One of the hardest and most irritating problems to work with the IRS is when someone has issued a W-2 or 1099 with an incorrect social security number on it. Generally, what happens is that you receive an IRS notice of proposed changes to your tax return for unreported income. The notice includes a list of 3rd party 1099s and W-2s issued to your social security number. One of those 1099’s, for say $20,000, is from some company that is not even in your part of the country.
Calling up the IRS and complaining about this does nothing. The IRS’s position is that it is up to you to prove that the 1099 is in error. Several people I have known over the years have given up at this point and just paid the additional taxes.
However, there are better options:
- Call the company on the form and try to get them to amend it.
- Fill out IRS Form 2624 giving the IRS permission to contact the payor. The IRS will race at a snail’s pace to contact them, but this is usually enough of a prompt to get it fixed.
- If this does not work, it’s possible that you are a victim of identity theft. You should call the IRS and request an IP PIN.
- The next step is to file a Form 911 with the Taxpayer Advocate Service. One of their primary purposes is to get the bureaucracy to correct errors when its processes fail.
- Finally, if it’s enough money, consider an Offer-in-Compromise due to Doubt as to Liability. Make an offer of $150 to cover the processing costs and hopefully, the IRS will let it go at that.
What is so irritating about this issue is its unfairness and the IRS response that this is your problem, not theirs. Luckily, most of the millions of 1099s and W-2s are issued with correct id numbers.
The IRS issues millions of liens on tax debtor property every year. Unlike other creditors, IRS liens are “self-releasing”. There is a highlighted box on each Notice of Federal Tax Lien that states that this notice will also operate as a lien release one day after the Last Date for Refiling. The problem is that most people, including financial professionals, do not read this and keep looking for a formal release that is not coming.
The easiest way I have found to handle the problem with bankers and closing agents expecting a formal withdrawal is to send them a copy of the lien notice and highlight in red the already highlighted box. You can also send them IRS Publication 1468 which explains the self-releasing nature on page 4.
The IRS will formally withdraw the lien notice if the debt is cleared prior to the Statute of Limitations. This is usually done automatically within 30 days after the debt has been paid off with money or an Offer-in-Compromise. There are also other reasons they will issue a withdrawal if the government can be convinced it is in their best interest.
Occasionally you really need to pay the IRS on a single day without fail. This can happen in cases with real estate closings in which the IRS is a lien holder. The safest way to make this happen is a bank-to-bank wire transfer.
The IRS Same-Day Wire Federal Tax Payments at https://www.irs.gov/payments/same-day-wire-federal-tax-payments has a downloadable worksheet that you can fill out and take to your bank. There are of course fees involved.
There is one big caveat to keep in mind in using wire transfers. If your wire comes in after 5:00 PM ET, it will be returned to the bank.
An Innocent Spouse Claim is worth considering in cases where the taxpayers jointly owe a lot of IRS debt. The downside is that the IRS does not generally approve these claims. Worse, most of the appeals to the courts have been IRS wins.
That said, it is still worth considering. Innocent spouse claims arise in cases where the tax understatement can be attributed to just one spouse. Additionally, the other spouse must have no knowledge or benefit from that understatement. The strategic advantage is that you might get a better result on the Reasonable Collection Potential formula by removing the one spouse from the liability.
An Offer-in-Compromise will only work if the taxpayers can show that they do not have the financial means that will enable them to pay the debt in full. The IRS does not accept offers for less than full pay merely because someone throws a number at them. Instead, they do a financial analysis. The results are plugged into the Reasonable Collection Potential formula. Removing one of the spouses from the liability could change the formula results and make the other spouse eligible for an offer.
If your tax debt is the result of an IRS Audit, do not overlook the possibility of getting the IRS to reverse the audit assessment. The Audit Reconsideration as explained in Pub 3598 is a process to get some relief from audit results you do agree with or an assessment made by the IRS because you did not file a return.
You may request audit reconsideration if you:
- Did not appear for your audit
- Moved and did not receive correspondence from the IRS
- Have additional information to present that you did not provide during your original audit
- Disagree with the assessment from the audit
The IRS recommends you use form 12661 to explain your dispute. New information is the key to getting this process to work. It is critical that you provide all the documentation with the request. Requests without documentation enclosed will be denied out of hand. You can use this process as long as the assessment is outstanding.
Your reconsideration request will be accepted if you:
- submit information that has not been considered previously.
- filed a return after the IRS completed a return for you.
- believe the IRS made a computational or processing error in assessing your tax.
- The liability is unpaid, or credits are denied.
This is a relatively cheap process to get rid of an IRS debt if you have the grounds to pursue it.
The Treasury Inspector General released an audit report on the IRS electronic filing system. Some of the interesting facts in this report include:
- The IRS destroyed an estimated 30 million paper 1099 type forms because of their processing backlog. Good thing we went through all the trouble to file them.
- The percentage of business returns filed electronically is now up to 63 percent which is nowhere close to the 93% of the 1040s filed electronically.
- The cost to process returns electronically is pennies vs multiple dollars. In the case of 1040s, it is 36 cents compared to $15.21 for example.
The bottom line is that the IRS is going to require more and more electronic filing of business returns, especially payroll tax returns. This is a good and bad thing from my perspective. Processing returns electronically means that we get an almost immediate acknowledgment without the hassle of certified mail. Additionally, it significantly reduces the IRS keypunch error rates in inputting paper returns. On the bad side, the IRS’s attempts at preventing id theft continues to make it harder for taxpayers to file electronically.