Previously Pro-IRS, I've changed my mind.

[ElfNinosMom]

While I won't ever go so far as to ever become a tax protester, much less a tax denier, I just got a glimpse into why so many hate the IRS so much.

I just got a notice in the mail, stating that I owe the IRS a little over $1000 from the tax year 2005. While that's not a lot of money, I really don't think I owe it. Basically, that year I was disabled for most of the year and unable to work, so I drew a small amount from my IRA to make ends meet until I could get back to working. Since I provided my bank with a notice from my doctor proving disability, as they said they needed to have so it would not be a taxable withdrawal, the dumbshits reported it as taxable income anyway, but never sent me anything to that effect. Of course, since it's an IRA withdrawal, it's taxable at 20% if withdrawn not due to disability.

My personal banker is on vacation until Monday. The last day to respond to the IRS notice was today. Quite conveniently for the IRS, I didn't even get the notice until today; had I received it tomorrow, I'd have been completely out of luck insofar as challenging the claimed deficiency. So I had to ask for a 30-day extension, during which time, she said, interest would continue to accrue.

Well, given that it's not my fault that I didn't get the notice in a timely manner, interest should not accrue while I am given a reasonable opportunity to determine whether I owe it or not.

The funny thing is, the whole time I was talking to the arrogant automaton on the other end of the phone, she was trying to get me to say, in a myriad of ways, that I agree with the IRS preliminary assessment. I don't agree with it, but I don't not agree with it either. I can't get the information together in just a few hours to say whether I agree or disagree, since I have to deal with my bank, and the person I need to deal with there is on vacation. I do know for a fact that I did not get a statement from my bank regarding those funds, or else I would have reported it even though I disagreed that it was taxable. I'd have been absolutely furious with my bank, but I would have reported it to the IRS to avoid just this kind of problem.

It was absolutely infuriating, although I managed to maintain my professionalism and politeness during the conversation. Frankly, I wanted to explode at them due to the sheer extent of their stupidity and underhanded dishonesty in their dealings with a taxpayer who has never, ever had a tax deficiency, even now only has a small one (if any at all) and has never even asked for an extention of any type. I was treated as if I'm some kind of lowlife tax cheat. Yet, I don't even itemize exemptions, so the IRS has made a killing off me over the years, based solely upon my intent to avoid just this kind of situation with an agency which thrives on having a God complex.

At this moment, I hate the IRS. I'm sure that hatred will eventually lessen into some combination of distrust and dislike, but I will never forget much less forgive the grossly condescending manner in which I was treated today. And now I no longer have to wonder why people become tax protesters, or tax deniers. Dealing with that particular bureaucracy, even once, would be more than enough to send a lot of people over the proverbial edge.

I definitely need to fire my bank, as soon as I get whatever the heck it is I need from them. See, I had originally planned to sell some stocks to hold me over, but they talked me into dipping into the IRA instead, since it's not taxable as a result of my disability status. As is no surprise to anyone here, I am still disabled as a result of the stupid car wreck in Aprill 06, and in fact am looking at even more surgery next week. The only way I can even function now is by having repeated epidurals and popping more narcotic pain medication and other meds than I care to count. I can't even get up from a sitting position without help. My entire life has completely fallen apart through no fault of my own, and now the IRS is mongering for money I shouldn't even owe on top of it? That's enough to send anybody over the edge.

To be honest, my first reaction was to sell my houses, just to keep the IRS from slapping a lien on my homes for a measly thousand bucks. Yeah, I know, that's an overreaction, since it is just a thousand bucks and I can either sell some stock or get the money from my other half just by asking. Then again, I'll be damned if I'm going to pay something I don't owe, given that I have always approached my taxes with completely clean hands, mostly because I absolutely do not trust the IRS, or any huge government bureaucracy. I just don't trust them to not file liens etc against my property even if I prove I don't owe it, or even if I pay it. I just don't trust the IRS at all.

Argh. What I'd really like to do is withdraw my entire IRA and put it into another more liquid investment, given my health problems which at this point appear to be permanent in nature since I'm seeing a pain specialist, to whom I was referred by my neurosurgeon. I live day-to-day by getting epidurals and trigger point injections, and taking so many pills that I had to get one of those pill reminders, to make sure I don't accidentally overdose myself. The last thing I needed was this bullshit.

The IRS has entirely too much power over people's lives and they treat even honest taxpayers like me as if we are deadbeats. Something needs to change. I don't have a problem paying the income taxes I owe, but they're nickel and diming the average American to death, and they seem completely unable to comprehend even the possibility that they may be wrong. It disgusts me.

I guess that's the end of my rant. I'll get with my bank on Monday, and hopefully will figure out how to handle this without the fricking IRS destroying my life, getting hit with penalties and interest which would be usurious in the real world.

