Every night at bedtime I pray, “Dear God, thank you for RGIII, without whom the Redskins are a winless team, an embarrassment to the NFL, and a waste of pixels on my hi-def, big screen TV. Additionally, I humbly pray for some defensive backs, who actually belong in the NFL and can outrun a little old lady in a wheelchair. I'm not asking for world peace. I'll let President Obama work on that. I'd just like a shot at the playoffs once every decade or so. In your son Stephen Strasburg's (baseball Jesus I) name, I pray. Amen.” Baseball Jesus II is Bryce Harper.
The IRS recently decided that its agents in the Criminal Investigations Division (CID) need more and better firearms training. The reason is not to shoot you in the back fleeing the scene of an audit, although it will make that more convenient for them. The reason is that CID agents deal with modern day versions of Al Capone. Many of you may know that Al Capone was imprisoned for income tax evasion, not the many murders for which he was responsible. Al pissed off the IRS, and they got him. If you piss off the IRS, they might not shoot you, but they will get you.
The easiest way to piss off the IRS is to screw up your tax return. With the IRS adoption of somewhat modern database technology, screwing up your tax return is easier than ever. They now have the ability to match millions of tax return documents, such as W-2 forms and interest statements filed by employers, banks, and brokerages with individual income tax returns. That means if you forgot to claim the income from a stock sale, the IRS will match your brokerage's record of the stock sale against your tax return.
Since you didn't voluntarily report the stock sale on your return, the IRS doesn't just send you a nasty letter. They send you an assessment notice, called a CP-2000 in tax lingo. The CP-2000 notices are produced and sent by the IRS computer in charge of dirty letters, the Automated Collections Service. The letter goes as follows, and I quote.
“Dear taxpayer scum, You suck. You missed a $10K stock sale on your tax return. Please send us $1 million immediately, or we'll empty your bank account and kill your dog.”
OK, maybe that isn't verbatim, but the sentiment is the same. The IRS knows you received $10K for your stock sale, but they don't know what you purchased it for. So they assume you paid nothing for it. Of course, you did actually pay something for it. Maybe you even lost money and are entitled to a deduction. Unfortunately many people just pay the IRS bill without questioning it.
If you were the person in the example above, here is how you should respond. You should prepare an amended tax return, form 1040X, showing both the stock sale and the purchase amount for the stock. You'll have either a gain or a loss. If you have a gain, you owe some additional tax, but probably not nearly as much as the IRS assessment. If you had a loss, the IRS owes you money. Attach the CP-2000 letter to the front of your amended return and mail it off to the IRS. There is a block on the CP-2000, which you should check that states, “I totally disagree with the assessment. Go torture some other poor soul.”
The example of the stock sale missing from the tax return is a common situation. As a firm, we deal with probably twenty or thirty similar situations a year. There are a lot of other documents the IRS electronically matches against your tax return. Here are some other common problem areas:
Estimated tax payments. Yes, people really can't keep track of what they have paid the IRS. You would think paying the IRS $10K would be a memorable event you just might happen to remember to record in your check register. This is the most common problem we see.
W-2 forms. Once in awhile, someone will forget one of these. The great thing about W-2 forms is not only do they record income, they record tax withholding as well. If you miss a W-2 form on your return, you may not owe any taxes, because you missed the tax withholding as well.
Brokerage and bank forms with dividends, interest, and / or stock sales. Many of these are minor in amount. However, if you miss a big one, substantial taxes could result. I'm not certain why the IRS chose to match stock sales the last few years. From 2008 through 2011, the stock market didn't exactly kick ass. I have found that most missing stock sales result in refunds once we amend the tax returns.
K-1 forms. This is a new matching program implemented just a couple of years ago. A K-1 form is something you receive from a partnership, S corporation, or estate showing your share of income from one of these entities. The IRS took awhile to determine how to match these forms since the numbers on your tax return may not exactly correspond to the amounts on the K-1 forms. Also the K-1 form amounts appear across a number of different forms on your personal tax return. This matching program has not gone well for the IRS or the unfortunate taxpayers affected, since a lot of the notices turn out to be incorrect.
