Garbage In - Garbage Out or
Corresponding With the IRS Computer
© by Greta P. Hicks, CPA
For many of us, communicating with computers is difficult. The old
theory of "garbage in - garbage out" is more true with the IRS
computer than perhaps the PC on your desk. When there is garbage in (erroneous
information) the IRS computer, writing to the IRS in attempts to get the
"garbage out" (information corrected) is frustrating for even
the experienced tax practitioner and doubly so for novices. First, it is
important to avoid getting garbage into the IRS computer. Secondly, there
are definite steps that can be taken to get the garbage out.
The White Elephant
The IRS computer is not as sophisticated as most taxpayers think.
The hardware is old and obsolete by today's standards and the soft ware
is a maze of separate programs. If we understand the program's capabilities
and limitations, it is easier to eliminate possible problems and quickly
solve problems when they occur.
One of the major functions of an IRS Service Center is to process
(input) data from tax returns you file. The data is recorded on magnetic
tape and forwarded to the Martinsburg Computing Center in Martinsburg,
VA for posting to the Master File. There are two Master Files, one for
individuals (IMF) and one for business type returns (BMF). The BMF includes
Forms 940, 941, 1120, 1065, and 1120S. After posting to the Master File,
a magnetic tape is returned to the original service center where you filed
the return. This takes time! See "Through the Pipeline: Processing
Tax Returns at Kansas City Service Center."
District offices are responsible for the Automated Collection System
(ACS) which is a separate program from the service center computer. The
ACS system is updated weekly from data from the IMF and BMF programs.
First limitation - Should you be told
that a payment is not reflected on your account, it may not have had time
to post and the data returned to the service center or district ACS.
Second limitation - Since Forms 940,
941, 1120, 1040, 1065, and 1120S are maintained in a separate file, it
is possible that a missing payment may be posted to an account rather than
the one you originally intended. Without human intervention, the computer
will not know that your $100 (example) is in the 941 file and not the 940
Third limitation - The person representing
you will have you sign a power of attorney (POA). These are recorded in
a Centralized Authorization File (CAF) system which is separate from other
programs. Should a representative call ACS, the IRS employee will have
to physically rise and go to another computer to access CAF to determine
if a POA is on file.
Fourth limitation - The IRS receives
so much correspondence that there is difficulty matching our letters with
the file. Three years ago, a service center department head "confessed
all" before a group of practitioners. He said, "The reason it
took us so long to answer your letters was that we just couldn't find the
file." To resolve this problem, they instituted a data base tracking
system which tells them which "stack" your file is in.
Payments Gone Astray
Or Garbage In
Limitation number two, posting of amounts to wrong account, can be
avoided by furnishing the IRS the necessary information to correctly post
Example 1: All checks and correspondence
mailed to the IRS should contain the following:
- Taxpayer's Name
- Federal Identification Number (FIN) or
- Employer Identification Number (EIN) or
- Social Security Number
- Tax Form Number
- Tax periods, years or quarters
If any one of these items is missing or incorrect, the form or payment
may be mis-posted. It is especially important to take care to use the same
name on all correspondence. Businesses operating as a sole proprietorship
should use the owner's name plus the trade or business name (dba).
Example 2: When using Federal Tax Deposit
Coupons (See FTD Checklist and Form 8109), care should be exercised to
mark the correct "boxes" for tax periods and forms. On payroll
tax reports (Forms 940 and 941) it is very easy to mark the wrong period.
This error will cause one quarter to be overpaid and another quarter to
be underpaid. Sometimes this can be corrected with a phone call or a single
letter. Often it takes several phone calls or many letters.
Example 3: Able and Beauty are getting
a divorce. They have been making estimated tax payments using Form 1040ES.
When Beauty files her tax return and claims her share of the estimated
tax payments, the IRS will say there are none posted to "her"
account. It is IRS policy to post all joint tax payments under the "first
named" person's name - usually the husband. Correspondence will be
required to inform the IRS that Beauty's payments are in Able's account.
Having estimated tax payments posted to the wrong account can be avoided
by each individual making their separate Form 1040ES payments.
Solving The Riddle Or
Getting The Garbage Out
What kind of correspondence can you expect from the IRS Service Center
within two months after a tax return is filed?