But right now, I'm just going to lay down on my bed, and hopefully take a nap. I'm just so disgusted with this entire situation that I need some time to recoup and decide what to do next.

[Famspear]

I'm curious: What was the date on the notice, and did the notice state that it was a "statutory notice of deficiency"? Did the notice mention anything about giving you 90 days to petition in Tax Court?

[VinnyZ]

Tradtional IRA distributions (assuming it was a deductible traditional IRA) are ALWAYS taxable. There is no way around paying the tax. If you are disabled and under age 59.5, you are not subject to the 10% penalty but you are always subject to ordinary income tax on the distribution.

[VinnyZ]

Relevant 1099 Distribution Codes

Code 3 - Disability - Ordinary Income Tax applies but not subject to 10% penalty.

Code 1 - Ordinary Distribution - Ordinary Income Tax applies as well 10% penalty. If disabled, use form 5329 to delete the penalty.

The "20%" your banker was talking about was the manditory 20% withholding for distributions.

[Imalawman]

Tradtional IRA distributions (assuming it was a deductible traditional IRA) are ALWAYS taxable. There is no way around paying the tax. If you are disabled and under age 59.5, you are not subject to the 10% penalty but you are always subject to ordinary income tax on the distribution.

I think that's where some people get confused, they think the 10% penalty is the whole tax. Also, IRA distributions wouldn't be taxed at 20%, but at that the current rate of taxation for your income bracket. Thus, in many ways selling stock is better than an early IRA distribution. There are just very, very limited circumstances that an early IRA distribution is the best option. I think you should definitely fire the bank, it sounds as if they screwed up on a number of fronts. Even if you had a huge gain on the sell of the stock, you would be better off leaving the IRA funds intact. Remember the funds went into the IRA tax free, they come out taxable. (some exceptions depending on the IRA)

So sorry ENM that you're dealing with all of this. If there's anything any of us can do, let us know.

[Joey Smith]

You should have filed a VOD.

But seriously, there are probably few of us here who would not scrap the IRS in whole or substantial part tomorrow and either try to remake or reinvent significant parts of it. I get junk from the IRS all the time, and just turn it over to my CPA to handle. Seemingly, about 90% of the time it turned out to be something bogus that the machines mindlessly spit out.

[As an aside, the Utah office has been really bad about this lately, kicking out notices by the millions that certain business returns were not filed when they were, and drawing open complaints on the American Bar Association's Tax Discussion listserv.]

[ElfNinosMom]

You should have filed a VOD.

But seriously, there are probably few of us here who would not scrap the IRS in whole or substantial part tomorrow and either try to remake or reinvent significant parts of it. I get junk from the IRS all the time, and just turn it over to my CPA to handle. Seemingly, about 90% of the time it turned out to be something bogus that the machines mindlessly spit out.

[As an aside, the Utah office has been really bad about this lately, kicking out notices by the millions that certain business returns were not filed when they were, and drawing open complaints on the American Bar Association's Tax Discussion listserv.]

I'm so angry that I'm not thinking straight right now. What's a VOD?

[Famspear]

What's a VOD?

Joey may be making a humorous reference to a request for validation of debt (VOD), something that people issue to a collection agency when they're being hounded for a debt.

But seriously, does your IRS notice say anything about it being a "notice of deficiency"? Does it mention a 90 day period?

Another issue is: Were you under age 59 and a half at the time you received the distribution?

[ElfNinosMom]

What I got is a Notice CP2000. They're claiming I owe them $1000 tax increase, plus $99 interest. The form was dated 6/18, and I just got it today 7/18.

Basically, they want to know if I agree with their changes.

[ElfNinosMom]

What's a VOD?

Joey may be making a humorous reference to a request for validation of debt (VOD), something that people issue to a collection agency when they're being hounded for a debt.

But seriously, does your IRS notice say anything about it being a "notice of deficiency"? Does it mention a 90 day period?

Another issue is: Were you under age 59 and a half at the time you received the distribution?

I'm 44, and the reason for the distribution was disability. My banker filled out a form marking that the reason for the distribution was disability, and I was told that I would still have to pay taxes on it, but that I would incur no penalty.

[LPC]

ENM:

It sounds like the bank gave you bad advice. Still, from what you describe, there shouldn't be any penalties, but there is probably no way to avoid some additional tax and the interest on the tax.

For what it's worth, these are my own personal guidelines for dealing with the IRS (and other bureaucrats).

The goal is to maintain an attitude of asking for help. This means:

1. Ask questions (sincerely) about what you don't understand, and whenever possible, present your situation in the form of a question. (I.e., "I was under a disability at the time. Would that make a difference?")

2. When you explain your situation, assume the role of a person asking someone with superior knowledge for help. In other words, act dumb and be grateful for whatever time they spend with you.

