IRS Code 971: Understanding & Next Steps for Refunds

IRS Code 971 Notice Issued: Your Action Guide to Understanding What It Means and Next Steps for Your Refund

Seeing an unfamiliar code on your IRS tax transcript can be unsettling, especially when you're anticipating a refund. If you've discovered IRS Code 971, you might be concerned about delays or problems with your tax return. This guide is designed to eliminate that anxiety by providing a clear, step-by-step roadmap. We will demystify what Code 971 means, explain why you received it, and detail the exact actions you need to take to resolve the issue and get your refund back on track.

Don't Panic: What the IRS Code 971 Notice Means for You

The appearance of Code 971 is a signal, not a judgment. It indicates that the IRS is communicating with you about your account. Understanding its role and its relationship to other codes is the first step toward a swift resolution.

What is an IRS Code 971 Notice?

At its core, IRS Code 971 is an informational transaction code. When it appears on your tax transcript, it simply means that the IRS has issued a notice or letter to you regarding your tax account. The code itself doesn't specify the issue; it only confirms that a formal communication has been sent to the address on file for your tax return.

Why You Received This Notice: Common Triggers for Code 971

The reasons for a 971 code notice are varied. The IRS may be requesting additional information to verify details on your return, notifying you of an adjustment they made, or flagging a potential issue that requires your attention. Common triggers include discrepancies between your reported income and their records, questions about dependents or credits claimed, or a need for identity verification to protect you from potential identity theft.

How Code 971 Relates to Your Refund and Tax Return

The most immediate impact of a Code 971 notice is often a delay in your refund. Because the notice signifies an unresolved matter, the IRS typically pauses the processing of your refund until the issue is addressed. The average tax refund is a significant amount for many households, with recent IRS data showing an average of $2,939, making any delay a financial concern. The notice is directly tied to the specifics of your filed tax return and must be resolved before your final refund amount can be confirmed and issued.

Understanding Related Transcript Codes: 971 and 570

How Code 971 and 570 work together: The 971 notice explains why your refund (570) is on hold.

Code 971 is frequently seen alongside Code 570, which means "Additional Account Action Pending." Code 570 is the freeze or hold on your account, while Code 971 is the signal that a notice explaining the hold has been sent. Seeing both codes together is common: 570 freezes the refund, and 971 indicates that the explanation is on its way. Resolving the issue outlined in the notice associated with Code 971 is the key to releasing the Code 570 hold.

Your Immediate Action: What to Do FIRST After Receiving the Notice

Once you see the 971 code on your transcript, taking prompt and organized action is crucial. Don't wait for the situation to resolve itself. Follow these initial steps to get ahead of the process.

Carefully Review the Official IRS Notice

The most critical step is to wait for the physical letter from the IRS to arrive in the mail. This notice contains the specific details about why your account was flagged. Read it thoroughly, paying close attention to any deadlines, requested documents, or specific instructions. The notice is your primary guide to understanding and resolving the issue.

Access Your IRS Tax Transcript (and why it's crucial)

If you haven't already, create an IRS online account to access your official tax transcript. This document provides a real-time log of all activity on your tax account, including transaction codes, dates, and amounts. It's the source where you first see codes like 971 and 570, and it will be the first place you see new codes appear as your case is resolved, such as Code 846 (Refund Issued).

Gather All Relevant Documentation

Based on the information in the IRS notice, start gathering all necessary paperwork. This could include your W-2 forms, 1099s, receipts for deductions or credits, bank statements, or proof of dependency. Having everything organized and ready will make your response process smoother and more efficient.

Deciphering Your Notice: Common Scenarios and Required Responses

The notice you receive will fall into one of several common categories. Identifying your specific scenario is key to providing the correct response.

Scenario 1: Identity Verification Required

A common reason for a hold is that the IRS needs to confirm you are the one who filed the tax return. This is a measure to protect you from identity theft, a serious concern for the IRS. The notice may ask you to complete a verification request online, by phone, or by mail. You will need to provide information like your Social Security Number and details from your prior year's return to prove your identity. The IRS uses a robust security solution to safeguard taxpayer data from online attacks, so this verification is a critical part of their process.

Scenario 2: Information Request for Review or Audit

The notice might be a request for more information to support something you claimed on your return. This could be related to income, credits, or deductions. For example, the IRS may want to see proof of educational expenses for a tuition credit. A review is not a full audit, but it requires a timely and complete response. On your transcript, this process might be preceded by codes like Code 420 (Examination of tax return) or Code 424 (Examination reconsideration).

Scenario 3: IRS Correction or Adjustment (Informational Notice)

Sometimes, the IRS identifies and corrects a simple math error or another discrepancy on your return. The Code 971 notice may simply be informing you of the change they made and its impact on your refund or balance due. If you agree with the correction, no action is required. If you disagree, the notice will provide instructions on how to dispute it. This might be reflected by Code 290 (Additional Tax Assessed) if you owe more.

