TurboTax 2021: Error in Taxes on Social Security Lump Sum

[Altoss]

In October of 2022 I filed my 2021 taxes.  eFile through the TurboTax service.

Recently, the IRS sent me a letter saying that I owe additional tax of $327.65 plus interest.

In 2021, I received a lump sum Social Security payment of $1,606 for 2020.

to calculate the taxable amount: 85% of $1,606 is $1,365.10.

In 2021, I am in the marginal tax bracket of 24%.  24% of $1,365.10 corresponds to $327.65 of tax.

This extra tax amount of $327.65 is exactly the figure that the IRS came up with.

I went back to TurboTax and checked that I have the lump sum info entered correctly.  On the paper copy of the Form 1040-SR, TurboTax has added the characters "LSE" to the left of the legend for line "6a".

Before I start claiming there is a bug in TurboTax 2021 that has cost me IRS interest, can anyone tell me if I did anything wrong in entering the Social Security info?

To say this another way, it looks as though TurboTax 2021 assessed zero tax on the lump sum; hence the shortfall that the IRS sent the letter about.

[fanfare]

Line 6a is interesting but it is not the taxable amount.

Line 6b is the taxable amount.

What is the amount in 6b ?

@Altoss 

[fanfare]

"can anyone tell me if I did anything wrong in entering the Social Security info?"

It's gong to depend on your other income.

if your AGI is low, there is no tax on the SS benefit and you should dispute the IRS finding.

@Altoss 

It's pretty surprising that you would get such fast turnaround from the IRS given their current backlog.

That's another reason to dispute it.

[Critter-3]

First the IRS is not always correct and if you mailed in the return the data input operator probably missed the LSE notation on the form 1040.

Next this could be a user data entry error ... when you made the LSE you had to enter the 2020 tax information so the program could calculate how much of the SS benefits on line 6a  were taxable on line 6b.   So save a PDF of the return with all the worksheets to see if this was your error or the IRS.  If it was the IRS send the calculation worksheet to support your position.  

[Altoss]

Thanks to @fanfare, @Critter-3 for responding.

If we refer to IRS publication 915 for 2021, Page 11, it states:

"Generally, you use your 2021 income to figure the taxable part of the total benefits received in 2021.  However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can elect this method if it lowers your taxable benefits.
Under the lump-sum election method, you refigure the taxable part of all your benefits for the earlier year (including the lump-sum payment) using that year's income.  Then, you subtract any taxable benefits for that year that you previously reported. The remainder is the taxable part of the lump-sum payment.  Add it to the taxable part of your benefits for 2021 (figured without the lump-sum payment for the earlier year)"

I read this to mean that we should take 85% of the Lump Sum payment of 2020 of $1,606  and apply my 2020  marginal tax rate of 22% to compute the tax on this Lump Sum payment.

I had enough Taxable Income in 2020 to get into the 22%  tax bracket.  In 2021, my Taxable Income puts me well into the 24% tax bracket.

However, TurboTax 2021 assessed zero tax on the Lump Sum payment.  I don't see that zero tax can possibly be correct, given my 2020 income.

Additional info, if I fire up TurboTax 2021 and delete the info I put in for the Lump Sum Payment, TurboTax  then comes up with the exact same tax amount and additional tax as shown in the recent letter from the IRS.

For now, I have sent a check to the IRS to pay the additional tax and "stop the clock" on the interest accruing.  For those interested, the exact wording in the IRS letter is, "We changed the amount of taxable Social Security benefits on your tax return because there was an error in the computation of the taxable amount"

In other words, the IRS computation disagrees with the TurboTax 2021 computation.

The IRS letter says I have until 20-Jan-23 to appeal the additional assessment.  So, any more input on this thread is appreciated.

At this point, I am puzzled as to how TurboTax 2021 computes the tax on the Lump Sum payment for 2020: am wondering about a bug.

[Altoss]

@fanfare 

Line 6a (Social Security benefits) has the total amount of payments for 2021, including the lump sum amount

Line 6b (Taxable amount) has a figure computed from (Line 6a minus Lump Sum Amount) * 85%

I went over the TurboTax 2021 Social Security worksheets and the figures appear to be correct.

These worksheets come from IRS Publication 915, it seems.

[Altoss]

@fanfare 

"It's gong to depend on your other income.

if your AGI is low, there is no tax on the SS benefit and you should dispute the IRS finding."

