Although the IRS is reluctant to admit it, it does make mistakes. In fairness to the IRS, collecting taxes from more than 130 million individuals (not to mention all the returns from corporations, partnerships, trusts, estates, and other assorted entities) under an extraordinarily complex tax system is, to say the least, difficult. The number of errors can appear to be limitless, but most errors occur for simple reasons. I wish I could explain why the IRS can’t get it right the first time. I can’t. But this post can give you an idea of the number of mistakes made, the types of mistakes, and the action that you can take. It also can offer tips to keep you away from the IRS paper trail.

Advertisement

The IRS processes more than a billion transactions a year. So, math wizard, what does an error rate of, say, 1 percent translate into? Ten million errors! That’s a whole bunch of errors.

 

The following is a long list of the types of mistakes and errors the IRS can make:

  • Misapplied payments: The IRS may not have posted tax payments that you made to your tax account (under your Social Security number). Payments are sometimes posted to the wrong year or type of tax. Perhaps the IRS didn’t properly post overpayments from a preceding or subsequent year.
  • Misunderstood date: The IRS may claim that you didn’t file or pay tax on time. Computers at a service center may not acknowledge that the due date for filing or paying fell on a legal holiday or on a Saturday or Sunday and may therefore blame you for filing late, when in fact you filed on the first business day following a legal holiday or a Saturday or Sunday. Or perhaps you had a valid extension of time to file, but the IRS said that you filed your tax return late.
  • Wrong Social Security/ID number: A data processing clerk may incorrectly input your Social Security number, or you may have been assigned two numbers. Because all data on a joint return is recorded under the Social Security number of the spouse whose name is listed first, any payments or credits that the other spouse made may not be posted under the first spouse’s number. This situation frequently occurs when taxpayers file jointly for the first time or when a taxpayer files separately after having filed jointly in a prior year.
  • Wrong income: Income earned by another person may be inadvertently reported under your Social Security number. This often happens when a taxpayer opens a bank account for a child or another relative.
  • Exempt income: Money you earned on your IRA, Keogh, pension account, or from municipal bond investments was reported to the IRS as being taxable.
  • Double-counted income: Income earned from a taxpayer’s business or profession may be recorded as income from wages — or vice versa — and the IRS moved the income to the line or schedule on the taxpayer’s return where it correctly belongs. That’s okay, but sometimes the IRS moves the income without removing it from the line or schedule where it first was incorrectly entered!
  • Lost return: The IRS or the U.S. Postal Service (or other approved private delivery service such as DHL, FedEx, or UPS) may have lost your return and payment, leaving you in the unenviable position of having to prove the timely filing of the return. Hopefully you made a copy and sent the original by an approved method, either certified mail from the post office, or an approved private delivery service!
  • Partially corrected error: The IRS may have corrected only one of the errors that were previously made. For example, an IRS error may be corrected, but the penalties and interest that were incorrectly charged were not removed.
  • Data processing error: A computer bug — or another unexplained phenomenon — may have caused a notice to be issued stating that a math error on your return was made where no error exists. Or someone may have failed to input all the data from the schedules attached to your return into the IRS computer. Data processing errors are common with Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, where a taxpayer claims an exemption from the penalty for underestimating the amount of his or her required estimated tax payments. This type of error usually causes the IRS either to assess a penalty when it shouldn’t or to issue a refund for the underestimating penalty that the taxpayer has paid.
  • Incorrect 1099: The IRS may receive an incorrect Form 1099 from a bank or brokerage firm — either the amount of income reported on the form is wrong or the income isn’t yours. Even if the payer corrects it (and files the correction with the IRS), the correction may never make it into the IRS computer. Don’t you just hate it when that happens?

 

 

Fixing IRS Mistakes

There is elegance in simplicity when corresponding with the IRS. Keep to the point. No letter should be longer than one page. A half page gets even quicker results. Remember, the tax examiner reviewing your inquiry could have little experience in the area you’re writing about. Such people are, however, extremely conscientious in performing their duties. You stand a better chance of achieving the results you want by making their jobs as easy as possible. Don’t succumb to the temptation to go into a narrative on how unfair our tax system is or how you’re paying more than your fair share. Save that stuff for your representative in Congress.

