IRS sent me a notice with the wrong tax liability – How do I advocate for myself?

[Polaris23]

Background:

Step #1 - While filing my 2022 federal tax return, I realized that Line 2 of my already filed 2021 Form 8606 had the wrong “historical non-deductible Traditional IRA contributions” (i.e., $0 instead of $6,000). This error did not impact my 2021 tax return because Line 2 serves to only keep track of the “non-deductible IRA basis”, but it did set the wrong “non-deductible IRA basis” for my the 2022 tax return I was about to file.

Step #2 - I did e-file my 2022 federal tax return using the correct “non-deductible IRA basis” (i.e., as if my 2021 Form 8606 had been originally filed correctly), and at the same time amended my 2021 Form 8606 (via mail) to show the correct “non-deductible IRA basis” on Line 2, which post-amendment aligned with the filed 2022 federal tax return. In filing the 2022 federal tax return, I added a statement at the end explaining that my 2021 return missed $6,000 of “non-deductible IRA basis” in Form 8606 and that I was going to amend it, but I was not able to actually attach the amended 2021 Form 8606 with my 2022 tax return because I e-filed my 2022 return.

Step #3 - In November 2023, I received Notice CP22A from the IRS stating that I had a balance due arising from the 2021 amendment I described on point #1 above. Considering that I am 100% sure the amendment should not trigger any additional tax liability in my 2021 tax return, I called the IRS and spoke to an agent that confirmed there was a mistake on the IRS’ end and that a $0 balance should be showing under my account. The agent told me they passed along a notice to the “Admitted Returns Department” via Form 4442 and that a decision would be made within 30 days.

Step #4 - In December 2023, I received an IRS Letter thanking me for my December call and explaining that the new balance due was from the amended 2021 tax return (which I already knew) – this letter did not provide any additional details. As such, I once again called the IRS and this time an Agent that seemed quite lost / unexperienced confirmed that my claim was still being looked at – They also told me that the IRS Letter I had just received did not show-up on their system and suggested to give more time to the process.

Step #5 – Last week (late February 2024) I received Notice CP501 (i.e., different from the original Notice CP22A) with the same balance outstanding plus some additional interest and late-fee penalties. This letter did not provide any details behind the balance due or regarding my inquiries or calls.

Questions:

1. Question #1 - The IRS calls / agents seem to not be very helpful to resolve this issue. What process would you recommend I follow to clear this up?
2. Question #2 - Is it better to pay my balance due and then figure out how to get a refund back?
3. Question #3 - Is there anything else I am missing in this overall process that I should be considering in terms of the amendment?

Thank you very much in advance!

[BillM223 · Accepted solution]

#1 Always respond in writing. This means that the people at the IRS who get this letter at least know the situation you are talking about. That is, you want to communicate only with the people in the office that sent you the letter in the first place.

#2 I would not pay the balance due until you ask for a waiver on the penalty and interest because you have shown that the original assessment was incorrect AND that you responded in a timely manner.

#3 Include references to all the contacts that you have had so that the agent responding to your response is aware that there are multiple communications - by letter and by phone.

And after this, always respond by letter.

[Polaris23]

Thank you very much @BillM223 , that's very helpful!

On your response #2 - What's the best way to go about requesting the waiver? I am seeing online that there's mainly 2 initial options to go about this - The first one seems to be through the Taxpayer Advocate Services (https://www.taxpayeradvocate.irs.gov/contact-us/), and the second seems to be via Form 843. Which one would you recommend?

Also, should I be re-attaching copies of all of my amended / previously related forms, received letters, and  a personally written summary when reaching out to the IRS via mail?

Thank you!

[LeticiaF1]

1. It would be good to send the waiver application first, and send it with the package of information that you are already preparing. 
2. Yes, send them all the information you have, the more information they have the easier it will be for them to process your case.  
3. Be patient the IRS can take a couple of months or more to resolve your case.  
4. If you do not get answers from the IRS, then contact the Taxpayer Advocate Service.  They usually want to see that you have exhausted all options with the IRS before they take your case. 

@Polaris23 

[fanfare]

Taxpayer Advocate gives priority to hardship cases.

They may be busy.

You can ask your U.S.Representative to request a status and resolution from IRS.

That gets IRS's attention, but still would take several months to show any result.

@Polaris23 

[Polaris23]

Thank you all - @LeticiaF1, @BillM223, @fanfare 

1. Could you please specify what a "Waiver Application" is? In other words, is there a specific / standard Form that I should use to formally explain my point to the IRS?

