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

[John J. Bulten]

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.

As you can guess, Mom, I too have great empathy for those who believe they had submitted a correct, true, and complete filing, but who are told that the IRS has info showing more tax is due— especially when medical issues are concerned.

Whether the original 1099-R is wrong or the IRS just disclaims formal notice of disability status, your fact pattern indicates a simple correctable error. The IRS is carefully programmed not to let go of errors favorable to itself without full burden of proof, so sometimes it takes several salvos to demonstrate to everyone that the facts meet that burden.

Hartley has an excellent grasp of this predicament. Whenever IRS info collectively shows more tax due, but your info does not: 1) sole responsibility for pursuing correction is yours; 2) third parties, though they may be held liable for not making the correction you request, may still refuse for other ostensible legal reasons; 3) you must ensure the correction, either the bank's or your own, is obtained by the IRS and ensure it makes it through processing while further adverse steps are simultaneously processing.

If, as Hartley considers possible, the bank chooses not to send the info to the IRS, the responsibility falls back on you to shepherd your correction through the system. I suspect that the actual method of your correction is immaterial, as long as it presents all the facts necessary for reversing the proposed assessment and penalty. You might be equally well-served with 5329 (with which I'm not familiar), 4852 (the official form for correcting erroneous 1099-R's), or an affidavit (potentially containing a scanned and corrected 1099-R for reference). I'm sure you know where I'd refer you to some successful examples of the latter methods for people in your situation without my linking them again.

Because of the IRS's well-established high priority for activities which generate and pursue lawful collections, and relatively low priority for performing its duty to acknowledge proper corrections, you need to be prepared that this may not be the last round of placing your facts on the official record. But as you can see, when we delegate the power to tax, that power operates naturally to be constantly expanding its sphere of destruction (whether we refer to the value spent in maintaining and growing the collection scheme itself, the much greater value spent on wasteful but theoretically republic-chosen expenses, or the slow destruction of due process by dragging it out through ever longer procedures).

Welcome to the "anti-IRS" throng!

BTW, Mom, I've noticed that spiritual preparation is one of the most important factors in disability cases. Could you comment briefly on your spiritual status, and would you accept our group praying for you on any particulars?

[Dezcad]

and would you accept our group praying for you on any particulars?

My group and I have prayed for you John, but unfortunately, it doesn't appear to be working.

[ElfNinosMom]

As others have noted, it sounds like one of the boxes was incorrectly completed by the bank when it was processed.

I would think that the first step is to have the bank issue a corrected 1099 showing the withdrawal was pre-59 1/2, for disability, with no 10% penalty.

Also, what you got from the IRS says that the IRA withdrawal increased your income that year by $1,000 (the amount of the withdrawal you made I bet), which in turn would have increased the taxes owed that year by a few dollars, plus the interest.

I beleive they are NOT saying you owe them $1,000, plus $99 in interest, but owe them any taxes that would have been due (above what you already paid) if your 2005 income had been $1,000 higher.

For example, using the 2005 Tax Table: http://www.irs.gov/pub/irs-prior/i1040tt--2005.pdf

Say you filed single in 2005, with $25,000 in income. Taxes owed would have been $3,369. What the IRS is saying now is that your income for the year should be $1,000 higher, or $26,000. Based on the table, the taxes you should have paid would have been $3,539 an increase/difference of $170.

Thus what the IRS wants from you, assuming the numbers above, is $170 plus $99 in interest, or $269 total.




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.

Now, take a deep breath and relax. The most you wil be on the hook for is a low 3 figure amount and if you ask nice you might be able to pay it in 3 installments.

C'mon CPA types, am I right?

It seems like you would be right, but under the box saying "you now owe us" (or something to that effect) it says $1099.00

[Quixote]

jg wrote:

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.

You may be right. It has been my experience that what would have worked on initial processing of the return is not always sufficient once the beast has been aroused. But, given the simplicity of your plan, ENM ought to try it. If the 5329 alone is insufficient, the employee assigned the case will probably respond by letting ENM know what that employee wants to see, a doctor's statement or a 1099 coded as a disability distribution.

[Nikki]

How much did you withdraw from the IRA?

A ballpark number will significantly help the analysis.

If it was around $10,000, the notice probably reflects an improperly applied premature withdrawal penalty. You should be able to get that corrected with a revised 1099 and documentation from your physician.

The only other alternative is that you didn't report any of the withdrawal as income on your tax return, and the adjustment reflects the taxes owed on the withdrawal. In this case, the IRS is correct and you do owe the taxes plus interest.

[ElfNinosMom]

How much did you withdraw from the IRA?

A ballpark number will significantly help the analysis.

If it was around $10,000, the notice probably reflects an improperly applied premature withdrawal penalty. You should be able to get that corrected with a revised 1099 and documentation from your physician.

The only other alternative is that you didn't report any of the withdrawal as income on your tax return, and the adjustment reflects the taxes owed on the withdrawal. In this case, the IRS is correct and you do owe the taxes plus interest.

Nah, it was only $5000.

