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IRS WatchEven when they’re Right, Sometimes they’re Wrong!
The most frequent example of being right, but wrong relates to IRS not applying the Qualified Dividends and Capital Gains Rates when qualified dividends are found to have been overlooked. I just responded to a notice for a client where we were agreeing to an additional $638 of dividend income but not to the additional $208 in tax. The proper rates resulted in only $138 of tax[ii]. I have seen examples of this error that resulted in thousands of additional tax dollars the client believed were correct “because IRS calculated them” so the taxpayer paid them. When the taxpayer finally showed me the notice, I provided a corrected computation to IRS so my client could recover the inappropriately assessed and collected tax on those dividends.
The second most frequent example of right, but wrong is when capital gains distributions or capital gains income is overlooked and the taxpayer holds an abundance of capital losses that were limited on the original return. IRS responds with an assessment of additional tax without consideration of the offsetting capital losses. Further, when IRS does acknowledge the “unreported gross proceeds income” from the sale of securities once netted against basis for those securities has resulted in a loss in excess of $3000, taxpayers are informed that “in order to carry forward the additional losses, you will need to amend subsequent tax returns using Form 1040X… If you do not file the required forms, you may be denied the carry forward loss when you elect to use it on your current year return.”
Watch Out for Changes to Credits!
We’ve seen a new variation on the adjustments IRS is making using the AUR program: A Making Work Pay and Government Retiree credit for $500 was taken from the taxpayer on the adjusted assessment, yet it had not been challenged on the original return or the initial IRS income-matching notice. Taxpayers delayed in responding to the first notice, but did not disagree with the one item identified as unreported income. When they received notice their account was in collection, they paid it immediately. It was not until I reviewed it and made them aware IRS had taken their $500 credit did they know they had been overcharged. We have filed a claim for refund of the $500.
The second example related to back-up withholding of federal income tax by a bank and brokerage that appeared on Forms 1099-Int and 1099-Div. Taxpayer had approximately $3400 withholding that IRS had not risen as an issue when the original return was filed, yet raised 21 months later with the CP-2000. We sent the confirmations, but IRS AUR unit failed to acknowledge receipt although they did acknowledge the income discrepancy we corrected. We called AUR, and the customer service representative (who did not have authority to make corrections to the file) confirmed she could see the supporting documents in the file. We went through two submissions of this information in response to incorrect notices. Without additional warning, IRS moved to collection a tax payment they were already holding! Most amazing in this situation is that in addition to our documentation, IRS possesses in their own 1099 files (the ones that show the income associated with these accounts also show the withholding) the verification of amounts withheld. My case is currently being held for Audit Reconsideration in an effort to stay collection until a live, cognizant, carbon based life form that does have authority to correct the problem can intervene.