IRS CP2000 Tax Bill Letter - Please Help

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gator1
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IRS CP2000 Tax Bill Letter - Please Help

Post by gator1 »

I opened the mailbox the other morning to find a letter from the IRS. It's a CP2000 stating I owe $5,000+change(including penalty+interest) from 2015. I know no one ever wants to see these, but it really came at the worst time. It seems I rolled over a 401k from a previous employer to Vanguard, into a ROTH IRA. I thought Vanguard took the taxes out of it but they apparently didn't. It was a mixup and my fault for not realizing it at tax time. I'm assuming on these checks the company holding the 401k wouldn't have taken the taxes, correct? I called Vanguard and they said I could go in my account history, click on the transaction and see if taxes were withheld from Vanguard. I did that, and it said no taxes were withheld. I just wanted to make sure I wasn't getting double taxed. I called the IRS and they, shockingly, weren't helpful with information.

So this leaves me with a couple of options:

1) Lump Sum all of it it and pay it off before the deadline(September 13...they don't give much time do they?). I can afford to do this, but I don't make very much money and just had some unusual circumstances that required me to spend quite a bit of money so would hate to spend $5,000 more right away.
2) Lump Sum half of it, then payment plan the rest while getting hit with penalties and interest.
3) Just payment plan all of it while getting hit with even more penalty and interest.
4) Apply for Offer in Compromise (Form 656) and see if I can work a deal with them. It seems this is a pain in the butt, judging by the headache I got trying to read through the hot mess of a Form. And seems I'd struggle to qualify if they check investments and Savings. If they will only go off income I'd probably qualify as my income is very low at the moment.

These are the only options I can think of. Not doing anything at all isn't an option as I don't want to mess with the IRS and I've never had any kind of debt before so I want to get this paid. Any advice is appreciated. If anyone has experience with this and/or the Offer in Compromise, all input would be greatly appreciated.

Thank you much. Cheers.
pshonore
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by pshonore »

Didn't Vanguard send you a 1099R with all those details, taxes withheld if any ? (They evidently sent one to the IRS)
Buford T Justiice
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by Buford T Justiice »

Interest rates are low, consider an installment agreement. I think they are pretty much automatic for debts less than $50k and liquidated within a couple of years.
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SmileyFace
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by SmileyFace »

$5,000 isn't that much in the grand scheme of things - if it were me and I know I owed it - I'd want to just pay it and put the whole episode behind me.
(otherwise - whether you go 1, 2, or 3 is a matter of what the interest rate and penalties are. Sounds like you don't quality for 656 so why bother).

Do you think you missed the 1099R from Vanguard that should have gone out for 2015?
omgbirdman
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by omgbirdman »

You should be able to login to your Vanguard account and go to the "Tax Center" section to view any tax forms from 2015. It seems, as others have said, that you failed to report the 1099-R for that year.

I agree with others, if not an undue burden, I would just pay it in full.
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gator1
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by gator1 »

Correct to the 1099-R questions. I believe I either never received it/saw it or it was misplaced. I do my own taxes and this is the first time I've ever had a mixup.

The IRS is calling it a "retirement distribution". Is this correct? Does it matter? I never took any amount of money out, just rolled it over.
omgbirdman
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by omgbirdman »

You rolled from a traditional 401k to a ROTH. This means you pay tax on the entire amount, as a ROTH is in post tax dollars. It is indeed a distribution. As I'm sure you're now aware, this was probably not a good idea.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (taxes).
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by jebmke »

gator1 wrote: Fri Aug 25, 2017 3:54 pm Correct to the 1099-R questions. I believe I either never received it/saw it or it was misplaced. I do my own taxes and this is the first time I've ever had a mixup.

The IRS is calling it a "retirement distribution". Is this correct? Does it matter? I never took any amount of money out, just rolled it over.
Yes, this is considered a distribution by the IRS. The tax is owed. If you have the funds, the best thing to do is pay the tax and interest right away. I have a hard time seeing that you have a case for a compromise.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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celia
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by celia »

Did you fill out any paperwork for the "rollover"? Who did you send it to? Did Vanguard pull the money or did the 401K push it over? Or were both accounts already at Vanguard?

If you filled out a form(s), did you specify it should be rolled over into a Rollover (traditional) IRA or converted to a Roth? In other words, did you mess up the paperwork or did Vanguard perform the receipt incorrectly? Why has it taken you so long to realize the money went into the wrong type of account?

