How should you respond to an IRS prove-it letter?  You know that guilty-until-proven-innocent IRS letter spit out by a regional office.  I’m sure I’m not the only person who receives these heart-stopping communications from the Internal Revenue Service.  Recall The Money Skinny™ mission is to save you time and money.   Let’s review the IRS mailing list, responding to an IRS letter and a suggestion on how to avoid IRS letters in the future.

IRS Mailing List

A prove-it letter is not personal.  You’re an outlier.  The IRS processing systems have determined that your response or result is outside the parameters of the customary range.  Maybe you have a high amount of deductions compared to earnings.  Perhaps you sold a stock that you neglected to include in your tax return.  Whatever the reason, an event within your tax return triggered a request for further explanation or payment.  Unless you’re under audit, most IRS letters are system generated inquiries.

IRS Letter Advice

The IRS publishes a What You Need to Know if You Get a Letter in the Mail from the IRS statement.  Their main advice is not to panic.  Easy to write.  Taxpayer Advocate Service also has response advice.  Review these documents before preparing a response.  The Money Skinny™ IRS letter advice is to only answer the question asked.  I know your inclination is to tell the whole story.  Don’t.  Answer only what is asked.  Your goal is to provide enough information to resolve the issue.  You want the case closed.  The letter is machine generated.  A live IRS employee will evaluate your response.  Be brief and clear.  Narrow the focus to an audience of one person.  Draw an obvious conclusion.  That employee may be shuffling through many of the same types of letters per day.

IRS Letter Default Position

The default position of a prove-it letter is never in your favor.  The IRS is not trying to give you money back.  If you don’t respond, you will owe more taxes.  Period.  End of story.  While the IRS letter may euphemistically say “We’ll recalculate the impact…”, that means you owe.  Maybe not this second.  The actual bill will be sent later.  They wouldn’t waste paper and postage without reason.  Help yourself by responding by the deadline.  Always respond.

529 College Savings Plan Example

Perhaps you’re an outlier like me.  A parent paying hefty college tuition for more than one child.  You’ve followed all the advice in The Money Skinny™ article When to Make a 529 College Savings Plan Withdrawal.  The IRS may still send a prove-it letter for details.  Don’t respond by the deadline?  No supporting paperwork?  You will owe more taxes.  It’s not personal.  That’s just how it is for outliers.

How to Avoid 529 Plan Letters

To avoid questions about the use of 529 money for qualified educational expenses, have the funds sent directly from the 529 account to the school.  Typically, the 529 account owner can request a payment online by providing the school address and student identification number.  The net result of sending a payment directly to the school means that the 529 account owner doesn’t touch the money.  The 1099-Q tax form will show the school as the funds recipient, not the account owner.  Detailed information on qualified and non-qualified 529 education expenses is available at IRS.gov.  Sending 529 tuition payments to the school can put you in a customary range of withdrawals.  In summary, you’re no longer an outlier!