Is there ever such a thing as a good letter from the IRS?


I arrived home yesterday to find a letter from the IRS in my mailbox. Dare I open it?

The only other interaction with the IRS I'd had previously was several years ago where they told me I had overpaid my taxes and sent me a refund check of a few hundred dollars. I went back and reviewed my return and concluded that my original return was correct and they were wrong to send me the refund check. I called the friendly IRS office and explained how I came to the numbers I did. The agent went through the same computations and agreed with me, and instructed me how to return the check with an explanatory letter. It's not worth committing tax fraud over just a few hundred dollars.

With some trepidation, I opened the letter.

This time, the IRS believed that in 2003, I failed to report income in the amount of over ten times my actual salary. What happened?

There were a few errors that they picked up, on the order of a few thousand dollars, although enough of them were errors in my favor that I think I came out ahead on that part. (For example, I forgot to report my sales of WorldCom and Nortel stock. Like many other peop^H^H^H^Hsuckers, I took a bath on both, and those losses easily covered gains elsewhere.)

But a few thousand dollars is nowhere near the tenfold alleged underreporting. Where did that come from?

I sold a lot of stock that year as part of a larger "realignment" of my personal finances, and due to the weirdness of United States tax law, the way I sold some of the shares required the income to be reported in a special way. And that's how I reported it. The IRS happily accepted that income but simultaneously claimed that I failed to report it! Not only do they want to double-count the income/loss from those stock sales, but since they don't have cost basis information, they assumed that the sales were pure profit.

Now I get to spend the weekend taking a few deep breaths, doing a lot of photocopying of supporting documents, and writing a friendly letter back to the IRS, explaining why I believe they over-over-overcounted my income. I hope they accept it.

Comments (22)
  1. Tim says:

    This one is easy to fix, just fake your own death in a server explosion and head to South America. Once there, you can start a new life under the assumed name of Raymundo and live confortably on all your ill-gotten booty.

    But I’m not a laywer or tax attorney, so there may be an easier solution. Have you talked to Willie Nelson about it?

  2. David says:

    I got one of those letters a couple of years ago. I forgot to give them the orginal purpose price of some stock that I sold. I made money on the sale, so I owned them more in the end, but it was a pain getting to that point.

    Good luck.

  3. John R says:

    Yet another reason to support the Fair Tax legislation currently before congress.

    http://www.fairtax.org

  4. Ajay Kalra says:

    It may be a while to straighten this out. I recently had experience with IRS as I was audited. Overall it was pleasant and friendly. The only hitch was that it took almost 4 months from the time I got the notice.

    What helped was that I knew my return and all the tax laws concerning my return. I really dont know why I was picked for auditing but apparently some returns that are audited are picked randomly.

  5. tsrblke says:

    Benifit to being young, I always claim the standard deduction. A little known fact is that it’s very very very rare to have an audit when all you claim is the standard deduction. (Unless of course you make a large amount of money and continue to claim that deduction.) Mostly because I end up getting over 80% of my taxes back, I’m not worth an audit.

    On an interesting note, Raymond it’s not tax fraud to keep that check, if you properly file your taxes and the IRS goofs you are allowed to keep the check for 1 year before cashing it, after that one year the IRS has to write it off and technically can’t come after you. The same rules apply if you get a check for $10,000 as $1000 provided you do everything by the books as it were, it’s considered an IRS mistake, and you’re not liable. Or at least that’s how an accountant/banker (i.e. my father) once explained it to me.

  6. James Curran says:

    In 1982 (I was in college), I had a summer job at the company where my father was a consultant.

    In 1983, (Still in college), I had a different summer job elsewhere, but my father was still consulting at the first company.

    In 1986, the IRS audited me, stating I was claiming only $3000 income in 1983, when their records showed I actually earned over $30,000.

    As you might have guessed, the accounting department at my father’s company — after filing 1099’s for two different "James Curran"s in 1982, and have to file a 1099 for one of them in 1983 — picked the wrong one! (Oddly, as we both used our middle initials, he would be first alphabetically).

    The REALLY interesting thing about this is that my father had also been audited for 1983 earlier — and the IRS made no mention of the fact that he was paying taxes on $30,000 of income that they had no record of him earning.

  7. Aaron says:

    I blogged about this same thing about a few ago. I neglected to list my option sales (which were a lot!) but not think anything about it because all of the income showed up on the W2. Great I thought I would just send in an amemended return where I listed all of the stock sales and in the process I was to get another $18 because you can deduct the fees from the sales. On June 3, I got letter #2. Letter #1 said I should have declaired X dollars on my return which my ammended return matched up. Letter #2 says i should have declaired X+ ~$8000 but gives no reason why there has been an increase between now and then for tax year 2003. I have done the math three times now I have no idea where this extra money comes from and the bottom line is this letter also says "pay up and we are already charging you interest" which is due by 6/30! Good luck to you with yours and I hope you do not get a letter #2.

  8. Dan McCarty says:

    Ahh, this is where it pays to be married to a tax accountant. There was once a day where these things mattered greatly to me but these days it’s filed in my need-to-know department, and I rarely need to know.

    For some reason our taxes are usually filed on April 14, but that’s another issue entirely.

