What Are the Different Types of IRS Notices?

IRS Penalty Notice, Tax Audit, or Soft Letter: What’s the Difference?

There are a variety of different notices that IRS sends to taxpayers, not all of which are as intimidating as many assume them to be. To most, the initial response upon receiving any notice from IRS is a mild amount of panic and confusion. In many cases, this response is unnecessary and unsolicited.

In the 2019 filing year, IRS only audited 0.15% of submitted tax returns. Of the total audited returns, even fewer were selected at random. Your greatest success at avoiding a tax audit from IRS is to ensure that your returns are submitted correctly the first time. However, even doing so doesn’t fully exempt you from the possibility of being audited.

While IRS audits are often what most taxpayers dread most, IRS also sends various other notices to taxpayers. The most common of these notices include a penalty notice, tax audit, or a soft letter. Keep reading to deepen your understanding of what each of these notice types means for their recipients. 

IRS Penalty Notice 

Following the submission of your completed tax return, prior to April 15th, IRS will review your return for mathematical accuracy. Their review aims to confirm the accuracy of your submitted return and evaluates the correctness of the sum you are responsible to pay. 

Upon the completion of their review of your documentation, should they find that you owe an outstanding amount, you will receive a bill or penalty notice, for the amount owed. 

It should be noted that interest occurs on any payment not made by its due date. Interest rate is determined on a quarterly basis and is the federal short-term rate plus 3 percent. 

Additionally, if you file your tax return on time but fail to pay your complete tax penalty on time, you will likely receive a failure-to-pay penalty. This penalty is equal to one-half of one percent for each month, or part of a month, up to a maximum of 25% of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. 

Lastly, if you fail to file your taxes on time and owe tax, you will be responsible for paying a failure-to-file penalty. This penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25%. Additionally, if your tax return is more than 60 days late, you will be held responsible for a minimum penalty for late filing. 

IRS Penalty Notice, Tax Audit, or Soft Letter_ What’s the Difference_

Tax Audit 

An IRS audit is a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws, and to verify the reported amount of tax is correct.

IRS may decide to audit an individual or organization based on a number of potential triggers, but may also select taxpayers to audit at random. 

Depending on the type of audit, you will deal with the IRS either by mail or in person. For all types of audits, the IRS will first notify you of the audit and provide instructions in a letter.

A correspondence audit is the lowest level of audit, as you are given the chance to solve the issue by mail. Fill out the paperwork, including the requested documentation, and send everything back in a timely manner. This will help establish to the IRS that you take this audit seriously.

The auditor will evaluate these items and ask you a series of questions about them before coming to a conclusion. The length of the audit will vary depending on how complicated your case might be — however, an office audit is usually completed within one day.

If at any point you need more time to respond to any IRS requests, be sure to ask for an extension immediately. Because documentation is essential, you may want to talk with a tax specialist if your bookkeeping has not been well organized.

Soft Letter 

IRS often utilizes soft letters to educate, inform, and encourage voluntary compliance. That being said, IRS soft letters are known to include language

aimed at compliant taxpayers that requires them to produce additional documentation and a supporting statement. Soft letters, which may cover more than one tax period, often request information not included on a return and may cover years outside the statute of limitations for assessment. 

While IRS utilizes soft letters for various purposes, they have used some as a means to bypass the rights and protections of examination procedures. 

Soft letters often warn taxpayers in a manner similar to the following: “Our records indicate that you haven’t taken necessary action to remedy your non-compliance with U.S. reporting requirements relating to foreign income, foreign entities, or foreign financial accounts.” Following the receipt of a soft letter, recipients can respond in one of three ways: 

  • Participate in the Streamlined Filing Compliance Procedures (if eligible).
  • Submit Form 15023, Offshore Compliance Status Response along with all required tax returns, information returns, and related filings, as well as ensure all necessary FBARs are filed with FinCEN.
  • Submit a narrative statement explaining why you believe you are fully compliant with all U.S. reporting requirements, along with a complete history of unreported foreign assets and the actions taken to become compliant.

Recipients of soft letters that do not respond within 60 days of their receipt may be at risk for a tax audit. The worst possible response to an IRS soft letter is to do nothing at all. Ignoring the request for voluntary information may land you in a costly and time-demanding audit that could have been easily avoided otherwise. 

While taxpayers often fear the receipt of the notification of an IRS tax audit, there are other various types of notices that may not need cause concern. While immediately partnering with a tax professional, such as a tax attorney, is advisable under the receipt of any notice type, it may not be necessary in the event of a penalty notice or soft letter. 

Should you decide to solicit the support of a tax law professional, our team of experts at Milikowsky Tax Law is prepared to support you. Our significant past experience in successfully defending clients in IRS audits has developed our professionalism and expertise in tax law support. Call or contact us today for support in handling your tax law concerns.