Your letter to the IRS should contain the following items — and nothing more:

  • Vital facts: name, mailing address, Social Security number on the tax return, and the year of the disputed tax return.
  • The control number from the notice, type of tax, and a copy of the notice you received.
  • The type of mistake the IRS made.
  • The action you want the IRS to take.
  • Copies of the documents necessary to prove your case — canceled checks, corrected Form 1099s, mailing receipts — but never the originals.

 

Address your letter to the Adjustments/Correspondence (A/C) Branch at the service center that issued the notice. You should note the type of request you’re making at the extreme top of the letter — REQUEST TO ADJUST FORM [form number]. Use the bar-coded envelope that was sent with the notice to mail your letter.

Include a simple thank you and the telephone number where you can be reached in case the clerk at the IRS Service Center has any questions. Telephone contact between you and an IRS employee can take weeks off the Adjustments/Correspondence process.

Request to Adjust Form CP-2000

[your address]
[date]

Adjustments/Correspondence Branch
Internal Revenue Service Center
[address]

Re: [your name, Social Security number]
[tax year, DLN]

Dear IRS:

I have received your notice dated [date], in which you claim that I failed to report [$] of interest on my tax return.

Please be advised that your notice, a copy of which is enclosed, is incorrect. The interest that you claimed I earned was in fact earned on my daughter’s bank account. Her Social Security number is [number], which should have been given to the bank, instead of mine, when the account was opened.

Please adjust your notice to reflect that no additional tax is due. Thank you for your prompt attention to this request. I can be reached at [phone number] should you require any additional information.

Very truly yours,
[your name]

 

Upon receipt of your letter, the A/C Branch is supposed to stop the computer from sending further notices until the matter is resolved, although you’ll likely receive the next notice that was already in the pipeline. If your problem can’t be resolved in seven days, you’ll be sent a letter indicating when it can be resolved. If you receive a second notice, don’t be alarmed. This delay isn’t unusual. The IRS doesn’t move all that fast.

 

Sending a Simple Response to a Balance Due Notice

If you receive a balance due notice for a tax that already has been paid, it’s time to dig out the proof you kept that shows when and how much you paid. With proof in hand, it’s a simple matter to write on the front of the notice:

This balance has been paid. Enclosed is a copy of proof of payment of taxes that you have failed to credit to my account. Please remove all penalties and interest charges that were assessed.

 

If you paid by check, you’ll need to send a copy, front and back, of the cancelled check. For credit card payments, a copy of your credit card bill, with the payment to the IRS with the date and amount highlighted, should suffice. If the funds were transferred directly from your bank account through electronic funds transfer, send a highlighted copy of your bank statement that shows the amount taken from your account and the date. And, if you’re enrolled in the Electronic Federal Tax Payment System (EFTPS), include a copy of the Electronic Funds Transfer (EFT) Acknowledgment Number you received as a receipt.

 

Sending Generic Responses to Generic Notices

If you’re like us, you probably dislike form letters with a passion. At times, however, you have no choice but to fight fire with fire. To simplify things, we’ve included an all purpose generic response letter below:

Generic Response Letter to generic Notices of IRS

Enclosed: Notice [number]

Request to adjust Form [number]
[your address]
[date]

Adjustments/Correspondence Branch
Internal Revenue Service Center
[address]

Re: [your name, Social Security number]
[tax year, DLN, Form number]

Dear IRS:

I am in receipt of your notice dated [date] (copy enclosed). Please be advised that your notice is incorrect.

[Insert generic paragraph(s) we have provided pertaining to one of the issues to be corrected]. I would appreciate your adjusting the notice that you sent me now that you have the information contained in this letter that was previously unknown to you.

I would also appreciate your abating any penalties and interest that were incorrectly assessed. I thank you in advance for your prompt attention to this request. I can be reached at [number] should you have any questions.

