Letter from the IRS

[DonB]

From the Bay Area, San Jose CA

Yesterday I received a letter from the IRS stating I owe taxes resulting from incorrect information on my tax return. The amount is about $16k in taxes and about $5K in interest and penalties. It was an honest error on my part and assuming the information the IRS provided is true (I’ll be speaking with my financial advisor on Monday to review) would a tax attorney likely be able to get the amount reduced? If so would it likely be just the penalties or additional? I also believe the same error was made with my 2019 tax return and would like to get ahead of that potential problem.

 

[FlyingRon]

You definitely should have a tax professional go over both years to make sure that you indeed have made such an error (and that the amounts are right). Just because the IRS thinks you owe it, doesn't mean you did. I once had the IRS suggest I owed them $250,000+ in capital gains when I hadn't sold anything (I had switched brokerages).

Unless you have some other serious stuff going on, you're not getting any relief. OIC and the like are last-ditch efforts for the IRS to squeeze blood out of a stone.

 

[Taxing Matters]

It was an honest error on my part and assuming the information the IRS provided is true (I’ll be speaking with my financial advisor on Monday to review) would a tax attorney likely be able to get the amount reduced?

First, understand that the tax amount you owe, whatever that is determined to be, and the interest, cannot be abated (reduced) except by an offer in compromise (OIC). An OIC is a program in which the IRS will take less than the full amount due as full payment of the tax liability when it is determined the amount offered by the taxpayer exceeds what the IRS could collect any other way. So if you have the ability to fully pay the liability, either in full now (including through liquidation assets), or through installment agreement, or whatever, the IRS won't accept an OIC and that tax and interest won't get reduced.

What might be able to be abated is the penalty (and if some or all of the penalty is abated then the interest on that penalty is adjusted accordingly). Whether a tax professional (or you on your own) might succeed in getting you some penalty relief depends on the penalty that was asserted and the circumstances that resulted in you making the error you did. Without that information I cannot tell you how likely it is that an abatement request would succeed. The tax professional doesn't need to be a tax attorney. It could also be a CPA or enrolled agent (EA). All three types of tax professionals are authorized to practice before the IRS. What you want is to ensure that the tax pro you hire has experience with post filing matters like these proposed adjustment letters, audits, etc. If the tax person's business is focused only on return preparation that is not the person you want for this.

 

[DonB]

You definitely should have a tax professional go over both years to make sure that you indeed have made such an error (and that the amounts are right). Just because the IRS thinks you owe it, doesn't mean you did. I once had the IRS suggest I owed them $250,000+ in capital gains when I hadn't sold anything (I had switched brokerages).

Unless you have some other serious stuff going on, you're not getting any relief. OIC and the like are last-ditch efforts for the IRS to squeeze blood out of a stone.

Thanks for the reply. What you say makes sense and may be similar to what’s happened here. Money was previously invested in a CD type of account (I don’t recall the exact term for it) and was changed over to ETF based accounts. I believe this happened around 2018, I’ll have to check records (currently in storage). When I speak to my financial advisor on Monday he should be able to tell me.

 

[DonB]

First, understand that the tax amount you owe, whatever that is determined to be, and the interest, cannot be abated (reduced) except by an offer in compromise (OIC). An OIC is a program in which the IRS will take less than the full amount due as full payment of the tax liability when it is determined the amount offered by the taxpayer exceeds what the IRS could collect any other way. So if you have the ability to fully pay the liability, either in full now (including through liquidation assets), or through installment agreement, or whatever, the IRS won't accept an OIC and that tax and interest won't get reduced.

What might be able to be abated is the penalty (and if some or all of the penalty is abated then the interest on that penalty is adjusted accordingly). Whether a tax professional (or you on your own) might succeed in getting you some penalty relief depends on the penalty that was asserted and the circumstances that resulted in you making the error you did. Without that information I cannot tell you how likely it is that an abatement request would succeed. The tax professional doesn't need to be a tax attorney. It could also be a CPA or enrolled agent (EA). All three types of tax professionals are authorized to practice before the IRS. What you want is to ensure that the tax pro you hire has experience with post filing matters like these proposed adjustment letters, audits, etc. If the tax person's business is focused only on return preparation that is not the person you want for this.