Mortgage interest statements. The common problem here isn't that you missed recording a mortgage interest statement. The problem is normally that the IRS doesn't have the statement in their records. In other words, you claimed interest that they can't verify by computer. This is another area where the IRS routinely sends out incorrect notices. They also have trouble matching the mortgage amounts across the various personal tax schedules on which mortgage interest can appear.
Dependents. If your douche bag ex-husband claims your precious little Susie on his tax return, and then you try to claim her, you will get a lovely little assessment from the IRS. They don't care that the divorce decree states that you get Susie as a dependent. The first to file a tax return wins, at least initially. If he filed first, you have to prove to the IRS, that under IRS rules not divorce rules, you are entitled to a deduction for Susie. You can win this, but it is a royal pain in the ass paper chase that will take six months or so to resolve. If you have a douche bag ex-husband, file your return early. Screw him, unless I'm that douche bag ex-husband.
Social Security payments. If you make any money at all in addition to your Social Security income, there is a good chance a portion of your Social Security is taxable. If you don't report the income from Social Security, you'll get an assessment.
1099-MISC forms. This is another common problem area. 1099-MISC forms are issued by businesses to their independent contractors. The IRS not only scans your tax return to see that you reported the income for regular income tax purposes. They are also looking for you to pay self-employment taxes on the income after you deduct expenses. When you get a CP-2000 notice for an unreported 1099-MISC, you get an assessment for income taxes and self-employment tax on one notice.
They are other areas where the IRS matches documents against your tax return electronically, but the above are the most common ones in our practice. The CP-2000 notices are also normally issued for the prior tax year. In other words, in 2012, we received mostly notices for 2010 tax returns. The 2011 document matching process will happen in 2013. Sometimes I hear people espouse the virtues of filing for extensions to have a lower chance of audit. There is no advantage to filing after the original deadline in terms of audit scrutiny. The IRS pulls some stupid tricks, but they have long been all over the idea that filing extensions reduce the probability of an audit.
Here's how to eliminate the possibility of receiving a CP-2000 notice for 2012. It really isn't that difficult. Just keep the documents that say “important tax documents” on the envelope. You don't even have to open them if you are really allergic to anything associated with the word, tax. Put the documents in a manila folder as they come in. Many documents are now available electronically. Save these in a folder called “2012 tax information” on your computer. If you receive documents by e-mail, create a folder in your e-mail program called “2012 tax documents.” Outlook and gmail make this easy.
The final way to make certain you aren't missing documents is to compare the documents you have with what you had for the prior year. It is one of the steps we take in preparing a tax return to ensure we aren't missing documents for our clients. If you use a tax preparer, ask for an income tax organizer in early 2013. An organizer is a document that shows all of your tax information for the prior year. You can see, for instance, that you had three interest income statements in the prior year. You should have three for the current year unless you opened or closed accounts.
When we work with professional procrastinators, who file their returns late every year, we don't totally rely on them to get us all of their tax documents. For tax returns that are already late, we can request a transcript of everything the IRS has in their records for a particular year. However, this doesn't work for returns filed during the normal filing season. The IRS electronic records are not available until later in the year.
As you can see pissing off the IRS can be avoided with a little (very little) effort at record keeping. However, once the dirty letter writing IRS computer gets mad at you, you will spend months getting off its mailing list.
On Friday night, we said a wistful farewell to the Nationals 2012 baseball season. By blowing a six run lead in the deciding game against the St. Louis Cardinals, a season of unexpected promise ended with a ninth inning collapse. I felt like a jilted lover after the game, wondering if it was really my fault, or maybe it's just that none of the damn Nationals pitching staff can throw a first pitch strike.
Strike one is known as the best pitch in baseball. After a first pitch strike, a .300 hitter becomes a .200 hitter. After ball one, the .300 hitter becomes a .400 hitter. You would think that by the time a pitcher reaches the major leagues, he might be familiar with this concept. You might even think his pitching coach would be familiar as well. Apparently not. I want the pitching coach, Steve McCatty, fired over this. After five playoff games, where his pitchers avoided anything close to first pitch strikes, he still couldn't get the concept through their skulls. I demand satisfaction or maybe a job as the pitching coach next year. I could save the money I spend on tickets.
Thanks for reading. For real tax and accounting advice, please visit our main S&K web site
www.skcpas.com. Until next time, let's do it to them before they do it to us.
