Confused about $32k SS Exemption IRS Notice

[miatax]

I have a client MFJ (both in their 90s) that state they did not file a 2007 1040 but notice states otherwise. Now they are receiving an IRS notice claiming the following:

1099 INT - $15,554

1099 SSA - $21,594 (IRS is proposing $18,355 Taxable SS)

1099-R - $1,435

Client claims that they have always been under a $32,000 SS exemption amount so they weren't under the impression they had to file. Can someone please explain this better to me.

IRS SS Benefits state the following on the notice:

"Our notice includes SS or Railroad Retirement Benefits. These benefits are partially taxable if your modified AGI PLUS 50% of the gross benefits, exceeds the following: *$32,000 if MFJ."

So,

Total Change to Taxable Income = $35,344

Shown on Return = $<9,800>

As corrected by IRS = $25,544

Tax = $3,438

Failure to File = $688

Interest = $310

Total amount owed = $4,436

SS benefits is not my forte. I am not clear on this issue. Please let me know if I should prep the 2007 1040 based on above and if what IRS is proposing is correct.

Thank you.

[JohnH]

Based on what you provided, I think the IRS notice is in error.

Even the amount of tax due doesn't tie back to the taxable income as adjusted.

There's a math error somewhere or some important piece of data is missing.

[mlinder42]

I would get a POA and call IRS and ask for all income info plus a transcript of the filed return.

[joanmcq]

The notice basically is telling you they did not report the interest or 1099-R & the taxable SS is being increased as a result.

John, the numbers do tie, $15554+18355+1435 = 35344. subtract the 'as originally filed' taxable income and you get $25544. The tax is too high though.

what intrigues me is the failure to file penalty; you just don't see that much on CP2000 notices. Also, unless they filed late, that wouldn't be on there, although if they filed without an extension it would be. I'm gonna bet they filed something to get the stimulus at least. Wonder if they cashed in some savings bonds or something and forgot about it; that's a lot of interest, and if they usually don't have to file they could have forgotten about it.

I agree with getting the POA and checking e-services to see what they have there in terms of filing and income.

[JohnH]

Joan: I was a little brief in my response and I didn't provide enough info to explain myself. I plugged the numbers into a dummy 2007 return just to see what happened. In order to hit a taxable income figure of $25,544. there had to be $19,425 of unreported income. However, the only way to get there would make only $8,7209 of the SocSec benefit taxable, whereas the IRS notice is pulling the entire 85% of it into income. The only way I can get $18,355 of SocSec to be pulled into taxable income is to add $30,760 to non-SocSec income, which yields a tax liabiity of $6,189.

Maybe there are dividends, CGD's, a 1099-B, or some other variable not presented, but there's clearly something wrong with the notice. Incidentally, adding $30,760 in qualified dividends does get us closer - the tax in that scenario is $3,114. Maybe there's some combination of qualified & non-qualified dividends and/or fully-taxed capital gains that produces the tax liability. (Or maybe they received $30.76 in dividends and someone at IRS let a decimal slip).

[miatax]

Thanks. I am getting the POA signed today and I'll call IRS later this afternoon.

So, considering this is all their income for 2007 as stated, what would be the correct taxable income?

[taxit]

I believe your client has not filed a return. IRS is assuming 85% of the SS is taxable. The client needs to file their tax return to establish what part if any of the SS is taxable.

[miatax]

So based on the above information, which I received all the backup from the client, what is the taxable SS portion and the total taxable income? I will plug it into ATX this evening when I leave my regular job, but I want to understand what is taxable.

[Gail in Virginia]

If the only income is the 15, 554 interest, the 1,435 from the 1099R , and social security that grossed 21594, then none of the social security is taxable, and the tax is zero. Even if the person had been single and under 65, only a small amount of social security would be taxable if this is all the income. If this is everything, you just need to do a return to show that there is no tax due.

However, I would look at a transcript for the year first as someone else suggested since it sounds like the IRS is correcting a previous return in one place, and then charging for failure to file in another. I had a client who swore he did not need to file right up until the IRS assessed the tax and the letter showed that they were basing it on his 401K withdrawal. He did not think that was income since he was just getting his own money back.

So while it sounds like the IRS is in error, and they very well may be, the problem also might lie with your clients not understanding something about their situation properly.