2. To what IRS address should I send the "Waiver Application"?

2. The last letter I received had a payment deadline - If I disregard it and send the "Waiver application" instead (before such deadline), is there a way the IRS may not realize I am trying to proof that the payment request is incorrect and escalate the issue?

Thank you!

[BillM223]

1. No, you make it as part of your response to the letter that the IRS sent - they gave you instructions on where and how to respond, right?

When you dispute (politely) their revised tax assessment, at the end you will also ask for an "abatement" of the penalty and interest, since you showed (presumably just above in your response) that you did not owe the tax that they said you did, and therefore, would ask for an abatement of the penalty and interest as well.

The correct word is "abatement", not waiver - sorry, the right word didn't come to mind earlier.

2. There is no Waiver application, just make the request for the abatement part of your response to the CP501.

3. The IRS normally sends you these letters and asks for your response by a certain date. So long as you make sure that you respond by that date, that is not necessarily the end of the conversation. This is the beginning of a conversation wherein you demonstrate that you don't owe the amount that they said you did.

Did you respond in a timely manner to the CP22A? A phone call does not satisfy as a response unless the phone agent is in an amazingly helpful mood to update your account. 

As I noted, in your response to the CP501, you need to note the history, like how you got a CP22A, a phone agent said that the CP22A was in error, then the CP501 came asking for a tax amount that you didn't owe, etc. Lay out your proof that you don't owe that tax, or the penalty and interest. Don't make the agent reading your response have to look up your account - of course, they will, but they will be impressed that your presentation covers all the facts.

The people in the IRS office who sent the letter have the power to make this problem go away, just give them a chance to do it.

[Polaris23]

Thank you very much @BillM223  - Amazingly helpful!

My last 2 quick follow-up questions:

1 - Should I send my Abatement Request to the CP501 letter address, or to the CP22A letter address? They are different. And also just to note, the CP501 letter did not include any instructions on how to reply, it only included payment options.

2 - There's no response deadline on the CP501 letter, just a payment deadline. I am assuming it's the same?

THANKS SO MUCH!!

[BillM223]

I see that the IRS has jumped a step. They apparently don't think that you responded by the deadline of the CP22A, and the CP501 has different instructions:

"What should I do if I disagree with the changes you made?

If you disagree with the changes, call us immediately at the toll-free number shown on your notice. ..."

OK, in this case, because they told you to call them, then call the specific number that they (I hope) listed on the CP501.

But write up your response to the CP22A anyway, in case the CP501 office wants to see it. You will need to have done this to save in your tax file, in case anyone asks, or to use on the CP501 call.

[Polaris23]

There is no phone number listed on the CP501 letter, only one in the old CP22A letter. The CP501 letter only includes instructions for the payment. Should I call back the CP22A number then? 

I also found the following guidance on the TAS>IRS website instructing to write  a "Formal Written Protest" for penalties below $25K:
https://www.irs.gov/pub/irs-pdf/p5.pdf

If I write the letter, do I send it to the CP501 address or CP22A address?

[BillM223]

"There is no phone number listed on the CP501 letter,"  Great, so the IRS website is wrong. See link above.

It sounds like the internal IRS system has run off the rails, if the left hand sends you notices that the right hand doesn't know about. But to be fair, they have been operating on a very lean budget for several years.

The CP501 has neither a phone number to reply to nor an address to reply to?

OK, do this. Send the written response to the address on the CP22A, even though it is well past the deadline by now. Make sure that they know that you have received a CP501 that you want to dispute, but the CP501 does not seem to provide a way to do this. Ask for their help (at the CP22A) address to resolve this situation, because you don't want this to fall between the cracks.

The Formal Written Protest is interesting, but I still think that we have not gotten that far. Let's try to get the CP22A office to resolve this situation.

If this continues to be a problem, note that you may be able to get help from the Taxpayer Advocate Service, which is an organization internal to the IRS that helps taxpayers resolve misunderstandings with the IRS. You can call them, or even better if TAS has an office near you, you can speak to someone face-to-face. You may be able to present your written history to someone at TAS in order to stop this from spinning out of control. TAS agents have power, but they are consequently busy, so be persistent.

[fanfare]

you don't need an abatement, you need the IRS to recognize your 2021 amendment and its relation to 2022.

Without that, even with abatement of penalties you are paying tax on  conversion that is not warranted.

@Polaris23