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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Data entry error/audit risk Date: 11/19/2009 12:25 PM
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A recent widow trusted her late husband and paid tax preparer. It was a very stupid decision and is likely to be an expensive one. In helping her understand her finances, we were reviewing her previous years tax returns. I am very concerned about the previous few years tax returns. I did not see the previous years tax returns, until after last years taxes were filed. I believe there are mistakes. If I am right, one recent year could be off by more than 25%. The others are closer to being correct.

I had her ask her tax advisor a specific question and verified here that the answer was wrong. I thought that her husband and tax preparer were ignoring inconvenient tax laws, but the tax preparer was just unqualified. Soon afterwards, the tax preparer also died.

The IRS has sent a communication regarding the year of most concern. I won't have access to the letter or tax return for a couple of days. It sounds like the data entry error was caught with an automated review.

Does finding a data entry error on a tax return make it more likely that the return will be more throughly audited?

The plan is to direct her to the CPA that does taxes for other members of her family. He is reliable and I would trust his recommendations regarding her situation. I was hoping for more time to allow other issues to be resolved before opening this can of worms. At least resolving the data entry error will make it a smaller problem. The best possible answer is that I am wrong and there are no other problems.
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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107727 of 121219
Subject: Re: Data entry error/audit risk Date: 11/19/2009 2:26 PM
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"Does finding a data entry error on a tax return make it more likely that the return will be more thoroughly audited?"
=========================================
With the caveat that IRS doesn't publish their methodology for selecting returns for audit, in my experience -34 years now:

It depends on what kind of a "data entry error". For example, if a wrong number is entered for estimated tax payments, the IRS will catch that quickly, and send a bill or a refund. Nothing to audit about that.

Errors in income numbers are something else.

If it's a "matching notice" - where they reconcile the 1099s filed for a taxpayer with the income reported on the return - it might depend on just what the "communication" your friend received looks like. Right now they're sending out those notices for the 2007 returns. If they just tally up the unreported income - as they see it, which might be wrong - and do an assessment based on that, and your friend pays it, they'll be done.

I THINK that if a return catches their attention, whether for a 1099 matchup, or their regular audit selection process, or both, they don't do a down-and-dirty assessment based on 1099s AND then later do a regular audit. I've had agents show up for an audit, with one of the things they have to pursue being a 1099 mismatch.

You won't know more until looking at that letter.

Bill

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107730 of 121219
Subject: Re: Data entry error/audit risk Date: 11/19/2009 3:39 PM
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It sounds like the data entry error was caught with an automated review.

Does finding a data entry error on a tax return make it more likely that the return will be more throughly audited?


As Bill said, you won't know what's going on until you see the letter. What year are we talking about, and when was that year filed? If it's not a recently filed return, it's no error discovered in processing, it's an audit.

There are some things, generically called math errors, that can be corrected without an audit and the additional tax assessed automatically. These require specific authorization in the law. Everything else is under the audit procedures as described in the law.

What level of audit remains to be seen, but in most cases IRS gets only one bite of the audit apple.

Phil
Rule Your Retirement Home Fool

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107732 of 121219
Subject: Re: Data entry error/audit risk Date: 11/19/2009 4:14 PM
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You won't know more until looking at that letter.

Bill


I really need to see the letter. I am hoping that it is a mistake with the 1098s and not unreported income. I remember not being able to match the 1098s to the mortgage interest deduction on Schedule A. All income is 1099/W-2. I do not want this to be a distribution from a 401K that wasn't reported.

It is amazing how timing can be the absolute worst. I am on a business trip. The past couple days have been quiet preparing for the major work tonight through tomorrow. If it had arrived a couple of days ago, my husband could have scanned and emailed me a copy. Now he is sick and he may have given it to me.

Maybe by the end of 2010, we will be able to straighten out the mess. Taxes are not the only problem. I hope she has learned that when someone wants you to sign a document and refuses to let you read it, tell them NO. It doesn't matter if it is your husband.

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107733 of 121219
Subject: Re: Data entry error/audit risk Date: 11/19/2009 5:21 PM
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As Bill said, you won't know what's going on until you see the letter. What year are we talking about, and when was that year filed? If it's not a recently filed return, it's no error discovered in processing, it's an audit.

It is a 2007 return, filed in 2008.

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107769 of 121219
Subject: Re: Data entry error/audit risk Date: 11/23/2009 11:43 AM
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I have now seen the communication. It is a CP2000. My head hurts. There are multiple problems, both problems with mortgage interest and missing income. Now I need access to the 1098s, 1099s and the tax return. I am expecting that the documentation will be incomplete.

The missing income should be easy to verify. My expectation is that the IRS is correct.

There should be more than one 1098. The CP2000 form shows only one.

I have read information regarding CP2000 on the IRS website. It appears that a 30 day extention can be requested and it is likely that it will be needed.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107770 of 121219
Subject: Re: Data entry error/audit risk Date: 11/23/2009 12:18 PM
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It is a CP2000.

The pros may weigh in with other things about process, but I want to highlight what I think is the most important thing for you and your friend to keep in mind. If it gets to the point that they send a certified letter, it's imperative that action be taken to protect her rights regardless of what anyone thinks is going on or what anyone at the IRS is telling you.

Phil
Rule Your Retirement Home Fool

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107771 of 121219
Subject: Re: Data entry error/audit risk Date: 11/23/2009 12:40 PM
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I have now seen the communication. It is a CP2000. My head hurts. There are multiple problems, both problems with mortgage interest and missing income. Now I need access to the 1098s, 1099s and the tax return. I am expecting that the documentation will be incomplete.

