4 Scary Letters You Might Get From the IRS -- and Why They're Not as Bad as They Seem

Not all letters from the IRS contain bad news. In fact, it's usually pretty ordinary.

It’s no wonder that some people panic upon receiving a letter from the IRS. After all, we’ve all heard horror stories about how the IRS has turned lives inside-out in an effort to collect money. Here’s a not-so-well-known secret: The IRS is not the bad guy. In fact, as long as you show a good-faith effort, the IRS is relatively easy to work with. We’ll touch on this a bit more in a moment. First, let’s look at four letters you might receive and the best moves to make once you have one in hand.

Read more: 4 Ways to Save Money on Your 2021 Taxes

1. You have a balance due

When you consider the number of math calculations included in a single tax return, you realize how easy it would be for you, your representative, or the IRS to get one (or more) of the calculations wrong. It happens. And typically, when the mistake is yours, it doesn’t end up changing your return by much.

The thing about receiving such a letter is that the IRS includes a page identifying the alleged mistake and showing their calculations. Check it out. If it’s clear the IRS is right, you may owe more money. If it’s a mistake on its part, you can go through a simple appeal process.

The appeal process brings us to an excellent point. The IRS does not show up on your doorstep, demanding payment. It doesn't call to tell you there’s a problem or send a message through email or text. The IRS doesn't even insist it’s right and you are wrong. It sends a letter through the U.S. Postal Service, laying a potential issue out for your consideration. If you disagree with the assessment, you have the right to file a written protest. An issue never has to become adversarial. If you believe the IRS is wrong, explain why.

On the other hand, pay the amount due if you got it wrong and the IRS is correct. If you can’t afford to pay it all at once, the IRS allows installment payments.

2. Your refund amount has changed

The same rules apply if you receive a letter claiming the amount of your last refund was wrong and you need to repay some of the money. The IRS will indicate where it believes a mistake was made, and you are given the opportunity to agree or disagree.

Not all letters from the IRS contain bad news, though. You may receive a letter saying the IRS owes you more money, along with a check for the amount owed. It's never a bad day when you end up with a little more money in your bank account.

3. We’re not sure you are who you claim to be

Scams of all sorts have been on the rise, including tax scams. Let’s say someone else beat you to the punch by filing a tax return in your name and using your Social Security number. The IRS may send a Letter 5071C asking you to verify your identity. You will be asked to call a phone number supplied by the IRS or to verify identity through the agency's Identity Verification Service.

Note: The IRS will never contact you via phone or email for identity verification. You may end up calling the IRS at some point, but it will never contact you. If you receive a message through social media, it’s also a scam.

Read more: Filing Taxes for the First Time? 5 Things to Know

4. You failed to file

One of the most frustrating letters you can receive from the IRS announces you failed to pay your taxes last year (or the year before). If you receive such a letter, do not panic. The IRS is currently buried under a mountain of correspondence that has accumulated over the past two years. Between responsibility for several rounds of stimulus checks and a workforce reduced by COVID-19, mail has stacked up, and frankly, it’s not quite sure who's paid their taxes.

The result of that huge backlog? A lot of taxpayers have received letters saying their taxes were never paid. If you're the recipient of the letter, it’s not worth sweating over. So many incorrect letters were mailed that the IRS announced it is temporarily suspending issuing more automated notices.

As with the other letters, take your time to read it through. If the information in the letter is incorrect, provide a written response. The letter should tell you where to mail your answer. You may want to skip calling the IRS as the agency is currently swamped with phone calls.

If your blood pressure naturally climbs at the thought of dealing with the IRS, it may help to know the agency is accustomed to dealing with thorny issues. Chances are, it has run across your situation hundreds of times and can help walk you through the process to make things right.