You got a letter from the IRS. What to do first

The envelope is the worst part. Almost every IRS letter looks identical from the outside, and the difference between one that needs an answer this month and one that needs an answer in three days is a code printed in small type in the top right corner.

Start there, not with the body of the letter.

Find the notice number first

Top right corner. It will be something like CP2000, CP14, CP504 or LT11, or it will say Letter followed by a number. That code tells you what this is and how much time you have, and it is what you search for and what you quote if you call.

Two things are true of almost every notice and neither is obvious under stress:

• It is probably not an audit. The great majority of IRS correspondence is automated — a computer matched two documents, they disagreed, and it generated a letter. An actual examination arrives differently and says so.
• The date on the letter starts the clock, not the date you opened it. Response windows run from the notice date. A letter that sat in a pile for two weeks has two weeks less runway.

The ones contractors see most

A balance-due notice. The first bill for tax the IRS believes is owed. It is the opening move in a sequence, and the sequence escalates on a schedule if nobody answers.

An underreporter notice. The most common of all. Third parties — customers who issued you a 1099, banks, payment processors — reported paying you an amount that does not match what your return reported. It proposes a change and gives you a defined window to disagree. It is a proposal, not a bill, and that distinction matters: if you do not respond, the proposal becomes an assessment by default.

Intent-to-levy notices. These are the ones that matter most and they escalate. A notice of intent to levy is serious; a final notice of intent to levy is a different animal, because it carries a right to request a hearing and that right expires. If a letter uses the words final notice or mentions a right to a hearing, that is the one to act on today.

A payee mismatch notice. This one is about 1099s you issued. The name and taxpayer ID on a form you filed do not match IRS records, and it typically requires you to solicit corrected information from that subcontractor and, if you do not get it, to begin backup withholding on their future payments. Ignoring it puts the liability on you, not on them.

A payroll tax notice. Treat any notice about employment taxes as the most urgent thing in the stack. Missed payroll deposits carry personal liability in a way no other business tax does.

What to do in the first hour

1. Write the deadline on the letter in pen and put it in your calendar with a reminder a week early.
2. Do not pay anything yet. A proposed change is not a determined liability, and paying it can be read as agreeing with it.
3. Do not ignore it either. Almost every genuinely bad outcome in this area comes from silence, not from a wrong answer.
4. Photograph the whole letter, both sides, every page, and email it to your CPA the same day. If you do not have one, this is the moment to get one.
5. Check it is real. The IRS initiates contact by mail. It does not open with a phone call demanding immediate payment by gift card or wire, and it does not text you. If the letter pushes an unusual payment method or an unfamiliar address, verify it independently before doing anything.

Gather these before you answer

Whatever the notice is about, the answer is made of records:

• The return in question, as filed
• Bank and card statements for the period
• 1099s you received, and 1099s you issued
• Payroll filings for the quarters concerned
• The general ledger detail for whichever accounts the notice touches
• Any prior correspondence on the same matter

If an underreporter notice is wrong — and they often are for contractors, because a customer issued a 1099 for the gross including materials, or issued one twice, or issued one to the wrong entity — the thing that proves it is reconciled transaction detail. Not a spreadsheet you assembled afterwards. Detail that ties to the bank.

When to stop and get representation

Handle it yourself if it is a straightforward mismatch you can document.

Get a CPA, an enrolled agent or a tax attorney involved if any of the following is true: it concerns payroll taxes, it uses the words final notice, it proposes an amount you cannot pay, it involves more than one year, or it says examination. The cost of representation is almost always smaller than the cost of a badly handled first response, and a first response is difficult to walk back.

The part that decides how bad this gets

Whether your books can answer the question.

An underreporter notice against clean books is an afternoon: pull the ledger, show the deposit, show where it was reported, write the letter. The same notice against a shoebox is weeks of reconstruction, and reconstruction done under deadline pressure is where people accept assessments they did not owe simply because they cannot prove otherwise in time.

That is the real argument for monthly close, and it is worth more than any deduction anyone will ever find you.

Related

• You missed a payroll tax deposit
• 1099 or W-2? Classifying the people who work for you
• What your CPA needs from you at year end

This is general information about how IRS correspondence works, not tax advice about your situation. Notice types, response windows and procedures change. Confirm the specifics against the current instructions for your notice number and take advice from a CPA, enrolled agent or tax attorney before responding.