Right at this very minute, I have a petition before the US Tax Court because of a CP2000 notice. A client of mine received a CP2000 notice about a year ago. Apparently, when the IRS matched up his 2014 return to information returns, he didn’t show a W-2 that had been filed with Social Security.
When the client received the notice, he sent it to me. I figured this would be simple. I will send the IRS the W-2 and the W-3 for 2014, and that would be it. I charged the client a nominal fee to answer the CP2000 notice, figuring it would be a simple letter with exhibits. After all, I didn’t want to take advantage of my client. I sent the letter, and about two months later, we received a notice that the IRS had received my correspondence and was reviewing it.
Thirty days later, we received a notice stating that my client owed the amount of money on the initial CP2000 notice, with no further explanation. I tried for a whole day to reach someone at the IRS. After being on hold for hours, and disconnected three times, I gave up and sent another letter, with a copy of the original response. Thirty days later, we received a notice of deficiency for the same amount, again with no other explanation. The client wanted to just pay the $11,000 and be done with it. I persuaded him to continue to fight, and we filed a Tax Court petition as a means of getting the case to appeals, where I could talk to an actual appeals officer and get the case handled.
About a year ago, I had a client that was a non-filer. He had not filed a tax return since 2010. So, I brought him into compliance for 2011 to 2013. I became his company’s accountant for the 2012 tax year. He had a C corporation that was carrying forward a $75,000 net operating loss (NOL) from 2011.
For some reason, for the 2012 tax year, the accountant before me elected for the corporation to be taxed as an S corporation and filed an S corporation tax return for 2012, disregarding the $75,000 NOL that the client could write off against $35,000 in income they had for 2012. The S corporation election was declared invalid for 2012, but valid for 2013. I properly filed a Form 1120 for 2012, showing the $35,000 in income being absorbed by the $75,000 NOL, leaving another $40,000 of the NOL to carry forward to 2013. I explained to the client that he would lose this $40,000 write-off, so we nullified the S corporation election and remained a C corporation.
However, the damage had been done. Even though the S corporation election had been invalidated for 2012, there was still a K-1 form showing up on my client’s transcripts for 2012. The IRS initiated a correspondence audit for 2012 and brought up the K-1 that wasn’t reported on my client’s tax return. In my response, I explained what happened and sent a copy of the 2012 C corporation return along with the letter from the IRS nullifying the S corporation election for 2012. I figured that would take care of it.
However, 60 days later, the IRS issued an audit report, with an amount of tax due for the missing K-1 form. I immediately appealed the audit and took care of everything in appeals – with an actual appeals officer.
My One Wish
If I could have one wish, it would be that I could speak to Congress. Please quit slashing the IRS’s budget. On one hand, you would think that enforcement would go down, but that isn’t the case. The IRS has adapted to having less money by automating everything. Correspondence audits and automated CP2000 notices are one way for the IRS to save money. However, as you can see from my examples, when there isn’t someone behind the scenes reading responses and acting on them, we have to navigate the maze of the IRS. This costs our clients money because they have to pay us for each escalation. Then you have client relations to think about.
When a CP2000 notice comes, or when a correspondence audit notice comes, we examine the notice, tell the client the problem, let them know it will take a certain approach to fix the problem, and the client is happy. The client becomes more and more dissatisfied with us when there is an escalation to the next level. Put yourself in their shoes for a moment: They don’t know about taxes; that is why they pay you to do their taxes. You do the return, and less than 1 percent of clients’ returns that you complete will get a CP2000 or correspondence audit notice. When these notices come, the client sends them to the tax preparer.
Early on in my career, I would answer these notices for free because I thought it was an extension of my tax return service. Today, when these notices come, and when they aren’t my fault, I charge a fee to the client to fix the problem. Most clients figure the fee I charge is less than the tax that is due, and if it isn’t, I tell them to just pay the tax.
Most CP2000 notices are simple fixes. You either have to amend the return or explain why the information the IRS has isn’t valid. You tell the client all of the steps that need to be done to fix the issue. Usually, they should be simple fixes. You resolve, or you think you resolve, the problem, and then you send the client copies of what you sent to the IRS so they know what they paid for. The client figures that the situation is over with. The practitioner has a power of attorney and will handle it all from here.
Then another notice comes, and you call the client to tell them that you need to escalate the issue to another level. They have to pay another fee to you, and they think to themselves that the practitioner could be wrong, so they hope for the best. But some trust in the professional could be shaken. What happens now if you need to escalate the issue again? Do you lose the client? It has happened to me. What about the taxpayers who don’t have representation? Is that the reason why there is such a backlog in the IRS’s collections inventory? Don’t get me started on how Congress is trying to save money on collections by hiring outside collections firms that may or may not know that the taxpayer has rights, and they can’t collect from the taxpayer in the same way they can collect any other debt.
I am from Generation X. We are famous for our text messages instead of phone calls and emails instead of meetings. However, this is a time where we need people. The issues in this article could have simply been settled had I been able to talk to a person and send substantiation to that same person. We have the IRS Practitioner Priority Service line, but we all know that if you call at the wrong time, you can be on hold for two hours, and the result could be a courtesy disconnect – all due to budget cuts. There isn’t enough manpower at the IRS to even answer the phones, much less talk to someone with a working knowledge of the tax code who can apply common sense. Apparently, revenue agents and revenue officers don’t come cheap. However, if I could just talk to a competent revenue agent or revenue officer, no escalation would be necessary.
Sage Advice
When I first started in practice 22 years ago, I worked as an intern for a CPA. He told me something that has stuck with me all of these years: 10 percent of your client base will cause 90 percent of your problems and headaches. I have to say that he was right. However, most of my problems with clients are due to the IRS automating systems. I am a huge supporter of automation, but not when it comes to IRS enforcement.
Do you dislike CP2000 notices and correspondence audits as much as I do? Let me know your thoughts and experiences dealing with CP2000 notices below.