You open the mail and see it.

Internal Revenue Service.

The letter says your business owes money from a prior tax year.

Maybe it's $800.

Maybe it's $8,000.

Maybe it's considerably more.

Your first reaction might be:

How do I owe taxes from three years ago?

Or:

Didn't my accountant already take care of this?

An IRS notice deserves your attention, but receiving one doesn't necessarily mean you did something wrong—and it doesn't necessarily mean every number on the notice is correct.

The most important thing is to understand why the IRS contacted you and what deadline applies.

First: Don't Ignore the Letter

Putting the notice in a drawer is usually the worst option.

IRS notices can be sent for many reasons, including a balance due, changes or corrections to a return, missing information, penalties, payment discrepancies, or questions about a return. The IRS advises taxpayers to review the notice carefully and respond by the stated deadline when a response is required. IRS

Find the notice number.

You'll generally see something such as:

CP161

CP503

CP504

or another CP/LTR number.

That number matters because different IRS notices mean very different things.

You can look up the notice through the IRS notice and letter guide.

Step 1: Figure Out What the IRS Says Happened

Don't begin with the total balance.

Begin with why the balance exists.

Read the notice and identify:

Tax year or tax period.

Type of tax.

Original tax amount.

Changes the IRS says were made.

Penalties.

Interest.

Payments the IRS says it received.

Total amount currently due.

Response or payment deadline.

Then compare those numbers with your records.

The IRS specifically advises taxpayers receiving certain business balance-due notices to compare the figures with their return and verify that all payments were properly applied. IRS

That can immediately reveal where the disagreement begins.

Step 2: Pull the Original Return

Suppose the IRS says you owe $7,400 from 2023.

Before doing anything else, find the return that was actually filed for that year.

Then gather supporting records such as:

Tax-payment confirmations.

Estimated-tax payments.

Payroll-tax records.

Bank statements.

Canceled checks.

Accounting records.

Prior IRS correspondence.

Amended returns.

Extensions.

Emails or documents from your tax preparer.

Now you're comparing three things:

What you reported.

What you paid.

What the IRS says happened.

That's much more useful than simply staring at a balance-due number.

Step 3: Don't Assume Your Accountant Made a Mistake

Sometimes the issue did originate with the return.

Sometimes it didn't.

The IRS could have adjusted something after filing.

A payment may have been applied incorrectly.

The IRS may have information that doesn't match what was reported.

A required return may not have been received.

There could be a payroll-tax issue.

There could be an information-return penalty.

Or there may actually be additional tax due.

The notice itself should explain why the IRS contacted you and what action it expects. IRS

Figure out the reason before deciding who's responsible.

Step 4: Send the Notice to Your Accountant

If a CPA, enrolled agent, accountant or tax preparer handled the return, send them the entire notice, not just a picture of the amount due.

A useful question is:

"Can you compare this notice with the return we filed and explain exactly why the IRS believes this amount is owed?"

Then ask:

"Do you agree with their calculation?"

Those two questions can save a lot of confusion.

If the professional needs to communicate with the IRS on your behalf, IRS Form 2848 can be used in appropriate circumstances to authorize an eligible representative. IRS

Step 5: If the IRS Is Wrong, Don't Just Pay It to Make It Go Away

If you disagree with the notice, follow the dispute instructions contained in that specific notice.

Documentation matters.

For example, you might have proof that a payment was made, a canceled check, an amended return, payroll records or other evidence supporting your position.

And pay close attention to deadlines.

The IRS specifically warns that responding by the applicable deadline can be important for preserving appeal rights. IRS

Don't assume that calling your accountant automatically stops an IRS deadline.

Step 6: What If the IRS Is Right?

Now the conversation changes.

Suppose you and your accountant review everything and determine:

Yes, the business actually owes the money.

The next question is how to resolve it.

If you can comfortably pay the balance without jeopardizing the business, paying it generally stops additional interest and applicable penalties from continuing to accumulate on that balance. IRS

But what if you can't?

Don't assume your only choices are:

Pay everything today

or

Do nothing.

