Got IRS letter requesting documentation for Health Coverage Tax Credit (HCTC). Determined that I took HCTC by mistake. How do I respond to IRS?

[Keildo]

Greetings,

I received an IRS letter requesting additional documentation concerning a Health Coverage Tax Credit (HCTC) I took on my recent income tax E-filing following what I understood from the TurboTax software I was using.  I have now researched this further and I now think I do not qualify for this credit.  I think I took this credit by mistake.  Becasue I was mistaken regarding HCTC, I simply do have the documentation they are requesting.  How should I respond to the IRS?

[rjs]

Read the entire IRS letter carefully. Follow the instructions in the letter for how to respond.

If you purchased Audit Defense for the year in question, call TaxAudit at 877-829-9695, or report your IRS letter on the TaxAudit.com web site. Do not contact the IRS until you have spoken to TaxAudit. They might contact the IRS on your behalf.

If you did not purchase Audit Defense, you can get help with your IRS letter from TurboTax at the following link.

We can help you with your tax letter

[Keildo]

Yes I aleady have audit defense and they have proved to be nearly useless.  I got one E-mail from them with basically the same response as you are giving me - read the letter and send them the documentation they want.  The problem is that I do not have this documentation for the tax credit they are asking about because I took this tax credit by mistake.  I do not know the best way to tell the IRS that I took the credit by mistake and I do not have the documenation they want.  After this first E-mail response, which did not answer my questions, TaxAudit has failed to respond to E-mail and voice mail (to my case coordinator) for additional clarification.  About 3 to 4 days have now passed.  Also contacting the IRS at the phone numbers given in their letter has proved useless. They just tell you they are busy, have nobody to answer and then just hang up. 

So then what is the best response to the IRS letter I received in this situation where I have mistakenly taken a tax credit (HCTC in this case) and I do not have this documentation?

[rjs]

Unless the IRS letter says otherwise, I would prepare an amended return to remove the HCTC. Then reply to the IRS with a letter explaining that you claimed the HCTC by mistake, that you do not qualify for the credit, and that you have attached an amended return removing the credit. Do not file the amended return. Just attach it to your reply.

This is just my suggestion. I have no experience dealing with this type of problem.

As you may have heard, the IRS is severely backlogged this year. It will probably be 4 to 6 months before you get a response to your reply.

[rjs]

Send your reply to the IRS by certified mail with a return receipt, so that you get tracking and confirmation that it was delivered. Send it to the address specified in the letter. Keep a copy of everything you send.

[fanfare]

if you can't provide supporting evidence that IRS requested because you made a mistake,

reply with that admission to the IRS, referencing their letter.

IRS will adjust your tax return accordingly.

@Keildo 

[Keildo]

Many thanks for your reply.  You suggest preparing an amended return and then just attaching a letter explaining explaining that I claimed the HCTC by mistake.  I understand that I should then fax the explanation letter and the amended return to the IRS at the fax number they provide.  Is this not the same as filing an amended return with the IRS or is filing an amended return typically done by a different procedure?   

Another source I consulted was advisting that I first E-file an amended return using the services within TurboTax and then send a faxed response to the IRS explaining explaining that I claimed the HCTC by mistake and that I have E-filed an amended return.  This source was concerned that if I send a fax a printed corrected copy it could take the IRS more than 6 months to respond given their current problems with dealing with paper returns.   Can you help me understand what you see as a problem with this alternate approach?   I am just trying to understand the best course of action and very much appreciate your response.

-Doug Keil

[rjs · Accepted solution]

You don't attach your letter of explanation to the amended return. You attach the amended return to your letter of explanation. You have to reply to the letter that you received with a letter in which you explain the situation. You can attach the amended return to your letter of reply. It's also a good idea to attach a copy of the IRS letter that you are replying to.

Conceptually there are two different groups or departments within the IRS that are potentially involved here. One group sends out letters asking for more information about your tax return, and handles the replies from taxpayers. The other group processes amended returns that are filed at the taxpayer's initiative, not in reply to an IRS letter. Neither group knows what the other group is doing. They don't coordinate. Attaching the amended return to your reply is not the same as filing it. The ordinary filing process goes to the group that just processes amended returns.

The fax number that they gave you (and the mailing address) goes to the group that handles replies to IRS letters. When someone in that group looks at your fax, the first thing they see should be your reply, so they know that they're looking at a reply to a letter that they sent. If the first thing they see is an amended return, they might not look any further. They might just assume that you sent an amended return to the wrong place, and send it off to be processed as an ordinary amended return. They won't make the connection to the letter they sent, and they will conclude that you didn't reply.

The problem I see with the "alternate approach" is that you would essentially be splitting up your reply and sending parts of it to two different places. The IRS is a huge bureaucracy and they are dealing with tens of millions of tax returns and pieces of correspondence. It's probably not easy for the correspondence group to access the amended return that you file through the normal filing process. The group that processes e-filed amended returns won't even know about the letter that you received. No one is going to make the connection between your reply to the letter and the amended return that you filed separately.

No matter what you do, it's going to take many months to get a response from the IRS, as I said earlier. They are currently saying that the processing time for amended returns is about 5 months. Sending parts of your reply to two different places in the IRS will not speed up the process. It will cause confusion and make everything take even longer.

You haven't said anything about how much the HCTC reduced your tax. You should at least prepare the amended return in TurboTax right away, so that you can see how much additional tax you are going to have to pay when you correct the error. Since you are using the CD/Download TurboTax software, use a copy of your original tax return for the amended return so that you preserve the unmodified original return. If the amount of additional tax is substantial, and you still haven't gotten a response from TaxAudit, you might want to consult a local tax professional for help in responding to the IRS.

[fanfare]

If you got a letter from the IRS, asking for documentation you can't supply because you made an error on your tax return, reply saying so.

IRS will adjust your return accordingly.

Unless the letter instructs you to do it, there's no reason to amend your return.

[Keildo]

To "Champ",

Thank you for an excellent and very thoughtful reply.  Very very helpful!  I now think I understand better.  Ok, I now understand that I should prepare a response letter explaining the situation and a copy of my tax return with the Health Coverage Tax Credit (HCTC) removed.  I would then fax the explanation letter, the IRS letter and the corrected tax return to the Fax number they provided.   

However, I still have a few questions:

(1) Should I send my entire tax return to the IRS in this fax or just those pages that have changed?  Elsewhere I have seen cautions about sending the IRS too much information.

(2) Should I still file an amended return (i.e. using form 1040-x) at some future date?  If so when should that future date be?

Again, many thanks for your terrific help!

-Doug Keil

[rjs]

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@Keildo wrote:

(1) Should I send my entire tax return to the IRS in this fax or just those pages that have changed?

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Just send the pages that have changed. That will probably be just Form 1040 and Schedule 3 (each of which is 2 pages). If there are no other entries on Schedule 3 - in other words, the corrected Schedule 3 is blank - you could omit Schedule 3 and just send the corrected Form 1040. On the corrected Form 1040, lines 20 and 31 will be blank.

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@Keildo wrote:

(2) Should I still file an amended return (i.e. using form 1040-x) at some future date?

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You should not file an amended return unless the IRS specifically asks for it. What I expect will happen is that the IRS will adjust your tax return based on your reply to the letter, without any need for an amended return.