Posts Tagged ‘AUR’

Do Not Blindly Pay IRS Notices, Reason ∞

Monday, March 20th, 2017

One of my clients angrily sent me a message today. She received an IRS Automated Underreporting Unit (AUR) notice alleging that she did not include $50,000 of W-2Gs on her 2015 tax return. She’s a professional gambler, so I looked at her Schedule C and shockingly (not) there was the $50,000 of W-2Gs included in her gross receipts. Attached to the return was a schedule helpfully breaking this out for the IRS (she also received a 1099-MISC that was included in her gambling gross receipts).

The IRS AUR program is a huge (or should I say “bigly”) money maker for the agency. People blindly pay these notices; after all, if the IRS sends it out it must be right? Well, the last survey I saw showed that two-thirds of IRS notices are wrong in whole or in part. AUR notices are not screened before being sent out. The recipient is literally the first person to have read it.

Do not assume an IRS notice is correct.
Most are not. If you blindly pay it, you have agreed to the tax. Had a human taken two minutes to read the return, they would have seen the income and the breakout schedule and the notice would have never been sent. But that simply doesn’t happen with the AUR program.

Additionally, you have a limited amount of time to respond to the notice (typically 30 days). Make sure you timely respond, and if you mail your response send it certified mail, return receipt requested. You want proof your response got there. Be prepared to wait many weeks for the IRS to send you a reply to what you’ve written; the average IRS time to respond to correspondence is now 14 weeks.

My client now understands this issue, and I provided her a pdf of the Schedule C and supporting documents to show that no tax is owed. If you get an AUR notice, make sure you carefully review it and then respond. While blindly paying an IRS notice did not make my Bozo Tax Tips for this Tax Season, I’m definitely considering it for the future.

Another Incorrect IRS CP2000 Notice

Wednesday, September 28th, 2016

One of my clients received an IRS CP2000 notice today alleging he did not include $1000 of ordinary dividend income. And the IRS was correct: She forgot to provide me the 1099-DIV. Yet the IRS, in the same notice, states that the client included $1000 in qualified dividends on the same stock.

This may sound familiar, and it should; back in March a client had a similar experience.

I will repeat what I said then: It’s impossible to have qualified dividends without having ordinary dividends. The IRS notice my client received today is wrong. Given I’ve seen two such notices it appears there is a systemic issue; I’ve reported it to the Taxpayer Advocate’s systemic issue hotline. If any other practitioners see similar incorrect notices, I urge you to do the same.

If you’re a taxpayer and receive an IRS notice, do not blindly assume it is correct. Show the notice to your tax professional. Your tax professional can look at your return and see if it is correct or not. IRS statistics show that two-thirds of IRS notices are wrong in whole or in part. The IRS has publicly stated that they know they send out incorrect notices, but it’s a profit center so they’ll keep sending them out.

As for my client, the IRS alleged my client owed a bit over $300. In truth, my client owes a touch over $100. A reply to the IRS notice has been sent and in about ten weeks we’ll hear back that we’re correct. My client has already paid what we believe the balance to be.

The Self-Employment Tax While Employed???

Tuesday, June 28th, 2016

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….

Math Is Hard, IRS Addition

Thursday, March 3rd, 2016

This time I couldn’t resist.

A client received an IRS CP2000 notice. This is an Automated Underreporting Unit (AUR) notice, designed to look for things such as matching errors. In this case, a client didn’t include his dividend income on his tax return. He was guilty as charged and was prepared to pay the tax due, but he ran the notice by me. The notice correctly noted that the ordinary dividend income from his brokerage hadn’t been included, but it said that the qualified dividends had been included.

Think about that for the moment if you’re a tax nerd. How can you have qualified dividends without having ordinary dividends?

For those of you who aren’t tax nerds or who haven’t figured this out, qualified dividends are a subset of ordinary dividends. The total of qualified dividends cannot exceed the total of ordinary dividends. If ordinary dividends are zero, qualified dividends must be zero, too.

So this IRS notice was wrong–I’m not sure if it’s a programming error (a systemic error) or not, but there were two other issues with this notice (both of which I expected). Somehow the notice ignored the one stock trade my client had. Could it be because my client lost money so that would decrease his tax? I’m sure my cynicism is misplaced, right? The client also paid foreign tax on his dividends; that, too, was left off the notice.

Does my client owe some additional tax? Absolutely. However, he owes about one-third less than what the IRS alleges, mostly because the IRS notice is plain wrong regarding qualified dividends.

To my clients and anyone else who receives an IRS notice: IRS statistics show that two-thirds of IRS notices are wrong in whole or in part. Do not blindly pay the notice without checking with your tax professional to see if the notice is accurate unless you like paying tax you don’t owe.

Reversing Two Penalties That Should Never Have Been Charged

Monday, May 6th, 2013

When are tax returns due? For most individuals, its April 15th. However, if you are outside of the United States on April 15th for purposes of employment or self-employment you get an extra two months (until June 15th) to file your return. There are no penalties but interest is charged. As the IRS states (see the link), you simply attach a statement to the return and no penalties are supposed to be charged. I’ve been preparing returns for expatriates for years and never had any problem with this…until last year (the 2012 tax season for filing calendar year 2011 returns).

For whatever reason, I had several clients who were charged penalties who were outside of the United States on April 17, 2012 (last year’s tax deadline) for employment/self-employment purposes. I checked with my software vendor and they told me that nothing had changed with the software–the notices were attached to the filed returns. I believe them because I had two clients who paper-filed who were charged penalties! In all cases, a statement was attached to the return noting the taxpayer was outside of the US on the tax filing deadline.