Depending on the circumstances, IRS resolution options can include payment arrangements, installment agreements, temporary collection delays and, for taxpayers who meet the requirements, offers in compromise. IRS

The appropriate option depends heavily on the business's circumstances.

Step 7: Ask Whether Penalty Relief Is Available

Your balance might not consist entirely of unpaid tax.

It may include penalties and interest.

In certain situations, taxpayers can request that penalties be removed or reduced. Eligibility depends on the particular penalty and circumstances. The IRS specifically provides procedures for taxpayers to request penalty relief or dispute certain penalties. IRS

That doesn't mean every penalty will disappear because you ask.

But it does mean you should understand the components of the balance instead of treating the entire number as one lump sum.

Ask your tax professional:

"How much of this balance is actual tax, how much is penalty, and how much is interest?"

Then:

"Is there any legitimate basis for requesting penalty relief?"

Not Every IRS Letter Has the Same Urgency

This is especially important.

An initial balance-due notice is very different from an advanced collection notice.

For example, a CP504 is a Notice of Intent to Levy. The IRS states that continued failure to resolve the balance can ultimately lead to collection actions involving income, bank accounts or property, subject to applicable taxpayer rights and procedures. IRS

An LT11/Letter 1058 can also involve proposed levy action and appeal rights. IRS

Those aren't letters to put on your accountant's desk and revisit next month.

The notice number and deadline matter.

Don't Let Paying Old Taxes Create a New Business Problem

Suppose the IRS says your business owes $25,000.

You have $32,000 in the bank.

Technically, you could write the check.

But should you immediately drain most of the company's available cash?

What happens to:

Payroll?

Rent?

Inventory?

Insurance?

Debt payments?

Upcoming taxes?

Normal operating expenses?

This is where resolving a tax problem becomes a cash-flow decision as well as a tax decision.

You need to understand both.

That doesn't mean delaying payment unnecessarily—interest and applicable penalties can continue accumulating on unpaid balances. IRS

It means understanding the business's complete financial position while you and your tax professional evaluate the available resolution options.

Then Ask the Most Important Question: Why Did This Happen?

Once the immediate issue is handled, don't stop there.

A surprise tax bill from three years ago should trigger another question:

What needs to change so this doesn't happen again?

Maybe estimated taxes weren't sufficient.

Maybe payroll deposits weren't handled correctly.

Maybe profitability increased dramatically during the year.

Maybe tax reserves weren't being maintained.

Maybe communication with the accountant broke down.

Maybe bookkeeping wasn't current enough to estimate taxes accurately.

Maybe there simply wasn't a system for monitoring upcoming tax obligations.

Whatever happened, fix the process—not just the bill.

Build Taxes Into Your Business Planning

Imagine your accountant estimates you'll owe approximately $36,000 next April.

That shouldn't become an April surprise.

It becomes a business obligation you can plan around.

If you have nine months remaining, you can begin thinking about setting aside approximately:

$4,000 per month.

Now the question becomes:

Can the business comfortably reserve $4,000 monthly?

What happens to cash flow?

Are there other major obligations approaching?

Should a planned equipment purchase be reconsidered?

Do estimated payments need to change?

Those are questions you can work through before the deadline arrives.

This Is Why Understanding Your Numbers Matters

UnpackFi isn't a tax-resolution service, and it doesn't replace your CPA, enrolled agent, tax attorney or other qualified professional.

An IRS dispute or back-tax issue is exactly the kind of situation where professional tax guidance can be extremely valuable.

What UnpackFi can help with is the financial understanding surrounding those conversations.

How much cash does the business have?

What obligations are coming?

What happens if you make a large tax payment?

How much could you reserve each month?

How profitable is the business actually becoming?

What questions should you bring to your accountant?

Because the goal isn't to turn business owners into tax professionals.

It's to help business owners understand their businesses well enough to ask better questions and make better-informed decisions.

Received an IRS letter?

Don't panic.

Don't ignore it.

Understand it.

Verify it.

Get the appropriate professional involved.

And then make sure your business is better prepared for the next tax bill before it arrives.

Use UnpackFi to better understand your business financials and prepare better questions for the professionals you trust. Try the free demo at UnpackFi.com.