The missing income should be easy to verify. My expectation is that the IRS is correct.

There should be more than one 1098. The CP2000 form shows only one.

I have read information regarding CP2000 on the IRS website. It appears that a 30 day extention can be requested and it is likely that it will be needed.


In your first post in this thread, you wrote that you intended to refer her to the CPA that does other work for the family. If you do so, they will certainly know how to proceed. If you were to do this yourself, here's what I would do. First, get a Power of Attorney so that you can talk with the IRS about the notice and the return. Then call the IRS using either the number on the notice or the Practitioner's Hotine and explain that the taxpayer just came to you with the notice, you weren't the original preparer, and that you'll need some time to collect the documentation from the taxpayer and review the case. I've never seen the IRS play hardball with an initial CP-2000 deadline.

Ira

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107772 of 121219
Subject: Re: Data entry error/audit risk Date: 11/23/2009 6:11 PM
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I've never seen the IRS play hardball with an initial CP-2000 deadline.

Ira


I am glad to hear it.

There is documentation to assemble. It is unrealistic to expect a CPA to obtain the correct answers without sufficient documentation. With multiple refinances, the history needs to be assembled. I maybe obsessive, but I would like to have the documentation in reasonable shape when consulting the CPA. Perfection isn't going to happen, but there needs to be enough to hold a coherent conversion. Not just, its a mess.

There are also some family issues. Her sister expects the late preparer's company to pay the interest. That is complicated by not all of the mistakes being the preparer's. Her trust in the idiot preparer hasn't yet been completely broken. Any document she signs will be reviewed by a CPA not associated with the original preparer. I have told her sister that this will also result in additional state taxes. I am expecting an amended state return will need to be filed. The situation would not be so difficult, if she also wasn't losing her home due to her late husband's actions.

Professional advise that can be trusted is needed. Convincing her sister that it should be paid for maybe difficult. We have recently had a session with our lawyer regarding estate planning. It was well worth the fee to be told that part of what I was considering should not be done.

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107775 of 121219
Subject: Re: Data entry error/audit risk Date: 11/23/2009 8:40 PM
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First off, CP2000 notices are pretty much automated. They are simply the result of a mismatch between the 1099s and 1098s the IRS received and the return as filed.

Their matching of 1099s is pretty good, but far from infallible. I have seen many instances of the 1099 information on a CP2000 being very different from the information on the actual 1099. One of the common errors made is for decimal points to be dropped or shifted.

The 1098 matching is not as good. It's also very new. The first year they did this matching is 2006 or 2007. 1098s are a bit harder, as the interest can show up in several different places.

So the information the IRS puts on a CP2000 notice needs to be checked carefully. It sounds like that is already part of your plan. They may indeed be correct, but you can't simply assume they are correct.

As to there being only one 1098 reflected on the notice, it's possible the IRS was able to successfully match up the others. When that happens with 1099s, they will sometimes just leave those items off of their notice. I suspect they may do the same thing with 1098s.

I also agree with Ira - a quick phone call or letter is all it takes to get additional time to respond to the notice. And I would not hesitate to mention that the original paid preparer has died, making it harder to respond to the notice.

Good luck to you. Cleaning up messes - particularly with family - is not always easy.

--Peter

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107783 of 121219
Subject: Re: Data entry error/audit risk Date: 11/25/2009 10:44 PM
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So the information the IRS puts on a CP2000 notice needs to be checked carefully. It sounds like that is already part of your plan. They may indeed be correct, but you can't simply assume they are correct.

I was expecting that the IRS was probably correct with the 1099s. What I wasn't expecting is that given 4 1099-Rs, there is no combination that matches the number entered on the tax return.

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107784 of 121219
Subject: Re: Data entry error/audit risk Date: 11/26/2009 8:25 AM
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So the information the IRS puts on a CP2000 notice needs to be checked carefully. It sounds like that is already part of your plan. They may indeed be correct, but you can't simply assume they are correct.

I was expecting that the IRS was probably correct with the 1099s. What I wasn't expecting is that given 4 1099-Rs, there is no combination that matches the number entered on the tax return.


Other than the obvious possibility of a data entry error, I would check that the entries in boxes 2a and 2b. Some payers make errors in the entries here or the original preparer may have determined a different taxable amount due to cost recovery calculations.

Ira

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107785 of 121219
Subject: Re: Data entry error/audit risk Date: 11/26/2009 3:53 PM
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Other than the obvious possibility of a data entry error, I would check that the entries in boxes 2a and 2b. Some payers make errors in the entries here or the original preparer may have determined a different taxable amount due to cost recovery calculations.

Ira


All of 2a boxes match the corresponding box 1. For the IRA distribution, taxable amount not determined is checked. The IRA cost basis is zero.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107786 of 121219
Subject: Re: Data entry error/audit risk Date: 11/27/2009 6:08 AM
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For the IRA distribution, taxable amount not determined is checked. The IRA cost basis is zero.

For all IRA distributions that box should be checked since that custodian doesn't necessarily know about all the taxpayer's IRA accounts.

Phil
Rule Your Retirement Home Fool

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 107787 of 121219
Subject: Re: Data entry error/audit risk Date: 11/27/2009 11:34 AM
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For all IRA distributions that box should be checked since that custodian doesn't necessarily know about all the taxpayer's IRA accounts.

Phil
Rule Your Retirement Home Fool


That makes sense. I had noticed the difference, but hadn't considered why.

Debra

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