Every year, about 196 million federal tax returns are filed in the United States. From the returns, around one million or 0.5% is subject to audit, which is an extra evaluation of the return, the deductions filed, and the amount owed or given back to the taxpayer. One relatively general reason for a taxpayer’s return to be audited is the itemized deductions that they’ve claimed for the year.
If you have received a letter stating that the IRS is disputing your itemized deductions, in order to know what to do next, read more on the information below.
What Are Itemized Deductions?
Every year, taxpayers must make up their mind between taking regular deductions on their federal tax return and itemizing their deductions. Itemized deductions are expenditures on qualified products, services, and contributions that can be deducted from the individual’s adjusted gross income for the year. This offers the taxpayers chance to pay less in taxes than they would if they took the standardized deduction, which is a fixed amount depending on the taxpayer’s filing status. There is an extensive list of allowable deductions that includes expenses such as mortgage interest, charitable donations, and medical expenses that were not reimbursed.
Tax deductions are different than tax credits in that deductions lessen the amount of taxable income, while credits lessen the amount of taxes owed. Itemized deductions for individual taxpayers are reported on the Schedule A of the 1040 form. When you incur a deductible expense throughout the year, you should keep a receipt of that expense in order to establish its validity if audited by the IRS. Other documentation that can be used for evidence of validity includes bank statements, insurance bills, medical bills, and tax receipts from charitable organizations.
Your Dispute Letter
Taxpayers have right, including the right to be notified of any issues the IRS has with their return, the right to pay no more than the correct amount of tax, the right to appeal the IRS’ position in matters pertaining to the collection of tax, and the right to retain attorney representation to assist in the dispute. You will always get a letter by mail if the IRS is disputing your itemized deduction. The IRS does not communicate with taxpayers about disputes over social media or email and because calling the IRS is often a time-consuming process; taxpayers are never required to speak with the IRS over the phone either. The IRS has set up its website in such a way that most business matters can be handled online. The letter you receive will provide the applicable website address and instructions as to what next steps you should take.
Taxpayers should bear in mind that ignoring correspondence from the IRS is significantly the same as agreeing with their determination that there was a mistake. If you fail to respond to the request for more information in an appropriate time, you can be subject to penalties and interest on any amount owed as a result of the dispute.
How to Respond
According to the IRS, if you dispute the discoveries of an official letter that was mailed to you, you should send a letter explaining the reason you disagree. Because the dispute is regarding your itemized deductions, include copies of information regarding the deductions such as medical bills, receipts of charitable contributions, or other allowable expenditures. Be sure to act in accordance with the instructions provided to you in the letter, submit the information requested by the deadline that is listed on the letter, and keep copies of all mail with the IRS in your personal files. If you are not certain of the information needed or the right procedure for submitting this information, you are allowed to seek assistance from a tax attorney. Allow 30 days for a follow-up response from the IRS and then follow the following steps:
1. If the IRS agrees to your itemized deductions documentation and shows that the matter is resolved, there is no further action needed.
2. If the IRS examiner determines that the deductions were not allowable and suggests an adjustment of your tax earnings, you can request a phone conversation with the examiner. If this does not produce the necessary desired results, you can either request a phone conversation with the examiner’s manager or you can request an appeal.
3. If the IRS determines that your deductions were not allowable and offers information on how to appeal the decision, then you are able to request an appeal by following the instructions. At this point, it is suggested that you contact an attorney who can offer guidance and services to assist you with your appeal. You will need to file a form with the IRS that lets your attorney to contact them on your behalf.
4. In order to get an appeal, you will need to file a protest on the letter explaining your appeal rights and send it to the IRS address given on the letter.
5. The appeals process is rather informal and can take place by the phone, in person, or virtually. It is necessary to have your attorney and/or certified public accountant present for the conversation. At the start of the appeal, the IRS appeals representative will explain the process before listening to your issues. If any new information is tendered during the appeals conference, the case may be returned for consideration of the new information.
6. When you have finished your appeals conference, you should receive an official decision by mail from the IRS within 120 days.
Why You Need an Attorney
The tax system can get really complex and often confusing for those who are not trained in the laws that govern the taxation of income. When the IRS is disputing your deductions, you can be certain that they are depending on information by experts who have a proper understanding of those laws. According to a publication by the IRS, a study of 17 cases involving disputed itemized deductions for charitable contributions had an outcome of 13 wins for the IRS, and 4 split decisions. In seven of these cases, the taxpayer was self-represented in the dispute, and the IRS was victorious in all of those cases. These statistics shows how significant it is to have a tax expert of your own to assist you in the dispute. Every year, about 196 million federal tax returns are filed in the United States. From the returns, around one million or 0.5% is subject to audit, which is an extra evaluation of the return, the deductions filed, and the amount owed or given back to the taxpayer. One relatively general reason for a taxpayer’s return to be audited is the itemized deductions that they’ve claimed for the year.
