Responding to Tax Agency Notices: Best Practices

Tax agency communication can be very complex and difficult to understand, and that reality is further complicated by the fact that each agency notice is laid out differently and uses different language.

The following are some common types of inquiries and how to handle them.

Amount Due

Many agency notices will list an amount due on the account, which often comes with instructions or demand for payment. We recommend that you do not pay the amount due on the notice without performing extensive research.

There are many different reasons why an amount due on an agency notice may be in error, the most common are listed below:

Payment Not Applied Correctly

Common reasons include the following:

Incorrect EIN Used

The EIN used could be incorrect or numbers could be transposed. Depending on type of payment, a tracer or cancelled check will need to be provided in order to prove the payment was made for the client. You will also need to correct the EIN in your payroll and/or tax system in order to avoid future notices of the same nature.

Payment Was Sent Using an “Applied For” ID

Many agencies do not accept payments and returns with applied or status. If you file a non-compliant payment and/or return, it will probably not be posted to the client’s account and you will need to provide proof of payment with a cancelled check, and proof of filing by showing the return and proof of mailing.

If an agency accepts payments and filing with and applied for status, that doesn’t guarantee they will post it accurately. Often there is a holding account for all applied for payments, necessitating a cancelled check to prove payment was remitted for the client. You will also need to update your system with the correct EIN in order avoid future notices of the same nature.

Client Not Registered to Pay Employment Taxes with the Issuing Agency

It is common for new businesses or businesses new to the agency, to process payroll taxes prior to registering with the agency.

The Return Wasn’t Posted

It is common for new businesses or businesses new to the agency, to process payroll taxes prior to registering with the agency. The remedy is easy, the client needs to apply for an account with the agency, which can usually be done online. You can even offer this as an extra service for your clients. Many new businesses are challenged or confused by agency requirements, which is why they choose to outsource their payroll to you.

Amount Due Carried Over from Another Tax Period or Type

Although not very common, the agency will sometimes carry over taxes or penalties and interest charged to a previous tax period or year, or another tax type such as corporate taxes or personal income taxes in the case of a sole-proprietor.

If this is the case, you will need to call the agency and ask that they reapply the taxes or penalties and interest to the correct tax period or tax and ask for a revised notice. If the amount due is for a period prior to your service relationship with the client, we suggest that you return to the client to handle. They may need to work with a prior provider in order to resolve. We do not suggest that you pay the amount, as the prior provider may have proof of payment that they can provide. And you should not muddy the waters by trying to handle tax periods in which you were not legally allowed permission to pay and file on behalf of that business.

Reasons the Inquiry Notice May Be Valid

Client processed or reported a late payroll or adjustment (after the check date), causing you to remit late payments to the agency. You will have the option of writing a penalty abatement request on behalf of the client, but there is no guarantee the agency will grant the request.
Client failed to timely fund the payroll, possibly due to an NSF, causing the payment to be remitted late. You will have the option of writing a penalty abatement request on behalf of the client, but there is no guarantee the agency will grant the request.
The quarterly return was processed with an incorrect SUI rate, causing the taxes to be underpaid.
A variance was discovered during quarter-end processing, resulting in taxes due with the return. If the additional amount due is for withholding taxes, even if payment is sent with the return, it will likely constitute a late payment.
The client processed an amended return, increasing wages or taxes.

Overpayments

Refunds are often displayed as “credits,” “overpayments” or “carry-over” amounts. Very few agencies issue automatic refunds to client accounts. The notice will frequently alert the client that they have a credit and ask what they want to do with it, with the options being to carry it over to a future tax period or request that a refund check be issued.

Please note that increasingly, agencies are no longer issuing refund checks, so a client’s only option may be to carry the credit over to a future quarter.

We recommend that you do not request a refund or credit carry over for an agency overpayment without extensive research, as the overpayment could be erroneous.

Taxing authorities recognize it as an employer’s responsibility to know whether or not a credit is valid. If a refund is received in error, the agency will eventually issue a notice with an amount due for the taxes, and they will assess penalty and interest, even if they made the mistake in issuing the refund check in the first place. It’s nearly impossible to receive a penalty waiver if a client cashed an erroneous refund check.

Why Overpayments Are Erroneously Posted

Common reasons include:

The agency did not post the client’s return. Sometimes when the agency does not receive or post a return to the client’s account, they will post zero liabilities and wages for the tax period. This will result in all payments being considered overpayments. You will need to forward a copy of the return to the agency and ask that they recalculate the notice.
Agency incorrectly applied a tax payment from another tax period or EIN. The agency can apply a payment from the wrong quarter, which is likely to happen with payrolls dated at the very end of a quarter, in which the tax deposit is not due until the new quarter; such as a payroll dated December 31. An agency can also apply a tax payment from another EIN owned by the client. Although incredibly rare, the agency can apply a payment for an unrelated company, as a result of an error by that company’s payroll processor. You will need to call the agency to have tax pa
yments applied to the correct tax period or EIN.

Reasons the Overpayment May Be Valid

The quarterly return was processed with an incorrect SUI rate, causing the taxes to be overpaid.
The client voided a check after tax payments were remitted.
A variance was discovered during QE processing, resulting in an overpayment shown on the return.
The client processed an amended return, decreasing taxable wages or taxes.

Missing Return

When an agency has not posted a return or part of a return to a client’s account, an inquiry notice will be issued. The notice may state:

“We have not posted a return to your account”
“We did not receive a return”
“We are missing your schedule B, wage listing, etc.”

Or the agency may list an amount due for the client’s average liability for previous tax periods.

We recommend not to simply reprint or create a return and submit to the agency to resolve this type of notice, but instead to contact the agency to determine if there are underlying reasons why the return was not processed or posted.

The client could be filing using the wrong deposit frequency for the agency. Many agencies have different filing requirements or forms, depending on the client’s deposit frequency. The agency may not have posted the return due to the fact that they were expecting a different filing. In order to properly resolve, you must obtain the correct frequency, update in your system, and create the correct return to submit to the agency.

Next Steps

If you want assistance on navigating the complex needs of your out-of-state or multi-state/local clients, contact us to see if we have an option that can help.