More IRS Audits Mean More Tax Questions--and More Errors
The Internal Revenue Service is in the process of sending millions of letters asking for more tax money and taxpayers are swamping help lines, apparently the result of a significant step-up in automated audits and the agency’s newly launched Social Security matching program.
“We expect to essentially double the number of returns we audit this year, and that’s going to result in a lot more notices going out,” says Jodi Patterson, an IRS spokeswoman in Washington. “Our goal is to audit 2.13% of the returns filed, compared to 1.08% last year.”
The notices that many taxpayers are now receiving are computer-generated form letters that are not technically bills, but that do ask the taxpayer to send money. They are the equivalent of the warning letters that notify taxpayers that unless there is an error that they clear up quickly, the IRS will soon be sending an official bill. If you get such a letter and the IRS is right, you might want to avoid further interest or penalties and pay right away, before you get the bill.
A huge number of questions generated by these notices were apparently responsible for the IRS’ toll-free phone lines being jammed last week. IRS officials say their lines are always overloaded but that recent demand has been about four times what it expected. Tax professionals note that for the IRS’ main help line--(800) 829-1040--waits have stretched to an hour or more for those lucky callers who were able to get through.
Tax experts stress that consumers should not pay anything assessed in error. However, should you get such a notice, check your tax records and respond promptly by either calling or, better, writing to the agency. Those who delay are likely to receive far more serious correspondence--actual tax bills from federal authorities and also from state tax officials, says Bernard Oster, partner at the West Los Angeles tax law firm of Cohen, Primiani & Foster.
That’s because the federal government shares tax information with state governments. If the IRS determines that you failed to report income or claimed unsubstantiated deductions, then that information will eventually reach state tax regulators. And they, too, will send you a bill for additional tax money and penalties. Oster notes that because state authorities can take longer to assess the tax, your penalties may be greater.
The IRS has been perfecting its aggressive cross-matching system since the late 1980s. The IRS matches the income information you’ve reported against W-2s sent in by your employer and 1099s sent by your bank and brokerage firms. It also checks your mortgage interest deductions against the amount your bank reported you paid. And, starting this year, it has been matching every name and social security number on the return against records provided by the Social Security Administration. This cross-matching, and the subsequent notices, are frequently referred to as correspondence audits.
Taxpayers must realize, though, that the IRS is not always right, says Lynn Freer, vice president in charge of education at Spidell Publishing, the producers of several tax newsletters.
More so this year than usual--because the Social Security matching program is so new--taxpayers are finding that the IRS has disallowed legitimate deductions for dependents, resulting in erroneous tax assessments.
Why would the IRS do that? Because a Social Security number reported on the return does not match Social Security Administration records. That can happen if the taxpayer transposed numbers in a dependent’s Social Security number, or listed the name on the return differently--sometimes ever so slightly--from way the name is listed on that person’s Social Security card. Some experts say that returns are being rejected because a parent listed the child’s nickname, rather than his or her formal name, on the return, for example.
Freer notes that newly married women who used a married name on their tax return but who have not changed their records with the Social Security Administration may also expect notices.
The good news here is that if a Social Security mismatch is the problem, it is among the simplest to clear up. In most cases, a taxpayer need only send a copy of the dependent’s Social Security card or the marriage license and a note explaining the mistake.
Somewhat more difficult to resolve are errors resulting from the income-matching program. One common problem, Oster says, involves taxpayers who get distributions from a retirement program and then roll the money into a tax-deferred individual retirement account. Banks and company trustees report retirement account distributions to the IRS, but no one other than the taxpayer reports what was done with the money. Therefore, taxpayers who don’t note on their 1040s that the money was rolled into another IRA are likely to get tax bills claiming tax and penalties are owed on the entire amount of the distribution.
To solve this type of problem, you will need to provide documentation--such as new account documents--showing that the money was rolled into another IRA within the 60-day period, Oster says.
A third common reason for taxpayers to receive erroneous requests for money results from having reported income on the wrong line on the tax form. If you report interest income on a line meant for dividends, for example, the IRS could decide that you had failed to report income, and therefore pay all the tax due, when in fact you have paid the proper amount.
Tax experts stress that whether the error is your fault or the IRS’, you should deal with it quickly and professionally.
The best way is to respond in writing, and to send letters by certified or registered mail, accountants suggest. Explain the discrepancy clearly and briefly, Freer says. Include copies of any documents the IRS will need to verify that what you are saying is true.
If you do owe money, pay it promptly. Any delay can cause you to rack up additional interest and penalty charges. Then notify the state government of the error and send it whatever tax you believe is due, Oster suggests. By being active in taking care of any problems, you solve them before penalties and interest charges get out of hand.
