You Just Received a Letter From the IRS—What Should You Do Next?

Imagine it's Saturday morning. You open your mailbox and see an envelope from the Internal Revenue Service. Before you even open it, your stomach drops. You start reading and see words like “balance due,” “proposed changes,” “penalty,” or “intent to levy.” Your first thought is probably: “How much trouble am I in?”

Imagine this.

You check the mail.

There it is.

Department of the Treasury — Internal Revenue Service.

You already know this probably isn't a birthday card.

You open it.

The first thing you see is: Amount Due: $38,742.

Your heart starts racing.

You keep reading: tax, penalty, interest, deadline.

You immediately think: “I need to pay this.”

Maybe.

But before you write a $38,742 check, there is a much more important question: Why does the IRS say you owe $38,742?

An IRS notice does not automatically mean the IRS is wrong. But it also does not automatically mean the IRS is right.

First: Don't Ignore the Letter

Do not put the notice in a drawer. Do not leave it unopened. Do not tell yourself: “I'll deal with it after tax season.”

IRS notices generally contain deadlines. Those deadlines can affect your ability to respond, dispute an adjustment, appeal, provide documentation, request certain relief, or address collection activity.

The problem may become much more difficult if you wait.

But Don't Panic Either

Receiving an IRS letter does not automatically mean you're being audited, you're going to jail, the IRS thinks you committed fraud, or your bank account is being seized tomorrow.

The IRS sends notices for many reasons. Some are relatively simple. Others are serious.

The first step is identifying: What exactly did you receive?

Look for the Notice Number

Many IRS notices contain a notice or letter number. You may see something like CP2000, CP14, CP501, CP503, CP504, Letter 1058, or another identifier.

That number helps tell us why the IRS contacted you, what stage the matter may be in, and what response may be required.

When a client sends me an IRS notice, one of the first things I want is every page of the notice—not just a picture of the amount due.

Send Your CPA the Entire Notice

Imagine the notice is eight pages and you send your CPA page one with a text saying: “What is this?”

Page one may show the balance. Page four may explain the adjustment. Page six may contain the response instructions. Page eight may contain important information about rights or deadlines.

Send the entire notice. Front and back if anything appears on the reverse side.

Read the Taxpayer Name and Tax Year

Before getting into the numbers, confirm whose notice this is, which tax year it covers, and which tax form is involved.

Imagine you own five companies. The envelope arrives at your house, and you assume it relates to your personal taxes. But the notice is actually for ABC Logistics Inc.

Different taxpayer. Different return. Different issue.

Verify the IRS Has the Correct Taxpayer Information

Check the name, address, taxpayer identification information shown on the notice, tax period, and form.

Sometimes the problem begins with incorrect or outdated information. Maybe the IRS sent correspondence to an old address. Maybe the business moved. Maybe an entity changed responsible parties.

These details matter.

Understand What the IRS Is Actually Saying

An IRS notice can generally be thought of as the government saying: “According to our records, something needs attention.”

Your job—and sometimes your CPA's job—is to determine what the IRS believes happened, what actually happened, whether the records agree, and if not, why.

Imagine the IRS Says You Forgot $100,000 of Income

The IRS says: “We received information showing $100,000 of income that was not reported.”

Your first reaction: “That's impossible.”

Then we investigate.

Maybe a Form 1099 was issued. Maybe the income was reported somewhere else. Maybe the payer used the wrong EIN. Maybe the amount represents gross proceeds rather than taxable profit. Maybe the income was reported correctly but the IRS matching system did not identify it properly. Maybe the IRS is completely correct.

We do not know until we reconcile the notice with the return and supporting documents.

The IRS Often Receives Information From Third Parties

The IRS may receive information reported by employers, banks, brokerage firms, customers, payment processors, retirement plans, and other payers.

Examples include Forms W-2, 1099-NEC, 1099-MISC, 1099-INT, 1099-DIV, 1099-B, 1099-K, and other information returns.

If the IRS records do not appear to match the tax return, correspondence may follow.

A CP2000 Is Not the Same Thing as a Traditional Audit

A CP2000 generally proposes changes when information reported to the IRS does not appear to match information on the taxpayer's return.

That does not automatically mean: “The IRS audited you and determined you cheated.”

