IRS Notice & Benefit of Hiring a Tax Pro

[Emerson11]

Every couple of years, I get thinking that I should start using Turbo Tax and save the tax prep fee. I had planned to do so for tax year 2019, then. . . .

I received an IRS notice asserting that we owe approximately $8500 in additional tax and penalties on year 2017. Everything, seriously, everything in the notice was incorrect. The biggest error, causing most of the problem was one stock sale shown with a -0- cost basis, when in fact the return and supporting docs had shown a basis that was more than the proceeds, a net loss.

Additionally, the notice asserted tax due related to income from a holding held in an IRA. The k-1 clearly states that the asset is held in a ROTH IRA. There were other blatant errors as well.

My accountant, quickly prepped a multi-page response complete with supporting docs., and I never had to get on the phone or write the IRS myself.

This episode and the once or twice a year I email my CPA to ask a planning question, is why I'll keep using a trusted pro to handle my taxes.

 

[Texas Proud]

So, did you file by paper or electronically?


I would assume by paper which means it could have been input incorrectly... filing by Turbo Tax would have prevented this in the first place..

 

[Emerson11]

No, have been filing electronically for years. The return was 100% correct.

 

[socca]

I received an IRS notice asserting that we owe approximately $8500 in additional tax and penalties on year 2017.

I recently received an IRS notice for tax year 2018. Anyone who e-filed and faithfully followed the IRS 2018 instructions for taking Section 199A(g) DPAD is going to receive such a notice, because the IRS computers aren't equipped to handle it.

It's not a big deal. I'll call the IRS in a few weeks and get it straightened out.

BTW: it's very useful to create an account with the IRS and download a transcript for the tax year in question. This provides you with a look at your taxes from the IRS's point of view.

 

[brett]

I had a similar experience. Always did my own tax. I was audited a few times but if was only desk audit..they wanted to see my automobile expenses. No issue, no adjustment.

About three years before retirement I was concerned that I might have made some errors. I wanted to be clear of the tax folks prior to FIRE. At the same time I got a notice that they wanted supporting data on a a tax shelter that I was involved with. It did not feel 'good'. Never does when the tax folks knock on your door.

Seemed a good opportunity to a recommended CPA involved. I engaged her and then got all of our papers, 1999-2006 organized so that she could do her work. Weeks later. A 3K bill. Refiled both our returns, some of them going back to 1999. 10K refund in total plus an efficient tax plan going forward that we are using to this day. Plus of course, her fees were tax deductable. The other benefit was knowing that there would not be a knock at the door and a big tax bill two years or so into FIRE.

I am a huge believer in engaging competent professional help when it is required. We do not care about the hourly rates/fee. We only care about the outcome. Strictly cost/benefit ratio for us. We never cheap out when we need good advice or guidance.

 

[Texas Proud]

How did they go back to 99? You are not supposed to be able to amend a return past 3 years...


The only way I know is that you never filed 99 which then still leaves that tax year open to file...

 

[Koolau]

I've always been a believer in using a CPA. They too can make mistakes, of course, but they also seem to know how to navigate the issues when the IRS gets it wrong (or even right, heh, heh.) YMMV

 

[Alan]

BTW: it's very useful to create an account with the IRS and download a transcript for the tax year in question. This provides you with a look at your taxes from the IRS's point of view.

I never knew that you could do this. Thanks for the tip. (assuming they let overseas filers create an account)

 

[bingybear]

I had an incident where we got a nice IRS letter over a decade ago that said we owed over 13k. We had two identical investment sales other than the owner. In the reviewing we had inadvertently left off the basis info on one of them. No pro, but after the shock it was easy to sort. Do an amended return and they owed us $80.

I usually keep K-1's out of IRAs as UBTI can cause your TIRA to have to pay taxes.

 

[gauss]

How did they go back to 99? You are not supposed to be able to amend a return past 3 years...


The only way I know is that you never filed 99 which then still leaves that tax year open to file...

Isn't the 3 year limit only to get a refund?

 

[LOL!]

