Irs Code 971: What the Notice Means & How to Respond

Understanding IRS Tax Code 971

A 971 Notice is an official communication issued by the IRS to notify taxpayers of issues or discrepancies regarding their tax returns. Several reasons may trigger the issuance of a 971 Notice, including potential errors or omissions on the return, the need for additional information to process a refund, or the necessity for further review.

Key Takeaways

• IRS Code 971: Indicates that the IRS has issued a notice regarding discrepancies or issues with your tax return. This notice requires prompt attention and action.
• Response Timeframe: The IRS generally allows 30 days to respond to a 971 Notice. Delays can lead to penalties and interest charges.
• Common Codes: Codes 570 and 971 often appear together on tax transcripts, indicating additional review or required action on your part.
• Impact on Refunds: Codes 570 and 846 on your transcript can affect the timing and amount of your tax refund.
• Action Steps: Check your IRS online account for detailed information, and consider consulting a tax professional to navigate the response process.
• Penalties and Interest: Late or insufficient responses can result in penalties and accruing interest on unpaid taxes.
• Differences from Publication 971: IRS Publication 971 deals with innocent spouse relief and is not directly related to Code 971 notices.

Transaction Codes and Their Significance

Transaction codes, such as code 570 and 971, appear on a taxpayer’s tax transcript and provide important information about the status of their tax return or other activities affecting their account. Understanding these codes can help taxpayers better grasp their tax situation and identify any potential issues.

Timeframe for Responding to the Notice

The IRS generally allows 30 days for a response to a 971 Notice. Responding promptly is crucial to avoid complications such as penalties and interest charges, which can increase your tax liability. If you cannot provide the necessary information within this timeframe, you can request an extension. However, it is still important to act quickly to mitigate any potential penalties or interest charges.

Engaging a tax professional can help navigate the process effectively. Their expertise ensures appropriate and timely responses to the notice.

Understanding Code 971 on Your Tax Transcript

Code 971, also known as the “Notice Issued” code, indicates a change in the processing or status of a tax return. The amount shown on the Code 971 line reflects the total dollar amount of changes made, which could result in additional taxes owed or a refund received.

Several IRS codes can impact the amount shown on the Code 971 line, each with its implications:

• Code 570: Indicates the tax return is under review, potentially delaying refunds.
• Code 846: Reflects a potential refund payment, though the amount may be adjusted due to debts or obligations.

Depending on the specific codes present on your tax transcript, certain actions may be required. For instance, if your return is under review (Code 570), you may need to provide additional documentation. Alternatively, if eligible for a refund adjustment, you might need to submit Form 8915-E.

Comparing Code 971 and Code 570

• Code 570: Signifies your return and refund need further review, typically adding 45 days to the processing time. This extra review can delay any potential refund payment.
• Code 971: Indicates a notice sent about an issue with your tax return. This could involve various issues, such as discrepancies or additional verification needs. If both codes appear, the IRS probably sent an additional notice regarding their review.

If your return is subject to an examination (indicated by Code 971), further documentation may not be required. However, examinations typically take 60 days to complete and may result in additional taxes owed or refunds reduced. Consulting a tax professional for guidance during this process is recommended.

These codes can cause potential delays in receiving any refund payment. Additionally, due to the ongoing IRS backlog, processing times for tax returns and refunds are taking longer than usual. It may take several weeks beyond the standard timeframes for you to receive your refund or any notices related to these codes.

How Does IRS Publication 971 Factor Into This?

Many taxpayers often mistakenly believe that IRS Code 971 and IRS Publication 971 are related. However, there are significant differences between the two, and understanding these differences can help taxpayers avoid common mistakes.

IRS Publication 971 refers to relief of a spouse from a joint tax return’s due amounts. The publication outlines relief methods available to innocent spouses, including equitable relief, innocent spouse relief, and separation of liability relief.

• Equitable Relief: Applied when tax liability allocation within a joint return is deemed inequitable.
• Innocent Spouse Relief: Applicable when one spouse improperly reports income or deductions.
• Separation of Liability Relief: Pertains to couples legally separated or divorced, addressing understated taxes on joint returns.

Potential Penalties and Interest Charges Involved With IRS Code 971

Receiving a 971 notice can involve potential penalties and interest charges:

• Late Payment Penalty: 0.5% of unpaid taxes per month, up to 25% of the total tax debt.
• Underpayment Penalty: Typically 3% per year on the outstanding balance of taxes owed.
• Interest Charges: Accrued from the tax due date until the debt is paid in full, based on the federal short-term rate plus 3%.

If unable to pay your tax debt in full, the IRS may agree to a payment plan. However, interest and penalties will continue to accrue until the balance is fully paid.

Steps to Take if You Didn’t Receive Your Notice

If you see Code 971 on your tax transcript but did not receive a notice, especially if you live outside the USA, it’s crucial to check your IRS online account for any messages or additional details. You can log in to your account at IRS.gov to check.

If there’s no information online, contact the IRS directly at 800-829-1040 to confirm your address and request a copy of the notice. 

In some cases, the notice may be a CP05, which means the IRS is reviewing your return to verify information. Review the letter carefully for instructions or requests for additional information. If you need to respond or provide documents, make sure to do so promptly.

Sources

“2023 IRS TAX REFUND UPDATE – Tax Refunds Issued, Audits, Adjustments, Transcripts, Codes 971, 570” by UI Vlogs 2021

“IRS codes 570 Additional Account Action Pending & 971 Notice on Transcript – They Stop Tax Refund!” by Random

 

Additional Information Summary

Code 971: Indicates an IRS notice issued due to discrepancies or additional information required on a tax return.

Transaction Codes: Codes like 570 (return under review) and 971 appear on tax transcripts, impacting the status and processing of returns.

Response Timeframe: Typically 30 days to respond to a 971 Notice to avoid penalties and interest charges.

Professional Assistance: Advisable to consult a tax professional for appropriate and timely responses.

Refund Impacts: Codes 570 and 846 can delay refunds and affect the refund amount due to reviews and adjustments.

IRS Publication 971: Deals with innocent spouse relief, unrelated to Code 971 notices.

Penalties and Interest: Late responses can result in significant financial penalties and accruing interest.

Action Steps: Check IRS online accounts for notices, and contact the IRS if the notice is not received, especially for those living abroad.

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