Decoding Tax Notices

Cold sweats, shortness of breath, indigestion—every business owner knows the feeling when a letter from the IRS arrives. Whether you’ve been in business for 100 days or 100 years, tax letters can be intimidating.

I’m here to tell you that they don’t have to be. In this guide, we’ve broken down the kinds of notices you’re most likely to receive from federal, state, and local tax agencies. Take it from the experts—Namely processes over $6.5 billion in payroll annually, meaning we deal with a fair amount of tax correspondence. 

Informational Notices

Breathe easy. Believe it or not, most notices from the IRS or state agencies are just informational, not punitive. Here are the different kinds of informational notices you might receive:

New Tax ID

If your business is just starting out or opening a new office, you might receive a notice from a state or local agency providing you with a new tax identification number. These letters should be the least frightening; they mark an important first step in your relationship with local tax officials. Your new Tax ID should be used when remitting payments so that they post in a timely manner. We'll dig into that more in just a bit.

Rate Changes

Another common reason for an agency to reach out is to make you aware that your unemployment or disability rate has changed. A company’s unemployment rate fluctuates with the number of former employees that claim the benefit annually. If your company had a low turnover year, the rate would reflect a lower percentage. Conversely, if you had a lot of claimants, you could potentially contribute at the highest rate. A notice with this rate could arrive annually at various times depending on how many states you are doing business in.

Payment Vouchers

Depending on what state you’re in, you might receive payment vouchers that look a lot like those dreaded tax notices. Certain state agencies still like to conduct business the old-fashioned way and to help you along, they will provide you with coupons to use when remitting payments directly to them. These notices are also informational and can commonly be disregarded if you are already using a payroll service to remit your payments. Even so, it’s always a good idea to verify that these coupons have the right agency ID number and the deposit frequency listed.

Speaking of deposit frequencies, you may receive a notice that has payments and amounts listed. Take another breath. The agency might just be letting you know they received your payment, but that you need to deposit on a different frequency. Basically, the more you are giving them, the quicker they want it. These notices should be acted upon quickly to ensure your next deposit is made timely with your new schedule.

Actionable Notices

Unfortunately, no one is lucky enough to only receive informational notices. Inevitably a payment might be late, missing an ID, or you could receive an unexpected payment notice. Let’s break these down individually and share the best steps to resolution.

Late Payments

When you get a late payment notice, sometimes it's just because it posted late—not that the funds didn’t arrive on time. The most common explanation for this notice is that you didn’t have your Tax ID number at the time. If you have proof of payment, contacting the agency can resolve these issues quickly.

From FICA to FUTA—our free Federal and State Tax Guide helps you stay current with tax rates, minimum wages, and more.  

If the payment was legitimately late and you were assessed a penalty, you can try to contest the decision, depending on the reason. Most tax agencies offer a list of acceptable reasons for late payments online. Tax agencies’ websites are always a great resource.

“Unpaid” Payments
When a payment is showing as “unpaid,” there are several factors to consider. Did you remit the payment? Do you have an account with the agency you remitted payment to?

This brings us to the “applied for” conundrum. While agencies love to see all that money come in, they still need to know where it is coming from. Typically, a monthly coupon on quarterly filing helps them to rectify this. When those are submitted without an ID number, it can reflect as unpaid and delay the agency in posting the funds. If you did send the funds on time, these can also be reconciled simply.

Remember, if you are doing business with an agency, make sure you have that ID number and an account set up. It is critical to a healthy tax agency relationship.

Taxes Owed Breakdowns

Finally, some state notices will break down a quarter and estimate taxes owed. These letters may seem concerning at first, but are typically not as bad as they look. If payments were made to a state and you subsequently stopped doing business there, remitting taxes to said state wouldn’t be necessary. Unless a return showing zero liability—or what industry experts call a “zero return”—was filed to that agency, some states might assume that you forgot to pay them. These notices are commonly resolved with a zero return or a quick call to the state agency. 

See, that wasn’t so bad. There you have it, a quick review of why tax agencies reach out and why not all notices are scary. The next time you open the mail and an agency letter is staring you in the face, take a deep breath—you’ve got this!

The content of this publication is provided for informational purposes only and does not contain or constitute legal or tax advice.

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