It means there is a proposed discrepancy that needs to be reviewed.

You may agree, partially agree, or disagree. But the response should be based on documentation and the actual tax law.

Imagine the IRS Proposes $50,000 of Additional Tax

Do not look only at $50,000. Ask what adjustment created it.

Maybe the IRS believes $200,000 of income was omitted. If that income really was omitted, the proposed tax may be appropriate or may still need recalculation depending on deductible basis, expenses, or other facts.

If the income was already reported elsewhere, perhaps the adjustment should be challenged.

The amount due is the result. The adjustment is the cause. Understand the cause first.

Cost Basis Can Create Huge Differences

Imagine you sell investments for $500,000. The IRS receives information showing gross proceeds of $500,000, but the IRS does not have correct basis information.

You originally paid $450,000. Economically, your gain may be approximately $50,000 before considering other relevant items.

If basis is missing, the proposed adjustment can look dramatically larger.

Documentation matters.

Business Owners Can Have Similar Problems

Imagine your company receives $1 million through payment processors. The IRS receives a Form 1099-K. But your tax return already included the underlying revenue.

If the IRS matching process treats that information as additional unreported revenue, you need to demonstrate the income was already reported.

Simply saying “That's wrong” is not enough. Show the reconciliation.

Keep Documentation

Useful documentation can include tax returns, W-2s, 1099s, bank statements, brokerage statements, closing statements, invoices, accounting records, payroll reports, receipts, contracts, correspondence, and proof of payments.

The appropriate documents depend on the issue.

The stronger the documentation, the easier it can be to explain what actually happened.

What If the IRS Says You Never Filed a Return?

Imagine you know you filed. The IRS says: No return received.

Now we need to determine whether it was e-filed and accepted, whether you have an electronic filing acknowledgement, whether it was paper filed, whether you have certified-mail or tracking information, whether it was rejected, or whether it was filed under the correct EIN or SSN.

Do not assume: “My accountant sent it, so we're fine.” Find the proof.

Proof of Filing Can Be Extremely Important

For electronically filed returns, retain e-file acknowledgements.

For paper filings, consider retaining certified-mail receipts, tracking, copies of what was mailed, and dates.

Tax compliance is easier when you can prove what happened.

What If the IRS Says You Didn't Pay?

Imagine you paid $25,000. The IRS notice says balance due: $25,000 plus penalties and interest.

You know the money left your bank.

Now investigate whether the payment was applied to the correct taxpayer, tax year, tax form, and quarter, or whether it was accidentally applied to your spouse, another entity, or an estimated-tax period.

Sometimes the payment exists. It's simply sitting in the wrong place.

One Incorrect Tax Year Can Create Two Problems

Imagine you intended to pay 2025 taxes, but the payment was accidentally designated as 2026 estimated tax.

Now 2025 appears unpaid while 2026 shows an unexpected credit.

You may receive a balance-due notice even though the IRS has your money.

The solution may involve tracing and transferring the payment rather than paying the tax twice.

Don't Pay the Same Tax Twice

This is exactly why I do not want clients automatically paying every notice the moment it arrives.

If the balance is correct and payment is appropriate, then yes, the matter should be addressed.

But first confirm what was assessed, what was already paid, where payments were applied, and what the IRS account transcript shows.

You do not want to solve an accounting problem by creating another payment.

IRS Transcripts Can Help Tell the Story

Depending on the matter, IRS transcripts can provide valuable information about return filing, assessments, payments, credits, penalties, interest, and certain IRS actions.

The transcript can sometimes show something the notice alone does not make obvious.

Your Tax Return and IRS Account Should Reconcile

Imagine your tax return says tax due: $100,000. You paid $100,000. The IRS says $20,000 is still due.

Now we reconcile.

Maybe one payment is missing, a credit was moved, an estimated payment went to the wrong year, a prior-year balance absorbed a refund, or a penalty was added.

There may be an explanation.

Penalties Can Become Significant

Depending on the situation, IRS penalties can involve failure to file, failure to pay, estimated-tax issues, accuracy-related penalties, payroll-tax penalties, information-return penalties, international information-reporting penalties, and other penalties.

Some can become substantial.

And in certain circumstances, penalty relief may be available.