Thanks for your reply. If the tax is owed it’s owed, as you stated I’ve no choice. I was hoping for a reduction in penalties mostly. As I mentioned in another reply some CD based investments were converted to ETF based accounts and I think that happened in 2018. Question is would this become a taxable transaction?

I also appreciate your clarification as to who might sort this issue out, I’m sure CPA or EA would be much more affordable than a tax attorney. What’s the best way to know if such an individual is truly qualified and experienced in such matters?

 

[Taxing Matters]

As I mentioned in another reply some CD based investments were converted to ETF based accounts and I think that happened in 2018. Question is would this become a taxable transaction?

Generally when you convert from one investment to another it is taxable event. On the other hand, if the investment was unchanged but all that happened was a change in broker/financial company managing that investment (like what happened to Ron) that would not be a taxable event. So the details of exactly what occurred matter.

What’s the best way to know if such an individual is truly qualified and experienced in such matters?

Like with any professional you hire, ask them about their qualifications and experience. What is their background? Where/how did they learn tax law? What is their experience in dealing with things like CP2000 letters (which is very likely the letter you received, IRS computer generated letter always have a letter code on them at the top or bottom of the letter). Ask them about their experience in dealing with the IRS on matters like penalty abatements. Note that EAs have to pass a comprehensive test administered by the IRS to become EAs, so presumably they are tax knowledgeable. Attorneys and CPAs, on the other hand, are not necessarily tax knowledgeable because the training and testing for attorneys and CPAs does not focus on tax law. Attorneys are trained in the law (but not necessarily tax law) and CPAs are trained in accounting (but not necessarily tax accounting). So for attorneys and CPAs it's particularly important to ask how they learned tax law. For attorneys, typically a tax attorney will have a Master of Laws (LL.M) degree in taxation. A tax CPA often will have a Master's degree in tax or other specialized tax education.

 

[DonB]

Generally when you convert from one investment to another it is taxable event. On the other hand, if the investment was unchanged but all that happened was a change in broker/financial company managing that investment (like what happened to Ron) that would not be a taxable event. So the details of exactly what occurred matter.

It was/is the same financial institution. Again thank you, the information you provided will be most helpful.

 

[LdiJ]

From the Bay Area, San Jose CA

Yesterday I received a letter from the IRS stating I owe taxes resulting from incorrect information on my tax return. The amount is about $16k in taxes and about $5 in interest and penalties. It was an honest error on my part and assuming the information the IRS provided is true (I’ll be speaking with my financial advisor on Monday to review) would a tax attorney likely be able to get the amount reduced? If so would it likely be just the penalties or additional? I also believe the same error was made with my 2019 tax return and would like to get ahead of that potential problem.

You can ask the IRS to wave the penalties. Sometimes they will, but not often. It certainly does not hurt to ask. However I would find a tax professional who is experienced in dealing with IRS problems for assistance. You could use a tax attorney but the cost might be prohibitive, based on the potential savings.

You also want to make sure that the IRS's calculations are accurate. The are not accurate sometimes. The tax professional can also help you with that. They will need a copy of your original tax return in order to help you.

 

[DonB]

So I sat down today with a CPA who’s well versed in issues such as mine. First off I did make errors on my 2018 tax return. But its not as bad as the IRS letter states. What happened was the investment account type changed as well as brokerage firm. My financial advisor is employed by a local bank we use and they once had an association with firm XYZ. In or around 2017 that association changed to firm XXX. The investment type remained the same (CD time based) but when the switch was made the “cost basis” was never recorded by XXX. So my financial advisor will get me this information which I will pass onto the CPA. I don’t know the exact numbers yet but I know I’m going to be better off than what the IRS letter suggests.
I‘m also asking the CPA to go over my 2019 return as I’m 99% sure I made errors on that as well. I know I’ll owe money here as well. Anyway when I have the final outcome I’ll update again. Thanks to all that replied, to those that are just following along or found this thread because of a similar problem hopefully this will ease the panic they may be feeling.