I don't have any problem paying taxes on it. I always pay my taxes, and I already paid my taxes on that money. I didn't get a 1099 from the bank, but I knew I had withdrawn it, so I listed it as income. I'm nothing if not an honest taxpayer. But even if I hadn't listed it, there's no way the taxes on 5K would be 1K.

[Neckbone]

How much did you withdraw from the IRA?

A ballpark number will significantly help the analysis.

If it was around $10,000, the notice probably reflects an improperly applied premature withdrawal penalty. You should be able to get that corrected with a revised 1099 and documentation from your physician.

The only other alternative is that you didn't report any of the withdrawal as income on your tax return, and the adjustment reflects the taxes owed on the withdrawal. In this case, the IRS is correct and you do owe the taxes plus interest.

Nah, it was only $5000.

I don't have any problem paying taxes on it. I always pay my taxes, and I already paid my taxes on that money. I didn't get a 1099 from the bank, but I knew I had withdrawn it, so I listed it as income. I'm nothing if not an honest taxpayer. But even if I hadn't listed it, there's no way the taxes on 5K would be 1K.

ENM:

I know I'm chiming in very late on this, but here's my advice:

If you included the amount of the distribution as income on the return, and you were not subject to the early withdrawal penalty, you don't owe the $. You should respond to the CP2000 by telling IRS that the income is included, which line it's included on and that you're NOT subject to the EW penalty. Tell IRS if they don't agree, you want a hearing on the matter with IRS appeals.

Good luck!

Neckbone

[Judge Roy Bean]

EMN - I sympathize in more ways than one.

Any bureaucracy that has no effective oversight will eventually step on toes. And by effective, I mean that someone can be identified as being responsible. That's one of the purposes of a bureacracy: Spread culpability so thinly that none of it really sticks.

A relative's issue with the IRS involves the computer repeatedly sending notices of deficiency and demand for payment for alleged amounts from tax years that were effectively ruled as non-collectible in a bankruptcy. The IRS's proof of claim for non-filed, unpaid taxes was erroneous, as the BK court ruled after reviewing copies of the filed returns and seeing the cancelled checks.

That did not stop the IRS from dragging their feet during the filing of the response to the challenge of the proof of claim in the BK (they get longer than other creditors to respond). Instead of owing up to the mistake, they simply didn't respond within the deadline and technically, the alleged amounts were discharged.

But even after the confirmation of the plan and the denial of the IRS's proof of claim, that didn't stop them from holding on to a bogus lien on the home which was effectively preventing them from selling (and a much-needed downsizing).

Through a recommendation from this forum, I pointed them to the ombudsman and they eventually found a real live human to call. (I don't think those posts survived the switchover to the new forum system.) They also found a number for a real live human in the group that handles lien releases.

Best of luck to you. I'll try and reach her and see if she has the ombudsman's office number.

In the mean time, maybe someone here can provide you with that number again.

[The Observer]

But even after the confirmation of the plan and the denial of the IRS's proof of claim, that didn't stop them from holding on to a bogus lien on the home which was effectively preventing them from selling (and a much-needed downsizing).

Through a recommendation from this forum, I pointed them to the ombudsman and they eventually found a real live human to call. (I don't think those posts survived the switchover to the new forum system.) They also found a number for a real live human in the group that handles lien releases.

Any chance that the IRS is holding on to that lien due to Isom issues?

And I am confused - how is the IRS able to record a notice of lien for non-filed periods? Or did the IRS prepare and assess substitute returns for the taxpayers? If so, was the lien notice recorded prior to the bankruptcy?

[Judge Roy Bean]

Any chance that the IRS is holding on to that lien due to Isom issues?

And I am confused - how is the IRS able to record a notice of lien for non-filed periods? Or did the IRS prepare and assess substitute returns for the taxpayers? If so, was the lien notice recorded prior to the bankruptcy?

The lien finally got released with a simple faxed form from the appropriate office to the title company once the BK processing department at the IRS did something in their computers. (I believe it was a "Certificate of Lien Release.")

If memory serves, the earliest Tax lien notice was just one of the many straws that broke the camel's (as in her parents') back. Long story but the IRS amounts involved were small in comparison to their other problems and they were actually assuming thier responses to the original CP22 notices to take care of them. Obviously, they didn't.

Apparently the system thought they still owed even post-discharge. I can only assume the folks who release liens were looking at the same system and the BK department was bogged down or there are holes in their end of the process.

Even with the lien gone, twice since the discharge they've received new CP22 notices for the same years that were discharged. Fortunately, they hung on to the phone number of the person who handled the first one and all it takes is a phone call - and it's been the same person each time.

[The Observer]

I guess I wasn't clear and didn't explain - my question should have been about whether the residence was claimed as exempt property in the bankruptcy and how this was affected by the ruling in Isom.

The reason I bring this up is that I know that exempt property that is encumbered by the federal tax lien will be pursued by the IRS even if a discharge is awarded to the petitioner.

