Saturday, October 7, 2017

IRS.GOV Gets a New Look

As a Tax Professional, I'm acutely aware of the myriad of ways that criminals try to steal your information.  As a person who spends their summer in a technology-free zone to allow uninterrupted tax book work, I sometimes miss some big news.

So when I typed into my browser today to begin the long, arduous process of fact-checking and verifying data for the work I did all summer, I immediately suspected someone was trying to scam me with a fake website.  IRS.GOV looks COMPLETELY different!  It looks more streamlined, less cluttered, and at first glance, like a totally amateur attempt to fake a website.

A lot of research later (because I am SERIOUSLY paranoid) ensures me that it is genuine.

Things I like so far: Less fluff and more meat on the home page, big buttons and tabs for things you are most likely to need, and tax professional and charity stuff moved to its own area with easy to find buttons.

Things I don't like so far: The eight buttons on the home screen aren't buttons since you have to click on the words.  A bunch of other stuff that will inevitably suck but I haven't discovered yet since I rushed to make this post so you would know that the website is real and not a scam.

While your here, click on this link to get to the IRS website, click on the "Get a Transcript Online" button, and go through the steps.  This will set up an account for you that will allow you a lot of access to your tax information without having to jump through hoops later.  It's well worth your time to have this done.  Just keep the username and password handy!

Friday, October 6, 2017

"Office" Hours

I've decided to set up a little time outside of tax season specifically for handling emails and phone calls (I answer emails anytime, but I hope office hours will get me back on track with the ones I procrastinate on).  I will publish them here and am perfectly willing to give you a call to answer questions from anyone and everyone - client or not.

I love answering questions - it keeps me smart.

Big caveat - if you aren't a client, the answers are free, and you get what you pay for.  I make no guarantees, and answering your question in no way establishes a preparer client relationship as defined by any IRS regulations.  It's just a tax guy answering questions for a friend.
Also, I don't work for my employer off-season, so everything I'm doing at this time is outside of our normal in-office relationship.  Again, friend to friend.  I will be back in the same office every year unless something goes to hell in a bucket so you'll see me there as usual.

So if you want to ask a question, feel free to email me at
I prefer to handle it all via email, but if you think a conversation is in order, go ahead and ask me to call you within one of the office hour windows.
I will do this for as long as the volume of questions allows.
I will update the dates as I set time aside.

Will be vacationing until the 6th of November

And buy my books:

Kirk's Amazon Author Page

Sunday, October 1, 2017

Master Index of Posts

I've compiled a Master List of my posts for easy reference. Not every post is included, and I have changed the order to put the most important or timely ones on top, and to group some based on categories (Military, Obamacare, Tax Software). I will try to keep this updated and just below the latest post. Please let me know in the comments if I screw up a link :) Some of the posts are OLD so be careful assuming the information is current.

If you have a Kindle, you can get a copy of my entertaining and useful book, The Short, Cheap Tax Book for Everyone for only 99 cents!

If you like the blog, buy my other books: Kirk Taylor, EA Author Page

Important or Time Sensitive Posts

"Office" Hours for Questions
Will Your Refund be Delayed (2016 Tax Year)
Tax Identity Theft State Efforts and Delays (2016 Tax Year)
The Dreaded CP2000 Letter from the IRS
Need a Copy of Your Tax Return? Get a Transcript Online! NOT! Updated advice...
The IRS did NOT Call You!
I Got an E-mail from the IRS!
I Want to Lower my Taxes!
Last Chance for 2013 Refunds
10 Simple Pieces of Tax Advice
10 Things Everybody Should Do
Check Your Withholding


Military Spouses Residency Relief Act Details and Matrix
Retiring from the Military? Tax Warnings!
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
2016 Military State Tax Guide
2016 Boomer Deduction Worksheet
2015 Military State Tax Guide
2015 Boomer Deduction Worksheet
2014 Boomer Deduction Instructions for TurboTax Online
2014 Boomer Deduction Instructions for H&R Block at Home (store bought or downloaded)
2014 Boomer Deduction Instructions for TaxSlayer
2014 Boomer Deduction Instructions for TurboTax (Store bought or downloaded)
Boomer Deduction - History and References
More Boomer Deduction Information
Minnesota Combat Zone Credit
SC Military Retirement Change (2016)

Tax Software

TurboTax Admits That Easy Is Better Than Accurate
Tax Preparation Software Sucks - An Open Letter to H&R Block

