IRS Notice and Audit Response

Identify the notice before you do anything else

Every IRS letter carries a notice or letter number, printed in the top right corner. That code tells you what the letter is, what it is asking and how long you have — and the letters differ enormously in seriousness. Treating them all as equally alarming wastes energy; treating them all as routine misses the ones that are not.

These are the ones this audience receives most often.

The distinction that matters most is between a proposal and an assessment. A CP2000 is a proposal you can dispute with evidence. If you let the window pass it generally becomes an assessment, and disputing an assessment is a materially harder and more expensive exercise than disputing a proposal. The deadline printed on the letter is the governing fact, not the date you got round to opening it.

CP14: the balance-due notice, and the clock it starts

A CP14 is the other kind of letter entirely, and the distinction above is what makes it simple. It is not a proposal. It is the first bill in the collection sequence, issued because a return you filed yourself shows tax that has not been paid. In most cases there is nothing to dispute about the liability, because you reported it. The question a CP14 asks is about payment, not about position.

It gives you 21 calendar days from the date on the notice, or 10 business days if the balance is $100,000 or more. What that window does not tell you is where the interest started, and this is the part that surprises people: interest runs from the original due date of the return, not from the date the notice was issued. A CP14 that arrives in September on an April liability already has five months of interest inside the figure.

The failure-to-pay penalty sits on top of the interest, and its rate is not fixed. It moves depending on what you do next, which is the practical argument for responding rather than waiting.

The useful thing to know about a CP14 is that when one is wrong, it is usually wrong about the credit rather than the tax. The liability came off your own return; the payment is what went astray. Payments applied to the wrong tax year, an extension payment that never matched to the return, and estimated payments made under one identifier while the return was filed under another are the recurring causes. That last one is specific to this audience and worth checking first: if you moved from an ITIN to an SSN, or filed jointly for the first time, a payment can be sitting correctly received on the wrong account. Establishing that is a different exercise from paying, and considerably cheaper.

Where the tax genuinely is owed and you cannot pay it now, the table above is the argument for arranging something rather than nothing. An approved payment plan halves the penalty rate for an individual who filed on time, so the arrangement pays for part of itself. Short-term plans, longer instalment agreements and the harder routes are covered in the payment question in our FAQs below.

Ignoring a CP14 does not leave the balance sitting quietly. It escalates through a defined sequence of reminders to a notice of intent to levy, and then to a final notice which carries something the earlier letters do not: a 30-day window to request an independent Collection Due Process hearing. That window is the one date in the sequence that is genuinely lost if it passes, and it is the point at which a balance-due problem becomes a collection problem.

One asymmetry worth planning around: interest cannot be removed on its own. The IRS can only reduce interest where the penalty it was charged on is itself reduced, so a successful penalty abatement takes its interest with it while a standalone interest request does not exist. That is why resolving a genuine balance quickly is worth more than resolving it perfectly.

Form 843: what it can claim back, and what it cannot

Form 843 is the Claim for Refund and Request for Abatement, and it is the form most often misdescribed. It is not a way to reduce a tax bill you simply disagree with, and knowing what it excludes saves more time than knowing what it covers.

It cannot be used to abate income, estate or gift tax. It cannot be used to amend a return you have already filed — that is Form 1040-X for individuals. And an employer cannot use it to reclaim FICA, Railroad Retirement tax or income tax withholding; an employer corrects those on Form 941-X instead.

What it does cover is penalties and interest, where those arose from an IRS error or delay or where reasonable cause applies, along with certain employment and excise taxes assessed in error. In practice, for the people this page is written for, it is the penalty and interest route.

Before reaching for Form 843, check whether the simpler route applies. First-time penalty abatement is an administrative concession for taxpayers with a clean recent compliance history who have filed and paid, and it is frequently granted on a phone call with no form at all. Filing Form 843 when a request would have settled it adds months for no benefit.