Don't Assume Every Penalty Can Be Removed

A client sometimes says: “Just call and get the penalty removed.”

It is not always that simple.

Penalty relief depends on the type of penalty, taxpayer history, facts, reasonable cause, IRS administrative criteria, documentation, and other factors.

Sometimes relief may be available. Sometimes it may not.

First-Time Abatement May Be Relevant in Some Cases

For certain penalties and qualifying taxpayers, IRS administrative First Time Abate relief may potentially be available if applicable requirements are met.

That does not mean: “Everyone gets one free penalty.”

The taxpayer needs to qualify.

Reasonable Cause Is About Facts

Imagine your filing was late because: “I forgot.”

Now compare that with a taxpayer who experienced circumstances outside their control and exercised ordinary business care and prudence but still could not comply.

Those are different facts.

Reasonable-cause requests should explain what happened, when it happened, how it prevented compliance, what the taxpayer did to address it, and when compliance resumed.

Supporting documentation can matter.

Payroll Tax Notices Need Immediate Attention

If the notice involves Form 941, payroll tax deposits, trust fund taxes, or withholding, do not ignore it.

Payroll-tax problems can become particularly serious because amounts withheld from employees involve funds the employer is required to remit.

If your business is falling behind on payroll taxes, address the problem immediately.

Do not use payroll-tax money as a business line of credit.

Imagine Using Payroll Taxes to Make Payroll

Cash is tight. You need $100,000 for payroll. You have money that should be remitted for payroll taxes.

You think: “I'll use it now and catch up next month.”

Then next month is also tight.

Now you owe current payroll taxes, prior payroll taxes, penalties, and interest.

The problem compounds quickly.

Sales Tax Can Create a Similar Business Problem

For businesses collecting sales tax, the same general financial lesson applies.

Money collected for tax obligations should not be viewed as extra operating cash.

If a business continually uses tax collections to fund operations, the underlying cash-flow problem needs attention.

What If You Cannot Pay the IRS in Full?

Imagine the balance is correct. You owe $150,000. You do not have $150,000.

Ignoring the IRS does not make the debt disappear.

Depending on the taxpayer's circumstances and eligibility, potential collection alternatives can include installment agreements, short-term payment arrangements, offers in compromise, currently not collectible status, and other resolution strategies.

The right option depends on the taxpayer's actual financial situation.

An Installment Agreement Is Not Automatically the Best Answer

Imagine you owe $100,000 and immediately say: “Put me on a payment plan.”

Maybe.

But first ask: Can you pay it faster? What penalties and interest continue? Is another year coming due? Are estimated taxes current? Can the business afford the payment? Will you create another tax balance next year?

A payment plan solves very little if new tax debt keeps accumulating.

Fix the Current Year Too

Imagine you owe 2024 — $50,000 and 2025 — $75,000. You set up an installment agreement.

But you are already underpaying 2026 estimated taxes.

Now you are creating the next IRS problem while trying to solve the old one.

Tax resolution should include current compliance.

An Offer in Compromise Is Not “Settle Your IRS Debt for Pennies”

You have probably seen advertisements saying: “Owe $100,000? Settle for $5,000!”

That is not how every case works.

An Offer in Compromise can be a legitimate IRS resolution program for qualifying taxpayers. But eligibility and acceptable terms depend on income, expenses, assets, equity, future ability to pay, compliance, and other factors.

It is not simply: “Offer the IRS 10% and see if they take it.”

Your Financial Information Matters

When seeking certain collection alternatives, the IRS may want detailed financial information, including bank accounts, investments, real estate, vehicles, business assets, income, expenses, debt, and other financial resources.

Before recommending a resolution strategy, we need to understand the taxpayer's actual finances.

Sometimes Paying the Tax Is the Best Resolution

This may not sound exciting.

But imagine you owe $50,000 and have $500,000 of liquid cash.

Trying to pursue a complex settlement strategy may not make economic sense.

The best resolution is not necessarily the one with the most complicated name. It is the one that makes sense for your facts.

What Is Currently Not Collectible Status?

In certain circumstances, a taxpayer may be unable to pay basic allowable living expenses and also make payments toward the IRS debt.

Depending on the facts, the IRS may temporarily classify the account as Currently Not Collectible.

