This letter is issued to inform the taxpayer of proposed changes stemming from an IRS examination. The letter explains the changes to the tax return and requests payment of the balance due (or outlines the amount of the adjusted refund).
Sections of Letter 525
- Header Section
This area contains the notice date, your Social Security Number, the applicable form and tax year, and the IRS contact information to reach the Tax Examiner.
- Explanation of Notice Response Requirements Letter
This section of the notice provides an overview of the information you will need to properly respond to the IRS such as the amount due (or adjusted refund amount), what you should do if you agree (or disagree), what to consider when responding to the letter, and what you should do if you have questions. As stated on the second page, please remember to include a copy of this letter with your response.
- Explanation of Items (Form 886-A)
This section is where the IRS will explain the changes they have made. The IRS may also provide you with detailed information which explains their reasoning for these changes, such as a set of IRS instructions or information from a publication.
- Income Tax Examination Changes (Form 4549)
This section of the notice will display the recalculation of the items in question and how those changes will affect your return. If you agree with the proposed changes, you must sign Page 2 of Form 4549 (referred to as the “Consent Page”) and include it with your response.
- Calculation Sheets
There may be a few pages contained within the notice which provide you with a detailed recalculation of the specific forms and/or schedules affected by the change.
- Interest Computation
This section of the notice informs the taxpayer of how the interest was calculated, if an amount is due. You will also see the date through which the interest is computed. Keep in mind there may be additional interest and/or penalties if the amount due is not paid by this date.
- How to Pay Your Taxes
This page of the notice provides the taxpayer with information regarding payment options, if it is determined you owe additional taxes. If applicable, you will need to include this page with your response.
Steps for reconciling the return to the notice
- First, you will want to review the “Explanation of Items” section to determine which item(s) are being adjusted on the return.
- Next, go to the “Income Tax Examination Changes” section to review the recalculation of the item(s) in question. Take note of the line item Taxable Income Per Return or As Previously Adjusted and make sure that number matches to the Taxable Income on your originally filed return. If you need additional details regarding the recalculation, review the “Calculation Sheets” that are included after the “Income Tax Examination Changes” section.
- Once you have identified the area of the return being changed, sign back in to the applicable year’s TaxAct® Online return (or open the applicable year’s TaxAct Desktop return). Navigate to the specific section(s) of the Federal Q&A to review your entries for the item(s) in question.
- Navigation to the most common forms are listed below for your convenience:
Ø Form 1099-R
Ø Form W-2
Ø Form 1099-MISC
Ø Form 1099-INT and Form 1099-DIV
Ø Form 1099-B
Ø Form 1099-G
- In order to reconcile the return with the proposed changes outlined on the notice, you will need to correct your entries by adding, removing, or modifying the information. If you have not done so already, please be sure to print a copy of your originally filed tax return before making any changes. If you’re not sure where the problem lies or exactly what changes are being made, contact the IRS using the phone number provided on the first page for further clarification.
- The return should now reconcile to the figures outlined within the “Income Tax Examination Changes” section and the “Calculation Sheets.”
- Note: Generally, when an IRS notice is received, the IRS prefers you do NOT file an amended return. Depending on your response (agree, disagree, or partially disagree), the IRS will update their records accordingly. You simply need to print a revised return for your own records.
- Print a copy of the revised return:
Ø Printing Your Return – TaxAct Online
Ø Printing Your Return and Individual Forms – TaxAct Desktop
- You can now respond to the IRS notice.
- AGREE: If you agree with the proposed changes, update your tax records (see Step #4), and then sign and date the “Consent Page” which is the second page of the “Income Tax Examination Changes” section. Mail the signed “Consent Page” and a copy of the “Explanation of Notice Response Requirements” letter to the IRS along with your payment, if additional tax is due, within 30 days of the notice date. Include your phone number (with the area code) and the best time of day to call. Before mailing your response to the IRS, make a copy of the entire correspondence for your records.
Note: If you are unable to pay the full balance due, you can make a partial payment or you may request a payment arrangement to pay the amount you owe the IRS. If you wish to pay in installments, fill out the “How to Pay Your Taxes” page and include it with your response. The IRS will contact you later with payment information. If an installment agreement is approved, you will be charged a one-time fee.
- DISAGREE: If you disagree with the adjustment, call the IRS using the phone number provided on the first page to discuss your account details. Have your tax information available to discuss with the IRS. You may also fax or mail the IRS your response. Include a copy of the “Income Tax Examination Changes” pages and the “Explanation of Notice Response Requirements” letter along with a signed statement explaining why you do not agree.
This must be done within 30 days of the notice date. If not, you will lose your right to appeal the IRS’s decision. Be sure to attach documentation supporting your claim. Include your phone number (with the area code) and the best time of day to call. Be sure to write your last name, SSN, and the tax year on each page you’re attaching to the response. Before mailing your response to the IRS, make a copy of the entire correspondence for your records. If possible, it is suggested you send the response through Certified Mail with Return Receipt requested. The IRS will then review the information and either reverse the proposed changes or forward your case for audit.