CP2000 NOTICE AND IRS INCOMPETENCY

[Cathy]

Sorry, but I just have to vent! I'm gravely concerned about the competency of IRS's employees. It's bad enough that I recently had to teach a supervisor and an auditor the difference in accountable and non-accountable plans and when employee business expense deductions are allowed recently for a correspondence audit, however, the letter one of my clients got today totally blows my mind!

From what I can tell, while IRS did the matching of 1099's to returns, my clients did in fact not tell me that they have had a very small amount of dividends each year since they were married. Finally in 2011, the $19 in dividends did make a $3 difference on their Federal return. It appears that when the computer spits out such a return for not including an income item, then a person (IRS employee) takes over and reviews the rest of the return.

From reviewing the many changes to the return that are in the CP2000 notice, it is very, very, very evident that the employee absolutely does not know what he/she is doing! I always try to figure out before we contact IRS what they did wrong and I've been playing with figures all afternoon. This is what I found: Spouse received an IRA withdrawal due to the death of one of her parents. The withdrawal was coded "4". The total withdrawal of the IRA PLUS the amount withheld in Federal taxes were BOTH added to the spouses WAGES....thus they are saying that the spouse's wages were underreported on the return. The withholding on the IRA withdrawal that was included on Line 62 is gone.....poof! It was noted in the CP2000 letter than an error was made on the total withholding. (Remember IRS added it in with the spouse's wages as INCOME). With the additional income (the IRA was already reported on the original return) added to the couple's income, now their education credit is lowered because they are over the threshold.

Now my clients have a bill for over $1,000. This is by far the most pitiful case I have ever had where an employee really screwed up a return....certainly not the ONLY time, just the most pitiful job of screwing it up!

I will follow up and get my clients to send in the $3.00 they owe (+interest...lol), however, after we receive the final "case closed" correspondence from IRS, I will forward the whole package to the Ways and Means Committee who I believe is over IRS. If not, I will find out exactly who to send it to. I have often complained about my local H & R Block office, but from what I've seen lately coming out of the IRS office itself, I do believe H & R is gaining ground on them and at a fast pace also!

Thanks for listening! I feel better now!!!!

[Guest Taxed]

I am surprised that the AUR system nailed your client for a $19 missing dividend?

If you think the 2011 return was submitted correctly (except the dividend issue) send a copy to IRS with your explanation and if you get a followup letter where IRS is still questioning, contact Taxpayer Advocate Service.

Few years back one of my clients did not submit his estimated tax payment with the correct voucher and IRS would not credit to his account inspite of us sending copy of cancelled check. Contacted TA and sent them our proof. Within a month got a letter from IRS that the mistake has been corrected and the additional refund plus interest check came!

[BulldogTom]

I am surprised that the AUR system nailed your client for a $19 missing dividend?

If you think the 2011 return was submitted correctly (except the dividend issue) send a copy to IRS with your explanation and if you get a followup letter where IRS is still questioning, contact Taxpayer Advocate Service.

Few years back one of my clients did not submit his estimated tax payment with the correct voucher and IRS would not credit to his account inspite of us sending copy of cancelled check. Contacted TA and sent them our proof. Within a month got a letter from IRS that the mistake has been corrected and the additional refund plus interest check came!

WTF.....do you ever really read anything. Or do you just like reading what you type. You really amaze me with your __________. The whole point of the post was that those lazy, unionized, government employee liberals who are spending so much time harassing honest, hard working tea party conservatives should be spending more time reading the tax law they are supposed to administer. Just another example of social experimentation in government gone horribly wrong.

Taxed, do you really have to respond to every post on the board. Ever heard the phrase "less is more". And in your case particularly, a lot less is a lot more.

Tom

Hollister, CA

[JohnH]

Funny this should come up. I had a very similar situation with an AUR notice - we just responded to it last week. The taxpayer had a couple of tiny interest and dividend statements (less than $25 total). But they also had a 1099-S for the $275,000 sale of a personal residence. Since he is single, the 1099-S needed to be accounted for. So IRS listed the $275,000 along with the 1099-Div and Int statements.

The odd thing is, we had reported the $275,000 on the original return and netted it out on Schedule D properly. Apparently nobody noticed that little detail. So we just faxed them a copy of the original Schedule D & 8949 and told them to send a bill for the rest of the adjustment. I have no idea why they missed it, especially because there was also a small loss carryforward (about $1,200) on the Schedule D which transferred to the front of the 1040 and they didn't question that.

