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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 file.

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 your payments.

Example 1: All checks and correspondence mailed to the IRS should contain the following:

  1. Taxpayer's Name
  2. Address
  3. Federal Identification Number (FIN) or
  4. Employer Identification Number (EIN) or
  5. Social Security Number
  6. Tax Form Number
  7. 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 computer.

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 1 above.

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 are:

  1. Error in computing earned income credit
  2. Error in computing total tax.
  3. Incorrect standard deduction.
  4. Error in address (e.g. placement of address, omitted ZIP code, etc).
  5. 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 properly signed.

    Example:                         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.

    Example:                         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
                                           tax liability.

                                           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
                                           assessed.

                                            Failure to timely pay taxes penalty is assessed
                                            if the taxpayer fails to "full pay" all taxes by
                                            April 15.

                                            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...."

    Example:                          Lines of Form 1040 have not been properly
                                            added or subtracted.

                                            Amounts from Forms and Schedules have
                                            not been properly carried forward to the
                                            Form 1040.

                                            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
                                            computer.

                                            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 subsequent years.

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 daily.

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.


Business Matches

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 above.


Getting A "Hired" Garbage Sorter

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 Say

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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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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