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A colorful way to ease IRS notice fears

A Halloween visitor to my neighborhood_photo by Kay BellToday is Halloween, when kids and adults alike overindulge in candy, enjoy dressing up (more than usual) and generally celebrate being scared.

But there's nothing like getting a letter from the Internal Revenue Service, on Oct. 31 or any other day of the year, to really strike terror in even tax-abiding hearts.

I speak from personal experience.

The IRS conducted a correspondence audit on one of my returns. Another year, I got a refund check that was much larger than I expected.

I must admit that the extra money was scarier.

The check -- pre-direct deposit days -- showed up before any explanation from the IRS about why Uncle Sam was being so generous. Since I naturally am skeptical, I was sure I made a huge tax-filing mistake that would come back to haunt me and make the IRS pull my return for added scrutiny every subsequent year.

There was no way in hell I was going to deposit that money!

But the IRS was right. The explanatory letter that arrived a few days later noted that I had used the wrong tax table (pre-tax software era) to figure what we owed. Doing so had cheated us out of hundreds that the IRS kindly sent back to us.

As for the correspondence audit, my exchanges with the IRS revealed that I had overlooked some investment income and did indeed owe the U.S. Treasury a bit more tax, along with some interest and a penalty charge.

In both of those instances where an IRS envelope showed up in my mailbox, my heart rate immediately jumped to Olympic sprinter pace.

The horror of getting an IRS envelope: That's a feeling shared thousands of times a year by taxpayers who get IRS notices. 

Adam Chodorow, however, has an idea of how to ease such tax correspondence induced panic attacks.

Chodorow, a professor at Arizona State's Sandra Day O'Connor College of Law, suggests color-coding so that taxpayers will immediately know the amount of tax trouble they are in. This, he says, could abate taxpayer stress.

He explains his idea and the IRS mail that sparked it in a letter to Tax Analysts (subscription required):

"About a week ago, I innocently went out to collect the mail. As I flipped through the daily haul, I was surprised to discover a thick envelope from the IRS. Addressed to me. At my address. Now, as a tax professor, I tend to take fairly conservative positions on my return. Nonetheless, my pulse picked up appreciably, and my blood pressure started rising. I was pretty sure I hadn't done anything wrong, but filling out a tax return has become so complex that I couldn't be sure. Perhaps I forgot to enter the $1.98 in interest I earned on my checking account over the past year, and the Service's computer matching engine was simply informing me of this small oversight. Still, it was an awfully thick envelope."

Cutting to the chase, Chodorow saw a surprisingly large amount -- $520,231.14 -- at the bottom of the document and the word "LEVY" at the top. "My heart stopped," writes Chodorow.

No kidding!

Lucky for Chodorow, his wife was around (we wives are always happy to save our husbands!) and between Chodorow's gasps for breath she pointed out that the IRS correspondence was in connection with another taxpayer. Uncle Sam's tax collector simply wanted to know whether Chodorow had any of this guy's property, and, if so, to please hand it over.

"My heart started beating again. No heart attack this time, but I'm guessing the episode shaved a few years off my allotted span," Chodorow told Tax Analysts.

What's your favorite tax color? That experience prompted him to come up with a color code for IRS correspondence similar to the terrorist threat system devised after 9/11. Chodorow's system:

IRS correspondence in a Green envelope would signify a low risk, such as an inquiry about another taxpayer or perhaps a refund.

Blue might indicate a simple query, perhaps about an inadvertent failure to report some minimal income amount.

Yellow indicate a more significant letter audit, perhaps up to $5,000.

Orange might signify an office audit, say up to $10,000.

"Red means you're screwed," writes Chodorow. "Time to grab your passport, the cash you've been hiding from the IRS, and catch the next flight to Namibia."

Chodorow notes that if such color coding had been in effect when he got his initially terrifying piece of IRS mail, a green envelope would have made it immediately clear that he had nothing to worry about.

So what do you think? Would Chodorow's color coded tax alert system be a good idea? Or would any communication from the IRS regardless of the color of its packaging still scare the crap out of you?

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Brian Huber

As a tax professional, I sometimes receive harmless IRS correspondence. Nevertheless, I still experience a little freight when opening those envelops, which far exceeds any fear of vampires or zombies.

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