If you have received a letter stating that the IRS is disputing your itemized deductions, in order to know what to do next, read more on the information below.
What Are Itemized Deductions?
Every year, taxpayers must make up their mind between taking regular deductions on their federal tax return and itemizing their deductions. Itemized deductions are expenditures on qualified products, services, and contributions that can be deducted from the individual’s adjusted gross income for the year. This offers the taxpayers chance to pay less in taxes than they would if they took the standardized deduction, which is a fixed amount depending on the taxpayer’s filing status. There is an extensive list of allowable deductions that includes expenses such as mortgage interest, charitable donations, and medical expenses that were not reimbursed.
Tax deductions are different than tax credits in that deductions lessen the amount of taxable income, while credits lessen the amount of taxes owed. Itemized deductions for individual taxpayers are reported on the Schedule A of the 1040 form. When you incur a deductible expense throughout the year, you should keep a receipt of that expense in order to establish its validity if audited by the IRS. Other documentation that can be used for evidence of validity includes bank statements, insurance bills, medical bills, and tax receipts from charitable organizations.
Your Dispute Letter
Taxpayers have right, including the right to be notified of any issues the IRS has with their return, the right to pay no more than the correct amount of tax, the right to appeal the IRS’ position in matters pertaining to the collection of tax, and the right to retain attorney representation to assist in the dispute. You will always get a letter by mail if the IRS is disputing your itemized deduction. The IRS does not communicate with taxpayers about disputes over social media or email and because calling the IRS is often a time-consuming process; taxpayers are never required to speak with the IRS over the phone either. The IRS has set up its website in such a way that most business matters can be handled online. The letter you receive will provide the applicable website address and instructions as to what next steps you should take.
Taxpayers should bear in mind that ignoring correspondence from the IRS is significantly the same as agreeing with their determination that there was a mistake. If you fail to respond to the request for more information in an appropriate time, you can be subject to penalties and interest on any amount owed as a result of the dispute.
How to Respond
According to the IRS, if you dispute the discoveries of an official letter that was mailed to you, you should send a letter explaining the reason you disagree. Because the dispute is regarding your itemized deductions, include copies of information regarding the deductions such as medical bills, receipts of charitable contributions, or other allowable expenditures. Be sure to act in accordance with the instructions provided to you in the letter, submit the information requested by the deadline that is listed on the letter, and keep copies of all mail with the IRS in your personal files. If you are not certain of the information needed or the right procedure for submitting this information, you are allowed to seek assistance from a tax attorney. Allow 30 days for a follow-up response from the IRS and then follow the following steps:
1. If the IRS agrees to your itemized deductions documentation and shows that the matter is resolved, there is no further action needed.
2. If the IRS examiner determines that the deductions were not allowable and suggests an adjustment of your tax earnings, you can request a phone conversation with the examiner. If this does not produce the necessary desired results, you can either request a phone conversation with the examiner’s manager or you can request an appeal.
3. If the IRS determines that your deductions were not allowable and offers information on how to appeal the decision, then you are able to request an appeal by following the instructions. At this point, it is suggested that you contact an attorney who can offer guidance and services to assist you with your appeal. You will need to file a form with the IRS that lets your attorney to contact them on your behalf.
4. In order to get an appeal, you will need to file a protest on the letter explaining your appeal rights and send it to the IRS address given on the letter.
5. The appeals process is rather informal and can take place by the phone, in person, or virtually. It is necessary to have your attorney and/or certified public accountant present for the conversation. At the start of the appeal, the IRS appeals representative will explain the process before listening to your issues. If any new information is tendered during the appeals conference, the case may be returned for consideration of the new information.
6. When you have finished your appeals conference, you should receive an official decision by mail from the IRS within 120 days.
Why You Need an Attorney
The tax system can get really complex and often confusing for those who are not trained in the laws that govern the taxation of income. When the IRS is disputing your deductions, you can be certain that they are depending on information by experts who have a proper understanding of those laws. According to a publication by the IRS, a study of 17 cases involving disputed itemized deductions for charitable contributions had an outcome of 13 wins for the IRS, and 4 split decisions. In seven of these cases, the taxpayer was self-represented in the dispute, and the IRS was victorious in all of those cases. These statistics shows how significant it is to have a tax expert of your own to assist you in the dispute.