When assigned a new audit case, the first thing I do is examine the IRS report. The report usually includes a letter of explanation with proposed changes and why these changes have been assessed. The IRS report in a recent case claimed that the members had failed to report four 1099-Rs (Distributions from Pensions, Annuities, Retirement, etc.) totaling $111,198. This resulted in a proposed tax liability of $53,316 for the members.
During my initial review, I saw that there were business Schedule Cs and they were labeled ‘required minimum distribution’ with the same amounts shown on the notice. I immediately suspected the members had confused the 1099-R with the 1099-Misc section in their tax program. After speaking to the members, my suspicions were confirmed. They had inadvertently reported the income under the business income section and even triggered the self-employment tax. The tax liability was $131,395 for the year in question.
Unfortunately, the members were not able to give me a solid account of what happened, and they did not have many source documents to determine what they had done. I sent over a Power of Attorney form and used that to pull their wage and income transcript. Using the transcript, I was able to recreate the tax return and find the members where due a refund in the amount of $40,615. There were unreported capital losses as well.
After discussing my findings with Tim Seagondollar, one of our Audit Quality Control Specialists, he suggested the members amend the return and notify AUR in our response. The members went from owing $53,316 to a $40,615 refund! That’s a $93,931 swing in circumstances. Needless to say, they were thrilled with the result.
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