Business Guides

Sole Proprietorships are Bad
Avon, Pampered Chef, Party Lites, Amway, etc. MLM Tax Guide
UBER Driver Tax Guide
Tax Guide for Contractors - or - 1099MISC WTF?
Real Estate Agent Tax Guide

General Posts

Getting Married? One Piece of Important Tax Advice.
The Dreaded CP2000 Letter from the IRS
Investing and Taxes - A Primer
How Much does it Cost to File Taxes?
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
Open a Roth IRA Today! And Not For the Reason You Think
Foreign Earned Income Exclusion Warnings - Update
Charity Made Simple
How Fast Can I Get my Refund?
Make Estimated Tax Payments the Easy Way
Depreciation Recapture - an inaccurate description
Don't Touch that 401K or IRA!!
What do you do with that Big Tax Refund?
It's Okay to Get a Big Refund - Really...
Common Tax Return Errors - Updated
Common Tax Return Errors
I Have a Blog and I Want to Bitch!
Mortgage Tax Credit Information
Lesson from the Government Shutdown - Emergency Fund
Don't Pay Capital Gains Taxes if You Don't Have To!
I got a 1099C - Now What?
Cancelled Debt and Insolvency
The IRS, email and privacy...
IRS Checking Facebook?
>$250 Donation Acknowledgement
Drop Box Donations - US Marines
Tax Scams
Rental Property Guide for Homeowners
Taxes and Divorce
Random Thought about Books
Taking Care of the Client
Warning - Tax Resolution Scams
Foreign Earned Income Exclusion - WARNINGS!
IRS.GOV Website Update

Affordable Care Act (Obamacare) Posts

Obamacare in SC - Something's Fishy
The Affordable Care Act (Obamacare) and People with Health Insurance
Affordable Care Act (Obamacare) for the 2014 Tax Filing Season
Obamacare, Affordable Care Act and Married Filing Separately - Warning
Affordable Care Act, Obamacare update and advice
Healthcare Law, Obamacare, Affordable Care Act Info
Weird Obamacare Strategies and Incentives - 1
Weird Obamacare Incentives and Strategies - 2
Weird Obamacare Incentives and Strategies - 3
Weird Obamacare Incentives and Strategies - 4
Weird Obamacare Strategies and Incentives - 5
Weird Obamacare Strategies and Incentives - 6

Wednesday, July 19, 2017

Real Estate Agent Tax Guide

If you like the blog, buy my books: Kirk's Amazon Author Page
Makes a great purchase gift for your clients!
I've set up some office hours to answer questions.  You can arrange a call or email HERE

So you've got your real estate agents license and that first commission is finally on the way.  No way around it now, you have taxable income.  The question is, how much?  And, how do you pay as little as possible?  This post assumes that you will be paid on a 1099MISC, as a self-employed Real Estate Agent.  If you're getting a W2, some of this will be useful, but not all.  I'm also assuming that you work for a real estate company, and aren't completely independent.  Much of this advice isn't gospel, it's just what I've seen and think works best.  In some ways, it's a list of "best practices."  As always, you should use this post as a starting point, and seek professional assistance when it comes to your personal situation.  I am also going to assume you have not formed a complex business entity such as an S Corporation or Multi-Member Limited Liability Corporation.  There are benefits and disadvantages to these, but you need to talk to a professional to understand them.

I'm going to start with some basics, and then get into details.  The first big surprise you will have is that nobody's taking taxes out of your paycheck.  You have to pay it all as you go, or at the end of the year when you file your tax return.  The second thing is that there's nobody to pay for Social Security taxes except, well, you.  Most people are barely cognizant of the 7.65% that's taken right off the top of a normal paycheck for Medicare and Social Security taxes.  What even the most aware don't realize is that their employer matches this deduction!  As a 1099 recipient (self-employed is the IRS term) you have to pay both the employee and employer portion!  This means a 15.3% additional tax!  Imagine you're in the 15% tax bracket - that means you actually pay 30.3% taxes!  And this doesn't even cover state taxes!

The good news is that, unlike a W2 employee, you only pay these taxes on your 'net' income.  This means you get to take all ordinary and necessary expenses off the top before you pay a dime in taxes.  Even employees with business expenses still pay their half of Social Security and Medicare taxes before any deductions.  So what is 'ordinary and necessary'?  I like to boil it down into two categories: 1 - things you pretty much have to pay - like licensing, commissions and fees. 2 - things you pay because you expect them to increase your income or make the business run more efficiently.  If they meet either of these requirements, they're pretty much a lock as being deductible.  

