How to Respond to a Payroll Tax Notice from the IRS

Quick overview

Receiving a payroll tax notice from the IRS can be stressful, but acting quickly and methodically reduces penalties and the chance of escalation. Notices arrive for many reasons: missing deposits, mismatched W‑2s, late or inaccurate Form 941 filings, or unpaid deposits the IRS believes it is owed. The IRS includes specific instructions, a deadline, and a contact—follow them exactly while you assemble records.

In my practice working with small-business owners for 15+ years, the cases that move fastest toward resolution are the ones where the employer reads the notice immediately, pulls payroll ledgers for the referenced period, and either corrects the error or documents why the IRS’s figures are wrong.

Sources: IRS payroll information and penalty guidance (irs.gov/payroll). See the IRS employer pages for current procedures and payment options: https://www.irs.gov/payroll.

How to decode the notice and prioritize next steps

1. Identify the notice type and deadline. The IRS notice or letter code appears near the top (for example, CP14-style collection notices or letters about mismatched Forms W‑2). The notice will tell you whether the IRS is asking for a payment, additional information, or a correction.
2. Note the response deadline. Many notices require action within 30 days; others give shorter timeframes. Missing the deadline can increase penalties and lead to collection actions.
3. Read the contact instructions. Some notices instruct you to respond in writing; others provide a phone number or a portal. Use the listed contact method unless you have a Power of Attorney (Form 2848) filed.

If you’re unsure of the code, search the IRS notice number at https://www.irs.gov or consult a tax professional.

What documents to gather

• Payroll registers and detail reports for the period in question.
• Copies of filed Forms 941, 944, or 940 for the affected periods.
• Deposit receipts and EFTPS records showing dates and amounts of federal tax deposits.
• W‑2 copies and related wage worksheets.
• Bank statements that confirm payroll-related payments.
• Correspondence with payroll providers or accountants.

Keep scanned copies and a simple timeline that ties each transaction to a date and filing.

Correcting errors: common fixes and forms

• Small math or reporting errors on a previously filed Form 941 are most often corrected with Form 941‑X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund. The 941‑X lets you correct wages, tax withheld, and tax deposits for a prior quarter.
• If the IRS shows missing deposits but you have proof of payment (EFTPS confirmation, bank record), submit that evidence promptly with a written explanation.
• If W‑2s or wage amounts are wrong, fix them using the process described by the IRS for corrected W‑2s and, if needed, file Form W‑2c.
• If the notice is about an unpaid balance and you cannot pay in full, consider contacting the IRS Collections to set up an installment agreement or explore other relief options. See IRS payment options: https://www.irs.gov/payments.

For more detail on amending payroll returns, see our guide: Fixing Payroll Tax Mistakes via Amended Forms: Employer Steps.

How to respond in writing (sample structure)

If the notice requires a written response, keep your letter concise and factual. A suggested structure:

• Header: your business name, EIN, and the IRS notice number.
• One-paragraph summary: say whether you agree or disagree with the IRS position.
• Supporting details: list the records you’re attaching (EFTPS receipts, payroll registers, corrected forms) and reference dates/amounts.
• Action requested: for example, “Please apply the attached EFTPS confirmation to the balance shown” or “We have filed Form 941‑X for Quarter X; please adjust your records.”
• Contact info: name, phone number, email, and statement authorizing IRS to discuss the account with your representative if you have one.

Mail or deliver the response using the address shown on the notice. Keep a copy of everything you send and obtain proof of mailing (certified mail or tracking).

When to pay vs. when to dispute

• Pay what you reasonably owe if the liability is undisputed and you can do so without causing cash-flow collapse—the IRS charges interest and penalties on unpaid amounts.
• If you believe the bill is incorrect, gather proof and dispute according to the notice instructions. Do not ignore the notice—file your dispute, and ask the IRS to place the account in a limited-status while you resolve it.
• If cash flow prevents payment, contact the IRS to request an installment agreement or short-term delay. The IRS Online Payment Agreement tool and the Collections Contact Center are common options (see https://www.irs.gov/payments for access).

