In the summer of 2018, TaxAudit member, Sierra, received a CP2000 notice. The IRS was questioning $9,000 in self-employment income and $10,000 in retirement distributions. While this might seem simple enough, this story actually had lots of twists and turns! Thankfully, Sierra had the expert help of TaxAudit to help walk her through this process.
After contacting our Customer Service Department and providing the required documents to start a case, Sierra’s case was assigned to me. I began to investigate what the IRS was questioning and realized this was not going to be a simple case.
First, the income the IRS was questioning did not belong to Sierra. It was an input error caused by Sierra’s bank and, unfortunately, since the bank account information in question did not match Sierra’s information, the bank refused to work with her to correct the mistake. Second, Sierra did an IRA Trustee to an IRA Trustee transfer and then converted the IRA to a Roth IRA. While this might be something that happens often, this caused a lot of confusion for the IRS. I worked with Sierra to gather the documents needed and sent a response off to the IRS. At this point, all we could do is wait.
When the IRS initially assessed the bank income, they assessed this as self-employment income – which requires self-employment taxes. When we received a response from the IRS, they removed the erroneous bank income that did not belong to Sierra; however, they forgot to remove the self-employment tax. In addition, the IRS could not understand that there was no early withdrawal penalty in the IRA transfer. Sierra transferred one IRA to another IRA and then converted the same IRA to a Roth IRA – it was all the same money, so an early retirement distribution was not taken out.
We formed a second response to reiterate that 1) there was no self-employment income, so self-employment tax should not be required, and 2) the retirement income was transferred and converted, so there should not be an early withdrawal penalty since nothing was taken out. After many follow-up phone calls, the IRS still had not made the changes and began to send bills to Sierra. We formed a third response, reiterating the same information, and sent it to the IRS once again.
At this point, we had reached late 2019 – a year and a half after Sierra initially started her case with us, and the IRS had not made the corrections after three responses filled with the necessary documentation. Despite our responses, the IRS sent Sierra’s file to the collections department. We continually worked to keep collections at bay while trying to get our responses reviewed and the notices corrected. We sent a fourth response to the IRS, once again reiterating that there was no self-employment income, so a self-employment tax should not be required and stating that the retirement income was transferred and converted, so there should not be an early withdrawal penalty. Even though we had been able to put incremental holds to stop collections, the IRS eventually took Sierra’s tax refunds to pay the “outstanding balance,” even though the balance due was still being disputed.
This was when we decided to get the Taxpayer Advocate Services (TAS) involved. In January of 2021, we sent our fifth response detailing, once again, all the same information and explaining that we had now involved TAS. After several phone calls with our TAS agent to make sure they clearly understood all the issues, the TAS agent began working with the IRS examiner to help them understand the issues and make the appropriate corrections.
Finally, after three years, five responses, and eighteen IRS notices, we got the result we wanted! In fact, when everything was all said and done, the IRS owed Sierra a refund of $120! Sierra and I were both thrilled to put this saga behind us and at the conclusion of her case, this is what she had to say:
“Lisa went above and beyond to help with a CP2000 that listed errors the IRS made regarding my income earned. She was able to prove the mistakes with all necessary documentation and was able to get the false amount owed taken off my record completely. I feel so grateful to have had her guidance through all of this.”
At TaxAudit, we will do whatever it takes to make sure our members are only paying what is rightfully owed. If you are interested in learning more about purchasing Audit Defense, click here!
**Some names and identifying details have been changed to protect the privacy of the individuals.