May
31

Don’t Pay This Tax Bill!

By

Green piggy bank with tax bill of $1000

 

The email caught me off-guard. It was short and to the point:

Hello again! I have a question for you. We received a letter from the state saying that adjustments need to be made to our income tax return and that we owe $580. It says that if we disagree then we can send them back more information. Do you have any suggestions on what we should do?

My first reaction was to snort and say, “No way!”

My next reaction was concern – concern that this was a new tax client, and first return filed out of the gate they receive a letter from the state demanding money instead of the $350 tax refund they were owed. My third reaction was to groan, knowing that somewhere between the envelope being opened at the state tax office and input into the state computer system, a W-2 had been lost.  How long would this take to fix?

The adjustment notice from the state told the taxpayer that a change had been made in the amount of withholding they had claimed. Because the withholding amount used in the state calculation was less than what was claimed on the return, an anticipated refund was suddenly a balance due.

Quickly checking the math in the notice against my records, it took me about two minutes to find the mistake and verify my fear.

The total state income tax withholding my client claimed on his tax return was $1690.00. The state adjusted that withholding down and used a figure of $830.00.

$1690 – $830 = $860.00

Somewhere, $860 in state withholding had evaporated between the time the return was prepared and the time the state processed the paper. The first thing I did was check the state withholding amounts on the W-2’s of the taxpayer.

Guess what. One of the W-2’s had state income tax withholding of $860.00. It was pretty easy to see that a missing W-2 caused the problem. This is actually a very common mistake at the final processing level. It’s also a common mistake for the taxpayer to forget to include his W-2 with his filed return, or to make a math error when adding his withholding among multiple W-2’s.

This error, although it wasn’t made by the taxpayer, is going to take some time and effort to fix. I’ll write a letter disputing the notice the taxpayer received, explaining the missing W-2 is the reason the withholding was adjusted down. Copies of the W-2 must be attached to the letter to substantiate the case. I’ll make liberal use a bright yellow highlighter to make my point. Once the state receives that information, they will make an adjustment on the case and issue the taxpayer his refund – a few months late.

Hopefully, the adjustments will be agreed to and made without incident. The first correspondence might not do the trick – it may take another letter or a phone call. Remember, they lost the W-2 in the first place!

You should never take any letter from any tax agency, telling you a mistake was made and you owe a bill, as gospel. If you don’t understand the adjustments the tax agency is making to your tax return and your account, contact your tax preparer and discuss your case. Take all letters you’ve received from the tax entity to your preparer.

When you’re dealing with changes being made to your tax return:

  • Make sure you understand completely and agree with the changes being made to your tax return before they are made.
  • Don’t ignore tax correspondence – all letters are sent out on a timed schedule and by law you have certain appeal rights, but if you’ve got 60 days to respond and you don’t decide to answer until Day 90, you’re out of time and too late.   Once Day 60 passes with no contact from you, their changes will become permanent.  If the law says you’ve got 60 days, that means 60 days, not 61.
  • If you choose to ignore the tax agency letters and blow your appeal time frame, the changes will become permanent.
  • If you don’t agree with the proposed changes to your account, present your case in a clear and concise manner. Include copies of the original correspondence to you, your reply, and all exhibits needed to back up your argument.  Keep everything brief but to the point.  They’ve already made the changes. You will have to change their mind.
  • If you prepared your own taxes and don’t know whether you made a mistake or not, make an appointment with a local tax professional and show them the letter. Ask your friends and neighbors for referrals. The best tax experts are often found locally. Personally, I would avoid any of the large tax prep companies and go with a local tax preparer or accountant that comes highly recommended.

Have you ever been on the receiving end of an IRS or state tax agency collection letter?

Were you able to resolve the situation without trading in your first-born?

 

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Comments

  1. Peregrin says:

    In 2012 I received such a letter from the IRS (federal level). My taxes had been adjusted due to two problems.

    1) 2010 was the first year I had to deal with a HSA and did not do it well – I had neglected to use form 8889, so all my health expenses were seen as unreported withdrawals.

    2) Some scammer had claimed to “forgive” a couple of debts and had filed 1099 forms with the IRS, which then saw these as income.

    Resolving this took several phone calls and no less than three return letters. More mistakes were made.

    * I filed a revised 1040 instead of just returning the 8889.

    * When attempting to fill out an 8889, I actually screwed myself over and came up with owing a significant amount.

    * I sent a check for the amount I thought I owed (should have sent no money until the disputed amount was settled).

    * The scammer refused to validate my “debt” to him, and the initial response from the IRS was to still hold me responsible for the amounts claimed on the 1099s.

    Eventually all this did get cleared up and the money I sent was refunded. It took persistence and refusing to accept what I knew was an incorrect judgement. Once I reached someone who was actually willing to help, all judgements were reversed.

    I also learned that responding to the letter has the effect of resetting the clock. Once you respond, they have to review your case and will send a new letter – and you have 60 days to respond to the new letter.

  2. Good post, and oh so true. As you noted, every taxing agency has a plan for you (and your money) and they will implement it at the slightest provocation. Said plan is NEVER to your advantage.

    I worked for many years in a CPA firm that was owned by two ex-IRS employees. They would wait until the last possible day before responding to any notice. It was fun watching them work the system. They were very effective. There was a lesson to be taken from that: don’t be afraid, but don’t ignore your tax problems! They won’t go away!

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