We know it’s scary when you get a letter from the IRS,
but it is not impossible for their computer to be wrong!
The IRS has so improved its computer systems that it is now able to track practically every penny of your income and compare the total against your tax return. When the IRS finds money not reported, a computer generates a letter telling you how much in taxes you owe on the missing income (plus interest), with a request that you pay the amount promptly. Don’t be in too much of a hurry to do so. You should make sure the letter is accurate before you send the check.
All too often people think it is smarter just to pay up and put the matter behind them, believing the problem is solved. After all, it’s a letter from the IRS (they call it a “CP-2000”) that says you owe the government money because you forgot to report some of your income. They MUST be right!
But before you pay we urge you to do some research. We know it’s scary when you get this kind of letter but it is not impossible for the IRS computer to be wrong. One year eight of our clients called saying they received these letters and asked for our help. It turned out the IRS was inaccurate in six of the cases and if the clients had paid the money, it would have been lost forever.
There were a variety of reason the IRS information was wrong. Often the income had already been reported correctly on the tax return but the employer information entered in the IRS computer didn’t match the information stated on the tax forms we received. For some reason W-2 information the clients receive is frequently different than how it is reported to the IRS. Or the final income numbers may match up but there may be two separate amounts reported to the IRS which together equal what the client had sent to them on one form alone.
It isn’t at all uncommon for 1099-MISC data to be mismatched in a similar manner. And on those occasions when the client doesn’t receive the actual forms they may choose to report the income as “non” 1099 sourced income. In other words the client reported the income, but didn’t report it as coming from a 1099. We had one occasion when the client received a 1099-MISC showing the correct amount of earnings as $600, but somehow the IRS computer believed it should have read $6,000 and was sending her a bill accordingly. All we had to do was fax in a copy of the original 1099 and the problem was solved.
But as we indicated, in two of the situations the letters were correct. On the other hand you may have made an innocent mistake and mislaid one of your tax forms; perhaps you moved and forgot to inform old employers of your new address, or your agent didn’t forward W-2s he or she received. If the missing income came from W-2 forms you could find yourself owing something additional taxes in such circumstances, but hopefully at least some withholding has been kept out of your check to assist in paying the new tax bill.
Preparers have been known to make mistakes and mistakenly type the figures into the program. (NOTE: When our office does make a provable mistake, if it ends up costing you interest and/or penalties it is the policy IN OUR OFFICE to cover those costs—not the actual tax that would be due in any case, but the interest and possible penalties that may accrue as a result upon the original notice date of the letter you receive. NOTE: This not necessarily a standard policy throughout the tax return industry but it is one we stand behind.)
However, if the amount the IRS wants to collect from you is the result of income reported on a 1099-MISC—meaning you were paid in cash or by check with no taxes taken out—they may understandably assume you were trying to hide the income to avoid paying the taxes on it. Again, this is a very good reason to report all your income.
If the additional earnings were from acting related sources you may have a reason to file an amended return so you can add extra expenses against the income. It is possible you had to pay some additional agent/manager commissions. If there was travel involved to perform the work then you can add those costs as well.
BIG HINT: Here's another scenario people don't consider. If you have some missing W-2 income from your tax return and the amount of withholding exceeds the amount of taxes due on the additional income to your return, you can bet the IRS won't be sending you a letter to let you know anything about it. If the IRS owes you money they'll usually just keep it without even a Thank You.
IT MAY NOT BE YOUR MONEY AT ALL
It could very well be money you never received or earned. Just because some piece of paper has your social security number on it doesn’t necessarily mean that it should. In today’s world of stolen identities, there are all too many reasons that income might be reported incorrectly to the IRS. Several years ago we had a young, beautiful model come into the office with letters from the IRS demanding she pay a rather large tax bill for money she allegedly made working at two fish markets in Delaware. There was no way this woman had ever worked in a fish market and she had never visited Delaware. She did have her purse stolen the year before.
On the other hand, honest mistakes can be made by bored accounting clerks typing contract data into computers all day. In many cases, paying the amount on that letter without doing some research first means you could be paying someone else’s tax bill.
The first step is to be sure the income belongs to you—and then make sure that kind of mistake doesn’t happen again. How? By keeping track of your income throughout the year and reporting it accurately the first time on your return, rather than relying on whatever tax forms get sent to you at the end of the year and hoping you received all that should have been sent to you. (Read our FATQ about "Identity Theft"-- It's a very serious issue with the IRS and taxes now.)
Whatever you do, you don’t want to try to hide income from the IRS. As much as we understand not wanting to pay taxes, from a legal standpoint you don’t want to get caught trying to hide income from the IRS. Not only is it ultimately safer, but from a tax preparation point of view, it can often be beneficial to report all your income, especially as an actor. Sit down with a qualified preparer to learn how to make the best use of your deductions on the proper forms.
We have seen clients getting audited more often when any money, even small amounts, such as interest from checking and savings accounts, is missing from your return. We warn our clients never to give the IRS a reason to look at your tax return but when income numbers don’t match up, the computers spit out your return for review, forcing an IRS employee to review the return manually. That’s something you don’t want, especially as an actor. Most IRS workers don’t comprehend the validity of our deductions; this causes them to single out the return for an audit.
Once you are into that process it can open up a whole can of worms. Even if you have your act together and you escape paying anything more as a result of the audit, there’s always the time and hassle of just going through the process.