You opened your mailbox and there's an envelope from the IRS. Your heart rate just doubled.
Take a breath. Most IRS letters are not as bad as they seem. The vast majority are automated notices, not audits, and many of them can be resolved with a simple response. But you do need to read it, understand what it's asking, and respond by the deadline. Here's how.
Every IRS letter has an alphanumeric code in the upper right corner. This code tells you what the letter is about. Before you do anything else, find that code. It's your roadmap.
CP2000 (Underreporter Inquiry): The IRS received income information (from a W-2, 1099, or K-1) that doesn't match what you reported. This is not an audit. It's an automated comparison. You need to review the discrepancy, agree or disagree, and respond within 30 days.
CP501: First reminder that you have a balance due. This is a billing notice. If you already paid, send proof. If you owe, pay or set up a payment plan before the next notice escalates.
CP503: Second reminder of a balance due. Slightly more urgent. Same action as CP501, but the IRS is getting closer to enforcement.
CP504: Intent to levy. This is serious. The IRS is warning you that they will seize your state tax refund (and potentially other assets) if you don't pay or respond. Do not ignore this one.
CP14: You filed your return but didn't pay the full amount. This is the initial balance due notice. It includes penalties and interest calculated from the filing deadline.
CP2005: Good news. The IRS reviewed the information from a CP2000 and agrees with your response. Case closed.
CP90 / CP297: Final Notice of Intent to Levy and Notice of Your Right to a Hearing. This is the last step before the IRS takes enforcement action. You have 30 days to request a Collection Due Process hearing.
LTR 566 (Audit Letter): This is an actual examination notice. The IRS is auditing a specific area of your return. You'll be asked to provide documentation for specific line items. This requires professional help.
Respond within 30 days: CP2000, CP504, CP90, CP297, LTR 566
Respond within 60 days: CP501, CP503 (though sooner is better)
Informational (no response needed): CP2005, CP49 (refund applied to balance)
Every notice contains:
Read the entire letter before reacting. Many business owners see a dollar amount and panic. The breakdown often shows that most of the "balance" is penalties and interest, which can sometimes be abated.
If you agree with the notice: Pay the amount due. For federal notices, use IRS Direct Pay (irs.gov/payments). For California FTB notices, use FTB Web Pay. If you can't pay in full, both agencies offer payment plans. Even paying something shows good faith.
If you disagree: Write a response letter referencing the notice number, tax year, and your taxpayer ID. Explain the discrepancy and include supporting documentation (copies, never originals). Mail it to the address on the notice. Use certified mail with return receipt.
If you're not sure: This is when you call your accountant. They can review the notice, pull your return, and determine whether the IRS is correct or whether you have a valid dispute.
The FTB sends its own notices independently. Common ones include:
FTB 4965: Demand for tax return. The FTB believes you need to file a California return and haven't.
FTB 5818: Proposed assessment. The FTB is adjusting your return based on information they received (similar to a CP2000).
FTB 4964E: Collection notice for a balance due.
FTB notices follow the same general pattern: read the notice number, check the deadline, respond or pay. The FTB's response times are generally shorter than the IRS (often 30 days or fewer).
You can receive an IRS notice without a matching FTB notice, and vice versa. They're separate agencies with separate databases. But if the IRS adjusts your federal return, the FTB often follows with a corresponding state adjustment within 6 to 12 months.
Tom owns a small landscaping company in Riverside. He received a CP2000 notice saying the IRS found $18,000 in 1099-NEC income he didn't report. His first reaction was to ignore it and hope it went away.
Sixty days later, he received a CP3219A (Statutory Notice of Deficiency) showing he owed $5,400 in additional tax plus $1,200 in penalties. The IRS was going to assess the full amount in 90 days unless he petitioned the Tax Court.
His accountant looked at the original CP2000 and found that $12,000 of the income had actually been reported under a different line item. A simple response letter with the correct Schedule C would have resolved the issue. Instead, Tom was now dealing with a formal deficiency notice and legal deadlines.
Ignoring the letter, or responding without understanding what the IRS is actually asking.
One thing we do regularly for new clients with existing tax issues: write an abatement letter. It doesn't excuse the payment, but it explains the circumstances, what happened, why, and what's changed. In some cases, the IRS or FTB will reduce or waive penalties based on that context. It's not guaranteed, but it's always worth requesting when the situation calls for it.
California business owners face a unique double exposure: the IRS and the FTB operate independently, and you can be dealing with notices from both agencies simultaneously.
FTB processing is slower. The FTB typically takes 6 to 12 months to follow up on federal adjustments. You might resolve an IRS issue in January and receive the FTB's corresponding adjustment in September. In our experience, this comes up most often with payroll-related adjustments. Plan for this.
FTB penalties can differ. While the FTB often mirrors federal adjustments, the penalty and interest calculations are different. California's interest rate on unpaid taxes is higher than the IRS rate in most years.
FTB's Franchise Tax Board has broader reach for California entities. If you have an LLC, S-Corp, or corporation registered in California, the FTB can assess the $800 minimum franchise tax independently, even if you had no income. Business owners who form entities and then go dormant without formally dissolving them often receive FTB notices for accumulated minimum tax.
California does not participate in the IRS's online dispute resolution system. FTB disputes must go through the FTB's own process (MyFTB online account or mail).
An IRS letter is not a crisis. It's communication. The IRS sends millions of these every year, and most are resolved. The ones that turn into problems are the ones that get ignored, responded to incorrectly, or handled without professional input. Read it, understand it, loop in your accountant, and respond on time. That's the whole process.
If you've received an IRS or FTB notice and you're not sure what to do next, send it to NCO. We'll review it, tell you what it means, and help you respond correctly before the deadline.