[Jack from Ohio]

These are all due to the sequester. The administration want the public "to feel as much pain as possible due to these tiny tiny cuts!"

[MsTabbyKats]

Gee...I'm surprised at a $19 dividend could generate such a mess. If a client gets something this small "after the fact" I generally say something like "You can pay me to amend the return....or you can wait until the IRS catches it, and pay them "whatever"...which would be less than my fee."

I think I'm going to change my policy and amend........

[jainen]

>>I'm gravely concerned about the competency of IRS's employees<<

Not me! As an honest taxpayer myself I want the IRS to be assertive in collections. To me that means they should make more challenges than they expect to win. Also as a taxpayer I want them to control administrative costs--and what does that mean besides less recruitment, training, supervision, and analysis of results?

As a taxpayer representative, I also want them to be, well, not exactly incompetent but certainly at a disadvantage in terms of my representation. In the original post, these clients were unquestionably wrong. They deliberately under-reported investment income, for which there is no de minimus amount. I can't say about the 1099, except there is no particular reason to assume the company handled it correctly. Whatever, it was a simple matter easily addressed by a single phone call or letter. I'd guess the error arose not from an incompetent employee but from poor quality control procedures in computer processing. Could be data entry, programming, or many other vulnerabilities.

That's what we get for wanting less administration--less administration! Cutting government means cutting government services.

[Cathy]

Thanks to each of you for your responses to my original post. Each of you made a bad day a lot more tolerable!

Taxed and Tom, I don’t know if you two are serious or not, however, you both need to get together and perform live in comedy clubs. You both would find instant stardom! No joke!!!! Funny thing is that I agree with both of you! You both made me laugh today and lately my laughing doesn’t come easy! So, I thank you both!

John, I appreciated your input very much! Part of the reason I posted my original rant was to see if these type situations are about to become the “norm”. I’m afraid we might be beginning to see a trend occurring. I just wonder if someone is enjoying the extra work they are creating for taxpayers or preparers or if it is simply a matter of incompetent employees. Both thoughts are worrisome. Even more concerning is the fact that especially older taxpayers have a tendency to pay any bill they receive from IRS as they are horrified of owing IRS anything! It is very hard to believe that amployee who has the position of correcting a tax return lacks the knowledge to check the existing Sch D in a return for a $275K sale prior to sending the taxpayer a bill for not having reported it. I feel like you when you stated you had “no idea why they missed it”. Sounds suspicious to me.

Jack, you probably hit the nail on the head with your statement that the administration wants the public “to feel as much pain as possible….” Another scary thought, but what else are we to believe?

Ms. TabbyKats, I’m with you on changing my policy also. If a simple oversight will cause as much worry and grief to my clients (and me) when the computer finds they left off an item on their return, they will be forewarned and encouraged to go ahead and pay to have the return amended before IRS’s computers finds the unreported item of income and thus receives a bill for much more than the omission itself. It’s simply not worth it to ignore an item any more even if the resulting tax is $1.

The first year that the $3,000 exemption for public safety officers came into effect, my brother and sister-in-law got a CP2000 telling them they made a mistake on their return to the tune of $3,000 in taxable income due to the 1099-R and ALSO they “made a mistake in calculating their taxable social security”. I would have rather personally received a letter saying I owed an additional $10K on my personal return than these two people to receive a letter telling them they owed an additional $ .25. Anyway, I placed a call and right away the lady I spoke with told me that their computer system was not yet set up to read the “PSO” that appears when there’s an adjustment (IRS has since corrected it) for a public safety officer.

I then asked her why the Lump Sum Distribution wasn’t recognized on the Social Security received for that year. She instantly told me that there is no reason why the employee should not have seen that it was a Lump Sum Distribution and she relayed her aggravation about the situation to me during the call. That is the reason (in addition to other calls I have made is that I feel whenever numbers don’t match up during the cross check of income statements, an employee takes over and reviews the entire return before notifying the taxpayer of the additional taxes that are owed.) Therein lies the problem….are the employees really not literate enough about the tax code to perform his/her job or is it a “game” they have begun to play to occupy themselves as computers have pretty much taken over their positions.

