As a tax preparer, it’s common to encounter IRS letters that can leave your clients confused or worried. One such letter is Letter 12C. It’s not as well-known as some other IRS notices, but it’s an important one. Understanding what Letter 12C is and how to handle it can help you guide your clients through the process with confidence.

In this article, we’ll break down what IRS Letter 12C means, why your client might receive it, and how to respond properly.

IRS Letter 12C, titled “We Need Additional Information to Process Your Tax Return,” is a request from the IRS for more information in order to continue processing a taxpayer’s return. If your client receives this letter, it means the IRS has noticed something on their return that needs clarification or additional supporting documentation.

Letter 12C is typically sent when:

• The IRS needs more information to verify a claim (such as deductions, credits, or reported income).
• The taxpayer’s information doesn’t match the IRS’s records.
• There’s a need for additional supporting documents, such as proof of identity or residency.

When your client receives a Letter 12C, it will contain the following key information:

• Why the IRS is requesting additional information: The letter will specifically state what the IRS needs, whether it’s supporting documentation, clarification of an entry, or verification of income.
• A request for specific documents or forms: The letter will indicate which specific documents are required to resolve the issue, such as a copy of a W-2, 1099, or another relevant document.
• A deadline for submitting the information: The letter will provide a date by which your client must respond. If they miss the deadline, the IRS may process the return without considering the missing information, which could result in adjustments or penalties.

There are several reasons your client might receive a Letter 12C:

• Inconsistent Information: The IRS’s records may show information that doesn’t match the data on your client’s return, such as incorrect income figures or missing forms.
• Errors or Omissions: Your client may have missed an important line item on their return or failed to provide necessary backup for deductions or credits.
• Verification Issues: Sometimes, the IRS needs to verify the legitimacy of deductions or credits, especially when they seem unusually high or out of line with typical claims for that tax bracket.

If your client has been audited or their return was flagged for review, they may also receive this letter. In any case, it’s a sign that the IRS needs more details to continue processing the return accurately.

• Review the Letter Thoroughly: Start by carefully reviewing the letter with your client to fully understand what’s being requested. The IRS will outline exactly what documents are needed, so make sure your client provides the correct information.
• Gather the Requested Documentation: Your client will need to supply the requested documents. Common examples might include:
  • Income verification: Copies of W-2s, 1099s, or other income statements.
  • Supporting documents for deductions or credits: Receipts, bank statements, or proof of charitable contributions.
  • Identity verification: In some cases, the IRS might ask for a copy of a government-issued ID or other identity-related documents.
  • It’s important to be thorough and provide all requested documents to avoid delays.
• Respond on Time: IRS Letter 12C will include a deadline for submitting the requested information. Make sure your client responds on time. Missing the deadline could result in the IRS processing the return without considering the missing information, which could lead to discrepancies in their tax calculations.
• Contact the IRS if Necessary: If you or your client are unclear about the letter or the documents needed, don’t hesitate to contact the IRS. Be prepared with the client’s tax information, and call the number listed on the letter for further clarification.

Failure to respond to a Letter 12C could result in the IRS making adjustments to your client’s return based on the information they have. This can lead to:

• Refund Delays: If the IRS is unable to process the return properly due to missing documentation, it may delay your client’s refund or even result in them receiving less than expected.
• Incorrect Tax Liability: If the IRS proceeds without the necessary information, your client’s tax liability could be miscalculated, leading to a balance due or other issue.

That’s why it’s critical for your client to respond as soon as possible to avoid these complications.

Prevention is always the best strategy. Here’s what you can do to help your clients avoid receiving a Letter 12C in the first place:

• Double-Check Information: When preparing your client’s return, make sure all the information is accurate, especially income figures and deductions.
• Ensure Proper Documentation: Ensure your clients have all the required documents to back up their claims. Keep records of all supporting documents for several years in case of future audits.
• Stay Updated on Tax Laws: Keep up to date with changes in tax laws that may impact deductions, credits, or reporting requirements to avoid common mistakes.

While Letter 12C from the IRS can seem daunting, it’s simply a request for more information. With a little attention to detail and quick action, you can help your clients respond to the IRS, clear up any confusion, and get their return processed without unnecessary delays. By staying proactive and thorough, you’ll keep your clients’ tax situations on track and ensure they avoid further complications down the line.