Love Letters from the IRS and Estimated Payments

Love letters from the IRS.  Every year, a handful of our clients receive correspondence from the IRS and/or state agencies regarding discrepancies with their tax filing. Normally, a client has forgotten to include a 1099 or W2, and being that the IRS is primarily on an electronic audit system, they know if something is missing, and are usually quick to notify you. But sometimes it can be a couple years before the error is discovered, which can lead to a balance of tax due, including penalties and interest.

Forgetting you worked that side job for a couple weeks, or that you sold some investments, happens. The tax document could have gotten lost in the mail, or went to a wrong address. Or you may have filed it away and forgotten about it. Whatever the reason, the answer is not to ignore the letter, but to call us immediately and provide us with a copy of the letter, so that we can assess the situation and rectify it quickly.

However, the number one reason we find our clients receive a correction notice is that the IRS’s record of estimated payments received are different than what was reported. Taxlink has tried to figure out the best way to ensure we have the right information. Usually when we ask the question “Did you make estimated payments last year?”, the response is “I did whatever you told me to.”

You would be surprised how often this is NOT the case! So, what happens is that the IRS sends a letter, you (angry, confused) call us, and we try to figure out what happened, sometimes calling the IRS which, if you’ve ever called the IRS, could leave you on hold for an hour or more. In most cases, we find that the information our clients provided us with is inaccurate, and the IRS and/or state agency is correct in their adjustment.

The other issue is applied overpayments. If you had an overpayment from the current tax filing that was applied to the following year, we automatically record that in our system. However, if the IRS makes an adjustment to that amount for whatever reason, we need to know in order to update our files. This can also cause a discrepancy when we finalize the return.

So, what to do? At this time, the IRS and most state agencies do not offer a “checks and balances” mechanism to look up payments on-line. We’ve decided that the best way to ensure we have the right information is to request copies of the cancelled checks that you send. In addition, if you receive any type of adjustment letter from the IRS for a previous year overpayment, we need to know that as well.

Why are estimated payments necessary? From the IRS website:

“The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. You can do this either through withholding or by making estimated tax payments. If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.”

If you are one of our clients who make estimated payments, please feel free to send over copies of your payments for our files throughout the year.