IRS Disputes my 2005 tax return, now what?

Question

I received a IRS envelope yesterday. (Oh joy!)

And they are disputing my return for 2005.

In the letter, they say I "may" owe them $7,000.

Can someone out there tell me what steps to take to get out of this mess?

Is this basically an audit and can I negotiate some type of payment
schedule??

Should I represent myself or hire a good CPA/Tax Attorney?

Thanks in advance to all who can help me.

Answer 1

If you have received a CP2000 form then it will make you a little happier to know that about 64% of them are incorrect. You have to read the notice they sent you; or find somebody who is familiar with tax matters; and have them read it. The IRS does not hire mind readers and they only use the information they received. If the information is in error then the situation goes downhill from there. All errors can be corrected and problems worked out so don't get an ulcer. Read it; or have it read and straighten out whatever has been screwed up.

Answer 2

The letter would have said what specific items they are questioning. If you disagree with their assessment, find a good CPA unless you're a tax expert, and reply to the letter saying why you disagree.

For example, if you didn't report the sale of a stock, they would have calculated the tax as if your basis was zero, since they don't know what it was. If your basis was really something fairly close to the sale price, the tax on the sale might be very low - or none, or a loss that can be deducted from your other income. So the amount you owe might not be anywhere near what they showed in the letter.

But if, when you look at what they're questioning, you realize they're right, then start figuring out where you're going to come up with the $7K. And yes, if you owe and can't pay the full amount, they'd set up a payment plan for you - it will cost you interest, and fees also.

Good luck.

Answer 3

First, it is an audit.

Rule 1: don't panic.
Rule 2: Read the entire letter. See what they're asking for.

I'm guessing it's a CP2000 notice for Proposed Changes to your tax return. The IRS believes you made a mistake on your 2005 taxes, and wants a clarification. I got a similar letter last month.

If that's the case, you should read the whole thing, go through last year's taxes, and see what they want.

You have 3 choices:
1) Agree with their proposed changes, and agree that you owe what they say you owe.
2) Agree with part of it.
3) Agree with none of it.

If you pick 2 or 3, you will need to explain why you believe the IRS is incorrect (I know that's scary, but they only take money that you legally owe them and no more.)

If you don't have the money, then you can propose to them a payment schedule. You'll have to pay interest, but the rule is that if 1) We're talking about less than $25,000, and 2) You'll pay the whole thing off within 3 years, then the IRS will be more than willing to accept your proposal.

BTW, $7,000 at 18% will be paid off with $250/month for 36 months.

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In my case, I had cashed in some stock options, the money was reported on my W2, so I didn't think I needed to fill out a Schedule D (Capital Gains).

The note told me that I "may" owe them $21,000, but the back of page one explained that they simply needed an updated Schedule D, in which I show that I didn't have any capital gains beyond the cash I already showed on the W2.

After doing the calculations and filling out the form, instead of me owing $21,000, it looks like I'll be due a refund of $16.32

Answer 4

Because he's got integrity. Did you read what he wrote about this? He made an especially good point about the fact that the rich don't stop investing when they are taxed more. A few posters here are giving simplistic answers along the lines of, "well why doesn't he give all his money to the IRS then?" - that's just childish. What he's saying is that all people in his income bracket should be paying more taxes and he's willing to put his money where his mouth is. The man is standing up for what he believes in.

Answer 5

If someone else prepared your return, go back to them and ask for help. If you did them yourselves, it will cost you, but I would first try one of the major chains of tax prep (I work for H&R Block and am partial, lol). They should have an office open for summer hours, though if you hurry, some of the neighborhood offices are open today (4/19). They can tell you why the government wants your money...probably underreported income, usually on a 1099-MISC. If you had expenses while you were earning the money, you can deduct those expenses to lower your tax bill. Mileage is the most likely way to benefit you, so try to get a good estimate of how much you had to drive your own vehicle (minus daily commute miles) while earning this money. Supplies, tools, business cards, or anything else you had to pay out of your own pocket counts. If you went out of town overnight, you can possibly also get some meals/lodging deductions (but you might need to get receipts if the IRS follow up with a desk audit).

The preparer will need a copy of your original return so they can recreate it in their computer systems. With self-employment taxes at ~14% and an estimated income tax rate of 15%, you'll save about $300 for every $1000 in deductions you can get (plus reductions in penalties and interest which has already been added to your total "bill"). Well worth the price and one of the "chain" stores.

Don't hire an Attourney unless you're facing jail time for fraud, they charge thousands of dollars. CPAs will work also, but find one who specializes in tax prep, they are the ones who know what they are doing. Not all of them keep up with the latest tax laws. You can also get an Enrolled Agent (EA) to help represent you during the desk audit, if there is one. Filing an amended return with the right documents will usually avoid the actual audit.

You can set up a payment plan. Go to www.irs.gov to find the form number (it's nine thousand something...don't have one handy). Send in what you can since the interest rate aint cheep.

Answer 6

well it depends, if the irs is disputing your tax return is one thing, but if they are wanting to see documents, and wanting to meet with you that is probably and audit. if the irs finds that you indeed owe 7000.00 than you can make payment arrangements to pay the debt off. as far as representing yourself or hiring a cpa, that's a judgement call if you feel that you have the knowledge to back yourself up for the 2005 return the by all means, but if you are not sure you might consider representation. i would suggest that you contact the irs to find out what it is that they are trying to do before you do anything else connscerning the matter

Answer 7

Along with the letter they sent you the information that is causing the increase in your tax liability, you need to review that information and compare that with what you reported on your 2005 return. If you had self employment income did you report that on a Sch C along with your expenses, and the complete the SCH SE. You need to read the complete letter to see what they are claiming was not reported, then if you have questions call the number on the letter to get more information. You may be able to file an amended return, reporting the correct information and taking any credits/deductions that may apply, but you do need to respond to the letter, even if it is to say that you disagree with the notice, and that you are going to do further research on the issue and then go to a Tax professional with the letter and a copy of your complete original 2005 return to see whether the IRS is correct or if you are.

Answer 8

Hire a good CPA/Tax Attorney. Try to figure out why they think you owe another $7,000. If it's something simple like sending them documentation - just do that BEFORE paying a CPA.

Answer 9

The same thing happened to my parents a few weeks ago. After I reviewed the notice, it turns out that the CPA who filed the return for them transposed my brother's SSN and so the IRS disqualified the dependent deduction for him. You need to review the notice and see exactly why they think you owe them more. If it is something simple like giving them the correct SSN you don't need to hire a CPA.

Answer 10

Any bunch of government people with three intials is a bad adversary. The IRS is one of these. They have infinite resources (our tax money) to achieve their goals .
If they pointed out an obvious calculation mistake that you made then pay them. If you think you are correct, then get a tax attorney to give you advice.