Got a Letter from the IRS?

The IRS sends tens of millions of letters a year. Most are not audits. They are a computer comparing what a bank or employer reported to what your return said, or a notice that a balance exists, or a request to verify your identity. Each one has a number in the corner, a date, and a deadline, and the deadline is the only thing you need to find before you call anyone.

Below is what the common letters mean, how the penalties work and how they stack, the one-call fix called first-time abatement that removes penalties for people with a clean record, what to do when you can’t pay, and the clocks that run in both directions: how long the IRS has to come after you, and how long you have to get money back.

The Letters You Are Likely to Get

The number in the upper right corner tells you what it is

Notice	What it means	Deadline
CP2000	Income reported to the IRS (a 1099, a W-2, a brokerage sale) doesn’t match your return. It proposes a change and a tax. It is not an audit and not a bill yet.	30 days to agree or disagree
CP11 / CP12	A math or clerical error was corrected; you owe more (CP11) or get a different refund (CP12).	60 days to dispute, or the change stands
CP14	The first bill: tax shown on your return that wasn’t paid, with penalty and interest.	21 days before more interest and the next notice
CP501, CP503	Reminders of the balance. Nothing new, more interest.	Pay or arrange before the next one
CP504	Notice of intent to levy your state refund; a warning that enforced collection is next.	30 days
LT11 / Letter 1058	Final notice of intent to levy and your right to a hearing. After this the IRS can take wages and bank accounts.	30 days to request a collection due process hearing, which stops the levy
CP49	Your refund was applied to a balance from another year.	None; informational
5071C / 4883C	Identity verification. A return was filed in your name and the IRS wants to confirm it was you.	Respond promptly; the refund is held until you do
Letter 525 / 2205	An actual examination (audit), by mail or in person.	As stated; usually 30 days
CP90 / CP297	Final notice before levy on Social Security benefits or federal payments.	30 days

The ones in bold are the ones that cannot wait. An LT11 ignored for 31 days is a levy on your paycheck. Everything else is correctable, usually by letter, without drama.

How to Respond

Agree, disagree, or ask for more time; never ignore

A CP2000 is the most common letter, and about half the time the IRS is wrong or half right: the sale on the 1099-B had basis the broker didn’t report, the 1099-R was a rollover, the income was reported on a different line. The response is a signed form with a short explanation and the document that proves it. Don’t sign the agreement page if you disagree with any of it, and don’t pay a proposed amount you dispute; paying is agreeing. If the IRS is right, sign, pay, and ask about the penalty below.

For every letter: respond in writing, by the date, keep a copy, and send it certified. Phone calls to the IRS can take two hours and leave no record. If the deadline is close, a one-line letter asking for 30 more days is routinely granted and stops nothing bad from happening. If the letter asks you to call a number or click a link, confirm the number against irs.gov first; the IRS does not initiate contact by email or text, and a “notice” demanding gift cards is a crime, not a tax.

The Penalties and How They Stack

The IRS calls them: Sections 6651, 6662 and 6654

Penalty	Rate	Cap
Failure to file (return late, tax owed)	5% of the unpaid tax per month or part of a month	25%; minimum $525 if over 60 days late (verify 2026 minimum)
Failure to pay (tax not paid by April 15)	0.5% per month; 0.25% while an installment agreement is in place; 1% after a levy notice	25%
Both in the same month	The file penalty drops to 4.5% so the pair totals 5%	47.5% combined over time
Accuracy-related (substantial understatement or negligence)	20% of the underpayment	40% for gross valuation misstatements
Estimated tax (underpaid during the year)	Interest at the federal rate, by quarter	See the W-4 page for the safe harbors
Fraud	75%	Rare; requires intent

The failure-to-file penalty is ten times the failure-to-pay penalty. That is the whole lesson of this section: file on time even if you can’t pay. A $10,000 balance filed on time and paid six months late costs $300 in penalty. The same balance on a return filed six months late costs $2,500 plus the $300. An extension moves the filing deadline to October 15 but not the payment deadline, so the 0.5% still runs from April on whatever wasn’t paid.

I didn’t file because I couldn’t pay. The not-filing cost more than the not-paying. The system is designed by people who assume you’ll read the fine print on the way down.