Unfortunately, my 2020 income is high enough that tax on the Lump Sum seems to be payable.

"It's pretty surprising that you would get such fast turnaround from the IRS given their current backlog.

That's another reason to dispute it."

I rather suspect that the letter from the IRS was computer-generated.

You could argue that, from the IRS point of view, the best strategy would be to work on the returns that generate additional taxes and have reduced priority on the ones that require refunds to be paid.

Ha! Ha!  But not so funny for us taxpayers.

[Altoss]

Hi, @Critter-3 , thanks for responding.

I eFiled the taxes through the TurboTax service, so presumably not a data entry error by the IRS.

I fired up TurboTax 2021 on my computer and went over the entries for the Social Security Lump Sum.  What I have looks correct.   TT is definitely showing the correct amount for the Lump Sum.

It is just that TT is assessing zero tax on the Lump Sum amount.

[fanfare]

"it is just that TT is assessing zero tax on the Lump Sum amount."

??

If what you say is correct then you are looking at a TurboTax calculation error and

TurboTax should pay your penalty and interest.

@Altoss 

[fanfare]

If you are in the same bracket both years, it doesn't matter if you use the LSE method (as described in IRS Pub) or you don't use it.  (unless you're right on the edge of the next higher bracket in one year)

The easiest method is to just assign all the benefits to this year.

 Do I read correctly that you're saying if you do that, TurboTax gives the correct tax?

[Critter-3]

Step 1 ... pay the IRS if the SS distribution  would have been 85% taxable in either tax year.

Step 2 ... put in an accuracy claim for any penalties/interest that the TT error may have caused.

Accuracy Guarantee https://ttlc.intuit.com/community/charges-and-fees/help/how-do-i-submit-a-claim-under-the-turbotax-1...

But it only covers actual CALCULATION errors in the program, not user error (and it’s almost always user error), and it only pays any penalties or interest resulting from that error, not the taxes. Either way, you are still responsible for the increase in tax.

[Altoss]

@fanfare 

To answer your questions:

"If you are in the same bracket both years, it doesn't matter if you use the LSE method (as described in IRS Pub) or you don't use it.  (unless you're right on the edge of the next higher bracket in one year)"

A true statement, agree.  I moved from the 22% bracket in 2020 to the 24% bracket in 2021.  2% is not a big difference.  Am not near the edge of the brackets - this Lump Sum does not cause a crossing of the bracket boundaries.

"The easiest method is to just assign all the benefits to this year.

 Do I read correctly that you're saying if you do that, TurboTax gives the correct tax?"

That is a Yes if by "correct tax" you mean the figure computed by the IRS.  Both TT and the IRS seem to be applying the 24% marginal tax rate.

At this point we are talking a small amount of money versus the time I would have to spend with the IRS on  a challenge.  But I do intend to pursue the apparent math error with TurboTax.

[Altoss]

@Critter-3 

Thanks for the link to the "Accuracy Guarantee"  I will definitely pursue this and hope to get a positive result from Intuit for three reasons.

1. I just purchased TurboTax 2022 to do this year's taxes.  I will import the info from TT 2021 and then will be forced to edit the Social Security amounts.
2. In 2022, I received a Social Security Lump Sum payment in 2022 for 2021.  So, will be facing this same issue with TurboTax 2022 software.
3. It would be nice for everybody to understand what is going on with the TT computation in this area.

A piece of good news is that the State in which I live does not tax Social Security benefits.

I'll post again when I hear from Intuit on the "Accuracy Guarantee"

[Altoss]

I have been using TurboTax to do my taxes since 2008.  That is 14 years.

In 2007 and prior years, I did them on an Excel spreadsheet.

In fairness to Intuit: I have to say that this is the first time that the IRS computation of my taxes has disagreed with what TurboTax gave.

[Anonymous]

Well mine is not a small amount of money. I got the same letter, but my taxable amount not paid was $36,653. My tax bill is pretty steep. My penalty and interest add up to about $2,700. I followed the step by step in TT. The 36,653 is entered on line 6a on my 1040 with LSE noted on that line. TT entered $0 on line 6b. 

The TT lump-sum, social security work sheet has 36,653 on line A, 9,055 on line B, and 27,598 on line C.

27,598 on line 1 and then the rest of the worksheet is blank.

How does that happen. All these worksheets are running in background as you go through the step by step process with TT. I had no idea. And I still do not know if the IRS numbers are correct or not.

Any thoughts?