I guess I was never intimidated by anything the IRS or state tax people sent me because they were always clearly wrong. It was also easy to straighten them out.

The way I approach it is that they are human beings and taxpayers themselves and just doing their job. If they don't have the resources (good computers, good software) to know any better, then I cannot blame them. Very often, these letters are simply computer generated.

As far as Emerson11's situation, if the return was correct (like mine have been), a phone call to have a human in the IRS look at it is probably all it takes to fix the situation.

I'll bet at first that Emerson11 was irritated with the accountant about the tax return.

 

[audreyh1]

It’s been rare, but we’ve easily reponded to the IRS by answering their letter with our documentation when we thought they were in error or correcting our mistake.

We don’t use TurboTax to save the tax prep fee. We were simply comfortable doing our own taxes long ago, and that hadn’t changed.

 

[Corporateburnout]

I prepare my sister's tax returns using TurboTax. Last year she received a CP2000 notice from the IRS for 2016 claiming she owed 9K in tax, penalty and interest.

The two issues they highlighted were a stock sale and under reporting of interest. The first one was legit as she forgot to provide me with the 1099 for the sale of all shares of an ESPP but the other issue was an input error on the IRS part.

She panicked and wanted to hire a CPA to handle the response but I convinced her to let me handle it. I responded to the IRS with a letter and an amended return with backup documentation. The IRS accepted the amended return and waived the penalty as we requested under the FTA (first time abatement). Her final bill was $343 plus $30 in interest.

For me it was an easy experience the few times I had to deal with the IRS. As long as someone is organized and the backup documentation is available.

 

[brett]

I live in Canada. We are able to go back and refile for four years (I believe).

We can go further back with the permission of the CRA, the tax dept. This is routinely granted for at least two or three years. In 2006 we refiled back to tax years 1999 with no issue whatsoever. I was given to understand that this is not unusual.

 

[Spock]

My experience with trying to correct IRS has been dramatically different.
I made four trips to the local IRS office to provide documentation etc for an IRA rollover (IRS wanted to tax it as a distribution) and a claim of the first time home buyer tax credit. Each time the locals said the documentation I provided " is very clear and should resolve it". Each time another letter from the IRS auditors stating "you owe" with no info as to what they disagreed with. Finally they sent the "we're going to seize all of your bank accounts" letter.
I went thru the tax payer advocate office to speak directly with the auditor on the phone... auditor asked 1 question regarding timing of an IRA rollover and poof... they were happy. When I asked if they needed documentation to prove that verbal answer: "no need... we're good".
That was 7 years ago. To this day I have to warn my wife that I'm expecting forms from the IRS so that she doesn't freak out that we've gotten another letter from the IRS.

 

[gerntz]

I'm not hearing anyone say they used TurboTax & heard from the IRS only when either a) the taxpayer's input was wrong, or b) the IRS was wrong and ultimately accepted the taxpayer's input with sufficient documentation. Net, don't know why to not used TT from this thread.

 

[audreyh1]

My experience with trying to correct IRS has been dramatically different.
I made four trips to the local IRS office to provide documentation etc for an IRA rollover (IRS wanted to tax it as a distribution) and a claim of the first time home buyer tax credit. Each time the locals said the documentation I provided " is very clear and should resolve it". Each time another letter from the IRS auditors stating "you owe" with no info as to what they disagreed with. Finally they sent the "we're going to seize all of your bank accounts" letter.
I went thru the tax payer advocate office to speak directly with the auditor on the phone... auditor asked 1 question regarding timing of an IRA rollover and poof... they were happy. When I asked if they needed documentation to prove that verbal answer: "no need... we're good".
That was 7 years ago. To this day I have to warn my wife that I'm expecting forms from the IRS so that she doesn't freak out that we've gotten another letter from the IRS.

I’m sure if it escalated when we thought we had responded correctly, we would get additional help.

 

[audreyh1]

I'm not hearing anyone say they used TurboTax & heard from the IRS only when either a) the taxpayer's input was wrong, or b) the IRS was wrong and ultimately accepted the taxpayer's input with sufficient documentation. Net, don't know why to not used TT from this thread.

