Immediate steps to take after you receive an IRS notice

If the IRS disallowed a credit, don’t ignore the notice. The letter or notice will explain why the credit was disallowed and list any action you can take. Common notices include requests for documentation, math-error adjustments, or a proposed change to tax due. The notice will state a deadline to respond (commonly 30 days for many IRS notices), so act promptly. (See the IRS notices and correspondence pages for examples and response instructions: https://www.irs.gov.)

In my practice I’ve found that prompt, organized responses cut resolution time in half compared with delayed or piecemeal replies.

Six practical steps to resolve a disallowed credit

  1. Read the notice carefully and note the deadline
  • Identify the notice type and the specific credit(s) affected. The notice will explain whether the IRS is proposing to change your return or merely asking for more information.
  1. Gather and organize supporting documents
  • Proof of income: W-2s, 1099s, pay stubs.
  • Proof of eligibility: school transcripts and Form 1098-T for education credits; birth certificates or custody documents for Child Tax Credit; proof of household/member residency for Earned Income Tax Credit (EITC).
  • Receipts, canceled checks, bank statements, and signed statements where needed.
  1. Respond in writing if the notice asks for documentation
  • Follow the notice’s instructions for what to send and where. Mail or submit copies, not originals, unless the IRS specifically requests originals. Include a one-page cover letter referencing the notice number and taxpayer identification.
  1. Consider amending the return
  • If you omitted information or made a calculation error, filing Form 1040-X (amended return) may be the correct fix. For example, if you later find documentation that supports the credit claim, an amended return can incorporate that evidence and explain the change. See our step-by-step guide on filing an amended return: Step-by-Step: Filing an Amended Return to Claim Missed Credits.
  1. If denied, use the IRS appeals process
  • If the IRS continues to deny the credit after you respond, you can request an administrative appeal with the Office of Appeals or pursue other review rights listed in your notice. Appeals are often faster and less adversarial than court. See IRS Appeals for details: https://www.irs.gov/appeals.
  1. Engage a tax professional when complexity or risk is high
  • Accuracy-related penalties (commonly 20% for substantial understatement) or fraud penalties (much higher) may apply in certain cases. A CPA, enrolled agent, or tax attorney can evaluate whether the penalty exposure warrants representation or a penalty abatement request.

Common reasons credits are disallowed (and how to address each)

  • Missing or insufficient documentation: Provide the specific receipts, forms, or records requested. For EITC claims, the IRS verifies income and residency; supplying W-2s, lease agreements, and school records often resolves these issues. (IRS EITC guidance: https://www.irs.gov/credits-deductions/earned-income-tax-credit-eitc)

  • Calculation errors or math adjustments: The IRS will explain a math error or an item that doesn’t match third-party records. If you agree, accept the adjustment and pay any balance due; if you disagree, provide documentation showing the correct amounts. See our article on reading and responding to math-error adjustment letters: How to Read and Respond to an IRS Math-Error Adjustment Letter.

  • Ineligible expenses or thresholds not met: Credits like the Child Tax Credit or education credits have specific income and qualifying expense rules. Recalculate eligibility and provide documentation that proves you met the rules.

  • Identity or dependency disputes: If the IRS questions who can claim a dependent, provide custody agreements, school records, or signed declarations that support your claim.

Documentation checklist (practical & printable)

  • Copy of the IRS notice (front and back)
  • Copy of the filed tax return (Form 1040 and schedules)
  • Forms W-2 and all 1099s for the year
  • Receipts and canceled checks for expenses claimed
  • School records, enrollment forms, and 1098-T for education credits
  • Birth certificates, custody or court orders for dependents
  • Proof of residency (lease, utility bills) where applicable
  • A one-page cover letter summarizing your response and enclosure list

Timelines and likely outcomes

  • Response, verification, and closure: If your response fully supports the credit, the IRS will usually correct the record and issue a refund or adjust the balance due. If documents require additional review, resolution time can stretch to several months.

  • Amended returns: Processing time for Form 1040-X can vary; see our article on amended return timing and common delays for current expectations: Common Reasons Amended Return Refunds Are Delayed and How to Fix Them.

  • Appeals and prolonged disputes: Appeals review can add several months; litigation is lengthy and expensive, so appeals or settlement negotiations are often preferable.

When you may owe interest and penalties

If the disallowance leads to tax owed, interest accrues from the original due date of the return until the balance is paid. The IRS also may assess penalties for underpayment, negligence, or fraud depending on the facts. The accuracy-related penalty is commonly 20% for substantial understatement, while fraud penalties are more severe. Always consult IRS guidance and a professional to evaluate your exposure (IRS: https://www.irs.gov).

Appealing or contesting the decision

If you disagree with the IRS’s findings after providing evidence, request an appeal. The IRS notice will explain your appeal rights and the deadline to request an appeal. Appeals provide an independent review and may allow settlement without litigation.

Avoiding future disallowances: preventive best practices

  • Keep organized records year-round using digital scans and indexed folders.
  • Verify eligibility rules for each credit before filing; rules can change annually.
  • If you rely on third-party information (school, employer), request forms early and reconcile them to your records.
  • When in doubt, attach a short explanatory statement to your return to clarify eligibility or special circumstances.

Examples from practice (anonymized)

  • EITC documentation: I helped a family who received a notice disallowing EITC because the IRS lacked proof of a qualifying child’s residency. We gathered school attendance records, pediatrician notes, and lease documents and submitted them with a concise cover letter; the IRS reversed the disallowance.

  • Work Opportunity Tax Credit (WOTC): A small business owner was denied WOTC because forms showing employee eligibility were not completed by the hiring agency. The employer obtained the completed certification and successfully reversed the denial.

When to consult a tax pro or attorney

  • The IRS has proposed significant tax, penalties, or fraud allegations.
  • You need help assembling technical documentation or negotiating an appeal.
  • You face collection action, liens, or levies related to the disallowed credit.

Useful IRS resources and further reading

For practical help with amended returns and refunds see our site guides: “Step-by-Step: Filing an Amended Return to Claim Missed Credits” (internal) and our article on reading math-error letters linked above.

Final notes and disclaimer

This article provides general information about handling a disallowed tax credit and does not replace professional tax advice. Tax situations vary by facts and may change with new laws and IRS procedures. In my experience, early organization and a calm, document-driven response improve the chances of a favorable outcome. For advice tailored to your case, consult a qualified tax professional or the IRS directly.

Sources: IRS guidance on credits and credits-specific pages (see links above); in-practice experience with client cases (anonymized).