Penalties, interest, and enforcement risks

Penalties and interest accrue on unpaid payroll taxes and missed deposits. The IRS can also assess the Trust Fund Recovery Penalty (TFRP) against individuals who willfully fail to collect, account for, and pay withheld employee taxes (see IRS guidance on trust fund penalties). Continued nonresponse can lead to liens, levies, and—rarely—criminal investigation for willful failure to pay (IRS Criminal Investigation). For specifics, review the IRS’s employer penalty pages: https://www.irs.gov/payroll and criminal enforcement pages at https://www.irs.gov/compliance/criminal-investigation.

For more on deposit penalties and how to correct them, see our related article: Payroll Deposit Penalties: Causes and Corrections.

When to involve a tax professional or attorney

• You receive a notice that names an individual for the Trust Fund Recovery Penalty (often assessed under Internal Revenue Code section 6672).
• The IRS alleges willful failure to pay or threatens criminal referral.
• The amounts are substantial, or multiple quarters are involved.
• You are unsure how to prepare or file Form 941‑X correctly.

If you hire a representative, file Form 2848 (Power of Attorney) so the IRS can discuss the matter directly with your advisor. In my experience, a skilled payroll tax CPA or tax attorney can both shorten the resolution timeline and reduce the overall penalties when applied correctly.

How payroll providers fit in

Even if you use a payroll service, the employer remains legally responsible for correct deposits and filings. If the error originated with your provider, gather vendor contracts and communications that show when and how payroll was transmitted. You may still owe the liability to the IRS, and you’ll need to pursue reimbursement from the provider separately.

If you need operational controls to prevent repeats, see our checklist: How to Set Up Internal Controls to Prevent Payroll Tax Mistakes.

Practical timeline and follow-up

• Day 0: Open the notice. Read it all and note deadlines.
• Days 1–7: Gather records, contact payroll vendor (if any), and decide whether to pay or dispute.
• Days 7–30: Send a written response with attachments or file corrective returns (941‑X) as needed. If paying, do so or request a payment plan.
• Ongoing: Monitor IRS replies and save all communications. If the IRS makes an adjustment, verify it on subsequent notices or transcripts.

Common mistakes to avoid

• Don’t ignore the notice or hope it goes away—nonresponse increases collection action risk.
• Don’t assume payroll vendors handle everything; verify deposits and filings quarterly.
• Don’t send partial or inconsistent documentation; ensure your response is organized and complete.

Final practical tips

• Use EFTPS records to prove timely deposits. Create a folder with EFTPS confirmations for each quarter.
• When amending returns, explain adjustments clearly on Form 941‑X and attach supporting schedules.
• If you expect ongoing cash-flow issues, reach out to Collections early to avoid liens and levies. The IRS prefers installment agreements where feasible.

Disclaimer

This article is educational and does not constitute individualized tax advice. For guidance that applies to your facts, consult a qualified payroll tax CPA, enrolled agent, or tax attorney. For authoritative IRS procedures and forms, visit https://www.irs.gov/payroll and the IRS Forms & Instructions pages.

Sources and further reading

• IRS — Payroll: https://www.irs.gov/payroll
• IRS — Employer-related penalties and collection: https://www.irs.gov/businesses/small-businesses-self-employed/penalties
• IRS — Criminal Investigation: https://www.irs.gov/compliance/criminal-investigation

Related FinHelp articles:

• Fixing Payroll Tax Mistakes via Amended Forms: Employer Steps: https://finhelp.io/glossary/fixing-payroll-tax-mistakes-via-amended-forms-employer-steps/
• Payroll Deposit Penalties: Causes and Corrections: https://finhelp.io/glossary/payroll-deposit-penalties-causes-and-corrections/
• How to Set Up Internal Controls to Prevent Payroll Tax Mistakes: https://finhelp.io/glossary/how-to-set-up-internal-controls-to-prevent-payroll-tax-mistakes/

If you want, I can provide a short template letter you can adapt for responding to a specific IRS notice number.