IRS says my wife owes back taxes, but I paid it on return

[siggy_freud]

Hey all,

So here is the situation. We received a letter today from the IRS saying my wife owes back taxes. In 2014 we did a consulting gig with our LLC, and the group made the check out to my wife, who was the registered owner of the company (with me as a member). They should have made it to the company, but in any case we just passed the income through to our personal returns, so I didn't think it mattered much. That year, we decided to file our taxes separately for student loan purposes, as my overall income tax would put her student loan payments through the roof (income-based repayments), and considering she just graduated the year before we were trying to keep those payments to minimum.

In any case, they showed in the letter that she didn't claim $31,250 in income whereas the client reported it, and they want ~$10,000 (8k in taxes, 1.5k in penalty, and 350 in interest).

The problem is, I claimed the $31,250 income on my taxes in 2014 and already paid taxes on it, after the business deductions for paying other consultants, equipment, etc. And I've been paying the taxes for our LLC for a few years now. So they're asking for taxes that I already paid to them.

Has anyone been through this? I have written a letter to send back, along with my 2014 return showing the information, as well as supporting screenshots from my tax software corroborating the $31,250 gross business income, the net income (which I point out matches my tax return), etc.

I haven't sent it, as I was going to call them Monday and try and talk to someone.

It's a little unnerving getting a letter like this. I know in their eyes they're owed taxes, but we paid it in full, on time. Is this just a matter of me showing them we paid it, or are they going to get worked up that I paid it, instead of her?

Thanks for any and all advice.

[Nutria]

Why did you pay the taxes instead of her? That's the confusing part, and where they have an issue.

You'd think that showing them copies of your old returns would be adequate, but an Enrolled Agent might be required if that doesn't work.

And if it doesn't work, then you need to file an amended return "unclaiming" that $31K and getting a refund on it, to use to pay what the IRS says that she owes.

[moneybags]

It sounds like the company issued a 1099 or K-1. Did you get that form? Was it issued to your wife's social security number? Did you enter it into your tax software? The IRS matches these number up: the tax id from the company issuing the form & the taxpayer id claiming it. If you just entered it on your return without including the company tax id that issued it, that is probably why you got the notice.

Don't panic. You have paid your taxes and have supporting documents. I would send a letter along with all the supporting docs to the IRS. I assume the instructions say respond by a certain date.

I would not call the IRS on Monday, unless you want to be on hold forever as it is the last week before taxes are due!

[siggy_freud]

Why did you pay the taxes instead of her? That's the confusing part, and where they have an issue.

You'd think that showing them copies of your old returns would be adequate, but an Enrolled Agent might be required if that doesn't work.

And if it doesn't work, then you need to file an amended return "unclaiming" that $31K and getting a refund on it, to use to pay what the IRS says that she owes.

In previous years this company always made payment to the company name. This was the first time they made it to her directly, as it was supposed to only be mailed "care of" her, but they made a mistake. I had always passed the income through, because in previous years we filed jointly.

When I did my taxes I started them as a joint return, but then we decided to file separate, so I deleted her and her primary income/deductions in the software and filed.

Push come to shove I'll have her file an amended return with the income, and deductions showing she paid it all to me or something, as then my tax return will be accurate, instead of both of us having to change.

Moneybags - They did indeed issue a 1099, but never to us. In the 4 years we've been on contract they've never done it, so I've always just reported the business income and went off what they paid us via the return invoice. As it turns out they've been issuing 1099s I guess, but never sending them to the company. This only became a problem because in that year they "paid" my "wife - company name," rather than just the company name itself. At least that's what I believe happened.

Do you recommend just replying to the letter by checking that we dispute the charges, and providing the explanation letter of my own, + my tax return and supporting screenshots?

[Nutria]

Moneybags - They did indeed issue a 1099, but never to us.

To whom, then?

[MonkeyMama]

I would not call the IRS unless you want to be on hold forever and be disconnected. (Their phone support is just atrocious. IT doesn't matter what time of year).

Just send the supporting documents. It's no big deal. They just can't tell on their end that it's been reported and paid. Next time report on the same Tax ID# as 1099 or ask for a corrected 1099. Will prevent these problems in the future.

[siggy_freud]

To whom, then?

Sorry, I meant that it's apparent based on the IRS request that they did issue a 1099, they just never sent anything to us.

[MonkeyMama]

P.S. Filing separate shouldn't matter if you clarify. They just want to know someone reported the income.

I've had prior business partners (not related at all) get their 1099s mixed up when they separated their business. The IRS just wants to know someone reported the income and paid it. Just be sure to tell them which tax return and Tax ID# the income was reported with. Sounds like you are doing that already. You can also still ask for a corrected 1099, to help your case. Corrected 1099s solve everything. Sometimes they are just impossible to get.

