There has always been a sense of fear with any tax client over the past 30 years in my tax practice when an IRS letter or notice lands in their mail box. Recently, a very long term tax client of FSI was visited by an IRS letter pertaining to his wife’s Roth IRA account they decided to cash in a couple years ago.
Unfortunately, the client failed to give me the end of the year 1099 that was sent to him from the IRA custodian. A little over a year after filing the return, the IRS letter (CP 2000) arrived with a proposed amount due over $16,000! The husband didn’t understand the 59 1/2 age rules for his wife, which had they waited another year, the entire distribution amount would have been tax free. (Noting the last IRA you should ever cash in is your Roth or your Inherited Roth IRA account due to the tax-free status)
The substantial penalty for understating income on their filed return (20 %) was imposed. And full tax on the IRS’s version of additional income, around $52,000, and of course penalty and interest added in for good measure.
I found the clients scared to death of the IRS notice and wanting to immediately write a check for the full amount due to their extreme fear from just a simple notice that wasn’t even a final determination of the true amount they owed for failing to report the income properly.
Upon examination of the problem, I discovered the IRS had sent the proposed amount with a zero basis factor which means it would be impossible to invest zero into a Roth account and have it gain $52,000 before cashing it in. So first of all, this was prima facie evidence of how bad the IRS accounting and bookkeeping systems are. By going back year by year, we found at least 1/2 of the amount was “basis” or in simpler terms, we were able to prove the proposed “gain” was no more than 1/2 of the amount cashed in.
The sad part is that the pre-payment of the full amount the client insisted way back in July of this year has made it extremely hard to get the remaining money back in refund. I had never done that for a client (we fight and then pay agreed amounts only) in my entire 30 years of tax practice. The filed Form 8606 that established the true basis in the cashed in account should have set the tax record straight. It was filed way back in September and a refund check over $7,000 was anticipated.
Each day the client got their mail, they looked for that refund check. Finally in early December, a two page letter came from the IRS. No check, just another copy of the same hold harmless legal release for them to collect the full amount of the understatement penalty on the full $52,000 bogus amount of taxable income!
Needless to say, our recent response was distinct and quoted figures (again) and reminded the IRS, they never acknowledged receipt of the $16,000 amount sent back in July. The letter only referred to how to pay the IRS MORE money!
This client was so scared in our last conference, he wanted to just drop it all and let them keep the full amount. As a professional tax consultant and IRS approved tax preparer and IRS approved Corporate E filer, I stated clearly that the response I assisted on would demand the excess refund money back. So, with chagrin and still that IRS fear so ever present, they agreed to that game plan.
I told them not to look for any IRS response, or check, for at least two months. And try to stop being fearful of them. Getting their honest refund money back will help reduce the fear. But when that happens could be anyone’s guess. This is not the IRS I started with 30 years ago. I don’t know this IRS any more…
M.D. Anderson, Accountant, Realtor, AZCLDP