jainen, I understand where you are coming from as I also don’t mind a tad bit of incompetency as it came in handy approximately 35 years ago on my personal audit. I had used the $5,000 death exclusion for part of the taxable income I received when my father died. Before the actual audit, I discovered that the death benefit exclusion ended the year prior if memory serves me correctly. When the auditor asked me about the $5,000, I threw out some code citings, etc.. in a matter of fact tone. My heart dropped when she told me she had to talk to her supervisor about the exemption. Approximately 30 minutes later she came back and told me that I was correct (I’m sure she had a good coffee break). A “tad bit” of incompetency is different from total incompetency. I wish you could see this correspondence my clients received. The more I think about it, it HAS to be a “let’s aggravate the taxpayer and preparer situation”. And before you say it, I know, it could be a pay back to me from the Death Benefit Exclusion that had expired. This one is not going to be handled by a simple phone call. In fact, I don’t trust myself to have a live conversation with an IRS employee regarding the garbage my clients received. As always, thanks for “the other way of looking at things” in your responses.

Take care all,

Cathy

6/3/13 Just edited to change the font. Sorry about the "calligraphy" if anyone else tried to read my response on their iphone. I don't know where that font came from....I know it made me nauseated trying to read it!

[clay]

A client of mine received an IRS notice asking for $10,000. The reason is for earnings on a 1099-Q in 2011.

The funds were spent on eligible college costs so we will respond with the info.

But is this typical of the IRS to send out notices when there is earnings on a 1099-Q withdrawal from a 529 college savings program?

Should I have added an attachment to the return to document the expenses?

What is everyone else doing?

An IRS notice like this creates extreme anxiety and stress for the taxpayer.

[mcb39]

I had a difficult divorce situation this year with splitting income for 11 months. The divorce was final on Nov 29. I prepared both returns; using the 8958 to split the income. I thought everything was clearly laid out. However, the IRS sent back one of the returns (the very hostile wife's) with a form 3531 Request for Missing Information or Papers to Complete Return. Along with the request, they sent all of the paperwork explaining the entries on the HOH return. (Clients have been separated for about three years). They kept the signed return.

I called Practitioners Help and the lady I talked to said that she had never seen a return done this way and that I should just attach a copy of the pages they tore off and send it back. Anybody else here have any bright ideas? This was the way the court ordered the return to be filed and when I told her that we could get around that; she refused.

In the meantime, the ex-husband tells me that he got a refund; which I don't believe he was entitled to. I just want to close and lock the door when I see either one of them coming; and no help from the IRS.

Understand that this was not an ordinary return. We have employment, self-employment, seven rental properties and itemized deductions. I hadn't done one of these in about 20 years.; and certainly didn't need it this year.

[Catherine]

I have noticed an increasing trend in the last several years of letters from the IRS (and my state, too, to a lesser degree) claiming all kinds of problems that do not, in fact, exist. "Unreported sales" that were properly reported, 1099-Q distributions as taxable when used to pay education costs and so reported, etc. It's like they put their computer algorithms on super-sensitive, and then handed the results to the newest of the newbies for review.

In times past, I saw 3-6 letters a year that clients received. Starting in about 2008 (after the real estate bubble burst, the economy tanked, and tax receipts plummeted), that number skyrocketed to over 30 a year. Almost all are completely specious. What hasn't been specious? Example: client claimed $X in estimated taxes, one check of which was not posted as received -- sent them to look for the check so we could dispute. Client found check -- in a folder! - they'd forgotten to send it in. Little things like that.

My personal opinion is that they're demanding funds in the hopes people panic and pay, to get more dollars in the coffers.

[Cathy]

Clay,

In all my years of preparing returns, I have had only one 1099-Q. My clients also got a notice whereby it made it appear that an error was made on the return and the "error" would cost them over $5K to correct. So, the answer to your question is yes, an attachment added to the return explaining the formula used in computing the taxable amount of the 1099-Q would be the best way to handle such a distribution. I know if I get another one, I will definitely have an attachment with the original tax return.

Take care,

Cathy

[Guest Taxed]

Cathy, I don't think I am funny enough for standup comedy!

But seriously, I do understand your frustration dealing with some inexperienced person at IRS. I have been there.

As I mentioned I have had success with The Taxpayer Advocate Office when I knew I was right and needed them to help me.

In my opinion it is far better to get the issue resolved as quickly as possible for the taxpayer (one way or the other) than embarking on an endless response chain to IRS letters. The TA office will help your client with that if you are right.