Knowing the above, it's important that I give one of my biggest pieces of advice - you pretty much should NEVER do something just because you expect it to help on your taxes.  Spend money only if you have to, or because it's the best idea for your business!  This has two benefits: 1 - you don't waste money on stupid s**t.  2 - chances are the deduction is legitimate.

So now comes the part you've been waiting for: What the hell can I deduct?  Here's a nonexhaustive list, with some details, to get you started:

Marketing Expenses:  Business cards, website fees, MLS dues, lead generating expenses, posters, signs, sponsorships, commercials, advertising, pretty much anything you do to get someone to call YOU when they want to buy or sell a house.  As a non-tax aside, you need to evaluate these carefully and talk to experienced agents to find the best of these.  Your commissions are big but come infrequently.  You need to understand how much you spend for each commission so you can properly evaluate what works best.

Good, cheap marketing techniques here (this purchase would be a tax deduction : )

Guerrilla Marketing, 4th edition: Easy and Inexpensive Strategies for Making Big Profits from Your SmallBusiness

Gifts and Referral Rewards:  Gifts to clients are generally limited to $25 per person, per year.  (That’s the deductible amount, you can give more.)  Be careful of referral fees.  You should have received more training on this than me to get your license, but I will simply remind you that there are varying rules from state to state, as well as RESPA requirements that restrict what amounts, how and to whom you may pay a referral fee, so, check with your senior brokers before paying these.  If the referral fees are legal, there are ways to deduct them, but talk to your tax professional about them.

A great gift for buyers would be a copy of my tax book.  It's based on life events and has chapters like, I'm Getting Married, I'm Having a Child and, wait for it...I'm Buying a House!  Please consider buying a ton and giving them to your new homeowners - they'll thank you!
Training, Education, and Licensing:  Whatever you pay to maintain your ability to be an agent is deductible, as well as things you do to increase your skills, as well as what you are allowed to do in the field.  Classes, seminars, books, and certificates mostly all qualify.

You could deduct this book - which will also help you make more money in your business:
EntreLeadership: 20 Years of Practical Business Wisdom from the Trenches

Insurance:  I'm not talking about homeowners insurance here.  I'm talking about ‘oops I screwed up and my client is suing me insurance’; or someone who's not my client.  Sometimes this is called Errors and Omissions Insurance.  If your state or agency doesn't require it, get it anyway!  Also, if you pay a rider to your car insurance for business use, the difference between that and regular insurance is deductible.  There is also a self-employed health insurance deduction that allows you to deduct your health insurance costs if you have no other insurance source (if you can get insurance through your spouse's work this is a no-go.)

Entertainment Expenses:  Eventually you'll be with a client, or potential client, and pick up the tab for lunch, or dinner, or a stripper (don't do that - it's tacky - and questionable as a deduction).  Generally, if you expect the expense to result in a sale that makes you money, either immediately, or in the future (whether it ultimately does or not doesn't matter, as long as you expect it to) it's deductible.  I recommend writing the name of the client on the receipt, as well as a quick description - "house hunting", "referral source", "potential client" or something like that.

Travel Expenses:  These are a toughie.  People love conflating personal and business travel.  If you travel to Maine to visit family and see the lobster festival, and go to dinner with a client that is moving to your area, the trip is primarily personal.  You can deduct expenses DIRECTLY RELATED to the meeting with the client, but little else.  I recommend keeping business and personal separate.  You can visit a friend for dinner on a three day business trip, but don't do business for an hour on a three day personal trip.  Also, avoid what I call BS travel.  Flying to Vegas to assess potential real estate markets is transparent vacationing disguised as business travel, especially if you spend 23 out of every 24 hours in the casino!  Be reasonable!  Go on trips that are going to increase your money-making potential.  Stay away from any others.  For legitimate travel, you get airfare, rental car, tips, taxis, laundry, internet, and phone, as well as 50% of meals and any other reasonable and necessary expenses.  Travel assumes overnight trips away from your home area.

Cell phones, laptops, and tablets:  Do yourself a favor, get a business only laptop, cell phone, tablet and/or computer.  It is simply too difficult to calculate expenses on a part personal and part business electronic device.  Don't share your business number with friends and family (other than wife and kids).  If you keep everything separate, the deductions are easy and legitimate.  If you don't, you have to establish a business use percentage, and worry about listed property rules - which suck!

