How to handle an IRS tax notice: A step-by-step guide for employers

If your business receives an unexpected letter from the Internal Revenue Service (IRS), you may be a little concerned.

However, the reality is that tax notices from the IRS are more common than you might think — and many of them aren’t as bad as they seem. The key is to handle these notices correctly, quickly, and efficiently.

In this guide, we’ll explain what you should do when you receive a notice from the IRS, what common notices mean, and how your businesses can more easily stay on top of payroll taxes to prevent these issues in the future.

Step 1: Don’t panic — read the notice carefully

Although you may be alarmed, tax notices are often routine — and not every letter indicates a serious problem. Many IRS letters are informational, or requesting additional information to resolve an issue quickly; in some cases, they may even be highlighting a mistake on their end, such as a misapplied payment.

That said, as soon as you receive the letter, you should:

• Know how to find the notice number. Every IRS notice includes a unique identifying number in the top-right corner, typically starting with CP (for a computer-generated notice) or LTR (for a letter). Knowing this will help you figure out why you received the notice.

• Read the details carefully. The notice will explain the reason for the IRS contact. It could be a discrepancy in a filing, a missing form, or a request for clarification.

Pro tip: Always keep copies of any correspondence you have with the IRS, and note the date you received the notice for your records. This can be crucial if follow-up is required.

Step 2: Understand which type of IRS notice you have received

Not all tax notices are created equal. Some are purely informational, while others require immediate action. Here are a few common IRS notices that your business might receive:

• CP 501: This is a reminder for an unpaid balance. If the IRS believes you owe money, this notice will explain the amount due and any penalties or interest.

• CP 2000: This notice indicates a discrepancy between your filed return and the information the IRS has. It’s not an audit, but it does require a response.

• Letter 226J: This is an assessment of penalties under the Affordable Care Act (ACA) for failing to offer adequate health insurance coverage.

Each notice will come with instructions on what action is required, whether it’s paying a balance, providing documentation, or filing an amended return.

Step 3: Take action and respond promptly

Once you’ve understood the reason behind the notice, it’s important to act quickly. The IRS usually gives a specific time frame to respond (typically 30 days from receipt of the notice). Failing to respond in time could result in penalties or interest charges.

If you “agree” with the notice: Pay any amounts due or provide the requested information as soon as possible.

If you disagree: It’s possible to dispute an IRS notice. Make sure you gather all supporting documents and prepare a formal written response, which may include amended tax returns or explanations.

Whatever you do, don’t ignore the notice. Even if you believe the notice is wrong, it’s crucial to respond. Silence can lead to further actions like tax liens or penalties.

Step 4: Review your payroll tax processes

In the majority of cases, IRS notices are related to simple payroll tax discrepancies that — with the right payroll tool — are easily avoidable.

As a result, you should review and re-assess your current tools and processes, and consider an automated approach.

How do automated payroll tools make a difference?

Managing your payroll taxes manually is often complex and time-consuming, leading to costly errors. But with an automated payroll tool — like Remote — you can:

• Automatically calculate the correct payroll taxes for each of your employees.

• Ensure you are fully compliant with IRS requirements, with automatic updates when those requirements change.

• File and report taxes quickly and easily.

Using an automated payroll tool not only reduces the risk of receiving IRS notices but also frees up time for your HR and finance teams to focus on other critical business tasks.

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Step 5: Get professional help (if needed)

Sometimes, tax matters can get too complicated to handle alone. If you’re unsure how to respond to a tax notice or don’t understand the specifics, consulting a tax professional or accountant is a wise move. They can help you:

• Review the notice and determine the best course of action.

• Ensure your response is accurate and timely.

• Manage communications with the IRS on your behalf.

How to prevent future IRS notices

While receiving an IRS notice isn’t always avoidable, there are steps you can take to minimize the chances of being flagged in the future. For instance, you should aim to:

• Stay organized: Keep detailed records of all your tax filings, payments, and correspondence.

• File accurately: Double-check all figures and documentation before filing returns, especially payroll taxes.

• Use a payroll tool: As mentioned, automating your payroll can increase accuracy and ensure compliance, reducing the risk of errors that lead to IRS notices.

Run payroll with confidence

No one likes dealing with IRS tax notices, but in most instances, they can be resolved smoothly.

As discussed, they’re often also avoidable in the first place. Remote Payroll automates your tax calculations, reducing the risk of manual errors, and ensures that you are always fully compliant with state and federal payroll tax requirements.

To learn more about how we can make your payroll quick and painless — and give you peace of mind — speak to one of our friendly experts today.

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