In most of these cases, I was able to reverse the penalties with a phone call. However, I have had three clients where I have had to write letters to the IRS. Here’s how one case was resolved.

This client’s return was filed in early June. She took the automatic extension, with a statement attached to her return. She had a small balance due which was paid through electronic debit (with the filing of her return). In mid-July she received a CP14 notice noting that she owed late filing and late payment penalties. I obtained a Power of Attorney and called the IRS. The IRS refused to lift the penalties. I wrote a letter in early August explaining that no penalties should be owed. In mid-September, I received a response from the IRS that they hadn’t resolved the situation. In mid-December, the IRS denied removing the penalties.

We have carefully reviewed your case. However, the information provided did not establish reasonable cause. Thus we are unable to remove your penalties for failure to file and failure to pay.

Did the IRS even read the letter I wrote? I asked for the penalties to be removed based on the out-of-country automatic extension, not for reasonable cause. (And yes, it took the IRS over four months to give an answer to my letter.)

We then appealed the decision. The hearing was held in late March and was the shortest Appeals hearing I’ve ever had. The Appeals Officer stated that we were correct, and that no penalties should be charged. “I can’t remove the interest,” he noted. I told him that was fine–the client does owe the interest. The Appeals Officer told me that he had no idea why this couldn’t have been resolved at the Service Center level or by Service Center Appeals Screening. (All appeals are first screened for obvious cases where the appellant is correct. A few years ago, I filed an appeal on behalf of a client who was charged the late filing penalty when his efile return was rejected on October 15th; he had mailed the return the next day–and mailed it using certified mail, return receipt rejected. The screening staff granted our appeal.)

Well, I may be able to answer the question as to why this couldn’t be resolved at the Service Center. I suspect that staff answering the notices (generally, the automated underreporting unit, or AUR) have problems when it’s not something they’ve encountered before. (I cringe when I have a client who receives a CP2000 notice regarding, say, a W-2G. Most personnel at the IRS rarely see gambling-related tax issues and don’t understand the law.) Most likely, the individuals who reviewed the letters I sent had no idea that there’s an extended deadline when you’re outside of the US on April 15th. Since they didn’t know of it, it couldn’t exist.

Second, the sheer volume of notices being sent out is creating a huge volume of responses. This means the staff handling those responses have been overworked. Given that two-thirds of IRS notices are incorrect (in part or in whole), the IRS is likely getting lots of letters. Overwork leads to errors in responses.

I don’t know if I’ll actually have to go to Appeals on the other two clients whose cases have yet to be resolved. (These are both going through the same IRS Service Center which rejected my first client’s out-of-country extension.) In the end, I’m certain my clients are in the right. But consider the expense to my clients and the expense to the IRS. As Joe Kristan noted last week, the IRS could do a better job in spending the money it has. I would expect that basic training in the deadlines would be given (or at least, knowledge of the rules or a database of where to look).

Unfortunately, I don’t expect things to get better. The problem is that the AUR program is a huge moneymaker for the IRS. Far too many individuals see an IRS notice and blindly pay it. Most of my clients have been reading my newsletter (or this blog) and know the reality of IRS notices and don’t blindly pay IRS notices. Make sure you don’t either.

When a W-2G (or Other Information Return) Is Wrong

Wednesday, March 20th, 2013

Let’s say you’re self-employed, and you get a 1099-MISC from a customer. He notes he paid you $1,200. However, he really paid you $900. What do you do?

First, you contact the customer and attempt for him to correct the error. Hopefully, you can show him a copy of your invoice(s) or other documentation, and he or she will issue a corrected 1099-MISC.

But what if he refuses? Here, practicality must be used. Let’s say the total of your gross receipts is $32,000, and the total of your 1099-MISCs (and 1099-Ks) is $29,000. I’d likely just enter the 1099-MISC as received, and lower the “other” gross receipts by the extra $300. (IRS instructions on information returns state to use the actual number. The problem is that the automated underreporting (AUR) unit will almost certainly send you a notice if you use the wrong number.)

Earlier this week I was faced with a different situation. My client, an amateur gambler from Indiana, entered a poker tournament in Iowa. The tournament had a $300 buy-in, and my client cashed for $2,300. Under federal law, no W-2G would be issued because the amount of his win, $2,000, is less than the threshold for issuing a W-2G in a poker tournament ($5,000). However, under Iowa law withholding on nonresident’s winnings begin at gross winnings of $1,200 (at a rate of 5%). My client received a W-2G for $2,300, not $2,000. What should be done? (My client has excellent records, including the tournament buy-in receipt.)

The amount of the win is $2,000, not $2,300. Indiana does not allow gambling losses to be deducted on their state income tax returns, so this is an issue for my client. (This can be an issue for individuals on federal returns, too. Gambling losses are an itemized deduction, so they don’t impact Adjusted Gross Income (AGI). Many tax items are tied to AGI, such as being able to contribute to a Roth IRA.) However, if I enter $2,000 as the amount won for that W-2G, the IRS’s automated underreporting unit will flag the return.

The solution is to enter the W-2G as it was received, and then subtract out the $300 buy-in just below this. I included an explanation: “Buy-in for W-2G winnings.” Should the IRS, Iowa, or Indiana flag the return, we can respond with a perfect paper trail showing that what we did is to put the income my client really earned on the tax return. Given that this is a fundamental principle of US taxation, all should be well.

The same process can be used for other information returns that are erroneous: Enter the “wrong” numbers, and modify them with an explanation. Do realize that there is a chance that the AUR unit may ask for proof. This is yet another reason why the solution to many tax issues is to document, document, document.