IRS tax notices are increasing but so are IRS errors!

<>IRS Notices increasing but so are IRS Errors!

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm 602-687-9900 x101

Receiving an IRS form CP2000 does not necessarily mean that you will owe a lot of income taxes. Why? Because, the good news is that 1 in 3 IRS tax notices did not result in a change in income taxes!!
The IRS uses CP2000 notices to show proposed changes to a personal income tax return. The proposal is based on a comparison of the income, payments, credits and deductions reported to the IRS by employers, banks, businesses, and other payers.

In 2011, the IRS received more than 1.8 billion information statements for items reportable on Forms 1099, 1098, W-2 and other similar statements. The IRS matched income and deductions against 141 million individual tax returns filed. The IRS found 20 million discrepancies and issued notices to 4.7 million taxpayers in three different mailings.
Yes, one out of every three CP2000 notices sent does not result in additional taxes owed!
The biggest mistake that is made is not responding promptly to the IRS.
What causes the IRS errors?
1. The IRS Alternative Minimum Tax calculation is sometimes wrong. Many times, the IRS does not use the correct tax rate when IRS picks up the long term capital gains and qualified dividends.
2. The IRS software reads the numbers incorrectly by missing a decimal point.
3. The IRS states that the state refund is taxable. There are many cases where the refunds are not taxable.
4. A recent example is where the IRS showed that an IRA was not allowed but then on another sheet it showed that the IRA was posted to the IRS computer (so you would think it would be allowed)
5. IRS sent a CP2000 letter to married filing separate taxpayer that disallowed the child tax credit for three dependent children.
6. The IRS recently sent one of my clients a form 1099S that showed that the sale of real estate should have been taxable. However, since the client had a loss on the sale of the property which was his principal residence, the transaction was not required to be reported.
7. One client in 2009 had qualified dividends that should have been recorded at the low tax rate, recorded as ordinary income.
Based on a sponsored study conducted to determine the tax gap, which was identified as $345 billion, the IRS made plans to close the gap and improve taxpayer compliance by utilizing improved technology and information system methods. As a result, there has been a significant increase in notices sent to taxpayers; from 2001 to 2009, notice volume increased 670 percent, or from 30 million notices sent in 2001 to 201 million notices sent in 2009. During that same timeframe, the IRS has only seen a 10 percent increase in taxpayers. It is highly likely that the number of notices sent to taxpayers will continue to rise in the coming years.

Despite many of us working through a “busy season,” the IRS compliance systems and personnel work year-round on tax compliance issues. The IRS sends notices throughout the year, including those outlined below. Note that if an IRS notice is received, the state return(s) may also be affected.

• CP 10, CP 12, and CP 13 series: Math Errors
o An individual may receive these notices when the IRS recalculates the return. Preparers should verify the data in the return for accuracy. If the preparer wishes to dispute the adjustment, s/he should contact the IRS.

• CP 11 series: Balance Due because of Math Errors
o If a taxpayer takes new IRS credits or the Earned Income Credit, or the IRS adjusts the return due to a discrepancy (resulting in a balance due), the taxpayer may receive a notice of this type. Proof of the credit taken may need to be provided.

• CP 14: Balance Due
o If a taxpayer did not pay an outstanding balance when filing the return, s/he may receive this notice.

• CP 23, CP 24 series: Estimated Tax Discrepancies
o A taxpayer making estimated tax payments may receive this notice when the estimated payments reported on the return were incorrect. Preparers can review the payments made to ensure they were posted correctly. Otherwise, preparers can file a dispute with the IRS on the taxpayer’s behalf.

• CP 71 series: Tax, Penalty, and Interest Owed
o A taxpayer may receive this notice as a reminder to pay any outstanding taxes, penalties, and interest.

• CP 88: Missing Tax Return and Refund Hold
o A taxpayer may receive this notice if the IRS has not received the tax return, which is more common for paper filed returns or rejected e-file returns. The return should immediately be filed.

• CP 2000: Proposed Adjustment of Underpayment/Overpayment
o A taxpayer may receive this notice if the information in the return does not match the information the IRS received from an employer, bank, business, or other payer, such as income, credits, and deductions.

For a more complete list of notices, visit

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

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Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009