[siggy_freud]

P.S. Filing separate shouldn't matter if you clarify. They just want to know someone reported the income.

I've had prior business partners (not related at all) get their 1099s mixed up when they separated their business. The IRS just wants to know someone reported the income and paid it. Just be sure to tell them which tax return and Tax ID# the income was reported with. Sounds like you are doing that already. You can also still ask for a corrected 1099, to help your case. Corrected 1099s solve everything. Sometimes they are just impossible to get.

I assume that by providing them the actual full tax return where it was reported, as well as my pertinent info (SSN) that covers the tax return/tax ID you mentioned?

[Nutria]

Sorry, I meant that it's apparent based on the IRS request that they did issue a 1099, they just never sent anything to us.

Well that's not right. I'd politely discuss it with them...

[MonkeyMama]

I assume that by providing them the actual full tax return where it was reported, as well as my pertinent info (SSN) that covers the tax return/tax ID you mentioned?

Yes. It would be good to state in the letter that the income was reported under your Name and SSN. Pretend like you are writing a letter to someone who is very slow. It's just the clearer it is, the better. I think the general rule is to spell out that the income was reported under your name and social security (list your name and SS# in the letter). & then you can refer to the documentation you have showing this to be true.

[Nutria]

Pretend like you are writing a letter to someone who is very slow.

Or that they have to read through jillions of these letters, and the simpler and more straightforward you make it, the easier and faster things get resolved.

Kinda like everyone, everywhere for all sorts of reasons KISS is always a good maxim to follow.

[siggy_freud]

Update

So I sent all the info in, essentially saying that I paid the taxes on my return, and provided evidence that I had.

They didn't reply via a narrative or anything, but essentially sent an updated form showing that instead of 10k, we owe 3k. I think what they did was amend my wife's tax return to show SHE had the income, and the same expenses that I showed. The letter mentions that she doesn't have to send an amended tax return, as they just amend it for her.

So would this mean that I should pay the IRS the 3k, and then send in an amended 2014 Tax return for myself, un-claming that income, and thus I should get a refund for the taxes I paid on that extra 30k income? If this is the case, does anyone have experience sending an amended return, and have any ideas of how long it would take them to process it?

Or should I try and muddle through the IRS tax services phone number to get a human who can confirm what they did?

[Gailete]

Personally I would amend BOTH returns and see if you come out owing anything. And be more strict in the future as to who checks are made out to.

I have had the IRS sending a letter once from the last year my ex and I were together. So he calls me on the phone saying the IRS says we owe $4000 so you need to pay $2000. I talked to my tax guy and he says we have to. So I told him to bring the paper and since I had ALL the tax paperwork what did his tax guy know about the situation? He brings me the letter. I see instantly that somehome the IRS and our mortgage company hadn't communicated the interest we had paid that year, so a phone call took care of the largest portion. The other amount said I hadn't paid the penalty for withdrawing my IRA early. Well I had and it was right on the correct line and so another phone call and in 20 minutes the problem was all gone.

So getting those letters means do not panic and the IRS is NOT always right, which is why you should amend both of your taxes for that year. I would even run the scenario for MFJ as well for that year until you get the best deal taxwise. I've also filed an amended form using my usual tax software although in the last few years who knows what you can do with the software as they seem to be raising the price and bumping more stuff into the higher priced deluxe software. I don't recall that it took much time for it to go through at all. If you usually do your own taxes you might want to think about hiring a tax person for some help here or if you feel comfortable then do it yourself. The ammended return is short because it basically only shows what has changed from the original filing.

The IRS is running at a deficit with emplyees these days and they all have too much to do. I assume that they are basically honest but they can only deal with what documents they have. Unlike a local tax person we used to have that would fight with you telling you that you owed more than you did and would ask for records that the IRS isn't allowed to. AND she would collect taxes that she had no business collecting as income tax (which in our town is only for earned income). My in laws paid income taxes for over 10 years that they didn't need to for a rental property that they owned. When the old witch was out on her ear, the next tax guy promptly repaid them for what they sent in that year and the two years previous, but he could only go back 3 years. She apparently got a bonus of what she collected and had a relative on town council. Evil woman.

Take you time, take deep breaths, get help if you need to and remember the IRS puts their pants on the same way you do!

[siggy_freud]

Yeah I'm honestly not too worried about it at this point. I'm really just trying to confirm that what I think they did (amend her return) is what they did, and that I'd be okay to file an amended return for myself to get the taxes back that I already paid on the 30k, since I'm essentially writing a 3k check to pay taxes on it again on her behalf.

I need to do an amended return for 2015 as well, since I stopped collecting rent half way through the year on a rental home, as the tenant (family member) was undergoing cancer treatment so to help out I just let them live free. But I goofed when I filed and just calculated the rental income for the whole year, hence I paid more in taxes than was required.