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How do I respond to an IRS notice?

The first thing to do is actually read it. That sounds obvious, but plenty of business owners open an IRS envelope, feel their stomach drop, and set it aside to deal with later. Later turns into weeks, and weeks turn into missed deadlines that make the original issue significantly worse.

Every IRS notice has a notice number in the upper right corner, something like CP2000, CP501, or LTR 531. That number tells you exactly what the IRS is asking about. Some notices are purely informational, like confirming a payment was received. Others require a response, like a proposed change to your return or a request for additional documentation. Knowing which type you’re dealing with determines your next steps.

Check the deadline. IRS notices give you a specific number of days to respond, usually 30 or 60. That clock starts from the date printed on the notice, not the date you received it. If the deadline has already passed or is close, act immediately.

Don’t assume the IRS is right. Notices about unpaid balances sometimes reflect payments that crossed in the mail. Proposed adjustments to your return sometimes happen because the IRS didn’t receive a form that was actually filed. Income discrepancies can come from a 1099 that was reported incorrectly by someone who paid you. You have the right to disagree, and the IRS expects that some people will.

If you agree with the notice, follow the instructions to resolve it. That might mean making a payment, providing a signature, or simply acknowledging the change. If you disagree, respond in writing with documentation that supports your position. Include a copy of the notice, your explanation, and any supporting records like receipts, bank statements, or corrected forms.

Respond to the specific office listed on the notice. Don’t call the general IRS phone number expecting them to sort it out. The notice will have a dedicated phone number and mailing address for the department handling your case. Use those. And mail your response with tracking so you have proof it was delivered and when. The IRS processes millions of pieces of mail and things do get lost.

For trade and construction business owners, common triggers for IRS notices include unreported 1099 income, payroll tax discrepancies, and estimated tax underpayments. If you’re running a crew and juggling multiple projects, it’s easy for a 1099 from a general contractor to slip through the cracks. That doesn’t mean you owe what the notice says, but you need to respond with the right documentation. Having clean books through reliable contractor bookkeeping services makes this dramatically easier because the records already exist and are organized.

If the notice involves a large dollar amount, proposed changes you don’t understand, or any mention of an audit, get professional help before you respond. A CPA with IRS tax representation authority can communicate directly with the IRS on your behalf and handle the back-and-forth. What feels overwhelming on your own is routine for someone who deals with these regularly.

The biggest mistake is ignoring the notice entirely. The IRS doesn’t forget. They escalate. What starts as a simple proposed adjustment can turn into liens, levies, and collection actions if you don’t respond. Even if you can’t pay the full amount, responding and setting up a payment plan is infinitely better than silence.

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More Questions

What is a balance sheet and do I need one?

A balance sheet shows what your business owns, what it owes, and what's left over as equity. If you're a trades or construction business, you absolutely need one for taxes, bonding, loans, and understanding your financial position.

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Can I deduct tolls and parking for work?

Yes, as long as the driving is for business and not your regular commute. Tolls and parking are deductible on top of the standard mileage rate, which makes them one of the more commonly missed deductions for contractors.

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Can I deduct my work boots, uniforms, and safety gear?

Yes, if you're self-employed or a business owner. Work boots, uniforms, and safety gear are deductible business expenses as long as they're required for your work and not suitable for everyday wear.

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Can QuickBooks handle progress billing for contractors?

Yes. QuickBooks Online has a built-in Progress Invoicing feature that lets you bill against an estimate in stages. It works well for most small to mid-size contractors, though it has some limitations compared to construction-specific software.

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How much does a CPA charge for a small business tax return?

It depends on your entity type and the complexity of your finances. A simple Schedule C might cost $300 to $800, while an S-corp return can run $1,000 to $2,000 or more. The condition of your books is often the biggest factor.

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How do I track payments to subcontractors for tax time?

Collect a W-9 from every sub before their first payment, pay through traceable methods, and record each payment in your accounting software by vendor. At year end you'll need to file a 1099-NEC for every subcontractor you paid $600 or more.

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Long Beach CPA firm specializing in contractors, trades, and service businesses. Bookkeeping, tax preparation, IRS representation, and advisory services for businesses across the South Bay and Greater LA. Owned and operated by a CPA with over a decade of hands-on experience.

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