What to Do When the IRS Contacts You
By: Tax Hotline
Spring 2026 (Vol. 44, No. 1)
Q: Help! I just received an IRS notice and I'm not sure what it's for?
A: Don't panic. Notices from the IRS are more common than you may realize. Each year, the IRS mails millions of letters to clarify information, confirm changes or request additional documentation. Receiving a notice may seem intimidating, but most notices can be addressed quickly with the right information and guidance.
Each IRS notice includes a reference number, such as CP49 or CP14. It identifies the issue and helps determine the appropriate response. Below is an overview of the most common types of notices and what to do if one arrives in your mailbox:
1. CP12 (including GP12, CP12E, CP12F, CP126G, CP12N and CP12U), refund adjustment.
A CP12 is sent when the IRS corrects a math error or similar issue on your tax return. The correction may increase or decrease your expected refund. If you agree with the change, no response is required. If you disagree, call the IRS at the toll-free number shown on the notice by the date indicated.
2. CP14, balance due.
This notice informs you that you owe taxes. Address the notice promptly. You can pay in full, explore installment options or seek assistance if you believe the notice is incorrect. Ignoring it can result in interest charges, penalties and collection actions.
3. CP49, refund applied to debt.
This notice explains that your refund was used to pay all or part of an outstanding tax liability. Review how the refund was applied. Disputes are generally handled with the agency that received the funds, not the IRS. On a joint return, a spouse who's not responsible for the debt may be able to recover his or her share of the refund by filing Form 8379, 'Injured Spouse Allocation.'
4. CP2000 series, proposed changes to your return.
This notice is issued when the IRS compares your tax return to information reported by third parties, such as employers or financial institutions, and finds a mismatch. It isn't a bill; it's a proposal to adjust your return. Read the notice carefully and respond by the deadline listed. Follow the instructions, include any required documentation and note whether you agree or disagree. If no response is received, additional notices or a bill may follow.
5. Letter 4883C, identity verification.
When the IRS suspects possible identity theft, it may pause processing your return until your identity is confirmed. Call the Taxpayer Protection Program hotline as directed in the letter. Have the tax return referenced in the letter, a prior-year return (if available), and supporting documents, such as Form W-2, Form 1099 and Schedule C, ready. If you didn't file the return listed in the notice, contact the IRS immediately, because this may indicate identity theft.
Speaking of fraud, remember that the IRS will never email, text or call demanding payment. Legitimate notices always come by mail.
IRS notices can be confusing, especially when calculations or supporting documents are involved. If you receive a notice, contact the Tax Hotline for help confirming whether it's accurate, understanding your options and communicating with the IRS.
Q: I have a hobby that's becoming more of an income stream. How do I determine if I can deduct anything?
A: A small business is a proven way to help lower your tax bill. Turning a favorite pastime into income can be rewarding, but it raises an important tax question: Is the activity a hobby or a business? The answer matters because different tax rules apply to each.
All income must be reported on your tax return, regardless of whether it's from a hobby or a business. But related expenses (and losses) are deductible only if the activity is a business.
The IRS distinguishes a hobby from a business based on several factors. It weighs all the facts and circumstances, and no single factor is more important than another.
One factor the IRS considers is whether you conduct the activity in a businesslike manner. This includes maintaining complete and accurate records, tracking income and expenses and taking steps to improve operations. The time and effort you devote is important, especially when they demonstrate an attempt to make the activity profitable rather than purely recreational.
Your financial situation is also considered. If you rely on the activity's income to support yourself, the activity is more likely to be viewed as a business. If other earnings primarily fund the activity, it may be treated as a hobby. Personal motives, such as pursuing the activity mainly for enjoyment or relaxation, can weigh against business classification.
Profit history and future potential are also key. The IRS considers whether losses you've experienced are typical for a start-up (assuming you began the activity relatively recently) or caused by factors outside your control. If so, the IRS may view your activity as a business. Experience and success in similar activities can further support business status. Additionally, the expectation of future profit from the appreciation of assets used in the activity can indicate a business motive.
Historically, taxpayers with hobby income could generally deduct certain related expenses as miscellaneous itemized deductions, subject to a 2% adjusted gross income (AGI) floor. The Tax Cuts and Jobs Act suspended these deductions for tax years 2018 through 2025. The legislation commonly known as the One Big Beautiful Bill Act, signed into law in July of 2025, made that suspension permanent. This means that if the activity is a hobby, you can't deduct expenses associated with it. However, you must still report all income from your hobby.
If the activity is considered a business, you can deduct related expenses. If the business activity results in a loss, you can deduct the loss from your other income in the same tax year, subject to various limits.
The line between a hobby and a business isn't always clear. If you earn income from a side activity, or are considering turning a passion into a profitable venture, contact the Tax Hotline for help evaluating your situation and understanding the tax implications.