You may receive the Form 1040 back as non-processable, a request
for an additional form, a notice that an addition or subtraction error
was made, or an assessment of penalties and/or interest. In each of these
circumstances, there is special handling required but these four basic
rules always apply.
Rule 1 - Respond timely. Once correspondence
is generated from the IRS computer, the computer is programmed to send
letters at stated intervals. It is possible that even if you mailed your
response within the 10 days (example) required, your answer and the next
computer notice will cross in the mail. Once your letter is received by
the service center, it will need to be routed to the department and to
an individual who has the authority to make changes in the garbage in the
Rule 2 - Staple a copy of the IRS letter/notice
to the front of your letter. Limitation number four comes into play at
this point. The service center needs to be able to match your response
with the original inquiry. Do they have a copy of the letter they sent
to you? Probably not! They input code numbers into the computer that tells
them the number of the letter they mailed and which paragraphs were enclosed
in the letter. At a minimum, include the information suggested in Example
Rule 3 - Enclose the reply in the bar
coded IRS envelope. Again the goal it to have your reply reach the "correct"
IRS person in the shortest period of time. As mail comes into the service
center, it is sorted by type of return and district number. The IRS has
very sophisticated mail sorting equipment to speed your reply to the correct
department. If mailed in a plain paper envelope, your response will need
to be hand sorted which causes a considerable time delay and increases
the chances that the correspondence will be routed to the incorrect person.
Rule 4 - Avoid the problem. Double check
all information prior to mailing it into the service center. The IRS Austin
Service Center reports that the top five errors of individual taxpayers
- Error in computing earned income credit
- Error in computing total tax.
- Incorrect standard deduction.
- Error in address (e.g. placement of address, omitted ZIP code,
- Wrong form used.
Consult the Processing Tipsheet for Tax Practitioners for additional
helpful hints on avoiding returned documents or error notices.
Don't Step On The Cow
Patty Or Avoiding IRS Problems
Within the first two months after a return is filed you may receive
one of the following letter/notices:
Forms can be returned unprocessed by the IRS Service Center because
all forms and schedules are not attached or the tax return has not been
Form 8332, Release of Claim to Exemption
for Child of Divorced or Separated Parents
If tax forms are late, the IRS Service Center will send notices that
additional penalties and interest is due.
Failure to correctly deposit estimated taxes
on a quarterly basis. This penalty is assessed
if the taxpayer fails to deposit estimated
taxes quarterly equal to 90% of current year
Failure to timely file penalty is assessed if the
taxpayer fails to file their tax return by April
15 or by the extension due date. Tax due on
Forms 1040 and not paid by April 15 will void
an extension request and late penalties will be
Failure to timely pay taxes penalty is assessed
if the taxpayer fails to "full pay" all taxes by
Interest is assessed for all taxes due and not full
paid by April 15.
The IRS Service Center will correct arithmetic mistakes and send
a notice that will say: "We have corrected an error on your tax return...."
Lines of Form 1040 have not been properly
added or subtracted.
Amounts from Forms and Schedules have
not been properly carried forward to the
Amount on Schedule A, Itemized
Deductions, have not been added correctly
or the limitations for 7.5% medical or 2.5%
miscellaneous itemized deductions has not
been properly calculated.
Amount withheld from W-2 and estimated
tax payments per the Form 1040 do not agree
with amount previously posted in the IRS
The W-2 form is not attached and the IRS does
not give the taxpayer credits for amounts of
income tax withheld.
Sooner Or Later They'll "Get Ya!"
About two years after a return is filed, the IRS computer in Martinsburg
performs what they call a "document matching program." The computer
attempts to match (compare) the tax return with the Forms 1099 and W-2
it receives from banks, savings and loans, brokerage firms, and other third
parties. If the amounts from the third party data base (Information Return
Payer File, IRP) to not agree with the Form 1040, then employees at your
IRS Service Center visually inspect the return. If the person cannot find
the IRP information on your 1040, a CP-2000 notice is generated. This letter
notifies you that the IRS has been unable to find the information on the
return and additional tax is recommended. This same IRP file is used to
identify persons who have not filed income tax returns.
