There are few things in life more unnerving than opening your mailbox only to find a large envelope from the IRS. In my tax office we call them the Dreaded Nastygrams. A few years back I received one at my business post office box and quickly scanned the envelope addressee wondering who the next victim was only to realize the unfortunate victim was ME.
The short version of the frustrating letter was regarding my personal 2012 tax return. The IRS had decided to disallow my self-employed health insurance deduction where I was entitled to write off 100% of the premiums from the front of my tax return, also known as an above the line deduction. And because the deduction was disallowed now my adjusted gross income (AGI) increased slightly past the allowable threshold so that my student loan interest was now disallowed AND in turn, the child tax credit I had taken was disallowed. It’s such a delicate balancing act. On top of that the IRS was disallowing my mortgage insurance credit – more about that in a minute. All in all, with penalties and interest the IRS claimed I owed them $2,201 – insert sad face emoji here – instead of the $286 refund I had calculated.
Since I had no interest in agreeing to their changes and mailing a check in the conveniently provided envelope, thank you very much, I quickly drafted a response letter informing them first, I am a CPA and the return was prepared correctly, and second I was including a copy of my W-2 showing my company (my tax firm is structured as a S-corporation) had paid my health insurance premiums and according to the Internal Revenue Code rules I had properly added the premiums to my W-2 and therefore was allowed to deduct them from my personal return. Third, I was also including a copy of my mortgage credit certificate I received from the housing authority back in 2010 when I bought my house (a little known tax credit goody that helps new homeowners and is available in Santa Cruz County) and while dissecting my tax return I discovered a glitch in my software and realized I had missed a $2,208 deduction. I pointed out this miscalculation actually increased the amount of my refund. I finished the letter with something along the lines of “This is what you owe me; now give me my money.”
So imagine my surprise when a few weeks later my assistant tells me the IRS is on the phone and wants to speak to me about my response letter. The IRS agent sounded about 12 years old and informed me he was rejecting my response because I wasn’t self-employed as I reported no income on Line 12 Business Income. I explain to him I am a 100% shareholder in my S corporation, the income from which was reported on Line 17 and according to the IRS I am deemed self-employed for the purpose of writing off all of my health insurance. The agent replied, “No you’re not” and I replied, “Yes, I am” and he replied, “No, you’re not”. Seriously. At this point I covered the phone and called out to my assistant in the other room, “Tiffany, are you playing a trick on me? Are we playing You’re on Candid Camera???” And of course a very bewildered Tiffany had no idea what I was talking about.
I reminded the agent about Internal Revenue Code Section 707 (c) and Revenue Ruling 91-26 (please Google it if you are looking for fun bedtime reading), told him to put me on hold and to please discuss the matter with his manager and, yes, I would hold the line. After a brief hold the agent told me his manager was busy but before he hung up he informed me it was in my best interest to write the IRS a check immediately as interest and penalties were accruing daily.
I wasn’t surprised to receive another letter from the IRS eight weeks later informing me they reconsidered their position and were going to issue my increased refund of $1,066 that included the additional amount from the software glitch.
I tell this story to remind people just because you get a letter from the IRS claiming you made a mistake doesn’t mean you did and don’t assume the IRS is automatically correct. I am a seasoned tax professional with over 20 years of experience yet was told by the IRS my return was incorrect. Can you imagine how many people, with less knowledge, receive these letters every day and automatically send payments because How could the IRS be wrong???
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Patricia Beckwith is a Certified Public Accountant and a Tax Resolution Specialist. For more info: [email protected] or visit www.santacruztaxrelief.com