IRS’ automated notices frighten taxpayers

You are not alone.

When I wrote recently about getting a letter from the IRS saying my husband and I owed $12,255 in back taxes, interest and penalties that was the result of an erroneous 1099 form, I opened a floodgate of fellow sympathizers.

They too had received a “CP2000 Notice.” The notice is part of the electronic era of the IRS where lots of taxpayer contact is initiated through automation.

Now, when someone initiates a call saying they are from the IRS and demanding immediate payment, it’s a scam.

Anyway, the program under which the CP2000 notices are issued is called the “Automated Underreporter.” The IRS matches documents it gets with what’s on your tax return to identify unreported income. If there’s a discrepancy, you get a CP2000. Under this program, for the most recent year, the IRS made about 3.7 million contacts with taxpayers resulting in tax assessments of just over $5.9 billion.

Even when you know you’re right, getting such a notice from the IRS can send chills up your spine because the agency has some gargantuan collection powers.

Here’s a note I received from one reader about her CP2000: “We received a letter from the IRS telling us we owed $33,000 in taxes. My husband and I are teachers and he is a referee on the side but makes just a small amount of money. So after hyperventilating with four children wanting my attention in the background, I got it together and looked into their claim. The big mistake they made was they forgot a decimal. The 1099 said my husband made $750 and they had it as $75,000. What bothered me is that if you look at what my husband and I make combined, the idea that we would owe $33,000 in taxes is insane and they should have double checks in the department before causing such anxiety and stress for the taxpayers.”

Jan from Louisiana had her own heart-stopping moment. “Our IRS letter stated that we owed the exact amount that we had voluntarily paid as federal income tax on our Social Security. I could not make any headway with an IRS agent over the telephone, so we went to the IRS office here in Baton Rouge. The agent agreed that we had paid the correct federal income tax.”

Fred, from Woodbridge, Virginia, said “These letters are scary. The IRS said I hadn’t reported income from a 529 distribution for my granddaughter. Huh? That money is tax-exempt! I told them so and it all ended. But what about the wasted time, scary feelings, and utter frustration for the folks trying to do the right thing?”

In my case, I quickly mailed my response with proof we didn’t owe the money — certified mail, a precaution I wanted to take. After you respond, you should receive a letter from the IRS in 30 to 60 days with a determination, based on the information you provide, a spokesman said.

The IRS says that the majority of taxpayers agree and pay up either in whole or in part. Another 17 percent of cases are closed with no change, based on information provided by the taxpayer. A small number of taxpayers — about 0.2 percent — request consideration by the IRS appeals office, the spokesman said.

Some readers said they were able to quickly clear up the issue. “I have a couple times made mistakes in my return that resulted in a letter such as yours (but not as huge!), and I have found the IRS staff helpful and courteous. A polite, business-like, well-documented letter in response to theirs produced prompt and correct results.”

Others complained about a round robin of telephone calls and letters. Although you may have gotten to the root of an error, you may still run into issues, said Michael Martin, a Washington, D.C.-based “enrolled agent,” which is a tax practitioner approved by the agency to represent people before the IRS.

“All I’m doing is CP2000 notice business,” Martin said. “A lot of people look at these forms and blank out. They don’t want to deal with it. My best clients are people who have ignored the IRS for years.”

Martin said that even when he’s collected and forwarded the necessary proof for his clients, including those who procrastinated but ultimately didn’t owe, some have still ended up in tax court.

Now he’s got me scared all over again. I’ll keep you posted.