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McPhersonSentinel - McPherson, KS
  • What to do if you receive a letter from the IRS

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  • You’ve filed your federal and state income tax returns on time and received your refunds. Then you get a notice in the mail from the IRS, or your state tax agency, telling you there was an error on the return and you owe additional tax, penalty and interest.
    You’ve filed your federal and state income tax returns on time and received your refunds. Then you get a notice in the mail from the IRS, or your state tax agency, telling you there was an error on the return and you owe additional tax, penalty and interest.
    Don’t panic!
    In 2011, the IRS received more than 1.8 billion 1099s, 1098s, W-2s and other such returns reporting income and deductions for tax year 2010.
    The information on these returns was matched against 141 million 2010 individual income tax returns.
    The service found almost 20 million “alleged” discrepancies and issued a CP-2000 notice to 4.7 million taxpayers explaining what they thought was wrong and asking for payment of additional tax.
    There are two basic rules when you receive correspondence from the IRS or a state tax authority:
    1. Never ignore the notice. The problem will not just go away.
    The only things that might go away are your wages or your home.
    On the other hand ...
    2. Never automatically pay the amount requested on an IRS or state tax notice. It has been my experience from 40-plus years as a professional tax preparer that at least 2/3 of all federal and state tax notices are incorrect.
    What to do
    If you get a notice in the mail, carefully check the return that is being questioned. If it was prepared by a tax professional, send a copy of the notice to your preparer immediately. If you prepared the return yourself and you do not understand the notice, you should consult a tax professional.
    In recent years I have seen IRS and state notices where:
    • The tax liability on qualified dividends, either under the “regular” tax or the Alternative Minimum Tax, was calculated treating the dividends as “ordinary” income instead of using the applicable lower 15 percent or 0 percent tax rate.
    • A state tax refund was treated as fully taxable, even though the taxpayer did not receive a “tax benefit” from deducting state income tax on the prior year’s return.
    • An IRA or pension distribution was treated as fully taxable when all or part of the distribution represented a tax-free return of contributions or was rolled over.
    • Credit was not given for all tax withholding reported on W-2s or 1099s, or for all dependents reported on the return.
    Page 2 of 2 - Might not be your error
    In some cases, the taxpayer or preparer made a clerical error or omission on the original return, but it is more likely that the notice was issued because there was some problem in the IRS or state processing software.
    I have been told that the IRS software sometimes reads numbers incorrectly by missing a decimal point.
    In one situation a taxpayer received a CP-2000 claiming he did not report $88,000 when the actual 1099-MISC reported $880.
     
    Be patient
    When responding to the IRS or the state, do not expect a prompt reply.
    The first letter you receive from the IRS will acknowledge receipt of your or your tax preparer’s response, tell you they need more time to review the situation and promise to get back to you in 45 days.
    And 45 days later they will write to tell you that they still need more time, and that they will get back to you in another 45 days.
    Robert Flach is an expert with almost 40 years of experience as a tax professional and blogs as The Wandering Tax Pro.
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