Understanding Notice 971 and IRS Code 971: When It’s Issued and Why

Code 971 is like the IRS version of getting sent to the principal’s office.

Mr. Dennis Arthur Waldrup thought he was a grown-up, 55-year-old man until he got a letter from the IRS. Then he was back in middle school, wiping his nose on his sleeve, hugging his books to his chest, waiting for Mom to pick him up from school, and hearing his own name bellowed out by Principal Hardknocks McGruff, “Dennis Waldrup, report to the principal’s office. Now.” 

Mail doesn’t need to make you flinch.

A 971 Notice is an official communication issued by the IRS to notify taxpayers of issues or discrepancies regarding their tax returns. There are several reasons why the IRS may issue a 971 Notice, including potential errors or omissions on the return, information that needs to be verified before issuing a refund, or the need for additional review or information.
Transaction codes, such as code 570 and 971, are tax codes that appear on a taxpayer’s tax transcript and provide important information about the status of their tax return or other activities affecting their account. Understanding these codes can help taxpayers better understand their tax situation and identify any potential issues.

Timeframe for Responding to the Notice

The IRS generally gives a timeframe of 30 days for a response, which means that you should be prepared to act swiftly. If you receive a 971 notice from the IRS, it is important to respond as quickly as possible to avoid further complications. Failing to respond within the given timeframe can lead to potential penalties and interest charges, which can ultimately increase your tax liability.
If for any reason you are unable to provide the necessary information requested in the notice within the given timeframe, it is possible to request an extension of time. However, it is still important to act promptly to avoid any potential penalties or interest charges.
The IRS takes such notices seriously, and it is advisable to engage the services of a tax professional to help you navigate the process. They can provide the necessary expertise and advice to ensure that you respond appropriately and timely to the notice.

Understanding the 971 Notice

The 971 Notice is issued to tax transcripts when the IRS needs additional information to process your tax return or when there are potential delays or issues with your tax refund. 

What Does the Money on Code 971 Line Mean?

Code 971, also known as the “Notice Issued” code, is often seen on tax transcripts and is indicative of a change in the processing or status of a tax return. The amount shown on the Code 971 line corresponds to the total dollar amount of the changes made, which could either be additional taxes owed or a refund received.

Several IRS codes can impact the amount shown on the Code 971 line, each with their own set of implications. One such code is Code 570, which indicates that the taxpayer’s return is undergoing an examination or additional review. This could lead to potential delays in the processing of the return, as well as the possibility of further taxes owed or refunds reduced.

Another relevant code is Code 846, which reflects a potential refund payment. While this may appear as good news, taxpayers are advised to exercise caution as the amount of the refund payment may be reduced due to various factors, such as outstanding debts or obligations.

If there are changes indicated in the Code 971 line, the taxpayer may need to take certain actions depending on the IRS code in question. For instance, if the taxpayer’s return is being examined or reviewed, they may need to provide additional documentation or information to support their claims. Alternatively, if the taxpayer is eligible for the unemployment tax refund, they may need to fill out Form 8915-E to claim the refund.

Code 971 appears in different scenarios, often related to miscellaneous transactions that occur during the processing of a tax return. It may be seen in combination with other codes such as Code 826, which reflects a duplicate tax return and could lead to further delays in processing, or Code 881, which indicates a bankruptcy notice.

So Dennis Waldrup might not have anything to worry about. Or he might have everything to worry about. You don’t know until you show up.

Code 971 vs Code 570, explained

As a taxpayer accessing your online tax transcript, you may come across codes that can be confusing, such as Code 570 and Code 971. Both of these codes can have significant implications for your tax return, so it’s important to understand what they mean. 

Code 570 is used your return and refund need more reviews. This code indicates that your return is being held for further review, and it typically takes the IRS an additional 45 days to process the return and issue any refund payment. Unfortunately, this extra review can delay any potential refund payment.

Code 971 is broader. It’s a notice saying they sent you a note about an issue with your tax return. It could be related to a variety of issues, including mistakes made on your return or other discrepancies that the IRS has found. If you see both on your transcript, the IRS probably sent an additional notice regarding their review.

If your return is subject to an examination (indicated by Code 971), further documentation may not be required. However, it’s important to note that examinations typically take 60 days to complete and may result in additional taxes owed or refunds reduced. It’s best to consult a tax professional for guidance during this process.

These codes can cause potential delays in receiving any refund payment. Additionally, due to the ongoing IRS backlog, processing times for tax returns and refunds are taking longer than usual. It may take several weeks beyond the standard timeframes for you to receive your refund or any notices related to these codes.

How does IRS Publication 971 factor into this?

Many taxpayers often mistakenly believe that IRS Code 971 and IRS Publication 971 are related. However, there are significant differences between the two, and understanding these differences can help taxpayers avoid some common mistakes.

As opposed to the 971 code, IRS Publication 971 refers to relief of a spouse from a joint tax return’s due amounts. The publication outlines relief methods available to innocent spouses, including equitable relief, innocent spouse relief, and separation of liability relief.

Equitable relief applies when the IRS finds that the allocation of tax liability within a joint return is “inequitable.” Innocent spouse relief may apply when the other spouse fails to report income, reports income improperly, or claims improper deductions. Separation of liability relief applies when the joint return shows an understated tax and the couple is legally separated or divorced.

Potential Penalties and Interest Charges Involved

When you receive a 971 notice from the IRS, it’s essential to understand that there may be potential penalties and interest charges involved. The IRS may charge penalties for late payment or underpayment of taxes, which could lead to additional financial strain on the taxpayer.

The late payment penalty is calculated at 0.5% of the unpaid taxes per month, up to a maximum of 25% of the total tax debt. The underpayment penalty is typically calculated at 3% per year on the outstanding balance of taxes owed.

Interest charges begin to accrue on the date the tax was due and continue until the tax debt is paid in full. The interest rate is determined by the federal short-term rate plus 3%. However, the interest rate can change quarterly, which means that the longer the tax debt remains unpaid, the higher the interest charges will be.

If you are unable to pay your tax debt in full, the IRS may agree to a payment plan. However, it’s important to note that interest and penalties will continue to accrue until the balance is paid in full. This means that the longer it takes to pay off the tax debt, the more you will owe in interest charges and penalties.

Keep your chin up, Dennis. Tomorrow’s another day.

SOURCES

“2023 IRS TAX REFUND UPDATE – Tax Refunds Issued, Audits, Adjustments, Transcripts, Codes 971, 570” by UI Vlogs 2021

“IRS codes 570 Additional Account Action Pending & 971 Notice on Transcript – They Stop Tax Refund!” by Random

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