffing that notice under the mattress, the problem will go away. Unfortunately, it doesn’t work like that. The best way to address a notice from the IRS is to deal with it immediately and head on. Here are some tips for what to do when you receive an IRS notice.
1. Don’t panic, and don’t shred it. Most IRS notices can be dealt with pretty simply. Not quickly, but simply.
2. Be sure you understand WHAT the notice is for. The IRS sends all sorts of notices — bills for overdue taxes, requests for you to file a missing tax return, to request additional information about something, notify you of a pending deadline, etc. When the IRS sends a letter via certified mail, it’s giving you legal notice that they intend to levy you, file a lien against you, or that they will examine or audit you or your business. The notice will ALWAYS thoroughly explain why you are receiving it. READ IT.
3. Every notice from the IRS will explain what you need to do with it. If they want extra information from you, it will explain what information they need. If it’s a bill, well, then they just want your money.
4. If you receive a notice about a correction to your tax return, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due. The IRS will just “fix” the issue and then send you a bill (if one is needed).
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. IRS notices are typically time bound and failing to respond in time can cause you to forfeit some of your rights/options. Respond to the IRS in writing to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left corner of the notice. Allow at least 30 days (sometimes it can take up to 90 days) for a response from the IRS.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the correspondence available.
8. Keep copies of any correspondence with your tax records. Also keep record of who you talk to, including their IRS employee ID number (they’re required to give it to you), and detailed notes of your conversation.
Don’t understand your notice?
If you receive a notice that you don’t understand or don’t agree with, then obviously consider speaking to a professional (such as ourselves). Feel free to email us via the address below in the footer. We can review a copy of your IRS notice, tell you what it means, and tell what you need to do about it, in simple terms.
Understanding The “New” Form 1040
—Update 01/01/2020-The IRS modified some of these schedules effective with the 2019 Form 1040. Forms that only apply to tax year 2018 will link to the 2018 form only. —
So, when lawmakers vowed in 2017 to simplify the tax code, one of their targets was the good ‘ol IRS Form 1040 pictured above. There was much hoopla about making it so taxpayers could file their taxes on something about as big as a post card. Well, the new Form 1040 is smaller than it’s predecessors. But will it make the filing process more simplified? We don’t think so. Read on to see why.
More Schedules. The new Form 1040 replaces the former Form 1040 as well as the Form 1040A and the Form 1040EZ. The new Form 1040 uses a “building block” approach, in which the tax return is reduced to a simple form. That form can be supplemented with additional schedules if needed. Taxpayers with straightforward tax situations would only need to file this new 1040 with no additional schedules. But what if you do need one of the additional schedules? Well, just know that there are six new schedules to accommodate this approach. What are these new schedules?
Schedule 1 Additional Income and Adjustments to Income. This schedule is used to report all of the income that was reported on lines 10 and 21 of the 2017 form. This includes income from Schedule C (business income), Schedule D (capital gains and losses), Schedule E (supplemental income and loss from rental real estate) and Schedule F (farm and ranch income). It also includes the reductions to income that that were formerly reported on lines 23 to 35 of the 2017 form.
Schedule 2 Tax. This schedule reports lines 45 to 47 of the 2017 form 1040, including the tax, alternative minimum tax and any excess premium tax credit.
Schedule 3 Non-Refundable Credits. This schedule contains lines 48 to 55 of the 2017 form, including education expenses, child and dependent care credit, foreign tax credit, retirement savings plan credit and child tax credit.
Schedule 4 Other Taxes. This schedule contains lines 57 to 63 of the 2017 form, including self-employment tax, additional tax on IRA and retirement plan withdraws, household employment tax and the individual responsibility payment for not having health care.
Schedule 5 Other Payments and Refundable Credits. This schedule contains lines 65 to 74 of the 2017 form, including estimated tax payments and amounts applied to the next year’s return, earned income credit, additional child tax credit, American opportunity credit (the amount of the education credit that is refundable), amount paid with a request for extension and several other credits.
Schedule 6 Foreign Address and Third-Party Designee. This schedule is used to report your foreign address or if you would like the IRS to be able to discuss the return with a third party (e.g. your paid preparer).
Why Was This Done? Keeping politics out of the conversation, we believe that this switch was done to fulfill a campaign promises. Why so?
- The new building block approach doesn’t actually simplify anything. If anything, it makes one have to look at additional forms/pages when one only had to formerly look at a two page document (i.e. the old “long form” 1040) to see it all.
- Only around 13% of tax returns are file via paper as opposed to being e-filed according to the IRS statistics. With that being said, who really cares if the Form 1040 is the size of a postcard? Most people who file are using software!
- Schedules 1 through 6 are additional to the ones that existed prior to 2018 (e.g. Schedules A, C, D, E, F, H, SE and 8812). While taxpayers can ignore them if they don’t have any lines on those schedules to fill out, they still might have to review them to determine if they are required. Simplification? We’re not so sure.
