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What to Do When You Receive a Letter From the IRS

The IRS sends out millions of these letters every year so they are somewhat common, so the taxpayer shouldn’t immediately panic if they receive one of these letters. An example of why you would receive a letter is if you inadvertently forgot to include your dividend income on your tax return. The letter will essentially alert you of this mistake and let you know the additional money that is now due. The IRS suggests a few hints in handling these notices:

• Read the letter carefully because most of these letters deal with a specific issue and will include instructions on how to resolve it.
• Compare the notice to your return to make sure the change the IRS is proposing is correct.
• Respond to the notice in a timely manner. The IRS will give you a date you need to respond by. You should write a letter to the IRS to the address listed at the bottom of the letter if you disagree.
• Keep copies of the letter and whatever you send to the IRS.

It is very important to research the claim the IRS is making to double check they are correct. A perfect example is with stock sales. If you sold $20,000 worth of stocks and forgot to report it, the IRS will often send a letter stating you owe taxes on the full $20,000 sale, they don’t take into account what you originally paid for the stocks. So if you paid $18,000 for them then your gain is only $2,000, not the full $20,000 the IRS is billing you for. In this case you would amend your return to report the $20,000 of sales and the $18,000 of cost which will result in you owing taxes on the $2,000 gain.

Please consult your tax advisor on all the above information.

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