  9. BenB says:

    I had this exact thing happen to me about a year and a half ago. I received a letter stating my 2000 and 2001 returns both were underpaid. The letter went on to calculate that I not only owed them money, but with interest, penalties etc., I owed them more per year than I even made each year! After about collapsing, I called the IRS and apparently this is a common issue. It turns out, every stock sale I had over the year was in their eyes pure profit. After documenting like you are probably going to do, it all got cleared up after 2 months or so.

    In fact, in my case, I had received some new losses I could apply retroactively for those years and even received a refund. For me, knowing you did nothing wrong is the stress release… but at the same time, it is always a little unnerving to have the IRS looking at you. For me, it is kind of the feeling of having a police car following you on the highway. You know you are not speeding. You know you have done nothing wrong, but you are still a little stressed out.

  10. AdamBomb says:

    I had the something similar happen to me earlier this year. In 2003 I excersized stock options that were reported as income on my W-2 form. I also received a 1099 form from my broker for the excercise, but I didn’t include the Schedule-D with my return, since the money was already reported and taxed as income.

    I wrote a letter explaining that the earnings had been reported on my W-2, along with a printout from my excercise history from the brokerage website that showed that taxes had been withheld from the sale.

    I just got a letter this week telling me they had reviewed and agreed with my claim and that I was not required to make the additional tax payment.

    An accountant has since told me that I do in fact have to submit the schedule D, just list $0 as the basis for the options.

  11. Manip says:

    I live in the UK and here are the amount of tax forms I have filed this year: 0

    What is up with this crazy tax system? In this country businesses do the taxes individuals don’t. So if you are employed the employer pays your taxes (and national insurance) before you ever get a penny…

    The ONLY time in this country when taxation falls on the individual is import taxes when you have to pay to get your parcel.

  12. waleri says:

    Manip,

    Yes, this system is 100% bulletproof… for the state.

    If you decide to reduce your taxes by doing some tax deductable expenses, you can’t do so, since your tax are already paid. OK, you probably can file for refund at the end of the fiscal year. You may event get your refund back in cash, but all this is like giving a loan during the year that will be returned to you at the end , usually without an interest.

  13. I second the vote for the FairTax. I do not mind the government putting th tax burden on me, but I why do I ahve to pay the complexity burden as well? Lets make April 15th just another day.

  14. Jim says:

    Raymond, go to HRBlock, or someplace like it. Save yourself.

  15. Søren Sandmann says:

    Andreas, another bit of trivia: The Danish and Norwegian alphabets are the same, but Danish and Norwegian *keyboards* have æ and ø swapped.

  16. Tax Payer says:

    Actually UK citizens can volunteer for the same tax paperwork burden as US citizens, but few do. Why? Because it’s a lot of extra work (and responsibility, if you screw up you can go to prison despite no fault) and few will be rewarded.

    Suppose the average UK householder could find a way to snatch back £40 from the tax man, if they asked for and filled out the complete assessment paperwork load. Are you sure it’s less than £40 work to prepare for, fill out and return such forms? I’m certainly not. If they pay an accountant they’ve lost money practically before they finish making the appointment. If they buy tax software they’ll lose money again.

    I received an automatic rebate from our Inland Revenue recently, I could have claimed it earlier if I’d been paying attention but since it was a no-fault error they automatically returned it when their systems detected the problem, plus interest (admittedly not at a commercially competitive rate). A separate government department audits the Inland Revenue’s work to ensure that they are fair, and to detect over-payment.

    Now, for the very rich the US system makes a lot of sense. They can afford to pay more up front (to accountants, financial advisers) in order to pay less to the government. Everyone loses, except the rich people. Makes sense if you look to see who sets the US tax code… To achieve a similar thing UK professionals sometimes create a limited liability company and run the money through company books. However this actually makes it easier to audit them and ensure they’re playing fair, even if it does open some tax avoidance strategies not available to the average person.

  17. Max Erickson says:

    Uh, yes? I got a letter from the IRS this year informing me that they were increasing the size of my refund. I was stunned.

  18. Wound says:

    Waleri,

    If you want you can actually make charitable donations directly from your pay before tax, so instead of getting back 17.5% back from the Inland Revenue if you gift aid something, you can get the equivalent of 40%

  19. Richard says:

    To correct the two previous messages about the system here in the UK. While you can volunteer to do a tax assessment, the Inland Revenue can also decide for you — and then you have no option.

    Having anything other than simple tax situation (e.g. you pay higher rate tax) is a cause to volunteered).

    Richard (Currently awaiting my P111 from work so I can do mine.)

  20. Jon Konrath says:

    I got audited by the IRS a few years ago (taking the standard deduction, even) and they were fair about it and everything, but the process was slow and drawn out, and this is coming from a person who used to work with VMS.

    The bad part was then the IRS notified New York State, and I got audited again, and had to write out a big check I couldn’t afford again. And then, six months later, the NY IRS wrote me back saying they had no record of me paying taxes EVER, and I had to contact them immediately.

    I called, in a huge panic, and quickly found out that they had audited me a second time under my name, but with two numbers in my SSN transposed. Genius.

  21. Gotta report everything.

  22. Not a single correct return.

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