Very truly yours,
[your name]

 
You can use this letter simply by inserting any one of the following responses to frequent IRS errors.  To keep it simple, I list the IRS error you want to address as the heading, and the response you can use:

 

Misapplied Payments

Insert below paragraph into the template:

Enclosed is a copy of my canceled check, front and back, showing that the tax was paid”

Misunderstood Due Date

Here are several solutions to common problems with due dates. Due date for filing or paying fell on Saturday, Sunday, or legal holiday. You can insert the following paragraph into the template:

Please be advised that your notice incorrectly penalizes me for filing/paying late. The due date for filing/paying fell on a [Saturday], and I made payment/filed on the next business day.  Enclosed is a copy of my check dated [date], which is dated the date of the extended due date, as allowed by law. The serial number on the back of the check clearly indicates that the IRS negotiated my check on [date]. Please correct your records to reflect that my return/payment was timely, and remove all penalties and interest that were charged”.

 

Beginning with the 2004 tax year, if the IRS says it hasn’t received your return, you’re required to show that you did, indeed, file it on time. If you mailed it, make sure to keep track of your certified mail or other receipt that clearly shows the date you sent it. You can’t say that you put it in the mail by the due date, but that the letter carrier failed to pick it up. This argument no longer works. If you can’t prove otherwise, you’re on the hook for late filing penalties and interest if the IRS says you filed late.

 

Valid Extension Of Time To File

Insert below paragraph into the template:

Your notice incorrectly assesses a penalty for late filing. Enclosed is a copy of my extension that granted me an extension of time to file until [date]. I filed my return prior to the expiration of the extension on [date]. Please correct your records by removing the penalties and interest that were incorrectly assessed”.

Enclose a copy of any canceled check that may have accompanied the extension and refer to the check in the letter. If you have it, also enclose a copy of your certified mail or private delivery service receipt, clearly showing the postmark or other date it was mailed.

 

Late Filing

If you mailed your return on time with a balance due that you didn’t pay — and the IRS sent a notice demanding the balance plus an erroneous late-filing penalty — be prepared for lengthy correspondence with the IRS. If you don’t have a postal mailing receipt for years prior to 2004, you’ll have to write to the service center and request a copy of the mailing envelope in which your tax return was mailed so that you can check the postmark. For tax years beginning 2004 and going forward, if you don’t have proof of timely mailing, you’re out of luck. Insert the following paragraph:

Your notice incorrectly assessed a late-filing penalty in the amount of [amount]. Please be advised that my return was timely filed on [date]. I am enclosing a copy of my certified mail receipt that clearly shows this return was timely filed

Or, for tax years prior to 2004 that you didn’t use certified mail, use the following paragraph into the template:

By checking the postmark on the envelope in which my return was mailed, you will see that I didn’t file late and therefore no penalty should be assessed. I would appreciate your sending me a copy of my mailing envelope when responding to this inquiry”.

If the IRS can’t locate your envelope (which sometimes happens) or the envelope bears a crazy, illegible postmark date, you have a problem. If this is the only time you were notified that you filed your return late, you’ll have to request that the penalty be abated because of reasonable cause — and because of your record of always filing on time.

If you file on time and enter into an agreement to pay in installments, the late payment penalty gets reduced from 0.5 percent a month to 0.25 percent a month while you’re making payments. The total late payment penalty that can be charged can’t exceed 25 percent of the tax owed.

 

Wrong Income

Use the following paragraph to response:

The income on which you claim I owe additional tax per your notice isn’t my income. The bank/broker/insurance company [or whatever] incorrectly reported the income that was earned on this account as belonging to me. This account, in fact, belongs to my [mother, for example], who reported it on her tax return for the year in question. Her Social Security number is [123-45-6789]. Enclosed, please find a copy of my [mother’s] tax return and a statement from her stating that the balance in the account you are questioning belongs to her. I have instructed the bank to correct its records. Please correct yours so that my tax account reflects that no tax is owed”.

 

 

Exempt Income

I am constantly amazed when I review returns that clients prepared themselves. One thing that crops up all the time is how often they pay tax on income when they don’t have to. Here are two prominent examples and the appropriate response when the IRS sends a bill for tax due on tax-exempt income:

 

Keogh — IRA

Use the following paragraph to response:

The income on which you claim I owe additional tax is income earned from my [Keogh or IRA] account and is exempt from tax. Enclosed is a copy of my year-end statement of that account. Please note that the number of this account is the same as the number that appears on your notice. Please correct your records so my tax account shows that no additional tax is owed your agency”.