Vehicle Expenses:  Keep a mileage log.  Let me say it again, unless you have a vehicle that is 100%, no s**t, total business and no personal use, keep a mileage log.  Don't worry about gas, repairs, oil changes, insurance or any other car expenses (except as discussed above under insurance).  There are other ways to track vehicle expenses, but mileage is the best.  Do track annual car taxes and finance charges.  The easiest mileage log is a notebook where you write the date, the trip purpose and the miles driven.  You will also need to know the total miles the vehicle is driven for the year, so write the odometer reading down every January 1st!  Mileage will be one of your biggest expenses, so keep track of it religiously!  10,000 miles of properly tracked vehicle mileage can result in $1500 of tax savings!  Mile IQ is the absolute BEST way to track this.  It is a mobile phone app that AUTOMATICALLY tracks your mileage every time you drive.  Then a simple swipe categorizes it as business, personal, medical or charity.  You can add notes to each trip and print a report for filing taxes.  It even keeps a running total of your deduction amount!  It costs a small amount to use (which is deductible) but is a MUST!

Home Office:  Set aside a space in your home that is 100% business use.  Never used for anything else, and regularly used for business.  This is where you keep your business records, your business computer or laptop, make your sales calls from and meet clients.  The tax term is regular and exclusive business use.  If you do this, you deduct a percentage of the household expenses - rent, interest, taxes, utilities, insurance, repairs, etc, based on the square footage of the office ratioed to the home square footage.  Expenses directly related to the office, such as a dedicated phone line; do not have to be ratioed.  You can also take a small depreciation deduction for the home losing value (let your tax guy handle this - it's a b**ch!)  

Employer Reported Expenses:  In many cases, your employer is going to charge you for a number of different things like marketing and insurance.  They will generally track the expenses and then deduct them from your commission check when you make a sale or broker a purchase.  Virtually everything they charge you for will be deductible, but they will report the full amount of your commission on the 1099MISC at the end of the year, and then give you a report of what they charged you.  This simplifies things for record keeping, except that you need to make sure not to deduct something from the employer report twice by tracking it in your own records.

Depreciation:  Some items that you buy for your business, that have a useful life longer than a year will have to be depreciated over time rather than deducted all at once (examples include computers, digital cameras or office furniture).  There are many options for deducting it up front, but be wary of this, there are tripwires that can cost you if you dispose of something before it has passed its useful life.  Talk about these items with your tax advisor.

Record Keeping:  This is where the rubber meets the road.  Good record keeping will save you when it comes to tax time.  Your records don't need to be extensive, but they do need to be accurate and usable.  I hate double-entry bookkeeping and would never recommend it as a tool for a Real Estate Agent.  I also have found that the various bookkeeping software programs are virtually useless when it comes to taxes.  They may help when it comes to managing the business, but they suck for doing taxes.  The best and easiest record keeping method I've found for Real Estate Agents involves a small notebook, a big notebook and an envelope or box.  The small notebook is for mileage, discussed above.  The big notebook is for every other expense (except employer reported expenses.)  You need simple columns set up: date, expense, and cost.  You can add categories, but don't really need to, if you're unsure something's deductible, write it down and let your tax guy tell you if it's deductible.  The box/envelope is for receipts - just throw them in.  Really?  No sorting, categorizing or organizing?  No.  Simply put, your odds of ever needing them for an audit are slim to none.  Save the box, notebooks and tax returns for 7 years, and then throw it all away.  If you ever do get audited, there's plenty of time to sort through the box and organize it to match the notebooks - but why do it if it's not necessary.  If I'm doing your taxes I'm going to use the notebooks, and remind you that you should have a receipt for everything.  You don't have to prove things to me.

Separate Bank Account:  This one might be a little controversial, but I believe it's the be all end all of successful businesses.  Combined with record keeping discussions above, and budgeting discussions below, this will make everything easier.  Open a separate bank account for your Real Estate Agent business.  It doesn't have to be in a different name, just separate from your personal account.  If you use credit, get a second credit card that is exclusively for business (again, it doesn't have to actually be a business credit card, just one that you use only for business).  Put all Real Estate income in this account, and pay all Real Estate expenses out of it, or with the business credit card.  Pay off the business credit card out of this account.  The only expenses not paid out of the account are car expenses (especially gas) and home office expenses that will be divided based on square footage as discussed under home office above (utilities would not be paid out of the account, but office supplies and business only cell phone would).  The beauty of this method is that it simplifies budgeting as we'll discuss below, and it allows reconciling of expenses to make sure your notebook covers everything.  A good tax expert should be able to compare your account statements with your notebooks and know if you missed something (assuming you don't intermingle personal and business expenses).

