So you wake up one day and it's just like any other day. You
know, nothing to worry about, it's just a normal day.
Maybe you look around and you see it's a nice day. So you decide to go outside,
take a nice little walk to the mailbox, check your mail. Because
you know, it's just like any other day and you don't have any other worries
about, especially financially. And especially about taxes because
you've been filing your taxes on time every year, and you've been
receiving your refunds every year from the IRS and the state. So
really you just want to enjoy this day before
you know, you go to work. So you get to your mailbox, you check
your mail, you get it out of there,
and to your surprise you see there's a letter from the IRS.
And maybe your heart starts racing a little bit, maybe they're just informing
you that they owe you more money. Because that could happen. You get home,
anxious to open the letter,
start to rip open the letter, you start to really rip open the letter,
just really rip it open. Yeah there you go.
And your heart just stops because what you see here is $285,000
of proposed taxes due to the IRS. Something you know
makes no sense to you because you've been filing your taxes on time
every year. Because you've been receiving a refund every year.
Why the hell is this happening? Why do you owe so much money to the IRS?
So you think to yourself...
So the scenario I just described is pretty common.
Now a lot of times the CP2000 notice is actually incorrect. Like the IRS is
wrong. But it's not because of some stupid
clerical error, it's just that they don't have
all the information. So they go off of the information that they have.
The most common types of missing information is the missing cost basis.
For example, if you sell a home and it's recorded on the 1099
and you don't record it properly on your tax return then the IRS is going to
think that you are going to owe way more taxes than you
actually do. Or another common scenario is if you sell stock,
or you forget to report your stock sales on your tax return. And the IRS doesn't
have your cost of the stock that you
purchased it at, then they're going to think you owe more taxes than you actually do.
So those are the two common scenarios. Now, sometimes the IRS in this notice is
correct. Like sometimes people just forget to
report their retirement withdrawals or they forget to report certain things.
And so the IRS issues this notice to propose changes to
their tax return because the IRS does show that maybe you do have
retirement withdrawals that you didn't report.
And in that case, this notice would be correct.
But I would always look at these notices with a fine tooth comb because
you can't always just trust the IRS. And you, and yeah I mean
I'll take it a step further. You should never just blindly trust the IRS,
you have to look into it. You have to dig deeper and see what's going on here,
okay. So you receive any kind of notice from the IRS
make sure you dig deeper, make sure you do some research.
Talk to your tax professional, call us up whatever it is.
Find out more information, figure out what's going on because
there is a decent chance that they don't have all the information
and they could be wrong. So in the example that I have here,
we do have a real estate sale. A sale of a primary home
that wasn't reported properly on the original tax return
and that's why the IRS sent this letter. So if you don't report it properly,
but let's say the title company reported it to the IRS that you sold this home
for $573,000, the IRS is
going to think that you had a capital gain of $573,000.
But the nature of capital gain is that
it's your sales proceeds, minus your cost of the home,
minus your expenses to sell the home, okay. And some other things too, but just
as a very basic formula that's it. So if the IRS doesn't know how much you
bought the home for, they're going to assume that you have a
capital gains on the entire sales proceeds of the home.
On top of that, this is your primary home, and you've been living in it for at
least two of the last five years, then you can get
a significant amount of the capital gains
forgiven or excluded. So if you're single that amount is $250,000. If you're married
that amount is half a million dollars. So in this case we have a few problems here.
First, the IRS doesn't know the cost basis of the home
that the taxpayer bought it at. So the IRS doesn't know the cost basis,
the IRS doesn't know that the taxpayer lived in it for at least two of the last
five years and they qualify for that capital gains
exclusion. And so the IRS just thinks that they owe
taxes on that giant amount of money. So what we did was we pulled up
the closing documents from the sale of the home,
the closing documents from when they purchased the home which
proved how much they purchased it for. If there's any renovations that they made
to the home, we would gather those documents as well.
And then, we even pulled up county records
from the county to prove that they did in fact live there
from this time to this time okay. And then we also wrote a letter
to the IRS stating that we want to challenge these results because of these
reasons. The last thing we did is we prepared a
Schedule D which is done on your tax return. So the
Schedule D, this shows it's a disposition of assets,
it shows what you sold. It'll report the sales proceeds and the
cost basis and any and any expenses of sales there.
So we also prepared a Schedule D. So all those things were required to
respond to this particular CP2000 notice. Now if you
don't have any of those things you can easily
get them or you can find some way to get those kinds of records.
Now this is specific to a real estate sale
C2000. You get a CP2000 based on a stock sale,
or any other reasons, you definitely would have to figure out
what they're asking for and what they're trying to get information for.
There's a lot of ways that this can go. So
if you get a letter, the things that you don't want to do
are ignore it, because if you ignore it the IRS is going to keep sending letters
and they might even impose a levy. So if you notice in this letter it's not
finalized, it's just a proposal, a proposal for a change of taxes. But if
you ignore the letter and you don't respond,
then it's going to become finalized. Then they're going to actually assess the
taxes on your accounts. And when they do that, they can start
collecting on those taxes if you don't pay or respond.
So you never want to just ignore IRS letters,
okay. And then the second thing you don't want to do is just
wait around. You want to start taking care of this
immediately because they usually give you a time limit to respond.
And sometimes they make you respond by mail and you can't really trust
how slow the mail is going to be or how quick. So you want to take care of this
and get on this right away. So to sum up the things that you should do
is figure out why the IRS is sending you this
notice, okay. Are they disputing your real estate sales, stock sales? Did you
forget to report income? Find more information first. If you don't
know what you're looking at, then hire a professional to do it. Or if
somebody else prepared your tax return, that would be the perfect person to go
to for help on this. So start there and from there, depending
on what the problem is, you should be able to figure out what to
do specifically. Alright that's all I've got for today.
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