October 16, 2009


Donald S Paris, CPA, MST

A friend of mine called me the other day, very upset. It seems she received a letter from the IRS. At first, like most folks, she didn't even open the letter. She started freaking out when she saw who the letter was from. When she opened it up, she saw that IRS claimed that she owed thousands of dollars in tax. She didn't understand why, so she called me (instead of calling her own accountant). After I asked her a few questions, we got to the bottom of it. It turns out that she set up a joint brokerage account with her son, but the name and social security number on the account was hers. She gave the annual tax documents to her accountant, who then prepared her tax returns. But, since she told him that the account was her son's, the accountant did not include the information on her returns. The IRS tried to match the information from the brokerage company to the information on her return, and guess what? No match. So, they sent her the letter. The son's CPA did include the information on his return, and once this was proven to the IRS, the IRS dropped the claim that she owed the money. In the meantime, she was nervous.

This story has a happy ending. This situation, like most, was avoidable. Unfortunately, they all don't end so happy. You see, her accountant could have shown the son's information on her return, and then shown a subtraction showing that the son included the information, and also given the son's social security number to prove it. In this case, like most cases, the IRS really is just concerned that the appropriate tax is paid. Once they are assured of that, they go away.

The IRS and Congress constantly deal with the "Tax Gap". Tax Gap is an estimated amount of tax that they could collect, if it was properly reported. Right now, we stand around the $300 billion mark. Yes, it is that high. As a result of this, the IRS has matching programs to enable them to attempt to match information provided by brokerage companies, banks, employers, casinos and others with the tax returns of the recipient. So, if they know that you, or your company, should have reported the income (and paid the tax), and you didn't, they send you a letter asking for the money. This automated under-reporter program affects between 4 - 5 million taxpayers annually. They start with the Form CP2000, We Are Proposing Changes to Your Tax Return. Believe it or not, when the IRS generated 3.5 million Forms CP2000 in it's 2007 fiscal year, it collected $5 billion in tax revenue.

So, what can you do to keep from getting one of these forms?

  1. Do not group income amounts together;
  2. Include an explanation when the payer information is not correct;
  3. Avoid netting items together;
  4. Report income on the correct line of the tax return;
  5. Identify reporting from joint accounts;
  6. Provide an explanation when the amount differs from the payer information;
  7. Include copies of revised schedules; and
  8. Always maintain detailed records.

In case you do receive one of these forms, the first thing I would recommend is to review the information provided by the payer against the information you included in your tax return. Then, call your CPA. I never recommend that you handle this, or any other case involving a taxing authority by yourself. Though the item may seem simple enough, unless you are trained in taxation, you do not know what problems are out there. In your attempts to clear up one item, you could generate many other problems that you then need to deal with. One client of mine received an audit notice from the IRS, and called me to tell me that he wanted to handle the audit himself and avoid having to pay me. I could not dissuade him. So, he met with the agent himself. He answered all the questions asked by the agent. The result? He owed significant amounts of tax, penalty and interest. Then he called me and put me in charge of the case. After my meetings with the IRS, he actually had refunds coming to him. Moral of the story: if you have a good CPA, use them.