 

Municipal Bonds

Use the following paragraph to response:
 
The income on which you claim I owe additional tax is tax-exempt municipal bond interest. Enclosed is a corrected statement from my broker/bank that clearly identifies that the amount of income reported on your notice is tax-exempt municipal bond interest. Please correct your records so my tax account shows that no tax is owed your agency”.

 

Double-counted Income

Use the following paragraph to response:

The interest income you claim I failed to report on my tax return for the year in question was, in fact, reported on Schedule C of my return (copy enclosed). By adjusting Schedule B (Interest and Dividend Income) of my tax return without adjusting my Schedule C, you are requiring me to pay tax on the same item of income twice by double-counting it. Please correct your records so my tax account reflects that no tax is owed your agency.”

 

 

Lost Return

This is a tough one. But one secret the IRS closely guards is that it frequently loses or misplaces tax returns. The IRS even has a form letter when this happens. The letter requests that you send a duplicate. Unfortunately, when you do, you’re likely to receive a follow-up notice saying that the IRS received the duplicate, but that it was filed late!

When you file a duplicate return, always mark the top in bold lettering:

Duplicate — Original Filed [insert date]”.

 

Refund Return

Insert below paragraph into the template:

Enclosed is a copy of my return that your notice claimed was not filed. Please be advised that this return, which indicated a refund due, was filed on [date]”.

If you have a postal mailing receipt, enclose a copy of it.

For tax years prior to 2004, if someone other than you mailed your return, or if another person saw you mail your return, get a statement to that effect and enclose it. (Of course, if the person you asked to mail your return forgot, you can always try to get him or her to pay your late-filing penalty).

 

 

Balance Due Return

Use the following paragraph to response:

Enclosed is a copy of the return that your notice (copy enclosed) dated [date] claimed was not filed. Please be advised that my return was mailed on [date]. However, as of this date, my check number [number] dated [date] that accompanied my tax return hasn’t been returned to me by my bank. I would appreciate your correcting your records to reflect that this return was timely filed. If you would be kind enough to send me a bill for the balance I owe without reference to any penalties, I will remit full payment on receipt of your bill”.

 

If, in fact, you sent a payment for the balance due with your return that has now been lost, verify that your bank hasn’t already charged your account before you authorize another payment.

A cashed check or other debit supports your assertion that you timely filed the original return, and you don’t want to pay the taxes twice. If your bank has cashed the check, then get a front-and-back copy and send it with your duplicate return. If your payment hasn’t cleared, stop payment on it, and send a fresh payment with the duplicate return. Including a copy of the stop-payment order is a good idea; remember that you’re trying to establish that the original return was timely filed. The more proof you can provide, the likelier the IRS will see things your way.

Enclose any proof of mailing or other method of filing that you have. Remember, saying that you placed it in the mailbox before the filing deadline now only works for years prior to 2004; after that, you need your certified mail or other approved private delivery receipt as proof.

 

Lost Check

Use the following paragraph to response:
 
Please be advised that my check, number [number], dated [date], was attached to my return that I filed on [date]. Because my bank still hasn’t returned my check, I am placing a stop payment on it and have issued a new check for the same amount as the original check. I am enclosing a copy of my bank’s stop-payment order. Kindly abate the interest that you charged on your notice. It would be unfair to charge me interest because your agency can’t locate my check”.

 

 

Tax Assessed After Statute of Limitations

By filing a Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), or TAO, you put the IRS on notice that it could be liable for damages and costs up to $1 million resulting from its reckless and intentional behavior in dunning you. If the IRS’s actions merely are negligent, you can collect damages and costs up to $100,000. TAOs are covered under the Taxpayer Bill of Rights. This form is filed with the office of the IRS’s Taxpayer Advocate in your area.

You can get a copy of Form 911 by calling 800-829-3676, or you can fill out the form online at www.irs.gov. The downside of filing this form is that the statute of limitations is extended while this application is pending.

