One of my clients was quite upset this morning. She had received an IRS Automated Underreporting Unit (AUR) notice alleging that she owed about $4,000 in additional tax. She sent me a copy of the notice and I looked at the change: The IRS added self-employment tax to her return.
My client (and her husband) were both employees in the year in question. There was no self-employment tax on the original return because you have to be self-employed to owe self-employment tax. As I told my client, this ranks with the most ridiculous of IRS notices I’ve seen.
Still, my clients had to respond to the notice; if they didn’t tax would be assessed. My client completed the response form, included a short letter noting why they didn’t owe self-employment tax, and they mailed it off (certified mail, of course).
I don’t know why my client got “lucky” and got this notice. The only conclusion I can draw is the computer goofed. When I spoke to my client, I let her know that two-thirds of IRS notices are wrong in whole or in part. Yet the IRS keeps sending them out for a simple reason: People pay them blindly. “If it comes from the IRS it must be right,” they think. The reality is sadly different.
Most of the AUR notices I see (even those that are wrong) have at least a kernel of truth in them. Clients do forget to include 1099s, or they misclassify items on returns. This notice was one of the rarer ones where nothing on it made sense. Well, they did spell my clients’ names correctly….