No one wants to receive a notice from the IRS, but if you do, there’s no need to panic — the vast majority can be quickly and easily resolved. So, here’s a quick overview of some common payroll-related IRS notices received by small business owners, plus how to handle things if and when Uncle Sam does come knocking.
And please feel (at least somewhat) comfortable in knowing that you’re not alone. Of the small business owners we surveyed recently, 28% said they’d received a tax notice or been audited in the past few years.
So, why is the IRS contacting you? According to the IRS website, taxpayers are typically contacted for something as simple as a math error or to say that a return has not been filed.
Other common reasons include:
It’s important that you open the letter promptly, as many notices are time-sensitive and require a response within a very specific timeframe. Missing a deadline can unnecessarily complicate the situation, so read and respond yourself or through your CPA, payroll provider, or tax professional. Generally the IRS prefers responses in writing, but if you do choose to call, use the number included in the letter.
Even a simple request for additional information can quickly turn into a full-fledged audit when ignored, and the IRS does not hesitate to attach a lien to business property. You’ll also want to be sure to save the original letter as well as copies of any response (if required) that you provided to the IRS, for your own records.
Though most IRS notices are sent to individual taxpayers, small businesses do receive them directly as well. Here are some of the more common ones as well as the best way to respond to the tax man.
You might receive this notice when a return such as a 1096/1099 contains errors, or information is missing. Or if you filed using incorrect media such as paper filing when you’re required to file electronically. Some businesses will also receive a 972CG if any tax ID numbers are missing or incorrect. Anyone receiving this notice must respond within 45 days, indicating agreement or disagreement with the penalty assessed, with an explanation if you disagree.
The IRS may send this notice if it has found a discrepancy between the amount of federal tax deposits credited to your account and the amount reported on your quarterly Form 941. A CP134B will also give you a due date for when any discrepancy needs to be paid. The best thing to do if you get this notice is to compare your deposits to the amount included on your tax form.
You might receive this notice if your payroll deposit requirements change. Though there’s no action to be taken, it’s important to review this notice carefully to ensure that deposits are made on time to avoid any late payment penalties.
This is a notice of penalties assessed and may be received if a return is filed late, is incomplete, or the return was not filed electronically, as required. CP162 is sent to partnerships and S corporations to notify the owners that penalties were assessed for failure to file on time. If you get one of these and agree with the penalties, you can pay them within 21 days. If you do not agree, you can respond via letter to the IRS within 21 days to dispute the penalties assessed.
This IRS notice might show up in your mailbox if it’s time to switch from filing form 944 to form 941. This simply means you no longer meet the criteria for the old form and will need to begin using a new one instead. No action is immediately required – but you would begin to file your 941 quarterly instead of filing a 944 annually. If you need instructions on how to get started, we’ve got detailed guidance for filling out for Form 944 and Form 941.
This notice would indicate that your business neglected to file a required 941 for the period(s) indicated on the notice. If you’ve recently filed a return in the last four weeks, you might be able to ignore the notice, but we recommend double checking your files so there are no nasty surprises. It is important to respond immediately if it’s been more than four weeks since you filed your return.
If you have not filed your quarterly return, you will need to do so immediately in order to avoid additional penalties, or will need to provide the IRS with an explanation of why you do not need to file. If you do not respond, the IRS may file a substitute return for you and charge penalties and interest on the amount of tax calculated.
Your business may receive CP2100 when a filed return shows an incorrect Social Security or tax ID number. This can be a fairly common occurrence, and can usually be resolved by simply updating the form with the correct information. If this is not possible, your business would be responsible for beginning backup withholding on the individual or business with the incorrect tax ID number until the correct one is received. If the correct number is not received, backup withholding must continue every time that particular vendor is paid.
From time to time, you may also get a garnishment order from the IRS, a court, or a state. Typically, it means you are responsible for withholding a portion of an employee’s wages and following a process to remit them to the proper agency. These orders are typically mandatory and should be followed. Check out our guide to employee wage garnishment to learn more.
While some of the notices the IRS or state agencies may send you cannot be avoided, you can reduce the number you receive by simply ensuring that your tax returns are filed accurately and on time.
As a small business owner, you’re already juggling a lot. Just remember to toss anything with an IRS return address to the top of the pile. The majority of letters and notices from the IRS (or state tax agencies) can be resolved with little fanfare, but only if you respond accordingly — preferably in writing — in a timely fashion.