3. Don't contradict them, even though you know you're right and they're wrong. (Express doubt, confusion, uncertainty, or just be silent, but don't contradict.)

4. If you get confrontational and the situation gets tense, apologize and explain that you're confused and upset, and hope that they'll understand.

5. When you've gotten as much help as you can expect from someone, the last question to ask is what they think you should do next.

6. Don't drag out a conversation that is going nowhere, because you're wasting both your time and theirs. End the conversation politely, thank them for their time, and then call back later, hoping to get someone else who might be more helpful.

There are several reasons that this approach is useful:

a. Many IRS employees actually want to help, and if you give them a chance they will try to help you get a good result.

b. You're smarter than they are, and if there is a misunderstanding, it is not going to be resolved by them figuring it out, but by you figuring it out. That means that you have to understand their point of view (and misconceptions) rather than vice versa.

c. It creates a non-confrontational situation. By at least pretending that you are working towards and common goal, you reduce the chances of defensive postures getting in the way and are more likely to get useful information (and perhaps even cooperation).

d. It should help to reduce your own anger and frustration.

[Joe Dirt]

ENM,

I'm very sorry to hear of your continuing health problems and most sincerely wish for your complete recovery.

I join the others in offering to help. Demo has my contact information should you wish to review this.

Take care.

[Famspear]

Dear ENM:

OK, since it's only a CP2000 notice, the IRS is nowhere near either any heavy collection activity such as assessing a deficiency (which, if made, would shortly result in the creation of a tax lien) or filing and recording of a notice of Federal tax lien (which would impair your ability to sell property). If the CP2000 is all you've received, you have time to deal with this. The IRS would issue what's called a "statutory notice of deficiency" or "90 day letter" -- and then wait 90 days -- before they would really assess anything.

Although you're under age 59 and a half, I think the 10% penalty for early distribution might still not apply, based on the disability thing. Actually I'm rusty on IRAs, so someone else here may be more helpful on that, but I'll check on it.

LPCs comments above are excellent.

I gotta go right now, but I or others will surely get back to you soon on this.

--Yours, Famspear

[hartley]

Apologies for the situation. I'm not sure what happened to cause the CP2000 to get to you so late, but luckily, there's actually quite a good deal of time before it advances to any kind of assessment.

Having been, until about 2 months ago, one of the IRS flunkies who answers the toll-free lines, let me apologize for that woman. She shouldn't have acted the way she did, and you're absolutely right, this is why people hate the IRS.

You have no idea how many finished a call with me with something like "wow, I didn't know you guys were allowed to be nice" or words to that effect.

Seriously, the IRS really doesn't want to charge you additional taxes, penalties, and interest if you don't owe them. It's just that currently all the info they have shows that the distribution should be charged a penalty, which you did not self-assess when you filed your return. Probably one of the codes on your 1099 is wrong, and the bank will have to issue a correction. Once you get the info fixed, the situation will go away.

The 3 biggest hassles you should face during this process are: 1)the IRS is going to lay all the burden of getting the record fixed on you; the people at the 1-800# have *no* power to do *anything* to fix it, all they can do is advise you on how to fix it, and possibly tell you what the status is of the situation after you have responded.

2)convincing the bank to issue the 1099 correction might be a giant pain. Don't believe them if they tell you they can't do it - oh yes they *can,* and they *have* to if it is wrong.

3)Once you, or the bank, sends the info to the IRS, it might be a couple of months before it's resolved, while an IRS employee whose job it is to look at this kind of stuff (this is *not* one of the people staffing the toll-free lines, and you generally will not be able to talk to them) reviews the data. In the meantime, you will probably get another computer-generated notice informing you that you haven't responded and additional interest will apply. This doesn't mean that the IRS didn't get the information, but it can't hurt to call and check just to make sure. You *should* get a letter in the mail once the new information has been looked at, and it will either ask for more information or tell you that you were right after all, and you don't owe anything.

[Quixote]

What I got is a Notice CP2000. They're claiming I owe them $1000 tax increase, plus $99 interest. The form was dated 6/18, and I just got it today 7/18.

Basically, they want to know if I agree with their changes.

The "deadline" for response to a CP 2000 is a fuzzy deadline. The chances are good that no one will pick up that file for another 30 to 60 days.

I doubt that you need anything from your bank. There's nothing in anything you have written to suggest that the bank did anything wrong. The distribution, as several people have noted, was fully taxable, but probably not subject to the tax on early withdrawal. However, to claim an exception, other than the age exception, to the 10% tax, you were supposed to file a Form 5329.

Depending on what the statement from your doctor said, it might be enough to prove disability and claim the exception. Alternatively, if you had deductable medical expenses, they can reduce or eliminate the 10% tax. See Publication 590

Don't try to handle this over the phone. It can't be done, because the IRS employee needs to see your documentation. Send the necessary documentation to support your exception to the 10% early withdrawal tax. Stick to the facts. None of what has happened to you so far is the fault of the IRS employee who will be reading your response. Give her only what she needs to reach the right decision.

