Definition of Tax Notice
A tax notice, or tax assessment, is a document regarding your company’s account status, new filing frequency, or rate assignments. These are typically either informational in nature or require action you can easily resolve and are received via standard mail from the IRS or another tax agency.
What is a tax notice, and why did I receive one?
Taxing authorities commonly send letters to taxpayers notifying them of changes to their account, upcoming deadlines, new tax rates, and any discrepancies (overages, underpayments, or missing filings). Tax Notices generally fall into these two categories with :
- Informational ( e.g. new tax rates, updates to your account, upcoming deadlines, etc.)
- Amount Due
What is an ‘informational’ tax notice?
Most unemployment taxing authorities will send you a notice at the start of the new calendar year. This notification will let you know what your tax rate will be for the coming year. Sometimes the rate may go up or down depending on the agency’s determination of your experience rating. For more information on how these agencies make rate determinations, see our article on Experience Ratings for State Tax Rates.
What is an ‘amount due’ tax notice?
Tax agencies can assess an amount due for both tax due and penalty/interest fees. The reasons vary but generally fall into the following categories:
Missing payment: If an agency has a missing payment in their system, many will automatically generate a tax notice to the taxpayer without reviewing the account. The causes for missing payments may be one of the following:
- The payment was sent but not posted to the agency’s system due to a delay or possible TIN error. In this case, proof of payment will usually resolve the notice.
- A business has switched payroll providers, and the previous or new provider was not authorized to make payment for part of the tax period. In this case, the tax liability is due and should be paid by the taxpayer as soon as possible.
Late Payment: If an agency assesses a penalty for a payment that wasn’t sent on or before the due date, there may be no tax due, but they will issue an amount due notice for the penalty (and possibly interest) assessed.
Tax Assessment: If an agency, usually an unemployment taxing authority, does not receive a filing for a given tax period, they will issue an estimate of the wages and associated tax due. These notices are not a reflection of the actual amount due. Therefore, the filing will need to be completed to determine how much, if any, tax is due for the period.
Tax adjustments and errors
Tax Adjustments: When a previously filed amount is corrected due to changes in wage/tax information, the additional amount due should be paid along with the corrected filing. Possible causes of an amount due notice resulting from a correction are as follows:
- The corrected filing was processed by the agency at a different time than the additional amount due (if applicable).
- The agency has assessed a penalty for the increase in tax liability.
Filing Error: Possible filing errors resulting in an amount due include the following:
- If a business has switched payroll providers and the previous and new providers were authorized to file for the tax period, it can result in an overstatement of taxable wages. This creates an erroneous amount due to the agency. In this case, the previous provider must work with the agency to back out their erroneous filing.
- An incorrect tax identification number was used when filing or paying taxes.
- Tax returns or corresponding payments were not properly posted.
What is the history of tax notices?
Payroll taxes are not a new concept. The practice of tax notices can be traced back thousands of years. However, official documentation of contemporary examples in the US date to the 1700s. They were directly tied to Britain’s imposed tea, sugar, and stamp taxes. The practice was given a more formal approach in 1861 with the implementation of the Revenue Act of 1861, intended to assist with funding the Civil War efforts.
The Bureau of Internal Revenue, now known as the Internal Revenue Service (IRS), was created the following year, in 1862.
Other similar terms to tax notice that can assist you
- Payroll taxes: Payroll taxes are monies deducted from an employee’s wages to satisfy federal, state, or local Social Security taxes, Medicare tax, and unemployment tax requirements.
- Federal Unemployment Tax Act: The Federal Unemployment Tax Act (FUTA) tax helps to pay unemployment benefits to workers who lose their jobs. FUTA taxes are paid only by employers. Employees do not have any amounts withheld for FUTA taxes.
Summary of the definition of a tax notice
A tax notice is a letter a company receives from the IRS or another governmental tax agency requiring action. It may also provide pertinent information regarding relevant tax requirements.
Similar glossary definitions you must know
- Sarbanes-Oxley Act (SOX): A regulation overseen by the SEC that requires public companies to establish payroll system controls in compliance with Section 404. Under this section of the Act, companies must accurately account for their workforce, salaries, benefits, incentives, paid time off, and training costs. This section also requires certain employers to create, codify, and adopt a code of ethics, a communications plan, and related staff training.
- Federal income tax withholding (FICA): The IRS requirement that employers must withhold a set percentage of an employee’s wages and pay that amount to the government. This includes social security and medicare withholdings (see FICA).
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