Another advantage of dealing with the TA office is that they document the issues and then it may have an impact on TIGTA audits that we so love to read!

I agree with all who say that the frequency of CP2000 and state level notice of intent to access has increased lately. This year in my state most EIC recipients are getting additional scrutiny. It is a real pain for the taxpayer, but when your refund is held you got to respond.

I think the lesson for all of us is to Document, Document, Document!

[Cathy]

I had a difficult divorce situation this year with splitting income for 11 months. The divorce was final on Nov 29. I prepared both returns; using the 8958 to split the income. I thought everything was clearly laid out. However, the IRS sent back one of the returns (the very hostile wife's) with a form 3531 Request for Missing Information or Papers to Complete Return. Along with the request, they sent all of the paperwork explaining the entries on the HOH return. (Clients have been separated for about three years). They kept the signed return.

I called Practitioners Help and the lady I talked to said that she had never seen a return done this way and that I should just attach a copy of the pages they tore off and send it back. Anybody else here have any bright ideas? This was the way the court ordered the return to be filed and when I told her that we could get around that; she refused.

In the meantime, the ex-husband tells me that he got a refund; which I don't believe he was entitled to. I just want to close and lock the door when I see either one of them coming; and no help from the IRS.

Understand that this was not an ordinary return. We have employment, self-employment, seven rental properties and itemized deductions. I hadn't done one of these in about 20 years.; and certainly didn't need it this year.

mcb,

I think if I were you I'd change my phone number and/or head for the hills!

Especially since the couple had been separated for three years, I think (and it's easy for me to say this now after hearing what you have gone through) I would have referred both of the clients back to their attorneys for clarification from the court (and to give the court tax law information) as the court order does not follow IRS codes, and a local or state divorce decree certainly can't trump the Federal tax code. The splitting of employment and self-employment income absolutely makes no sense at all, especially as they are each considered "single" for the tax year as their divorce was final on November 29, not to mention the fact that they had been separated for three years to boot!

If the couple had not gone through a property settlement prior to the end of the tax year, then I agree that possibly the income from the rental properties might need to be split accordingly (unless one of the two actually received 100% of the rental proceeds). Insofar as the itemized deductions are concerned, a taxpayer does not have the right to claim any amount unless he/she actually paid it so it seems as the court should not have any concern in that matter anyway.

Your situation sounds like a good case for the Taxpayers Advocacy program. I would turn the entire matter over to them. I may be wrong, but if one spouse received a refund he is not entitled to as you suggested, his return might need to be corrected according to IRS codes, rules and regs. Your case sounds like one that can be sorted out by a Taxpayer Advocate as he/she should have the proper connections to find out if both returns need to be amended to follow IRS rules rather than a court order. I wish attorneys and judges would obtain the proper knowledge in regard to tax laws before allowing such orders to be handed down.

Take care,

Cathy

[mcb39]

Yes, this was a tough one. Not only did the divorce decree order the 11 month splitting of income, but it ordered both of them have their returns prepared by me.; they have been clients for many years. This was a 21 year marriage. The property was split at the time of the divorce, therefore the rentals were awarded separately; but for eleven months they belonged to both of them.

WI is strong on community property laws,; but you can get around it by failing to disclose info to each other. I wish she would have listened to me. Divorce attorneys (in my experience) are usually lacking in tax law knowledge. She is still suing him for every little thing; crazy stuff like barn boards, the second key to the four-wheeler, etc. And, he is being the ultimate antagonist.

I am not going to let their mistakes and troubles ruin my life.

[ILLMAS]

Aren't CP notices computer generated when there is a mismatch of information?

[jainen]

>>a local or state divorce decree certainly can't trump the Federal tax code. The splitting of employment and self-employment income absolutely makes no sense<<

It makes sense in community property states, where the court DOES determine how income must be allocated and reported on the federal return. That's in the federal tax code. And even though a divorce decree can not over-ride federal law, it DOES bind the two parties themselves in the way they must apply the law.

[Guest Taxed]

Yes they are. The AUR system spits it out. But when you respond to a CP2000 hopefully an intelligent person will read it and investigate the matter more carefully, instead of sending back a generic form letter!