Current documents which are matched with the Form 1040:
- W-2, wages
- 1099B, sale of stock or investments
- 1099Div, dividends
- 1099Int, interest
- 1099R, pension, retirement, and IRA withdrawals
- 1099S, sale of real estate
- 1099Misc, non-employee compensation, rents
- 8300, currency transactions over $10,000
Suggestions for avoiding unnecessary CP-2000 contacts:
- Record the form from third parties on the proper line of your return.
- Provide explanations for items which could appear to be under reported.
- Report interest and dividends in the same manner as the bank, savings
and loan, or broker. Some banks send separate 1099's for each certificate
of deposit or account. Other institutions send all accounts on one 1099.
Place the amounts on your tax return in the same manner as the 1099 that
has been mailed to you, either total or separate.
- Attach copies of "corrected" forms received.
- Explain erroneous payer documents received.
- Explain misidentified payees (Example: Trusts, Minors, Estates).
- Attached copies of all back-up schedules which show computations.
- Contact payers who file faulty documents to prevent recurrence in
Prompt action is required when a CP-2000 notice is received. The
earlier you respond the more options that are available to you.
Option 1 - Agree: If you agree that
you left the item off the return, sign the notice and return it to the
IRS. You can pay at that time or let them bill you. Interest compounds
Option 2 - Disagree: If you disagree
in total or part, the method of response is the same.
- Write a letter and explain why you disagree.
- Attach any documents you have to support your position.
- Attached a copy of the CP-2000 notice to the top of your letter.
- Use the bar coded envelope.
Option 3 - Ignore: If you delay sending
a response or ignore the CP-2000 notice, the IRS will mail a Statutory
Notice of Deficiency. This letter gives you 90 days to pay the tax or petition
tax court. If the 90-day letter is ignored, the IRS assesses the tax, sends
you an invoice, and starts the collection process. The only option at this
point is to pay the tax and file a claim for a refund.
The longer hamburger lays on the side walk the worse it stinks. Procrastination
does not make the IRS go away. It makes the problem worse.
Again, two years down the line, your business may receive a notice
that things don't match up.
The combined Annual Wage Reporting (CAWR) program matches the W-2
and W-3 information sent to the Social Security administration with the
employment tax returns, Forms 940, 941, 942, and 943 mailed to the IRS.
Matches are also made in the Federal Unemployment Tax Act (FUTA)
where unemployment tax credits claimed on federal returns are matched with
actual payment amounts reported by the state. This program also allows
states to identify non-files of required state returns.
In responding to these notices, follow the same rules as explained
Getting A "Hired"
Should you handle IRS letters, notices, inquiries, or correspondence
yourself or hire a person to represent you? IRS Publication Number 1, Your
Rights as a Taxpayer states, in part, that "you can represent yourself,
or generally with proper written authorization (POA), have someone represent
you in your absence. During an interview, you can have someone accompany
you... If you want to consult an attorney, a certified public accountant,
an enrolled agent, or any other person permitted to represent a taxpayer...
we (the IRS) will stop and reschedule the interview."
If choosing a representative, take care to interview them thoroughly
as to their prior experience in handling IRS problems. Some practitioners
are more familiar with the inter-workings of the IRS than others. It is
best when dealing with the IRS, to select a representative that concentrates
in IRS problems. The advantage to having a qualified representative versus
doing it yourself, is an experienced representative knows "how to
speak the language." As you can tell from the abbreviations used in
this article, the IRS has its own slang and knowing what words to use can
avoid or solve a problem.
Who To Call, What To
Saying the right thing to the right person at the right time is the
key to getting an IRS problem solved quickly.
In The End
Whether you prepare your tax return or it is prepared by a paid preparer,
in the end you are responsible for it's contents. Review you tax return
thoroughly before signing and mailing it. Make sure you understand the
contents of the return. You are more familiar with your personal, business,
and investment transactions than any other person and can easily spot an
entry that does not make sense.
Good luck on getting the "garbage out" and better luck
on avoiding the "garbage in."
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List of Articles by Greta P. Hicks, CPA
GRETA P. HICKS, CPA and former IRS manager, concentrates in solutions to IRS problems and advises business and tax professional on IRS policies
and procedures. Ms Hicks is owner of TAX SOLUTIONS, Inc., a company providing
educational materials and programs on solutions to IRS problems and is
a nationally known speaker and writer on solutions to IRS problems. To
arrange for consultation contact:
Greta's web site: http://www.gretahicks.com
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