Fraudulent IRS Notices Alert
By David P. Dillwood, CPA, Partner
About this time of the year, the IRS sends out a flurry of notices to taxpayers alleging a variety of wrongdoing, ranging from mailing in tax forms late to not reporting all of the income which should have been reported. The notice will claim that there is additional tax, penalties and interest due, usually in a small to annoyingly not-quite-large amount. The first reaction in seeing correspondence from the IRS is dread. They like it that way. They encourage that reaction. When the envelope is opened and there is a notice of an amount due, say $49, it is often met with a reaction of (somewhat) relief. In many cases, thinking that it will not pay to do battle with the IRS over such a relatively small amount, the taxpayer simply writes a check to pay the balance, and dutifully sends it in. The sad part is that most of the time, the error is not the taxpayer’s error, it is the IRS who is in error.
Many of the notices assert that a form was filed late. For paper filed forms, we always recommend that our client use certified mail with return receipt requested for any document sent to the tax authorities. Forms that are filed electronically automatically produce confirming evidence of filing and acceptance by the IRS. Too many important things are date dependent to trust that the US Postal Service and the IRS will promptly deliver and record receipt of correspondence in a timely manner. Certified mail with return receipt requested is the best way to prove that a package was mailed on the day you mailed it. This alone could save you lots of money and headache. In most cases, the monetary penalties for late filing a return are significant enough to warrant the extra step in using certified mail. What many people forget or don’t know is that there can be other, far more onerous consequences to a late filed return. Many tax elections, which allow taxpayers to claim favorable treatment for items on their tax returns must be included in a timely filed tax return. If the election is with a late filed return, the election is invalid. So while you may be concerned with the notice and a few hundred dollars of assessment, the problem may be far greater. It could result in thousands of dollars, or even more in extra taxes over time.
Other notices claim that the taxpayer left something off of their return when they prepared it. The government is relying on their computers to match the amounts taxpayers reported on their returns with the amounts reported to them by banks, brokerage houses and others who issued forms 1099 for the year. In many cases, there is a problem with the amount in the government’s computer, or a slight difference between what is in the computer and the amount reported on the tax return. The procedure is to treat any amounts on the taxpayers return as accepted, and then add the amounts from the government system which do not match an amount in the taxpayer’s forms. In many cases, taxpayers combine stock or mutual fund sales which were reported separately to the IRS by the brokerage house. This could result in a double counting of the gain or in the worst case, a double counting of the gross proceeds from the transaction. We have found that in nearly all cases, the government’s notice is incorrect and the amount requested by the government is substantially overstated. Usually a letter with copies of documents which prove the taxpayer position is enough to have the government reverse their position.
The Franchise Tax Board is also guilty of sending out fraudulent attempts to collect additional tax, routinely claiming that taxpayers aren’t entitled to claim head of household status when they are, and questioning dependency credits.
While it may seem like a lot of trouble to respond to the erroneous notice in order to have it corrected versus just paying the amount requested, taxpayer feedback is an important part of the ongoing integrity of our tax system. In some ways, responding to erroneous notices demanding that they be corrected is the only way that the government will find out that they are making errors (or, as my cynical mind believes, that we caught them trying to get money they are not entitled to). If the government does not receive this feedback, they will just continue making the errors or in the worst case, purposefully not correct problems and continue to issue fraudulent notices.