Message Font: Serif | Sans-Serif
 
No. of Recommendations: 2
ptheland writes:

For the first two items, I would have recommended writing a letter to the IRS and explaining their errors in reading your return. And I would send copies of the applicable schedules/forms as support.

However, you have a third item - the mis-reported SEP contribution. And I'm torn on that one. That one is your error, not theirs. Normally when the original return is wrong I suggest an amended return. But if you walk through an amended return, the correction won't really show up as everything affecting AGI is compressed into one line.

From my experience, it seems like the folks at the IRS who process amended returns are sharper than those who read and process responses to these notices of proposed changes. And it will take an employee who can understand the larger picture of your return to see that your error makes no difference. So that's an argument in favor of the amended return.

You could write to them, explaining the SEP error pretty much as you did here. Or you could prepare an amended return that has no changes, just an explanation. I'd probably break the conventional rules and actually attach a corrected 1040 to the amended return to show your changes, as that is the only place the SEP correction would be reported.

Either one
should work. But I'd have to favor the amended return by a very slim margin.

I reply:

I ended up writing the following letter:

This letter will explain our disagreement with the changes proposed to our 2010 federal income tax return. In summary, we disagree with all of the proposed changes and believe that our return as filed correctly states our tax liability.

The proposed changes set forth on page 10 of the Notice flow from two separate proposed issues. First, the IRS wishes to increase our taxable retirement income (reported on Line 15b) from $[omitted] to $[omitted plus additional amount]. Second, the IRS wishes to disallow the $[omitted] adjustment to income reported on Line 32. The first page of our Form 1040 is enclosed for your convenience. We understand that the remaining proposed changes on the return flow from these two changes, so that if our position is correct with respect to those two items, then the IRS has no further disagreement with our return. We discuss the two items separately.

Retirement income reported on Line 15b

Our retirement income reported on Line 15b arose from two separate sources. First, Ms. 63 [my wife kept her maiden number] took a required minimum distribution of $[omitted] from an inherited IRA. As the IRS acknowledges, that distribution was reported as taxable income on our return.

Second, Mr. 78164 converted $[additional amount] from a traditional IRA to a Roth IRA. The IRS now proposes to include the entire conversion as income on our 2010 return. This proposal is error for two separate reasons. In the first place, as reported on Form 8606 (enclosed), Mr. 78164 had a basis in his traditional IRA. The portion of the conversion attributable to his basis (reported on Line 17 of his Form 8606) is $[calculated and reported amount], and in no event is that portion includible as taxable income. Moreover, we elected to include the taxable portion of this conversion in our income for 2011 and 2012 (as reported on Lines 20a and 20b of Mr. 78164's Form 8606). Accordingly, our 2010 return properly omitted all of the conversion income.

Adjustment to income reported on Line 32

The IRS wishes to disallow the adjustment to income reported on Line 32. The adjustment is, in fact, proper, but we reported it in the wrong location. We should have reported the adjustment on Line 28, because it arose from Mr. 78164's contribution as an employer to his SEP-IRA, based on the self-employment income he reported on Line 12 of Form 1040. We enclose Schedule C, demonstrating the self-employment income, and a statement from [Custodian], Mr. 78164's IRA custodian, demonstrating that the amount in question was contributed in Mr. 78164's capacity as his own employer.

In short, although we agree that the $[amount omitted] should not have been reported on Line 32, it should have been reported instead on Line 28. When these corrections both are made, the total adjustments to income reported on Line 36 of our return will remain unchanged. Accordingly, our adjusted gross income was correct as reported, and therefore our tax liability was likewise correct as reported. We therefore request that you withdraw the Notice of Proposed Changes.

Thank you for your attention to this matter. We look forward to your response.


It worked. They accepted our position in full. Thanks for the help. --Bob
Print the post  

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.