How should I respond to an IRS notice about unreported interest income?

Receiving an IRS notice that says you didn’t report interest income can be unsettling, but in most cases it’s a documentation and reporting issue that you can fix. This article gives a clear, practical workflow you can follow, plus templates, timelines, and when to get professional help. I’ve helped clients with dozens of these notices over 15 years and the same steps consistently resolve most cases quickly.

Quick summary of the typical notice

The IRS compares the information returns it receives (like Form 1099‑INT) with what you reported on your Form 1040. If the numbers don’t match, the IRS will send a notice showing the amount the payer reported and the difference. Form 1099‑INT is issued for most interest paid of $10 or more (IRS guidance: About Form 1099‑INT) (IRS).

Helpful internal reading: review our guide to Form 1099‑INT and how the IRS uses information returns:

These resources will help you interpret the notice and choose the right next step.

Step-by-step response workflow

  1. Read the notice fully and note the deadline and contact details.
  • Notices always include a response deadline and a mailing address or phone number. Use the contact shown on your notice — different notices route to different IRS units.
  1. Verify the information reported to the IRS.
  • Compare the 1099‑INT (or other form) amount the IRS shows to the copy sent to you by the payer (bank, brokerage). If you didn’t receive a 1099‑INT but the notice lists one, request a corrected copy from the payer.
  • Confirm the payer’s name, tax identification number, and amount. Small transcription or account-transfer errors are common.
  1. Reconcile with your tax return and records.
  • Check the tax year’s return to see whether interest was reported and where (Form 1040, Schedule B, etc.). For most taxpayers, interest shows on Schedule B when required.
  • If you had multiple accounts, aggregate interest across all accounts — sometimes taxpayers report one 1099 but forget others.
  1. Decide how to respond (agree vs. disagree).
  • If you agree the IRS amount is correct: either pay the additional tax shown or file an amended return (Form 1040‑X) if the extra interest changes your tax computation materially.
  • If you disagree: gather supporting documents (account statements, corrected 1099s, correspondence with the bank) and prepare a clear written explanation to send to the IRS.
  1. Act promptly.
  • Even if you dispute the amount, respond before the stated deadline explaining your position and enclosing copies of supporting documents. Prompt responses reduce the chance of enforced collection actions.
  1. Keep a record of everything.
  • Save the notice, all 1099s, your bank statements, a copy of any amended return, and proof of mail or online submission.

Forms and filing options

  • Form 1040‑X: File an amended return if the unreported interest changes your taxable income materially. Current filing instructions and where to mail are on the IRS site (irs.gov).
  • Payment options: you can pay the additional tax online via IRS Direct Pay, pay by debit/credit, or request an Installment Agreement if you cannot pay in full.
  • Power of attorney: If you want a CPA, enrolled agent, or attorney to handle the case, file Form 2848 (Power of Attorney and Declaration of Representative) to allow them to talk to the IRS on your behalf.

What if you agree with the notice?

  • Pay or amend: If the additional tax is small, many taxpayers choose to pay the amount due after checking the math. For larger changes, file Form 1040‑X to correct the return and explain the change.
  • Penalties and interest: The IRS generally charges interest on unpaid tax from the original due date. Penalties may apply depending on whether the underreporting was due to negligence or willful omission. You can request penalty relief if you have reasonable cause (see IRS penalty information).

What if you disagree with the notice?

  • Dispute in writing: Send a concise, documented response that explains why the IRS amount is incorrect. Include copies (never originals) of 1099s, bank statements, or corrected forms from the payer.
  • Request corrected 1099s: If the payer sent an incorrect 1099, ask them for a corrected form and include it with your response. Our article on correcting 1099 and W‑2 errors explains that process.

Sample response letter (editable)

[Your name]
[Your address]
[Date]

Internal Revenue Service
[Address shown on the notice]

Re: Notice [Notice number shown on the IRS letter] for tax year [YYYY] — Taxpayer: [Name], SSN: XXX‑XX‑XXXX

To whom it may concern:

I am responding to the IRS notice dated [date] regarding alleged unreported interest income in the amount of $[amount]. I dispute this amount because [brief reason: e.g., the payer incorrectly reported interest on the wrong year / I already reported this interest on Schedule B / The 1099‑INT shows a duplicated amount].

Enclosed are copies of the following documents supporting my position:

  • Account statements for [bank name], period [dates]
  • Copies of Form 1099‑INT issued by [payer] (including corrected 1099 if applicable)
  • A copy of my originally filed Form 1040 for tax year [YYYY]

Please contact me if you need further documentation. I request that the IRS review this information and adjust your records accordingly. I am available at [phone] or [email].

Sincerely,

[Signature]

(Enclosures: list)

Timelines and what to expect

  • Response window: Your notice will state a response deadline. Even if you need time to gather documents, send a short letter asking for additional time if needed.
  • IRS processing: After you respond, it can take several weeks to several months for the IRS to process your case depending on complexity. Keep copies and follow up if you do not hear back in the time frame the notice suggests.

When to get professional help

Hire a CPA, enrolled agent, or tax attorney if:

  • The amount is large or could trigger additional investigations.
  • You suspect identity theft or fraud.
  • You need representation for an audit or collection hearing.

If you retain a representative, file Form 2848 so they can speak with the IRS for you.

Common situations I see in practice

  • Missing small amounts: Interest from multiple savings accounts that individually fall under thresholds but combined exceed $10. Review all year‑end statements.
  • Brokerages reporting interest or margin interest in ways that confuse taxpayers. Ask the broker for an explanation and, if needed, an amended 1099.
  • Bank errors: Occasionally payers report interest for the wrong tax year; a corrected 1099 will resolve most notices.

Practical tips to avoid future notices

  • Keep year‑end statements for all accounts.
  • Review 1099s as soon as you receive them and before filing.
  • Use tax software or a preparer that aggregates all 1099s to reduce human error.

Useful authoritative sources and where to learn more

Professional disclaimer

This article is educational and does not replace personalized tax advice. For case‑specific guidance, consult a qualified tax professional (CPA, EA, or tax attorney) or contact the IRS using the address/phone number on your notice.

If you want help drafting your response or deciding whether to file Form 1040‑X, an experienced tax practitioner can review your records and represent you before the IRS. In my practice, a clear, documented response typically resolves these notices without penalties when the taxpayer acts quickly and cooperatively.