From my experience, the IRS does make a strong effort to notify taxpayers when issues exist with their tax account through IRS tax notices. Most of the IRS notices are standardized forms that can range from you having unreported income to having a refund on your tax return that is different than what your tax return states. The IRS is very good about using the mail to notify taxpayers, so do not be fooled if a person calls you on the phone and acts like they are from the IRS. This is likley a person just trying to impersonate the IRS to steal your money. However, if you receive such a call, remain polite but do not give out any personal information. Since the IRS uses mail and a primary method to reach taxpayers, it is important to keep your address with them current.
Your response to the IRS issue contained in the notice needs to be tailored to the issues involved. Often, I find that you have to clear and concise when responding to IRS notices to make any progress in resolving the issue. If the notice relates to an unfiled tax return, the IRS notice will ask for a copy of the tax return filed, or why it was not filed (this could be because you had to little income to cause a filing requirement). If you have many years of unfiled tax returns, its a good idea to hire a tax attorney to help file the tax returns and reduce the tax penalties.
If you ignore this request related to unfiled tax returns, the IRS will prepare a substitute tax return, using information that they receive from third parties (banks, employer W2 forms, etc.) to prepare the tax return for you. In some ways that may seem ideal, but this return the IRS will not allow a married filing jointly form of filing, or take into account any itemized deductions. Therefore, your tax bill will be higher than if you prepared and filed your own tax return.
When the IRS issues a notice that you owe money or prepared a substitute tax return, they typically send the notice as a proposed assessment, which allows you to respond with information showing the IRS why the proposed tax assessment is not correct. If you do not respond to the IRS tax notices, then they issue a Notice of Deficiency which gives you rights to go to the US tax Court typically within 90 days. Going to US tax Court is not a simple matter, and the typical costs range from $5000 to $15,000 for most matters.
Once your US tax Court rights expire, the IRS can begin collection efforts, such asking for payments and invoking their right to levy and lien your property. Therefore, it is very important to respond to the notices to get in front of the issue before it becomes unmanageable.
In conclusion, if the IRS sends you a notice, it is always best to review the notice and take action. If your are not comfortable responding to the notice yourself, hiring a tax professional who can assist with the response makes sense. It is important to realize that the notices have strict time deadlines that need to be met.
