The
IRS Has Your Numbers!
Correspondence from
the IRS has a tendency to escalate a taxpayer's pulse rate. However, most of
the letters received are not of the feared “come on down” type that requests an
appearance for a face-to-face audit; they would be more likely to just require a
written explanation. Generally, all types of income (wages, interest,
dividends, etc.) are reported by the payer to the IRS, which, in turn, matches
the reported income to the recipient's tax return based on Social Security
number (SSN). Over the past few years, the IRS has become very proficient in
using its matching software to pick up unreported income and other
discrepancies on tax returns. Discrepancies will generate an IRS inquiry, so in
addition to income, take note of the following items which are frequently
monitored by the IRS computer:
· Dependent SSN - The IRS allows only one taxpayer to claim
the exemption for a dependent. Frequently, a dependent will claim the exemption
himself or herself, or in other cases, separated or divorced individuals will
both attempt to claim the dependent. Expect correspondence when the exemption
for any SSN has been claimed twice.
· Gross Proceeds of Sale - All brokerage firms are required to report
security sales to the IRS as “gross proceeds of sale” on Form 1099-B. The
1099-B copy provided to the account owner is generally combined with interest
and dividend reporting requirements and included in a consolidated 1099
statement. These statements can be confusing, and the “gross proceeds of sale”
line is frequently buried in the multi-page statements. If a taxpayer fails to
report these security sales, the IRS will treat the gross proceeds as all
profit, recompute the tax owed and send a bill.
· Stock Basis - For stocks purchased beginning in 2011, the IRS requires the
brokerage houses to track the cost of the stock and report that information on
Form 1099-B when the stock is ultimately sold, so the IRS can then verify
profit or loss.
· Pension and IRA Rollovers - Unless it is a direct (trustee-to-trustee)
rollover, the plan administrator is required to issue a Form 1099-R whenever a
taxpayer withdraws funds from an IRA or other type of qualified plan. If the
1099-R income is not properly accounted for on the tax return, the IRS may
treat it as unreported, taxable pension income and issue a revised tax bill.
Even if it is directly rolled over, ALWAYS bring rollovers to our attention.
· Alimony - The person paying alimony must include the recipient's name
and Social Security Number with the deduction claimed for alimony payments. The
IRS will match the payments to income reported by the recipient. If the two
amounts are not the same, the IRS will initiate correspondence to both parties.
· Home Sales - Technically, escrow companies are not required to issue
1099-S forms to taxpayers who sell their primary residence for less than the
home sale gain exclusion amount and certify that they meet the exclusion
qualifications ($250,000 for a single taxpayer and $500,000 for married
taxpayers). Despite this, many escrow companies choose to issue them, making it
necessary to report the home sale on the seller's tax return to avoid IRS
correspondence.
· Home Mortgage Interest - Since all lenders who are in the business
of lending money are required to report home mortgage interest, the IRS can
verify the amount claimed as deductible mortgage interest on Schedule A of a
tax return, and any significant discrepancy can lead to IRS correspondence. If
a private party holds the loan (not in the course of business), Form 1098 is
not required to be filed, but the taxpayer claiming the mortgage interest as a
deduction is required to include that party's name, contact information and SSN
on Schedule A. The IRS can then match the claimed interest deduction to the
amount reported by the private party as interest income. However, if a third
party lent money to the taxpayer to purchase the home, the third party's
information is not required.
· Education Benefits - Colleges and universities are required to
report the tuition payments that may qualify for the American Opportunity or
Lifetime Learning tax credits on Form 1098-T. Educational lenders report the
amount of student loan interest paid on Form 1098-E. Both are used to match
against claimed deductions and credits on the tax return.
Should you receive a
notice from the IRS, it is generally best to contact this office. Don’t just
pay the revised tax the IRS proposes. Frequently, the IRS notice is in error,
and attempting to respond to the notice without professional advice may create
additional problems.
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