To cover all bases, write to the Adjustments/Correspondence Branch at the service center that issued the assessment. Use the following paragraph:

Please be advised that your assessment for additional tax, penalties, and interest was issued in violation of the statute of limitations. The time for making an additional assessment for the year in question expired on [date]. Please remove this assessment from my tax account, along with any interest or penalties that were charged. The assessment you made is in direct violation of the law. An assessment must be made within three years after the return is filed. This assessment doesn’t comply with that requirement”.

 

Partially Corrected Error

Use the following paragraph:

Please make the following adjustment [insert] as requested in my original letter of [date] (copy enclosed) that your current notice [date] failed to adjust”.

At this point, you may want to refer the matter to the local Taxpayer Advocate Office.

 

 
Erroneous Refund

Remember what your mother told you about keeping money that doesn’t belong to you? She was right, of course — maybe because she had to deal with the IRS. As a practical matter, if you want to save yourself a great deal of time corresponding with the IRS; deposit the check, but don’t spend the money. You ultimately will receive a bill for it.

You may be asking, “Why not just return the check?” The problem with doing that is, if the IRS doesn’t get its paperwork right, you won’t have the money, but you will have a bill from the IRS demanding repayment.

 

You Returned a Refund Check

Use the following sentence:

Enclosed is a refund check that was incorrectly issued to me”.

Return the check to the service center where you filed your return, not to the Treasury Department office that issued the check. Send this letter by certified mail, and request a return receipt. This is one letter that you want to be able to prove that you sent and that they received.

If you didn’t return a refund check sent to you by mistake, use the following:

Your notice demanding interest on a refund sent to me in error is assessed in violation of the law. I discovered the error only when I received your notice demanding repayment. I call your attention to the fact that Section 6404(e)(2) of the Internal Revenue Code states that no interest may be charged if a taxpayer who receives an erroneous refund of $50,000 or less repays it when the IRS demands payment. Enclosed please find my check in the amount of the tax that was incorrectly refunded. Please correct your notice by removing the interest that you shouldn’t have charged me”.

If this approach doesn’t work, contact the IRS Taxpayer Advocate in your area.

 

 

Data-processing Error

A data-processing problem is probably the most difficult to cope with, use the following paragraph:

Your notice incorrectly states that [choose appropriate problem(s)]:

(a) A mathematical error was made.
(b) I used the wrong tax table in computing my tax.
(c) I incorrectly claimed a credit.

Please be advised that I rechecked my return and do not believe that any error was made. Enclosed is a copy of my return. Please review it and advise me exactly where you believe an error was made

 

Incorrect 1099

Use (a) or (b) when appropriate:

(a) “Your notice incorrectly claims that I failed to report all the income I received from [name]; or

(b) “Please be advised that the 1099 information that you received from [name] is incorrect.

I have enclosed a copy of a corrected 1099 that [name] has reissued to me. I would appreciate your adjusting my tax account to reflect the information contained in the corrected 1099. When this is done, you will readily see that no additional tax is due

 

Always try to get the 1099 corrected and send along a copy of the new one. Forms 1099 have to, by law, list the names, addresses, and telephone numbers of whom you can contact when the 1099 is wrong.

 

 
Wrong Tax Year

Use the following paragraph:

The miscellaneous income your notice claims I failed to report for the year in question was not received until the following year and was reported on that year’s return (copy enclosed). Additionally, I am enclosing a copy of my bank statement for the month in which this income was received. You will notice that this bank statement bears the following year’s date”.

 

You Never Received Prior Notices

Use the following paragraph:

“You don’t have my correct address, which is probably why I never received your prior notices. Please send me copies of these notices so I can determine whether the most current notice that I have enclosed is correct. If it is, I will pay the amount I owe upon receipt of the prior notices I never received. If it is not correct, I will contact you.”

 

Note: Just because I keep referring to canceled checks in these examples doesn’t mean that you’ve paid your taxes by check. If you used one of the other approved payment methods, such as electronic funds transfer, credit card, or the Electronic Federal Tax Payment System, just fill in the appropriate method of payment and provide the necessary proof.