Budgeting and Saving:  Now that you have an account that is separate for business, you can start thinking about budgeting.  Your income is going to fluctuate wildly, so you can use the business account to pay a "salary" to your personal account.  I recommend letting some money build up in the business account until you have a feel for your income level.  It will probably start small, but build up over time.  Once you have a good feel, you can pay yourself this salary.  The salary should be no more than 50% of your gross income or 60% of your net income.  You need to play around with it.  Start small and raise it if income exceeds expectations, but NEVER pay yourself more than 60% of net income.  Having a salary allows you to budget like you had a normal job.  Keeping a buffer amount in the account allows you to have a "salary" even during lean months.  By paying yourself a salary and saving the rest, if you have a really big month, you end up saving more, which in turn allows you to have the money to pay the tax bill that the big month will generate.  When you file your taxes, you should have plenty of money to pay the tax bill, and still have money left to maintain a buffer, and, if you're lucky, have the ability to pay yourself a bonus to your personal account for a big purchase or vacation!

Estimated Payments:  My advice is that you should use the budgeting advice above to pay your taxes.  You'll still need to make estimated tax payments if you're making good money, but you should pay the minimum required to avoid an underpayment penalty.  Your tax advisor will calculate them for you, but to explain simply: you need to pay at least as much as your prior year's total tax liability in withholding or estimated taxes to avoid a penalty (oversimplified explanation, but really all you need to know).  This is an easy calculation for your tax guy and he will set up quarterly payments and provide vouchers for paying them.  (The timing is a little weird.  You pay 4/15, 6/15, 9/15 and 1/15.)  You can also pay varying payments to try to avoid a tax bill, but it gets complicated, and the government won't pay you interest.

I hope you find this advice useful.  If you keep good records and separate personal and business expenses you'll make your tax guy's job easier, and pay the minimum in taxes.  If your tax guy sighs a lot while viewing your records, try harder next year.

If you are an experienced Real Estate Agent, help make this better by emailing me with any best practices you use, or anything I might have missed.  Feel free to leave a tip if this helps you save a bunch of money on your taxes!

As always, I’m available to answer questions at  You might get a reply from a slightly different email address – that’s my phone.  It knows taxes better than I do so sometimes I let it respond!

Don't rush off!  I have a lot of other cool posts:

Buying from the Amazon links supports this blog!  Thanks!

Tuesday, May 9, 2017

Obamacare in South Carolina - Something's Fishy

This post is based on my experience with tax clients who have had Affordable Care Act (ACA) policies and their statements about how they were sold the policy, what they were told, and what knowledge they had.  I have no personal knowledge of how these policies were sold, and my opinions and conjecture as to the methods and/or their legality/ethics is based upon a logical assumption as to what might have happened.  I'm not accusing anybody of wrongdoing, just guessing as to what MIGHT be going on.  I am also intentionally fudging specifics to protect client confidentiality.

Three tax seasons under Obamacare, over 1500 tax returns during that time, and dozens of clients with ACA policies have given me a unique perspective.  Out of that collection, I've come to 2 major conclusions: Many clients weren't told they were getting an ACA policy and/or a subsidy, and most clients were either encouraged not to account for increases in income, or were told they were not allowed to specify a higher income in order to lower their subsidy.

Imagine you are an insurance salesman hired by one of the SC insurance company to sell ACA policies.  Imagine how quickly you would figure out that Obamacare has a bad rap in the state.  Also, imagine how much easier it is to sell a policy with lower out of pocket premiums due to a subsidy.  It's not hard to figure out that this incentivizes a salesman to maximize the subsidy and not mention that the low premium is due to a subsidy from Obamacare that you might have to pay back.  Based on my experience I feel confident in assuming that a LOT of salesmen succumb to this pressure (even though in the long term it would probably be better being honest).  I expect insurance companies are perfectly happy getting the premiums, no matter if they come from the government or the insured.  Keep in mind that if the taxpayer has to pay back a subsidy, the insurance company gets to keep the money they received.  Often, the payback is limited by income, so it's the rest of the taxpayers who are on the hook for the excess premiums paid.

So why do I think this?  Well....

1. I have clients with incomes that are not even close to the income level that would get a subsidy who still got a subsidy.  All of them either didn't know they were subsidized and some didn't know they had an ACA policy.  These were some very smart people.

2. Almost every client who had to pay back a subsidy had a story about being restricted or lied to with regard to reporting an accurate estimate of income for the upcoming year.  The most common answer was that they had no choice but to use the income from the previous tax returns.

3. EVERY client is specifically asked if they have an ACA policy and if they are getting a 1095A (reporting ACA premiums and subsidies) and the answer is entered into the computer.  Despite that, so many people ended up getting letters requesting the 1095A before their return was processed that my company ended up preparing specific instructions for responding, including how to do it, a fillable letter for faxing a response, and specific fees for it.  I used those instructions A LOT.  (I personally can state that for the last 2 years I have been VERY specific in asking about this, and still have clients who need to respond to letters.)