[ILLMAS]

Well I will share something I found out a couple of years ago when it comes to "Reasonable Cause", whatever letter you submit, an agent enters the reason and a computer either accepts or rejects it. I called on behalf of client of mine that fell ill and was hospitalized for a while, the agent was entering the information into their system and she told me to hold while the computer generated a response, amazed, I asked her, so nobody reads the letter, she was like no, we only enter key information like an illness, specific dates etc.... from the letter and the computer decides. But she also mention having the "key words" doesn't always gets an acceptance if the tax payer is always late on filing their returns, the computer will take that into account.

[Guest Taxed]

Gee, such a powerful IRS computer! Learned something new today. May be the next generation of MeF will have artificial intelligence.

[joanmcq]

Cathy, the AUR CP2000 notices are exactly that, automated. They are spit out by computer mismatches of the tax return and whatever was reported. The $19 of dividend income did not generate the notice, the programming for the 1099-R did. Now this isn't to say that a code 4 1099-R should not have been programmed to show up on line 7- but once something that triggers a mismatch over the de minimus occurs, all mismatches show up on the notice. The only reasons a 1099-R goes on line 7 is if the payment is due to disability and the person is under normal retirement age, or a code 8 for over contribution to a retirement plan. So there's a hiccup in the programming. I've seen a bunch of hiccups in the programming over the years. So answer the notice with a simple letter, and get on with it. The TA isn't going to help you; they have become very discriminating in what cases they take up. I have found more often than not, one letter clears it up. Calling may get a look at the AUR programming to see if there is an issue; I don't think the IRS wants to waste time and resources on incorrect notices any more than you do.

[Cathy]

Aren't CP notices computer generated when there is a mismatch of information?

I agree that the return itself is spit out of the system, however, the computer doesn't actually generate the CP2000 notice....well, actually, it does generate the NEED for a notice, but from every incorrect CP2000 notice my clients over the years have received was due to an IRS employee further examining the return and including additional items not reported correctly... or so the IRS employee thought so anyway! That's when the aggravation sets in! Years ago, a new client brought me an audit letter as her preparer would not respond to her messages left on his recorder.

I helped her get her records in order and went with her to the audit. What the agent told us was as she had neglected to include a small amount of interest income from a life insurance policy on her return, her return was reviewed before sending her a bill for the additional taxes due. She said the employee reviewing her return noticed a very large employee business expense deduction taken on that return. The IRS employee didn't realize the expense taken was due to the fact that the taxpayer personally owned the school bus that transported students to and from school. The auditor stated that had they realized that fact, all the taxpayer would have gotten from them was a bill for the taxes due to the under reported interest.

The above is just one example of why I feel the entire return is reviewed before the CP2000 notices go out. I have many instances over the years that have confirmed to me of the actual employee involvement prior to the notices being mailed out. Another reason to make sure every item if income appears on the return! More and more correspondence audits are now being used due to budget restraints. These CP2000 notices are beginning to look like correspondence audits as well as billing for unreported income.

[joanmcq]

You are confusing a correspondence audit, a desk audit, and a CP2000 notice. A CP notice is seen by no human eyes until a response letter comes in.

[Cathy]

Cathy, the AUR CP2000 notices are exactly that, automated. They are spit out by computer mismatches of the tax return and whatever was reported. The $19 of dividend income did not generate the notice, the programming for the 1099-R did. Now this isn't to say that a code 4 1099-R should not have been programmed to show up on line 7- but once something that triggers a mismatch over the de minimus occurs, all mismatches show up on the notice. The only reasons a 1099-R goes on line 7 is if the payment is due to disability and the person is under normal retirement age, or a code 8 for over contribution to a retirement plan. So there's a hiccup in the programming. I've seen a bunch of hiccups in the programming over the years. So answer the notice with a simple letter, and get on with it. The TA isn't going to help you; they have become very discriminating in what cases they take up. I have found more often than not, one letter clears it up. Calling may get a look at the AUR programming to see if there is an issue; I don't think the IRS wants to waste time and resources on incorrect notices any more than you do.

Thanks Joan,

I appreciate your response, however, if you could actually review the notice itself, you would definitely know than no computer could have come up with the figures in the notice. Just trust me on this one. The more I review it, the more I chuckle because it is plainly idiotic. Anyway, the taxpayer and I are to be roommates next week when we chaperone her child/my grandchild at cheerleader camp in Florida. Hopefully, it will take a simple phone call to straighten out this matter. At least I'm seeing the notice as amusing today....big difference since Saturday!

Take care,

Cathy

[joanmcq]

Trust me, it was a computer. If you can get it done with a phone call, good. Otherwise, just fax a letter.