[Judge Roy Bean]

I guess I wasn't clear and didn't explain - my question should have been about whether the residence was claimed as exempt property in the bankruptcy and how this was affected by the ruling in Isom.

The reason I bring this up is that I know that exempt property that is encumbered by the federal tax lien will be pursued by the IRS even if a discharge is awarded to the petitioner.

My understanding of the situation was the home was exempt (and there was no homestead issue). Also, the filing was before BAPCPA came into play. In any event, the BK court ruled in their favor and the taxes weren't included in the plan.

And unless something I'm not aware of changed with BAPCPA, BK courts still have jurisdiction in tax disputes.

This is also substantiated by the fact that the IRS did release the lien after the intervention of the ombudsman.

[Ned Netterville]

Hi Elfninosmom and greetings Quatloosian brethren: I haven't been attentive to Quatlloos Forums for a while as other interests beckon, and so, EFM, I am truly saddened to learn that the pain from your back injury hasn't diminished, and has had such a devastating impact on your life. I fell rather remiss, for I had been praying for your full recovery, but, I'm sorry to say, I eventually stopped. I'm glad I saw your post today. I will resume that exercise now.

I can't say I was ever pro-IRS, but the behavior of an IRS revenue agent in relation to my 1971 1040 return had a profound impact on me. I was informed by an IRS agent or notice that my business deductions for that tax year were to be audited. When the agent came to see me, instead of just substantiating those business deductions, I was subjected to a full-scale "field audit," and required to prove the veracity of essentially every item on that year's return. Regarding the questionable business deductions, the agent pointed to a section of the Code that could be read to disallow them. However, I point out to him another section of the Code that appeared to make them perfectly legitimate. We debated the matter, and I was confident that my position was the right one. The agent left saying he would get back to me after discussing my case with his supervisor. In due course I was advised by him that some of my business deduction were being disallowed, which increased the amount of tax I was required to pay for that year. With interest and penalties, the additional tax amounted to something over $200, as I recall. I concluded that the $200 figure was not determined pursuant to the tax code, since I was certain that my reading of the Code was correct, but rather the figure was set just high enough to compensate the IRS for the agent's time spent auditing me, yet low enough so that it would be uneconomical for me to appeal the agent's ruling, which I felt would require the services of a lawyer to be effective, whose services would cost me considerably more than the additional $200 the IRS wanted. Well, I paid the IRS. but that $200 was the last money the IRS ever received from me. And the incident served as my inspiration to become what the IRS calls an "illegal tax protester." I should add, for it may offer you or someone else encouragement or consolation, I have pretty much lived happily--although not richly--ever after.

Keep the faith, ENM, and try not to become dependent on pain pills--if that is possible...Ned

PS: I have also been remiss lately in keeping up NED'S BLOG on my website, http://www.jesus-on-taxes.com. I think the last one I wrote was in December 2006. In the near future I plan to post a commentary I am writing on this matter of dependency, including addiction to pain pills, alcohol, other drugs, gambling and government. Hope y'all find time to read it.

PPS: That certainly is a handsome Elf serving as your avatar. Hope he's doing well and finding the time to ride his bike.

[Paths of the Sea]

I have not been following closely here lately either, but this did catch my attention. Long time, no see, ENM!

I could offer speculations as have others, but I will try to restrain myself for lack of the detailed information which should be quite easily determined if there is interest.

For reasons not clear, the relevant details do not seem to have appeared despite all of the posts to this subject.

I would think the notice informing ENM of the deficiency proposed would provide such details as to the amount of income adjustment(s), income tax increase, early withdrawal tax increase, if any, and other details from which it could be easily determined what makes up the $1,000.00 deficiency proposed (i.e., income tax, early withdrawal tax, other taxes, etc.).

Ultimately, it sounds like a communication problem that may be, in part, compounded by ENM's present distress.

For those that don't like the telephone contacts, correspondence suspense, and have a few bucks (Is it still only $60.00 to file a tax court petition?), in many cases like this it may pay to wait for your statutory (90-day) notice and then petition the Tax Court and wait for a nice Counsel attorney or para-legal or IRS Appeals Officer to call you up and try to work things out to avoid trial.

Of course, you also have the option of trying to work it out with the IRS while the 90 days is running and can wait until the end of the 90 day period to make the final call as to whether or not to file the petition with the Tax Court.

That gives you plenty of time to try and figure out what the right answer should be and make an election as to whether or not to go ahead and pay or wait until the case settles. Of course, the longer you wait on a losing case, the more the interst is going to be.

I'm getting rather rusty on all of this stuff. How does the above sound you you guys?

Sincerely,
Maury enthusiast!

[Paths of the Sea]

FWIW, here is a link to a recent Tax Court case that provides a little insight into when a disability will qualify for an exception to the early withdrawal tax:

http://www.ustaxcourt.gov/InOpHistoric/ ... um.WPD.pdf

I didn't notice any specific development of that in the postings on the subject. Just being "disabled" apparently is not enough, under the law, to escape the early withdrawal tax.

SIncerely,
Maury enthusiast!