Now obviously it's possible that some of this was honest confusion, and/or not fully accurate information from clients.  That said, the sheer numbers involved, and the way it spans so many levels of client income and sophistication convinces me that there's something funny going on.

If you like the blog, buy my books: Kirk Taylor, EA Author Page

Tuesday, January 17, 2017

2016 Boomer Deduction Worksheet

I know this worksheet is making you Boomer Dudes a crap ton of money, so share the love and buy my tax books: Kirk Taylor, EA Author Page

You should also check out these blog posts on Military State Rules and the Military Spouses Residency Relief Act.

Military Submariners serving on two crew ballistic missile or guided missile boats are eligible to deduct lodging and other expenses when their "Tax Home" (the sub) is unavailable. Sometimes this is called the FBM Deduction. There are many discussions of what exactly is deductible, but this worksheet will work in most situations and make it easy to determine what amounts to enter on various forms or enter into tax prep software. If you find this worksheet useful, and it saves you money on taxes, consider making a donation.

I will not be able to do the instructions for individual software programs this year.  It simply required too much time and effort, for not a lot of return.  I have had to allocate more of my time to the book.  The 2014 instructions will probably work okay:

Boomer Deduction Worksheet for Tax Preparation - 2016
Numbers are for entries into software or initial form entries.

(A) Days of Refit assist in 2016 __________
(B) Days of Off Crew in 2016 __________
(C) Distance from Home to Off Crew Bldg __________
(D) Distance from Home to Waterfront __________
(E) Rent (do not include any mortgage info here)*__________
(F) Average Monthly Utilities __________
(G) Do you go home for lunch every day? __________
(H) Number of people (including wife and kids) sharing your residence___________

(I) Total Days with boat unavailable (A) + (B) = _____________
(J) Monthly Housing Costs (E) + (F) = ______________

Form 2106 Computation Worksheet Entries:
(K) Lodging and Incidental Expenses ((I) / 30 x (J))/H = _____________
(L) Laundry and Cleaning Expenses (I) / 7 x $10 = ______________
(M) Meal Expense (I) x Per Diem Rate from Table below = ______________

(N) Business Mileage:
If (G) is NO:
( (A) x (D) x 2 ) + ( (B) x (C) x 2 ) = ______________

If (G) is YES:
( (A) x (D) x 4 ) + ( (B) x (C) x 4 ) = ______________

Per Diem Rates (assumes reasonable distance from base):
Glynn County, GA $64
Other GA Counties around Kings Bay $51
Florida (around Jacksonville) $51
Kitsap County, WA $51
King County, WA $74
Pierce County, WA $64
Other counties look up in IRS Pub 1542 or
*You deduct mortgage interest, taxes and mortgage insurance premiums directly on Schedule A

Monday, January 9, 2017

The Dreaded CP2000 Letter from the IRS!

A CP2000 notice is a type of letter the IRS sends automatically when information is reported to them that doesn't match your tax return, or when there is information on your return that they SHOULD have gotten information on but didn't. You can tell it's a CP2000 notice because it will say so in the upper right hand corner of the first page. A CP2000 looks like a bill, has a payment coupon like a bill, but it's NOT a bill. It's a “question” from the IRS about something that's missing, and contains their suggestion as to what the answer to the question is (in the form of a bill). Don't send money unless you are ABSOLUTELY certain that you owe it. You have 30 days to respond, and you should use this time to make sure you understand what you really owe. If you need more time, call the phone number from the upper right hand corner of the letter and ask for more time. DO NOT IGNORE THE IRS!

In this post I'm going to go through all the sections, and tell you what they mean, and what you should do in them. Most letters are very similar in structure, but some may not have all the sections. The sections are separated by a nice bold line across the whole page, so I'm going to make it easier to follow by putting a series of asterisks (*********) on my page where one of those lines would be You can find a sample CP2000 HERE:

First. Here are some things to do immediately:

1. Take a deep breath, even if the proposed payment amount is big. A lot of times the number is smaller, or zero, and even if it is the big number, there are ways to mitigate it or pay over time. Don't Panic.

2. Make sure the letter is to YOU. Check the name in the top left and the Social Security Number in the top right. If it's not you, I would suggest calling the number on the form immediately, or sending them a quick letter (Appendix C of My Book has an example) telling them so (I'll go over exactly how to do this towards the end of this chapter when I get to the response section of the CP2000).