[Edited to remove the stuff that didn't make sense after I read the rest of ENM's posts.]

[webhick]

ENM, my heart goes out to you. That bitch shouldn't be treating tax-payers like tax protesters over a mixup (especially since it's obvious that you aren't a TP...since you file and pay your taxes).

[Nikki]

ENM:

Since you're disabled and can't travel, contact your local IRS office and ask if a representative can come to your house to work out the details with you.

Assuming they can send someone out, the worse outcome will be that you are no worse off than you are on paper, today.

On the other hand, the representative might well be able to tell you exactly what forms to file, etc, to minimize your liability.

Just maike sure you have all the paperwork regarding the IRA withdrawal and from the bank available. Having a complete copy of that year's tax return wouldn't hurt either.

[BBFlatt]

Captainkickback wrote:

For the sake of craziness. Say your taxable income for 2005 was $98,999, you would have owed (filing single) $22,220. If it should have been $99,999 you should have paid $22,500, an increase/difference of $280, plus the $99 interest or $379 total.

If the increase in tax is $280 and the interest is $99 (since 4/15/2006) that would work out to about a 28% interest rate. If the amount due is $1000, then the interest looks more like 8%, which is in line with the rates being charged by the IRS for that period. So I think ENM's original post is correct when she said she was being dunned for a little over $1000.

[iplawyer]

ENM.
I feel for you and do hope that you will someday recover from the accident. It sucks to have this going on in the mean time. We are here for you, though.

Somethng similar happened to me. Our motgage company did not report mortgage interst paid on our home loan. I got the notice late too. I got every bit of documetation together to prove that we'd paid the interest we claimed and wrote a letter to explain the documentation. I never called the mortgage company - I wasn't completely sure that they would help. I did not call the IRS - prcisely for the reason that I knew it would be like your experience.

A month or two later I got a notice that everything was fine. The mortgage company owner called me hopping mad a couple of months after that wantng to know why I did not call and ask them for a 1099. Apparenty they were not reporting the interest as income - I my letter spurred a investigation. I guess the point of this story is that you probably have everything you need to prove your disability status and withdrawal. I don't think you have to beg and plead with the bank to re-issue if they won't do it on the spot.

On another IRS matter, our business passed from the "monthly" to the "weekly" requirement to pay withholding taxes. I swear that I thought I was following the rules that they sent to me, but by my interpretation I was paying a day late each month. The penalty turned out to $1000's by the time they notified me. I did call then and followed Dan's rules. Using that method, and acting completely inferior to the agent on the phone, I told her why I paid on the day that I did - and she agreed that although it was wrong, it was reasonable given the awkward wording in the rules. As a result of acting like a stupid idiot and letting her know she was "the man," she actually spent some time and had the penalties except for the first month removed.

In short Dan's advice works - and there are some people that really will help. You got a bad apple and I am sending bad thoughts her way. You did not deserve that.

[jg]

What I got is a Notice CP2000. They're claiming I owe them $1000 tax increase, plus $99 interest. The form was dated 6/18, and I just got it today 7/18.

Basically, they want to know if I agree with their changes.

The "deadline" for response to a CP 2000 is a fuzzy deadline. The chances are good that no one will pick up that file for another 30 to 60 days.

I doubt that you need anything from your bank. There's nothing in anything you have written to suggest that the bank did anything wrong. The distribution, as several people have noted, was fully taxable, but probably not subject to the tax on early withdrawal. However, to claim an exception, other than the age exception, to the 10% tax, you were supposed to file a Form 5329.

Depending on what the statement from your doctor said, it might be enough to prove disability and claim the exception. Alternatively, if you had deductable medical expenses, they can reduce or eliminate the 10% tax. See Publication 590

Don't try to handle this over the phone. It can't be done, because the IRS employee needs to see your documentation. Send the necessary documentation to support your exception to the 10% early withdrawal tax.

All that may be needed is the Form 5329 (especially if the distribution was 10K so the tax increase is only the excise tax of 10% of 10K=1K) to explain there is no penalty due.
The letter was computer generated due to no Form 5329 and a distribution code that suggested the penalty was due.
The 1099-R does not need to be corrected as the 5329 will suffice to exclude the amount included in income from the penalty and provide a code for the reason to not apply the penalty.

The form is at http://www.irs.gov/pub/irs-pdf/f5329.pdf
Instructions are at http://www.irs.gov/pub/irs-pdf/i5329.pdf that list the exceptions on page 3.

Hope this helps.
NOTE: This message is only for discussion and is not intended to replace the advice of your tax practitioner.