Scenario 4: Other Specific Situations

Less common scenarios can also trigger a Code 971. For instance, if you filed an amended return, you might see Code 767 (Credit from Form 1040X), followed by a notice. If a refund check was lost or stolen and you filed Form 3911, a 971 notice may be issued regarding the replacement. Another code, Code 841 (Refund Cancelled), could also appear if a previously scheduled refund was stopped, triggering a notice to explain why.

Crafting Your Response: Ensuring Clarity and Compliance

How you respond to the IRS notice is just as important as the information you provide. A clear, compliant response can significantly speed up the resolution process.

Understand the IRS's Request Clearly

Before writing or sending anything, re-read the IRS notice to ensure you fully understand what is being asked of you. Are they requesting specific documents? Do you need to fill out a particular form? Is there a specific question you need to answer? Misinterpreting the request is a common cause of further delays.

Prepare Your Response Letter (if required)

If a written response is necessary, be concise and professional.

• Reference the notice number and tax year in your letter.

• Address each point or question from the IRS notice directly.

• Clearly state your position and provide a brief explanation.

• Attach clean, legible copies of all requested documents. Never send originals.

• Sign and date the letter.

Submitting Your Response

The IRS notice will specify how to submit your response. Most often, this will be by mail to a specific address or by fax to a specific number. Use a trackable mailing service to have proof of delivery. Follow the instructions precisely. The error rate for paper-filed documents can be much higher than for electronic ones; according to TurboTax, paper returns have a 21% error rate compared to less than 1% for e-filed returns, so accuracy is paramount when responding by mail.

What If You Can't Meet the Deadline?

IRS notices come with deadlines, typically 30 days. If you cannot gather the required information in time, do not ignore the notice. Call the IRS number provided on the letter before the deadline expires. You may be able to request an extension. Proactive communication is always better than no communication.

What Happens After You Respond? The IRS Review Process

After you've sent your response, the waiting period begins. Understanding the next steps can help manage your expectations.

Monitoring Your Tax Transcript and IRS Online Account

Your IRS online account is your best tool during this phase. Check your tax transcript weekly for updates. The appearance of new codes will signal progress. For example, once the issue is resolved and your refund is approved, you will see Code 846 (Refund Issued) with a corresponding date. Other codes like Code 806 (Credit for withheld taxes) may also be present as part of the final account reconciliation.

Typical Timelines for Resolution

Resolution times can vary widely, from a few weeks to several months, depending on the complexity of the issue and IRS workload. During peak season, delays are more common. As of May 2023, the IRS still had 4.2 million unprocessed individual returns, illustrating the potential for backlogs. Be patient, but don't hesitate to follow up if you haven't seen any updates or received your refund after 60-90 days.

Potential Outcomes: Refund, Balance Due, or Further Action

After reviewing your response, the IRS will make a determination.

1. Refund Issued: If your information is accepted, the Code 570 hold will be released, and a Code 846 will appear on your transcript, indicating your refund is on its way.

2. Balance Due: If the IRS adjustment results in you owing money, you will receive a bill with payment instructions.

3. Further Action: If your response is incomplete or raises more questions, the IRS may send another notice or escalate the case to a formal audit.

Preventing Future IRS Code 971 Notices

The best way to deal with an IRS notice is to avoid getting one in the first place. Adopting good tax habits can significantly reduce your chances of being flagged.

File Accurately and Completely

Double-check your return for accuracy before filing. Ensure all Social Security Numbers are correct, math is accurate, and you have reported all income from W-2s and 1099s. E-filing is highly recommended as the software helps catch common errors.

Maintain Thorough Records

Keep organized records of all financial documents, including income statements, receipts for expenses, and bank records, for at least three to seven years. If the IRS ever has a question, having these documents readily available makes responding simple and stress-free.

Monitor Your Tax Account Proactively

Get into the habit of checking your IRS online account periodically, even outside of tax season. This allows you to spot any unusual activity early, such as a notice being issued that you may not have received in the mail, protecting you from potential identity theft or other issues.

Seek Professional Help When Needed

If your tax situation is complex, or if you feel overwhelmed by an IRS notice, consider hiring a tax professional. They can communicate with the IRS on your behalf and ensure your case is handled correctly. Each year, thousands of taxpayers seek in-person assistance at IRS Taxpayer Assistance Centers (TACs), which conducted over 781,000 appointments in FY 2023, highlighting that you are not alone in needing expert guidance.

Conclusion

Receiving a notice related to IRS Code 971 can be nerve-wracking, but it is a manageable process. By understanding that this code simply signals a forthcoming communication, you can shift from a state of panic to one of proactive problem-solving. The key is to wait for the official notice, read it carefully, and respond promptly with accurate information. Use your IRS tax transcript as your guide, monitor it for updates like the coveted Code 846, and keep organized records. By following the steps outlined in this guide, you can navigate the IRS review process efficiently, resolve any outstanding issues, and clear the path for your tax refund.