3. Make sure the letter is not a SCAM. There are some real a-holes out there who will stop at nothing to steal your money. If the letter was an email attachment, it's a scam. I think the only sure ways to be certain it's not a scam are to ask a professional or contact the IRS at 1-800-829-1040 (not the number on the letter). Also, if it differs significantly from my description of how the letter should flow, you should be suspicious as heck.

There are probably a few things in the envelope besides the CP2000 letter. When I refer to “the letter” I'm just talking about the pages that have page X of X in the upper right-hand corner information box. The letter may also include: an envelope to send a response in, a payment voucher that you include if you send them money (this may have page X of X on it like the letter, but should be easy to identify as a payment voucher), an installment request form for if you want to make payments, and a pamphlet on your rights as a taxpayer.

Now let's go through the letter:

The first section has the IRS address, your name and address, the summary of proposed changes, a brief description of why they sent the letter, and, most importantly, the top right corner has vital details about the letter. These include the notice type (CP2000), the year in question (make sure you compare to the right tax return), the notice date, your SSN, the AUR control number (refer to this when communicating with the IRS), and the IRS contact information. It also tells you the date you need to respond by.


The What you need to do immediately section: This section is generally the same on every letter. We'll be covering what to do as we go through the rest of the letter.


The If we don't hear from you section: Tells you the date you need to respond by, and the fact that they will issue a Statutory Notice of Deficiency (basically a final notice) and a final bill once the date passes. Also states that they charge interest and penalties the whole time (if you pay by the due date in the letter the interest and penalty are already included). This is a good time for me to point out that ignoring the IRS is one of the two things the IRS hates the most (lying to them is the other.)


The Changes to your 20XX tax return section: This is usually a table with line items from your tax return that has columns with your numbers, the IRS numbers, and the difference. This can be confusing, and oftentimes not much use, but reviewing it will show you where they made the changes. The next section is often more useful. (The XX in the year obviously will be the year the letter applies to).


The Explanation of changes to your 20XX Form 1040 section: This is a big section, with a lot of information. If they got a form with information you didn't include on your tax return, it will usually be listed here first. There's a catch! If the form had tax withholding, they list that separately from any income it reported so it can look like there are a lot more forms missing than there should be. A W-2, for example, almost always has withholding, so there will be two separate lines with the same general information on the form, but one shows the withholding and one shows the income. If there are a lot of lines, it can be helpful to make a list of the forms missing (ignoring the duplicates for withholding) and comparing it with what you reported on your tax return. It's not uncommon for you to have reported everything correctly, but somehow the IRS misses it (though sometimes this happens because your employer corrects a form, but does not indicate that correctly, so the IRS treats it as a totally separate form). If all the forms were reported on your tax return, try to figure out why the IRS doesn't know that, and, even if you can't figure out why, send them a letter (Appendix C of My Book has an example) explaining the situation ( I'll go over exactly how to do this towards the end of this chapter when I get to the response section of the CP2000). If the forms aren't included, but you are sure they shouldn't apply to you (a W-2 for a company you never worked for) send a letter like we just discussed (be careful though, the name of the company on the W-2 may not be the name you know your employer by, and some jobs issue multiple W-2's if they change corporate structure.) I'm going to cover some common missing forms and give some advice on each:

W-2, 1099INT, 1099DIV, SSA1099: If you missed one of these on your return, the amount owed calculated on the CP2000 is probably right, but you can redo the tax return to confirm.

W-2G: This is winnings from gambling at a casino or poker room, lotteries or horse races. If you did win the money, you can deduct your losses on Schedule A up to the amount of your winnings. This requires itemizing to make a difference. You might want to get some professional help if this is a big number.

1099B: This is one of the most common missing items. Usually, this represents you selling some investment. A lot of people don't report these because they lost money, or didn't make much and they thought it wouldn't make a difference. BIG MISTAKE! The IRS doesn't take what you paid for the investment (your basis) into account, so this letter is charging you taxes on the amount you sold it for, ignoring what you paid for it. Find the 1099B, use it to fill out a Schedule D, Form 4797 and/or Form 8949 and then run those numbers onto your tax return to get the RIGHT amount of tax you owe (or you might get a refund!) Make sure this number is the DIFFERENCE between your original result and the new result. Make sure to include the revised schedules when responding, and there is also a worksheet for calculating the tax on capital gains that you should include.

1099MISC: This could be for work as a contractor, rental income, or even royalties from writing a book or owning an oil well. These can get very complex and you should seek professional help unless you are absolutely sure how to handle these.