 

[Taxing Matters]

Glad to hear that it's at least not as bad as the IRS proposed. It's always good when people come back to the boards to let us know how their situation turned out. Good luck.

 

[FlyingRon]

Yep, that's what happened to me. Not only did the former brokerage report it as a sale (which it wasn't), there wasn't any basis filed, so the entire sales price was considered a capital gain. I made the accountant and the new broker sit down and fix everything.

 

[LdiJ]

Glad to hear that it's at least not as bad as the IRS proposed. It's always good when people come back to the boards to let us know how their situation turned out. Good luck.

I had a client recently whose CP-2000 letter proposed that he owed $263,000 with penalties and interest. What he really owed was $731 only. So yes, sometimes those letters are really really wrong.

 

[Taxing Matters]

So yes, sometimes those letters are really really wrong.

I, of course, never said anything to the contrary. Having worked for the IRS for a number of years as both revenue officer and attorney I am keenly aware of the limitations in the data the IRS has from income reporting program (IRP) documents like W-2s, 1099s, etc as well as the limited reliability of the return matching programs. The IRS has access to more information today than it did in the 1960s when computers started to be used in a big way by the agency, but it is still far from perfect. That's why I tell people to not just simply accept that a letter from the IRS is correct. Instead, they should go back to their own records (and hopefully they have retained those records) and verify if the IRS got it right. If it did, then go ahead and write that check. If it didn't, then follow the process in the letter to challenge the proposed assessment and explain what the actual result should be.

 

[LdiJ]

I, of course, never said anything to the contrary. Having worked for the IRS for a number of years as both revenue officer and attorney I am keenly aware of the limitations in the data the IRS has from income reporting program (IRP) documents like W-2s, 1099s, etc as well as the limited reliability of the return matching programs. The IRS has access to more information today than it did in the 1960s when computers started to be used in a big way by the agency, but it is still far from perfect. That's why I tell people to not just simply accept that a letter from the IRS is correct. Instead, they should go back to their own records (and hopefully they have retained those records) and verify if the IRS got it right. If it did, then go ahead and write that check. If it didn't, then follow the process in the letter to challenge the proposed assessment and explain what the actual result should be.

I realize that you are keenly aware and I never suggested that you said anything to the contrary. I was commenting to show just how badly "off" they can be. I have dealt with at least 2 dozen CP-2000 letters in the last two weeks and they have been at least partially wrong on all of them. On the average, that is way higher than normal. Normally its about 50/50. There were no CP-2000 letters going out at all for several months and now there are a bunch of them at once. I suspect that they are not getting quite as much oversight because the IRS is short staffed.

Those letters really scare taxpayers and unfortunately some of them just pay whatever it is the IRS says that they owe. So, any opportunity there is to educate taxpayer's on just how far off they can be, is one I like to take.

 

[DonB]

Met with the CPA today and have the results. The big error on the 2018 return and 1099 is that no cost basis was recorded when brokerage firms changed. That said I owe the FED about $2700 not the $21K suggested (w/penalties and interest). I also recognize their calculations were based on ”available information”. The sad part, the CPA said, is that more than half the people who receive CP2000‘s just pay what it says. True of not I don’t know. Now since the Federal return was redone for 2018 so was the state, money to be paid there as well.

I also had decided when this train started to roll I’d have my 2019 returns checked. Turns out I owe the Fed and State for 2019 as well. All said I’m looking at about $16K for both years. The only question that remains is what the actual interest and penalty that might be applied to the 2018 return. The CPA believed the penalty will be waived and of course the interest will be less based on the new calculation. Once this final piece is known I’ll report back.

I would also once again thank all those that commented, your input is appreciated and helpful.