That generally does not mean the tax debt disappeared. Interest and penalties may continue, and the IRS can revisit the taxpayer's financial condition.

It is a collection status—not a magic eraser.

IRS Liens and Levies Are Different

People often use these words interchangeably. They are not the same thing.

A federal tax lien generally represents the government's legal claim against property when applicable requirements are met.

A levy generally involves the IRS actually taking property or rights to property to satisfy a tax debt, subject to applicable procedures.

That distinction matters.

Imagine Receiving an Intent-to-Levy Notice

This is not the notice you put on the kitchen counter for three months.

Certain collection notices can carry important deadlines and appeal rights.

If you receive language involving intent to levy, final notice, collection due process, bank levy, or wage levy, contact a qualified tax professional quickly.

Wage Levies Can Be Extremely Disruptive

Imagine your employer receives an IRS levy.

Now part of your wages may be required to be sent to the IRS under the applicable levy rules until the matter is resolved or the levy is released.

At that point, the tax issue is affecting your household cash flow, your employer, and your ability to pay normal expenses.

Earlier intervention is usually much better.

Bank Levies Can Create Immediate Problems

Imagine your business operating account contains $80,000 intended for payroll, rent, and vendors.

Then an IRS collection action affects the account.

Now a tax problem becomes an operational emergency.

This is why collection notices should not be ignored.

You May Have Appeal Rights

Depending on the type and stage of the IRS action, taxpayers may have rights to respond, appeal, request administrative review, or challenge certain proposed actions.

The available procedures and deadlines depend on the notice.

Again: read the letter.

Don't Miss the Deadline Because You Were “Working on It”

Imagine the response deadline is October 15. You start gathering documents. October 10: still gathering. October 16: you finally send everything.

A deadline can affect your rights even if you had a good reason for being busy.

If you cannot complete the response immediately, talk to your tax professional about the available procedural options.

What If the Notice Is Wrong?

Then respond.

But respond with facts, tax law, documents, and reconciliation—not: “I disagree because this doesn't make sense.”

Imagine the IRS says you omitted $200,000. Your response shows the $200,000 was already included in gross receipts on the filed return. You provide the 1099, general ledger, bank reconciliation, tax-return page, and explanation.

Now you have an actual response.

What If the IRS Is Right?

Then the strategy changes.

Imagine you review the notice and discover income really was omitted, the return was wrong, and the IRS adjustment is substantially correct.

Now ask whether an amended return makes sense, whether there are related deductions, whether penalties are correct, how the balance should be paid, whether a payment arrangement is needed, and whether future estimates are corrected.

Tax representation is not about arguing with the IRS no matter what. Sometimes the correct answer is: Fix it.

Don't Create a Fake Argument Just to Delay Payment

If the tax is legitimately owed, filing unsupported disputes merely to delay collection can create more problems.

A good tax professional should tell you when the IRS appears wrong, the IRS appears right, or more information is needed.

Representation should be based on the facts.

What Does IRS Representation Actually Mean?

IRS representation means you do not necessarily have to handle the matter alone.

Depending on the issue and the professional's authorization, an eligible tax professional may be able to communicate with the IRS on your behalf.

That can involve reviewing the IRS notice, obtaining and analyzing transcripts, determining what the IRS has assessed, reconciling payments and credits, reviewing previously filed tax returns, responding to IRS correspondence, providing supporting documentation, discussing proposed adjustments, addressing certain penalties, communicating with IRS collection personnel, evaluating available payment or collection alternatives, helping bring missing returns into compliance, and representing the taxpayer in certain IRS matters within the professional's authority.

The goal is not simply: “Call the IRS and make the problem disappear.”

The goal is to first understand: What happened? Then determine: What is the appropriate way to resolve it?

Form 2848 Can Allow an Authorized Representative to Deal With the IRS

In many representation matters, a taxpayer may authorize an eligible professional through Form 2848, Power of Attorney and Declaration of Representative.

The authorization identifies matters such as the taxpayer, tax form, tax period, and authorized representative.

Once appropriate authorization is in place, the representative may be able to communicate with the IRS regarding the covered matters.

Representation Does Not Mean You Stop Paying Attention

Imagine you hire a CPA and think: “Great. I never need to look at another IRS letter.”

No.

