IRS 'corrected' 2010 1040 and excess refund needs to be repaid

I have a case where the IRS 'corrected' a 1040 filed MFJ for a 20 year old grand-daughter and her spouse married at the end of 2010. The grand-daughter was in school full-time for 2010 and was claimed as a dependent by her grand-mother who got EIC since the g-d was a Qualifying Dependent.

On her own return, the g-d was not claimed as a dependent by her spouse as the only reason they were filing was to get back withholdings. Software was used and paper returns were submitted.

The grand-mother received a CP-87A from the IRS (I'm assuming the g-d did too, but haven't heard for sure yet) stating someone else had filed using the g-d's Soc. Sec. #. Since I signed the return and checked the 3rd party box indicating I could talk to the IRS, I called to see what the problem was.

The facts as related to me by the agent were these:

  1. The grand-daughter's biological mother did not file to claim her as a dependent nor did anyone else other than the grand-mother. The agent also said that the grand-mother was entitled to claim the g-d and get the EIC.

  1. The agent couldn't look at the original return, but only the data as it normally appears on the IRS computer.

  2. The IRS had arbitrarily changed the exemptions on the g-d's return ln. 6d from '1' to '2'.

  1. and also ln. 42 from ,650 to ,300

  2. and had calculated the 'Making Work Pay' credit on ln. 63 to be 3.

  1. and increased the refund by the 3.00.

Per the agent's instructions, I have prepared a 1040X in which I had to use the 'corrected' figures as original which results in the grand-daughter & spouse now having to pay back the overpayment of $563.00.

Now, these kids have to pay back the $563, but don't have it in full and may need an Installment Agreement which will cost them more plus interest.

First off, I'm fairly outraged that the IRS made these changes in the first place and now it will cost these people my time plus their aggravation and interest to make right that which was right to begin with.

Secondly, do my clients or anyone else put in this situation have any recourse to this aggressive action by the IRS?

Other minor details include that the kids did get a letter with the Sch. M refund and they simply cashed the check & never consulted me. The AGI was only $9032, so regardless of 1 or 2 exemptions, the taxable income was -0-.

Thanks in advance for any help.

Reply to
Wilson
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I assume you meant to say "qualifying child" because the granddaughter resided with her grandmother for more than 6 months and she was not the qualifying child of anyone else.

One spouse does not claim a dependency exemption for another spouse. When they file a joint return, they each are entitled to one exemption (two total). Once the Married-Joint box was checked on the software input and both names with SSNs were entered, the software would have triggered two exemptions and the joint standard deduction. Someone would have had to override the software to remove an exemption. In addition, any diagnostic run would have come up with errors. I assume, this is the reason paper returns were filed as the incorrectly filled out return would not be able to be e-filed.

Not arbitrary. The IRS corrected an incorrect return.

This is also correct and flows from the additional exemption.

This surprises me as I was not aware that the IRS automatically created Schedule Ms and a credit. Last year, I processed a few amended returns to obtain the credit for taxpayers that had filed and overlooked the Schedule M. The Schedule M has a line that requires a Yes or No from the taxpayer. I don't know how or why the IRS would have assumed the answer was No. (See line 10). In addition, the processing of a refundable credit violates the joint return test for being a qualifying child and would make the grandmother ineligible for the EITC.

The kids were filing for a refund of withheld taxes. The amount of the refund was excessive (an additional $563). They should not have cashed that check. They took the money and apparently spent it. Well... guess what... they have to pay it back. If they had the money, they might have been able to avoid having to pay any interest on the use of the money. Unfortunately they do not have the money. If they use an Installment Agreement, they will pay the fee and the interest. Assuming they can pay off this debt within a short period, don't use an Installment Agreement. The IRS will agree to a payment schedule under an informal arrangement if you call them.

As I said earlier.... they never should have cashed the check and spent the money.

Reply to
Alan

On 11/8/2011 4:02 PM, Alan wrote: If they use

Calling IRS and agreeing to make payments, formally or otherwise, may trigger the IA fee. This $ amount is below collection tolerance - absent additional liabilities, it won't go to ACS or Field Collection. It it were me, I'd just pay it when funds are available, but without discussing payment arrangements with IRS.

Reply to
paultry

Yes, I was trying to shorten the explanation.

My software allows that either spouse could be listed as someone else's dependent. As per my discussion with a Taxpayer Advocate, the trouble is that the 1040 should include information as to who the other person might be who claimed the exemption with their corresponding SS# for cross-referencing. In this case, that would have been the grand-mother. This was a case of the IRS 'assuming' that an error had been made and went about correcting it as such. She agreed with my preparation of both of the returns.

Not arbitrary, but incorrectly assumed a 'math error' as it did not apply here. Pub. 501 pg. 10 says

Which was the case.