Right, this is not the reason to avoid TurboTax and have an accountant do your taxes all the time.

 

[Teacher Terry]

We only used a CPA for 2 years when we had complicated returns due to selling 2 properties at a loss. It was expensive but worth it. The rest of the time we use turbo tax.

 

[Emerson11]

My OP was conversational, not a directive.
My point was that I didn't have to call the IRS, go through a process, wait on hold, fill out forms, or seek an IRS supervisor.
I was merely providing food for thought about an additional value received when one hires a professional to do ones taxes. I wasn't implying that everyone should stop doing their own taxes, or stop using TT, or even that my way is the best way. Each of us values things differently.

 

[athena53]

I've used TurboTax or a competitor for years for semi-complicated returns- many types and source of investment income, and always itemizing deductions. I've gotten nasty letters from the IRS only 3 times and they were easily resolved with a letter I wrote back and, if necessary, a 1040X and any payment due.

1. Forgot to report some money market redemptions. They assumed the basis was zero so of course the amount due was big and scary. I filed a 1040X, included the proceeds and the proper basis, paid small additional taxes due.
2. Brokerage firm merged in early February and I didn't realize the transactions I downloaded didn't include those pre-merger. Oops. I did owe more taxes but not the fault of the software.
3. Rolled over a 401(k) into an IRA when I left the employer. The form I got form the employer left the "Taxable amount" box blank so that's how I completed it in TurboTax. The IRS computer decided it was ALL taxable. A polite letter made them go away.

I suspect that those places that advertise on TV about how they negotiated huge discounts for their clients from the original IRS demands were working with cases like #1 and #3.

 

[GrayHare]

I've received those IRS letters from time to time. Usually the solution was supplying them some detail I had omitted. The resolutions have always been fair and proper from my point of view. One time when it was a Turbotax error the IRS waived the penalty and I simply paid the correct additional tax.

 

[ocean view]

How did they go back to 99? You are not supposed to be able to amend a return past 3 years...


The only way I know is that you never filed 99 which then still leaves that tax year open to file...

Not to take this too far off topic, but I thought it might be helpful/informative to respond to this comment.

There are a couple of scenarios that I know of where the IRS could audit a taxpayer beyond the 3 yr statute.

1- you are invested in a pass through entity that is under audit for an old year. The pass thru has granted waivers to the IRS to extend the statute to allow them time to complete the audit. When the audit is complete, the pass thru has to amend K-1s to all investors, who in turn have to report those changes to the IRS and state agencies. Your filing of the amended return would reopen the statute for just this item for a new 3 yr period.

2- if you have carryover credits (or NOLs if you are a Corp) that were generated beyond 3 years ago, and are utilizing them in a current year this will open up that prior year return for audit for this item only. The statute of limitations on a carryover item doesn’t begin until the credit is utilized.

3-taxpayer is under audit within the 3 yr statute, but IRS is not able to complete the audit before the statute closes. The IRS will ask the taxpayer to sign a waiver to extend the statute for an agreed to period of time. You are not obligated to sign the waiver, but if you don’t they will assess based on their incomplete findings and it may not be in your favor.

4-as TexasProud stated, if you never filed a tax return, then the clock never starts and the IRS can come at anytime.

 

[youbet]

I was merely providing food for thought about an additional value received when one hires a professional to do ones taxes.

That seems like an odd statement........ Shouldn't one seek value whenever a professional is hired to do something for you? A carpenter, a CPA, an auto mechanic, a FA, whatever......

Deciding to hire a professional to do some task for you is dependent on your own skills, the benefit you gain from developing the expertise yourself, your own abilities, how much time and aggravation you may or may not save, etc., etc.

Why would the "hire a CPA" decision be any different that any other "hire a professional" decision?

 

[LOL!]

I wonder if the CPA e-filed an earlier not-quite-i's-dotted and t's-crossed version (i.e., the wrong version) of the tax return, but then printed out the completed final version to give to the taxpayer. I have evil thoughts all the time.