What is an IRS Notice?

Tax agency notices are more common than you might think, and most require a straightforward response. An IRS notice is official communication about a tax-related update, a required correction, or a request for documentation. Receiving one doesn't mean your business is being audited. This article helps you identify what your notice means and what to do next.

Things to know

7shifts Payroll automates tax calculations and files federal, state, and local forms on your behalf. Every IRS notice includes a CP (Computer Paragraph) code in the top-right corner of the letter. This code identifies exactly why the IRS is contacting you. 

Deadlines for responding are time-sensitive; ignoring them can result in penalties or additional interest charges. State tax agency notices operate on a separate system from the IRS and may have shorter response windows of 30 days or less.

Common reasons for IRS notices

The IRS issues notices when there is a mismatch between your reported data and their records, or when specific account actions occur.

• Errors in calculations or missing details on a tax return.
• Unpaid federal tax balances or missed payroll tax deposits.
• Discrepancies between the wages you reported and the tax payments received by the IRS.
• Changes or corrections made by the IRS to a previously calculated refund.
• The need to verify a business owner's identity before processing a filing.

Federal notices vs. state notices

IRS notices and state tax agency notices come from two completely independent systems. The IRS is a single federal agency that uses standardized CP codes and typically gives you 30 to 60 days to respond. 

State tax agencies, such as California's Franchise Tax Board or New York's Department of Taxation and Finance, each have their own format and their own timelines. State agencies can escalate to penalties, liens, or levies faster than the federal government. Response windows can be 30 days or less.

Resolving an IRS issue does not resolve a state issue. If you've received notices from both, address them separately.

Action plan for receiving a notice

If you receive a letter from a tax agency, follow these steps to resolve the matter efficiently.

1. Review the entire letter to identify the specific issue and the deadline for your response.
2. Cross-reference the notice with your 7shifts Payroll reports to verify the accuracy of the claim.
3. Provide any requested information and address immediate payments exactly as outlined in the notice instructions.
4. Keep a copy of the notice and any response or payment confirmation you send for your internal business records.
5. Contact 7shifts Support if the notice relates to taxes processed through 7shifts Payroll. We'll coordinate a technical review with our payroll partner, which typically takes up to 4 weeks or more.

Common employer-related notices

The CP code in the top-right corner of every IRS letter tells you why the IRS is contacting you. Here are the most common notices 7shifts Payroll customers encounter.

• CP11: The IRS recalculated your tax return, found a math or data discrepancy, and is billing you for the difference plus interest.
• CP14: Your tax return was filed on time, but the balance owed wasn't paid by the deadline. This is the IRS's first formal request for payment. Interest starts accruing from the original due date.
• CP136: The IRS has updated your required payroll tax deposit frequency for the upcoming year. Your new schedule will be either monthly or semi-weekly. This is informational, not a bill. Missing a deposit frequency change can trigger automatic failure-to-deposit penalties, so review and act on this notice promptly.
• CP161: A business tax balance is unpaid. No penalty has been assessed yet. You owe the tax balance plus accrued interest.
• CP2000: This is a proposal, not a bill. The IRS is flagging a discrepancy between what was reported on your return and data they received from third parties such as W-2s or 1099s. You typically have 60 days to agree, dispute, or provide documentation. Many CP2000 discrepancies resolve without additional tax owed.
• CP501, CP502, CP503: Escalating payment reminders for an unresolved CP14 balance. Each notice in this sequence signals increasing urgency.
• CP504: A Notice of Intent to Levy. The IRS is formally signaling their authority to begin seizing assets if the balance isn't resolved. Contact 7shifts Support immediately.
• CP90: A Final Notice of Intent to Levy and the most serious notice in the IRS collections sequence. This grants you the right to a Collection Due Process (CDP) hearing, which is your last formal option before enforcement. Contact 7shifts Support immediately.
• CP2100: The IRS has identified a mismatch in a Taxpayer Identification Number (TIN) on file.
• Letter 226J: Correspondence regarding Employer Shared Responsibility Payments under the Affordable Care Act (ACA).

Penalties vs. interest: what's the difference

Tax notices sometimes include both penalties and interest, but they're calculated differently.

A penalty is a fixed charge applied for a specific action such as filing late, paying late, or missing a payroll tax deposit. Late filing carries a 5% monthly charge up to a maximum of 25%. Failure to deposit payroll taxes on time carries a tiered rate of 2% to 15% depending on how late the deposit was. In certain cases, penalties may be reduced or waived through a process called penalty abatement.

Interest is a time-based charge on any unpaid balance. It compounds daily and is set quarterly by the IRS based on the federal short-term rate. Unlike penalties, interest is generally not waivable.

The only way to stop both from growing is to act quickly.

Reducing tax compliance risks

Following these practices can help minimize the likelihood of receiving an IRS notice.

• Ensure all federal payroll tax deposits are submitted on time.
• Audit employee profiles regularly to confirm names and Social Security numbers are accurate.
• File Form 941 (Quarterly) and Form 940 (Annually) correctly and by their respective deadlines.
• Use 7shifts Payroll reports to check your tax filing status throughout the year.