There is one situation where Form 843 is exactly right and routinely missed. If you were on F-1, J-1, M or Q status and your employer withheld Social Security and Medicare tax you were exempt from, the sequence is: ask the employer to refund it first, because they can correct their own filing. Only if they will not or cannot do you claim it from the IRS on Form 843, attaching Form 8316 to record that the employer declined, together with evidence of your status and work authorisation. The claim goes to the IRS office where your employer filed its Forms 941, not to the address on your own return. Our FICA refund and F-1 pages cover the eligibility side of this.

Refund and abatement claims are subject to a filing window, so the practical risk with wrongly withheld FICA is delay rather than refusal. If an employer has been unresponsive for months, start the Form 843 route in parallel rather than waiting for them indefinitely.

Why Indian filers get mismatch notices more often

Automated matching compares what third parties reported to the IRS against what your return shows. It is good at spotting a difference and has no ability to understand why one exists. Several of the most common causes are specific to cross-border filers, and in most of them the IRS figure is wrong.

• Securities sales reported gross. A 1099-B may report proceeds without cost basis, so a $60,000 sale of stock you bought for $55,000 looks like $60,000 of unreported income rather than a $5,000 gain. This is the single most common overstated CP2000.
• RSU and ESPP double-counting. Equity income already included in your W-2 can also appear on a broker 1099-B, so the same compensation looks reported twice. Reconciling requires the vest and purchase records, not just the forms.
• Foreign tax credit disallowed on a technicality. A Form 1116 claim can be queried where the supporting evidence of Indian tax paid is not in the format expected, even though the credit is properly due.
• Income under a different identifier. Interest or dividends reported under a spouse's SSN or a newly issued ITIN may not match to your return, particularly in the year an ITIN was first issued.
• Treaty positions the matching system does not model. A claim under the India-US treaty is a legitimate position that automated comparison reads as a discrepancy.

The practical consequence is that a mismatch notice for someone with Indian assets and US employer equity should be verified before it is paid, more often than for a straightforward W-2 filer. Paying an incorrect proposal does not just cost the money — it concedes the position for that year.

Penalties are more removable than most people assume

Where tax genuinely is owed, the penalty on top of it is frequently negotiable even when the tax is not. Two routes exist and they work differently.

First-time abatement is an administrative waiver available to taxpayers with a clean recent compliance history — broadly, no penalties in the preceding three years and current filings up to date. It is granted far more readily than most people expect, and it is not means-tested or discretionary in the way reasonable cause is. It has to be asked for.

Reasonable-cause relief is the broader route and turns on facts: serious illness, a natural disaster, records destroyed or inaccessible, or reliance on incorrect professional advice. For this audience one situation recurs — a first US filing season handled without understanding that Indian income was reportable at all. That is not automatically reasonable cause, but it is a fact pattern worth presenting properly rather than paying without argument.

Interest is a different matter from penalties and is rarely abated. It runs on the underpaid tax from the original due date regardless of the reason, which is why resolving a genuine balance quickly is worth more than resolving it perfectly.

If the letter is about a year you never filed at all

A separate and more serious situation, and it is common among people who spent a partial year in the US and left, or who assumed no filing was required because tax had been withheld. The IRS may prepare a substitute return on your behalf, which will not include any deduction, credit or treaty position you were entitled to, and will therefore overstate what you owe.

The right response is to file the actual return rather than argue with the substitute. Where multiple years are involved, or where unreported foreign accounts are part of the picture, there are formal routes back into compliance and choosing the wrong one has consequences — that is a different conversation from a single-notice response and should be handled as one.

Where this comes from

• IRS — Understanding your CP2000 notice: what it proposes and how to respond
• IRS — Understanding your CP14 notice: balance due and payment options
• IRS — Failure to Pay Penalty: how the rate is calculated and when it changes
• IRS — Administrative penalty relief, including First Time Abate
• IRS — Penalty relief for reasonable cause: what qualifies and what evidence is expected
• IRS — Online Payment Agreement: instalment options and eligibility
• IRS — Taxpayer Bill of Rights, including the right to challenge and to representation