Every tax payer usually receives at least one notice from the Internal Revenue Service (IRS) during his or her lifetime. Therefore, when you do receive a notice do not panic but be brave, open the envelope and read the notice! In numerous cases, the notice just requires a simple response along with additional information and in some cases your notice might have been sent in error.
The most common notice sent to taxpayers is a CP2000; this number is displayed in the top right corner on the notice. Typically, this notice is sent to inform you that an item of income was not included on your income tax return. The most overlooked items are stocks which have been sold, interest or dividends. Information on these types of income is reported to the IRS by third parties such as a broker, a bank or a mutual fund company.
If this is the case and you just neglected to include this type of income on your tax return all that is required for you to do is to agree to the changes made by the IRS and send in the payment. If the notice is correct and you send in payment for the increase in tax owed, your record will not be damaged and your chances of being selected for an audit are not increased.
If the increase reflected on the notice is from the sale of your stocks, you will need to figure the difference between the price you initially paid for the stock, the stock basis, and what you sold the stock for. The difference between these two figures is your gain (or loss) on the stock sale. If by chance you lost money on the sale of stock, the IRS might owe you a refund as in this scenario you would have had a capital loss on the sale of your stock rather than a gain.
The IRS notice or letter will explain the problem and once you know what the problem is carefully review the information supplied. Then compare the information with your records to determine if the changes the IRS made are correct or an error. After making this determination, take whatever steps are necessary to resolve the issue. Additionally, whenever you are dealing with financial and tax issues make sure you keep an accurate record of any figures along with the documentation to support your figures, copies of notices and any correspondence associated with the notices. Also, remember that the IRS only sends notices and letters by mail and never communicates by phone or email.
Therefore, if you do receive a letter or notice from the IRS do not panic, just open the letter and resolve the issue. Also, remember that no matter what the issue is do not ignore the notice as the IRS does not like to be ignored!! The consequences of ignoring the IRS are not something a taxpayer would enjoy!!
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