Continue opening your mail. Continue sending notices to your representative. Continue providing requested documents. Continue making required current tax payments. Continue filing returns.

Your representative can help manage the matter, but you still need to remain involved in your own tax compliance.

Current Compliance Is Often Part of the Solution

Imagine you want to resolve $200,000 of old IRS debt, but you have two unfiled tax returns, current payroll-tax deposits are late, and estimated taxes are not being paid.

That creates a problem.

Many IRS resolution strategies require taxpayers to address current filing and payment compliance.

Before discussing sophisticated resolution strategies, we may first need to stop the problem from getting bigger.

File the Missing Returns

One of the first questions in a tax-resolution engagement may be: “Are all required returns filed?”

If not, we need to identify which returns and years are missing—individual, business, payroll, or information returns.

You cannot build a clean resolution strategy when several years of tax compliance remain unknown.

Don't Assume the IRS-Prepared Number Is Your Best Number

In certain situations, if a taxpayer does not file a required return, the IRS may prepare a substitute return based on information available to it.

That calculation may not necessarily include every deduction, credit, basis item, or other tax position the taxpayer could potentially establish on a properly prepared return.

If required returns are missing, determine whether filing accurate returns can establish the taxpayer's correct liability.

Imagine the IRS Says You Owe $300,000

That number gets your attention.

But before discussing an installment agreement, Offer in Compromise, or Currently Not Collectible status, we should first confirm: Do you actually owe $300,000?

Maybe yes. Maybe no. Maybe the correct number is $250,000, $175,000, or $350,000.

Resolution begins with understanding the liability.

Then Understand Your Financial Position

If the balance is correct and cannot be paid immediately, the next question may become: What can you realistically afford?

That can require reviewing income, expenses, cash, bank accounts, real estate, vehicles, investments, business ownership, debt, and other assets.

The IRS resolution strategy should fit the taxpayer's actual financial circumstances.

The Biggest Tax-Resolution Mistake Is Waiting

Imagine the first IRS letter arrives. You ignore it. Second letter. Ignore it. Third. Ignore it.

Then the language becomes more serious.

Now you call your CPA and say: “The IRS is threatening collection. Can you stop this?”

Maybe there are still options. But we would have preferred to begin months earlier.

Tax problems generally become easier to manage when addressed early.

What Should You Do the Day an IRS Letter Arrives?

Keep it simple.

First: Open it.

Second: Read the entire notice.

Third: Identify the deadline.

Fourth: Do not automatically assume the amount is correct or incorrect.

Fifth: Gather the tax return and documents related to the issue.

Sixth: Send every page to your CPA or qualified tax professional.

Seventh: Do not miss the response deadline while trying to figure it out yourself.

And if the notice involves levy, lien, payroll taxes, large balances, unfiled returns, examination, appeal rights, or significant international penalties, consider getting professional help quickly.

How LUNA CPA Helps With IRS Representation

At LUNA CPA, our first objective when a client brings us an IRS notice is not to scare them.

It is to answer: “What is actually happening?”

We begin by reviewing the correspondence and the underlying tax issue.

Depending on the matter and the services required, we can assist with reviewing IRS notices and letters, reviewing previously filed tax returns, obtaining and analyzing IRS transcripts when appropriate, reconciling assessments, payments, and credits, identifying missing returns, preparing delinquent tax returns when needed, responding to IRS correspondence, providing supporting documentation, communicating with the IRS under appropriate authorization, reviewing proposed adjustments, evaluating penalty-relief opportunities where applicable, assisting with certain examination or collection matters, evaluating installment-agreement options, evaluating Offer in Compromise considerations when appropriate, reviewing Currently Not Collectible considerations, helping taxpayers understand liens and levies, developing a plan for current tax compliance, and helping the taxpayer understand what needs to happen next.

Our job is not to promise: “We can make every IRS debt disappear.” That is not realistic.

Sometimes the IRS is wrong. Sometimes the taxpayer is wrong. Sometimes both sides are working with incomplete information.

Our job is to review the facts, understand the account, explain the options in plain English, and help the client work toward the most appropriate resolution available under their circumstances.

Most importantly, we want the client to understand: What do I owe? Why do I owe it? What options do I have? What deadlines matter? And what do we need to do so this problem does not happen again next year?