1099C: This is for having debt canceled by someone you owed money to. Don't be surprised if the event happened years ago, and/or the creditor bears no resemblance to the people you originally owed. Don't assume that just because you don't recognize the debt doesn't mean it's not yours (unless you are absolutely sure you never owed money that you didn't pay back). This is also very complex, and there are some ways to avoid paying the tax on it. My Book has very useful chapters on this subject.

There are a few other forms, but they don't come up much.

Below the list of missing items will be a list of reasons why your tax results might have changed. Some of these are explanations about the affect of the missing forms above, and others are about changes unrelated to missing forms. One very common example would be if you claimed an education credit, but the IRS did not receive a 1098T showing the expenses you paid. They also have been tending to ask for additional proof of education expenses even when they got the 1098T, especially if they are sending you a CP2000 for an unrelated missing form. Read this section carefully and it will usually tell you what they are looking for in order to prove the specific item missing. Don't worry if not every listed change asks for documents, most will simply be explaining how the missing forms affected various items on your return. Again, read this section carefully. It helps to make notes for each item of information that you need to find or verify, leaving out the things that don't require action.


The Next steps section: This section just tells you not to file a 1040X for the tax return the letter refers to, but to check state returns for the year in question and all returns for other years in which you might have made the same mistake. Most states will chase you down if the CP2000 effects the state return, so be aware of this possibility.


The Interest charges section: This section explains how the interest amount was calculated.


The Additional information section: This section has information on obtaining forms and assistance. It should be the last section before a new page, which will be the start of the Response form.


The top of the first page of the Response form has the IRS address, the response due date, a place for you to update your contact information and the identifying information in the upper right-hand corner (SSN, AUR #, notice type, tax year, and notice date). You'll use this form to respond to the letter, whether you agree or not. You can usually fold the response form in a way that the address at the top of this form will appear in the window of the envelope the IRS provided for responding. If you don't use that envelope, the address at the top of the form (the one that starts with INTERNAL REVENUE SERVICE) is where you send it.


1. Indicate your agreement or disagreement:

Two choices, you either agree with the amount they want you to send, or you don't. If you agree, you check the box and sign that you acknowledge that you owe the money. You are also acknowledging a few other things, but you basically had better be sending in the money with the response, or arranging to make payments. If you disagree, check that box, and move on, though there is often a fax number here that you can use to send the response form with supporting documents back to them.


2. Indicate your payment option:

Four options: Full payment, Partial payment (write in the amount you are sending), No payment, or installment request form. You can check more than one, but that would generally be partial or no payment with an installment request. If you're sending a check, make sure you follow the instructions in this section and include the voucher page from the letter. If you don't write the requested information, when the guy at the IRS messes up and separates the check from the voucher, the payment might not get credited to you. This is a good time to mention that when sending money to the IRS, it's a good idea to track when the check gets paid and print out proof that it was. Anyway, check the box or boxes that apply. If you want to do an installment request, there is usually one included with your letter, if not, go to and search for Form 9465 (or apply online).


3. Authorization (optional): You use this section if you want someone to talk to the IRS on your behalf.

******* (there's not actually a line here, it's just the end of the letter.)

That's just about everything in the letter. So...

If you agree with the letter, send the response form, the payment voucher, a check and/or an installment agreement request.

If you disagree with the letter, but still calculate that you owe them money, send the response form, the voucher, a check and/or an installment agreement request. Include a letter (Appendix C of My Book has an example) explaining why you disagree with their conclusion and how you came up with your amount. Include all forms and worksheets from your tax return that have changed with the correct amounts on them. Include any proof to substantiate your claim.

If you disagree with the letter and don't think you owe them any money, send the response form indicating that you disagree with the changes and are sending no payment. Include a letter (Appendix C of My Book) explaining why you disagree with their conclusion. Include all forms and worksheets from your tax return that substantiate your conclusion (for example, you may have failed to include a 1099C for canceled debt, but you use Form 982 to exclude it from taxation). Include any proof to substantiate your claim.

On occasion, they may owe you money! This can happen if you didn't include the information from a 1099B (investment sale) and the sale was actually at a loss. Respond the same way discussed above for not owing any money, and simply indicate in the letter the amount you think they owe you. With luck, you'll get a check...with interest!

Send all of the above to the address at the top of the response form (you can also fax them to the number provided). Make sure to include enough postage! The IRS will send you a response indicating whether they agree, and may request more information. Make sure to keep your address updated with them!

I've set up some office hours to answer questions.  You can arrange a call or email HERE