Imagine the horror. You come home to an IRS letter in the mailbox that has your and your wife’s name on it. Thinking nothing of it, and because the only letters you have received in the past are refund checks from the IRS, you curiously open the letter and read it. It states, due to recent changes in your 2016 tax return, the IRS is assessing you an additional liability amount of $7,562.00. Wait…. what??? You flip the letter back over to the front to make sure it has your name on it. To your surprise the letter matches your name, address, and social security number. What would you do? Well, if you are anything like Scott and Amanda H. of El Toro, CA., you start to freak out. This week I received a call from Scott and, I must say, he was surprisingly calm about the fact that the IRS is now saying he owes this amount. Especially considering that he has never owed taxes before and gets a refund every year. He was clearly looking for answers and said he found me on the internet.

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As I do with every person that calls into my firm, I like to just sit and listen in the initial part of the call. A lot of tax professionals have different ways of doing things but I find that I can avoid asking a lot of questions by listening. When I spoke to Scott, both Amanda and he were on the phone together. I can appreciate that and quite frankly I prefer it, as nothing will get lost in translation if one of them reports back to the other. I explained to the two of them that their 2016 tax return has been “Reassessed.” To avoid confusion, a reassessment is not an audit. An audit is an examination of expenses claimed on a tax return. A reassessment is when there is a variance between what the taxpayer reported as income on their return, and what the IRS had reported to the taxpayer’s social. A reassessment can also be referred to as an underreporting of income. This underreporting can be caused by many things. And even though there has been a significant rise in IRS identity theft, I am not quick to suggest it as the culprit if not necessary. I have learned that doing this, it only freaks people out more than it should, so it was important for me to rule out the other causes first in Scott and Amanda’s situation.

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I explained to Scott and Amanda that I was going to take them through a series of questions to better determine what may be causing this issue. The first thing I asked was if either one of them has recently cashed out any type of retirement savings like a 401k or an IRA. Or maybe they sold a piece of property? In many cases these withdrawals or sales are not reported properly on the tax return and the IRS will see it has extra income not reported. In addition, in the case of the withdrawal, taxpayers are unaware that they will be penalized if they withdraw when they are younger than 59 ½. This is called an early withdrawal penalty which also appears to be a reassessment to the untrained eye. Both Scott and Amanda said that they had not done any withdrawal of any kind nor had they sold any property so we quickly ruled out that possibility.

 

One of the other things that can cause a reassessment that the taxpayer may be unaware of is if the taxpayer received any kind of debt forgiveness. I asked Scott and Amanda if they had any kind of foreclosure, short sale, credit card debt forgiveness, student loan or medical bill debt forgiveness and they both quickly stated no. What many taxpayers don’t understand is that when a banking institution agrees to forgive a debt, they don’t just take that loss on the books. Instead, the bank will 1099 the debtor for the amount forgiven so that the bank may take that loss. Unbeknownst to the taxpayer, this extra income in the form of a 1099 can account for the unreported income of a reassessed tax return. Scott and Amanda assured me that this was not the case either. So, I moved on.

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The last question I asked before determining the possibility of identity theft is often one question that is met with a long sigh. I ask, “Did you have any gambling winnings that you may have forgotten to report?” In the case of Scott and Amanda, they told me that they do not gamble. However, in many cases, and due to the fact that alcohol is served regularly at gambling establishments, people forget to report their winnings. By law, any jackpot of $1200.00 or more is paid out with a 1099. Because so many folks forget to report this, it is often the cause of a reassessed tax return.

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Now that I had eliminated the other options, it was time for me to move on with my possible identity theft questions. Because I don’t want to freak people out beyond what’s needed, I often tread lightly when trying to determine if it is a factor at play. I asked, “Scott, have you or Amanda, ever been the victim of identity theft?” Scott replied no, as did Amanda. I explained to them, that it was the only thing that makes sense based on what they were telling me. I told them about the rise of identity theft and that it normally happens in a different state. I also told them that if it is determined that the extra liability amount is identity theft, that the IRS will make him show proof that it is. Unfortunately, this is where the conversation went a little sideways. I told Scott that he was going to have an uphill battle with reversing this without some help. Scott wasn’t having it. He thought that there is no way that if it was determined that it was indeed identity theft that the IRS wouldn’t just reverse. He told me he would just call the IRS himself and handle it. Scott thanked me for my time, I gave him the necessary contact info at the IRS, knowing that I would probably hear back. At that point, we ended the call.

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The very next day I got a call from Scott. He said that he spoke to the IRS and the income was reported from a little café in New Mexico. Scott then stated that in order to get the amount reversed, the IRS told him he was going to have to substantiate that he had never lived in New Mexico and the debt wasn’t his. Scott then asked if I would be willing to take on the case and I agreed. In about two months, we were able to prove to the IRS that the income came from someone using a fake social security card with Scott’s number on it. In addition, we were able to show that Scott had never lived in New Mexico, nor did he work there. The liability was reversed. As much as I was happy that I could help, I believe it to be unfair that Scott had to hire someone to prove his innocence. Scott and Amanda sent me a nice thank you card and are now my friends on Facebook.

 

If you have had a tax return reassessed, give us a call here at Honest Tax. We will take you through an IRS tax consultation to help determine if it is something we can help you with or if you can possibly handle it on your own.  It’s difficult to handle the IRS on your own, especially when you’re guilty before proven innocent. Reach out to us via phone at ☎ 800 673 9731 or send us an email here.

– Mitchell Agnew