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CPA Wilmington NC | Tax Preparation and IRS Notice Tactics

Tax preparation in Wilmington NC: a CPA discusses IRS tactics

The IRS isn't obligated to do tax preparation. A Wilmington NC CPA discusses how the IRS motivates folks to seek competent tax preparation via their infamous notices.

When a tax payer doesn’t file, the IRS pushes for the tax payer to provide an original or amended tax return, instead of just paying the tax, interest and penalties calculated on their Notice.  The IRS isn’t in the business of tax preparation.  One tactic they use on their Notices, when calling for unfiled returns, is as follows.

“IRS Notices calculate the highest possible amount of tax due by ignoring deductions and credits.  Compounded by interest and penalties, this motivates the taxpayer to find competent tax preparation advice.”
Gary Bode, CPA | Tax Preparer, Wilmington NC

Client’s Story

While this example concerns individual taxation, I think it also applies to S Corporations (Form 1120S), LLCs, partnerships (Form 1065), Estate taxes Form 1041 and even payroll.  The IRS wants a properly prepared return.

Specifics: the IRS often has a heart

My client received an IRS Notice in 2010 stating the 2007 tax was now increased by $4148.  Distraught, the taxpayer talked to three IRS agents by phone.  A 1099-C was sent to to the IRS in 2007 for a cancelled car loan by a local Wilmington NC bank. But not to the client.  Revenge maybe?  Few folks who utilize self tax preparation would know cancelled debt is taxable income without the 1099-C acting as an impetus.  Cancelled debt can become taxable income. Increased taxable income incurs not only the tax on the cancelled debt itself, but increases taxable income in other areas of the return too, through phase outs, etc.   One agent alledgedly said to find a tax preparer who would ask for the penalties to be abated on the basis of not receiving the 1099-C, since the original return had used all other known documentation. All three agents reviewed the return and  noted the taxpayer had omitted legitimate deductions. All three agents suggested not paying the amount on the notice and utilizing CPA tax prepartion to file an amended return.

The Tactic

So while the IRS doesn’t do tax preparation per se, it does calculate tax due on its Notices without regard to deductions and credits. This usually results in a scenario where the highest possible amount of tax due is compounded by penalties and interest. Factor in penalties and interest.  Add the feared power of the IRS.  Bingo, you’ve created an attentive tax payer.  To me, this seems like a negotiating tactic to motivate taxpayers to find a CPA tax preparer who will file or amend a return using all the available deductions and credit. Which means the tax due is less, which lowers the interest component too.

Source of IRS Bad Reputation

Horror stories about the IRS partly originate from the emotional response a tax payer has to any IRS situation.  In tax preparation, the IRS wants what the IRS wants when the IRS wants it.  To me this situation is analgous to a legal case, in which the lawyer proceeds with emotional detachment. A CPA can represent you before the IRS to:

  • Concentrate on the actual issues at hand.
  • Minimize damages to the least legal dollar amount through competent tax preparation.
  • Look at how any remaining tax can be paid (IE Installment Agreements, Offers in Compromise) 
  • Alleviates the emotional baggage associated with IRS interaction.

If you need a free initial consult on tax preparation, or any accounting, tax or business issue, please call us at (910) 399-2705