The kids should have contacted me when the IRS told them why they were getting the MWPC and the rest of this could have been prevented. I called the Taxpayer Advocate specifically to see how they might avoid the Install. Agree., and was told that if they could make all the re-payment with 120 days, no IA was necessary.

Turns out, they will be able to make the payment in full.

Reply to
Wilson

You should note:

The standards and requirements for a tax professional (including "Circular

230") require that the professional notify the client of an error and wait for the client to decide; nothing more. When the error is in the client's favor, I find that less than half choose to make a correction (unless the correction affects another year with a superior benefit).

I also note the following areas where the IRS has erroneously adjusted a return:

1) Taxable Social Security - where there was also a repayment during the year. 2) Estate Tax Deduction for IRD - subjecting it to the 2% AGI floor when it is exempt from such.

For both of those, the error is in the IRS's favor. However, it shows that their screeners don't regularly pay attention.

Reply to
D. Stussy

Not so fast, I'll elaborate after the next paragraph -

GD is NOT a dependent of her spouse. If the return you prepared showed that it was wrong and this may be the reason for the IRS "correcting" the return.

Additionally, you say they only filed to get back withholdings. BUT if the GD and her husband had ANY tax liability - meaning if their liability was $1.00 and they had $2,000 in withholding so they filed to get back the $1,999 - they I'm NOT sure granny is entitled to use the GD on her return. I had a similar case this tax season only with a mother and child, not grandmother and granddaughter.

Just becasue the IRS said so, especially over the phone, don't make it so. If it isn't given to you in writing by the IRS the IRS does NOT have abide by what they tell you. It sucks, but that's how it works.

True enough - even auditors only get summary info from the return. They only way they get the actual return is to ask for it during an audit OR make a formal request to have it pulled from archives, if the return was filed on paper.

Likely NOT arbitrary. Even if they're wrong, they may have had a good faith beliefe that they were right which means it wasn't arbitrary.

Just a math adjustment.

Another math adjustment.

More math.

Here's where I think you made the big error, with the caveat that I have not seen the notice nor any of the other support you have so this is purely conjecture on my part - I would NOT have agreed with the notice and I would NOT have filed an amended return if I believed the return that was filed was correct. Rather I would have instructed the client NOT to pay the additional tax. This would have resulted in several notices and finally a

90-day statutory notice of deficiency, giving you an option to go before the U. S. Tax Court (don't get scared or get ahead of me just yet).

At various points along the way you or the taxpayer would have had several opportunities to get with IRS personnel at different levels - first via examination, then via collection, then a due process hearing. If you still couldn't resolve the matter the IRS would issue a 90-day Statutory Notice of Deficiency and you'd need to petition the tax court to hear the case. After you file the petition the clerk dockets the case and bounces everything BACK to appeals with instructions to do the best they can to settle the case. The court does NOT want to hear cases - this does NOT mean the IRS will roll over and play dead if they think they're right.

But it DOES mean that would have been ample time between the first notice and the 90-day letter to resolve the case. Either the IRS would be able to convinice you that they are right OR you'd be able to show them you are right. Either way, the case should have been resolved this way.

Maybe, maybe not - I can't tell from what you've posted who's correct and what the real result is.

Outrage is a wonderful thing, it motivates people to not let the world run roughshod over them. BUT your outrage is wasted on the IRS for two reasons - first, they don't care; second, the initial notice was almost assuredly the result of a computer matching program where the SSNs were crossed checked against other returns.

Remember, CP at the beginning of an IRS notice means "Computer Program" and almost always is the result of the operater letting the computer think for itself.

Yes, see my comment about exam, collections, due process and the 909-day letter. If you've been in this business for any length of time, even if you're not an EA or CPA, you should have been aware of the IRS process. Otherwise you cannot effectively protect your clients.

Not everyone is or wants to be a CPA or EA. I'm an EA and have no desire to be a CPA. I know several CPAs who would never dream of being an EA. So don't think I'm dumping on you if you're not licensed in some way. I'm just saying that even if you're unlicensed or unregulated you still need to know how the IRS and state tax agencies work so you can know when its time to bring in a hired gun.

And you need to develop relationships with licensed professionals so you'll have both a resource and a reference when this happens next time.

This doesn't surprise me - you only have part of the story because your other clients didn't get back to you with relevant info. How many times since you got the notice from granny have you contacted GD for missing info?

I didn't see this part till I was almost finished. Based on this and this alone, granny MAY have been entitled to claim GD as her dependent BUT I'd need to actually SEE the returns and get more info to know for sure.

Lastly - I fully expect to see a LOT more of this in the future. As the economy is stagnant people aren't paying as much in income taxes as they used to. Yet the governments, at all levels haven't backed off on their spending. Instead they are looking at ways to squeeze more income out of fewer taxpayers. Yes, this is a political statement but that doesn't mean its paranoia, just simple fact.

Good luck, Gene E. Utterback, EA, RFC, ABA

Reply to
Gene E. Utterback, EA, RFC, AB

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