Interest

The IRS calls it: Section 6601; set quarterly

Interest runs on unpaid tax from the original due date, and on penalties from the date they’re assessed, compounded daily. The rate for the last quarter of 2026 is 7%. Interest is almost never abated; the law allows it only when the IRS itself caused an unreasonable delay. When a penalty is abated, the interest that accrued on that penalty goes with it, which is a reason to pursue abatement even on small balances.

First-Time Abatement

The IRS calls it: the first-time abate administrative waiver

If you have no penalties in the prior three years, all your returns are filed, and your current balance is paid or on a payment plan, the IRS will remove the failure-to-file and failure-to-pay penalties (and the failure-to-deposit penalty for employers) for one year, on request, no explanation needed. It is a policy, not a law, and it is granted by phone or in a short letter. It does not cover the accuracy penalty or the estimated-tax penalty.

Two things people get wrong. It is available once per clean three-year window, not once in a lifetime; a taxpayer with a penalty in 2019 and nothing since can use it for 2026. And the IRS will not offer it; you ask. Ask on every balance-due notice, because the answer is yes more often than not and the amounts are real: $2,500 of failure-to-file penalty on a late return is a phone call.

Reasonable Cause

The IRS calls it: Section 6651(a), ordinary business care and prudence

If first-time abatement isn’t available, penalties can still be removed for reasonable cause: you exercised ordinary care and still couldn’t comply. Serious illness or death in the immediate family, a fire or disaster that destroyed records, an inability to get records that you tried to get, and in some cases reliance on wrong advice from a professional. Not reasonable cause: not having the money, forgetting, being busy, not knowing the rule, or relying on a preparer to file (the duty to file is yours). The request is a letter with dates and documents, and the standard is whether a careful person in your situation would have been late too. They work when the facts support them and not otherwise.

When You Can’t Pay

The IRS calls them: installment agreements, currently not collectible, offers in compromise

• Short-term plan: up to 180 days, no setup fee, interest and the 0.5% penalty continue. Set up online.
• Installment agreement: up to 72 months for balances under $50,000, approved automatically online without financial disclosure; the failure-to-pay penalty drops to 0.25% a month. Direct debit is cheaper and keeps the agreement from defaulting. Larger balances need a financial statement and sometimes a lien.
• Currently not collectible: if paying would leave you unable to meet basic living expenses, the IRS can suspend collection. The debt doesn’t go away; interest runs; the ten-year clock keeps running too, which sometimes means the debt expires.
• Offer in compromise: settling for less than the full amount, based on what the IRS could collect from your income and assets over the remaining time. Real, and far rarer than the radio ads suggest. The large ones are usually handled with a tax attorney.

None of these stops a levy once an LT11 has run out. The 30-day hearing request does. Then the plan is negotiated inside the hearing.

The Clocks

The IRS calls them: the assessment, collection and refund statutes

• Three years to assess. The IRS has three years from the date you filed (or the due date, if later) to audit and assess more tax. Six years if you omitted more than 25% of your income. No limit for fraud or for a return never filed, which is the main reason to file old returns: it starts the clock.
• Ten years to collect. From the date of assessment. After that the debt is gone. Payment plans, offers, bankruptcy and some hearings pause the clock, so “ten years” is often twelve.
• Three years to claim a refund. From the due date of the return. A 2023 refund is lost after April 15, 2027. Non-filers who are owed money lose it on that schedule, every year, and the IRS keeps it.

Colorado

The Colorado Department of Revenue runs its own notices, usually a few months after the IRS makes a change, because it receives the federal adjustment and recomputes. If a CP2000 changes your federal return, Colorado expects an amended Colorado return (DR 0104X) within 30 days of the final federal determination, and will bill you if it doesn’t get one. Colorado’s late-filing penalty is the greater of $5 or 5% of the unpaid tax plus 0.5% per month, to a maximum of 12% (verify), and its interest rate is set annually (verify 2026 rate). The Department will abate penalties for reasonable cause on a written request and offers payment plans through its online account; it has no formal first-time abatement policy, but a first request with a clean history is usually granted. Colorado also sends identity-verification letters of its own, and they hold refunds the same way.