Dealing with Tax Authorities

What to do if you receive a letter from the Internal Revenue Services or Canada Revenue Agency.

Nothing strikes more fear in the heart of a client than a letter from the Internal Revenue Service or the Canada Revenue Agency. Clients immediately question what it will cost them, are they in trouble, or did the CPA make a mistake. If you receive such a notice, do not immediately respond to the taxing authorities, but call me and send me a copy of the notice for review. There are several reasons for this request:

  • The taxing authorities do make processing errors.  The notice may be the result of such an error.
  • Penalties are usually assessed if the notice was the result of an item that was reported directly by a third party to the taxing authority but not reflected on the tax return, such penalties can often be removed if a reasonable cause exists for the failure to report the item. Reasonable cause is a term of art, and a taxpayer should never assume that reasonable cause does not exist.
  • Taxpayers often volunteer too much information, leading to an expanded inquiry and exposure to additional taxes.
  • When dealing with tax law, taxpayers have certain rights under the law. Unlike television crime dramas, the taxing authorities are not required to inform taxpayers of their rights before asking questions.
  • There are deadlines prescribed by law for actions by both the taxpayer and the taxing authority. These deadlines are very unforgiving, and failure to abide by them will always cost money.

Confidentiality laws prohibit the taxing authorities from discussing taxpayer information with third parties without specific authorization by the taxpayer. The disclosure authorization on the signature page of most U.S. tax returns is very limited, and expires after one year. To resolve most tax issues, it is usually necessary to secure a specialized Power of Attorney. In some circumstances I may request the Power of Attorney when I prepare the tax return.

As Arizona has adopted the Internal Revenue Code, and has not excluded Section 894 from its adoption, income excluded from US taxation under the Canada-US Income Tax Treaty should also be excluded from Arizona taxation.

It is necessary to file a US Income Tax Return to claim the benefits of the treaty, and if one meets the Arizona residency requirement, one should also file an Arizona income tax return, with its starting point the Adjusted Gross Income from the federal return.

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