The Result? While the new form is shorter, we can’t say that it will be easier for taxpayers to understand. We have already started preparing 2018 returns and we can say that it makes it “slightly” more challenging to review. Most professional software has a view/comparison mode/worksheet that allows us to analyze variances to ensure nothing is missed. But we can say that the building block scheme takes a little extra work.
To that end, don’t expect it to cost you any less to have your “simplified” tax return prepared when compared to years past. Most paid preparers, if anything, are actually raising their prices to accommodate the extra forms and other changes such as the 20% QBI deduction.
S-Corp Automobile Deduction
Who owns the vehicle matters!
You want your S-Corporation (S-Corp) to have a nice clean set of books, and the cleaner they are, the better. Corporate payments of personal expenses either dirty up the accounting or can create a strong impression of impropriety. The IRS is attracted to things that look suspect, which is an even better reason for you to make sure your S-Corp has a clean set of books. So how does one go about deducting the expenses of a vehicle that is used by a S-Corp. Well, the answer depends largely on who the vehicle is titled to.
Vehicle Titled In Corporation’s Name. Corporations, S-Corps, and Partnerships may only claim actual expenses for vehicles. Thus, your S-Corp may claim depreciation, fuel expenses, oil expenses, repairs, insurance, and so forth. But what about mileage? When the car is owned in the corporation’s name, it is not allowed to deduct mileage, just the actual expenses incurred for it’s use in business.
Vehicle Titled Personally. To deduct the expenses of a vehicle that is owed personally by the business owner, the S-Corp can reimburse the employee expenses under an accountable plan or a non-accountable plan. The expenses are deductible under either methodology, but the rules are different.
Accountable Plan
When an accountable plan is used, the business only reimburses expenses that are substantiated (proved) by receipts and other documentation. The reimbursements are not taxable income to the business owner nor are they reported on their W-2. What the owner needs to submit to the business depends on what expenses they will be reimbursed for. In this post about S-Corp Home Office Deductions, we provide a sample accountable plan that will give you an idea of the reimbursement language.
- Mileage Reimbursement. The business can reimburse at the IRS standard mileage rate. This rate includes allowances for depreciation (i.e. wear and tear), maintenance, repairs, gas, insurance, and a host of other things. The proof the business owner would need to provide for reimbursement would be a mileage log. This log would need to show the date, business purpose of the trip, miles driven and should be submitted to the business on a routine and timely fashion (e.g. once a month). One important thing to note is that the standard mileage method only applies to passenger vehicles with a gross weight of less than 6,000 pounds.
- Actual Expense Reimbursement. The business can also reimburse for the actual expenses the business owner incurs. The business does not have to reimburse for every expense, for example, you could reimburse gas and insurance and not tires and oil changes. However, for any expenses the business does reimburse, it must have adequate proof. Adequate proof means you need to see all the receipts for the expenses that will be covered. In addition to the expenses, the owner also needs to supply the total vehicle mileage for the year as well as the mile log. Why? So it can determine the number of business miles and the number of personal miles to compute the percentage of business use. This percentage is then applied to the total amount of expenses incurred to determine how much is reimbursed to the employee.
Non-accountable plan
If a non-accountable plan is used, then the business does not need to keep or see any vehicle records. They can reimburse any amount, from below the IRS standard rate, or above the IRS standard rate. They can reimburse for gas and insurance but not oil changes, or anything else that it wants to pay for (that is vehicle related). But under this method, all the reimbursements get included in the employee’s box 1 W-2 wages and are subject to income and employment tax withholding. The non-accountable plan is less beneficial to the employee because of the inclusion of the amounts on their W2 as income.
Could you be paying more in taxes than you should?
As a business owner, there are some tax benefits to being structured as a S-Corp. The biggest one (that almost everyone knows) is the potential to reduce/minimize their employment taxes. But did you know that through some deliberate and diligent tax planning, you could be able to legally reduce your tax burden further?
If your business does $100K (or more) in revenue, you would be a perfect candidate for our S-Corp Tax Reduction Analysis. This analysis (a package valued at $1097, but $345 to you for a limited time), includes the following:
- One hour investigative session to understand your business operations and potential tax levers
- Review of the past 3 years of filed Form 1120S tax returns to unearth potentially missed deductions or tax savings
- Formulation of potential tax strategies that if implemented could reduce the underlying tax liability
- Comprehensive report indicating findings, tax strategies and steps to implement
- Complementary copy of Jared’s book How to Slash Your Taxes Legally and Ethically
Furthermore, this analysis is guaranteed by our 100% ironclad money back guarantee. If we can’t find any tax savings that equal or exceed the cost of the analysis, we’ll refund your money, no questions asked!
To claim your analysis, simply email us via the address in the footer on this page or give our office a call at 773-239-8850. We only have capacity to perform so many of these analysis per month so get yours NOW. We look forward to working with you!
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