If you were doing a custodian-to-custodian transfer from one tax-deferred account to another (which is what you thought would happen), several members on this forum would say that a 1099-R shouldn't have been issued by the 401K custodian. The 401K custodian would have generated it for you, but if they didn't, that gives credence to the transfer was supposed to go to a Rollover (traditional) IRA. And when doing such a rollover, no tax would be withheld, since this is a non-taxable event.
Last edited by celia on Fri Aug 25, 2017 5:08 pm, edited 1 time in total.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by baw703916 »

So hypothetically, if you did have taxes withheld on the original amount when converting to a Roth, wouldn't you owe an early withdrawal penalty because you didn't roll all of it over into the Roth account (unless you were 59.5 years old)?
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by gator1 »

celia wrote: Fri Aug 25, 2017 4:46 pm Did you fill out any paperwork for the "rollover"? Who did you send it to? Did Vanguard pull the money or did the 401K push it over? Or were both accounts already at Vanguard?

If you filled out a form(s), did you specify it should be rolled over into a Rollover (traditional) IRA or converted to a Roth? In other words, did you mess up the paperwork or did Vanguard perform the receipt incorrectly? Why has it taken you so long to realize the money went into the wrong type of account?

If you were doing a custodian-to-custodian transfer from one tax-deferred account to another (which is what you thought would happen), several members on this forum would say that a 1099-R shouldn't have been issued by the 401K custodian. The 401K custodian would have generated it for you, but if they didn't, that gives credence to the transfer was supposed to go to a Rollover (traditional) IRA. And when doing such a rollover, no tax would be withheld, since this is a non-taxable event.
It was so long ago I struggle to remember. The 401k wasn't at Vanguard. If I recall correctly it went like this: I called the company that had the 401k and said I wanted to roll it to Vanguard into a Roth IRA(I wanted everything in one place). They said they had to write the check to me & Vanguard and it had to come to me first, then I had to forward to Vanguard. I mailed it to Vanguard, they put the check into my Roth IRA, and I believe that was done at my request. I don't believe it went into the wrong account. I believe there was a miscommunication on when the taxes needed to be paid. The miscommunication was I thought the taxes were being paid at that time. They obviously weren't, since the IRS wants their money.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by gator1 »

jebmke wrote: Fri Aug 25, 2017 4:43 pm
gator1 wrote: Fri Aug 25, 2017 3:54 pm Correct to the 1099-R questions. I believe I either never received it/saw it or it was misplaced. I do my own taxes and this is the first time I've ever had a mixup.

The IRS is calling it a "retirement distribution". Is this correct? Does it matter? I never took any amount of money out, just rolled it over.
I have a hard time seeing that you have a case for a compromise.
Same. Apparently it happens roughly 40% of the time. But those 40% probably don't have the cash to lump sum it. I was going to try to shoot for a 75% of total bill lump sum agreement and we shake hands and call it a day. Doubtful they bite.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by gator1 »

baw703916 wrote: Fri Aug 25, 2017 4:49 pm So hypothetically, if you did have taxes withheld on the original amount when converting to a Roth, wouldn't you owe an early withdrawal penalty because you didn't roll all of it over into the Roth account (unless you were 59.5 years old)?
I'm not anywhere near 59.5. Idk, I'm starting to think taxes weren't withheld from the original amount. It sounds like that would've been Vanguards job, not the holder of the 401k, right? Since at no point did i early withdraw it.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by earlyout »

Any taxes would have been withheld by the firm making the distribution of the 401K which in this case was not Vanguard. It sounds like you instructed Vanguard to add the money to a Roth account and that is what they did.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by celia »

It looks like everyone followed your instructions but a 1099-R got lost somehow. The 401K custodian could have done the withholding (probably at a default 10% rate or so unless you declined it), but the IRS doesn't look like they received it, else they would have credited it to you.

Why don't you call the 401K custodian and see how much was sent out when you closed the account. If that matches what Vanguard put into the Roth, well, then...no taxes were withheld.

I would just pay it and then build up your savings again by holding off on new IRA contributions or 401K contributions over the amount that the employer matches. If your state also has an income tax, you'll have to amend your state return, or wait until they contact you with bigger penalties and interest than you've already accrued.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by Katietsu »

You need to start by getting a copy of the 1099-R from the 401k provider. Then you need to correctly do your taxes. Otherwise, there is no way to know if the amount the IRS says you owe is correct. Do you know whether or not the IRS included a 10% penalty for early withdrawal? If you had done the taxes correctly, you would have reported a retirement distribution. This amount would have been included as part of your AGI. But you would have also reported that the money went into the Roth IRA and hence avoided the 10% early withdrawal penalty. We need to know the 1099-R box 7 code to know whether the IRS had the right information to not apply the 10%.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by JBTX »

Its been a while, but my recollection was you had to roll a traditional 401K into a Traditional IRA first, then roll the traditional IRA into a Roth IRA. I didn't think you could roll it directly into a Roth IRA. Perhaps that is the way Vanguard did it, but I wouldn't assume anything.

You may have a mess here. You could have inadvertantly liquidated your 401K. I would talk to Vanguard first and see what happened, and you may have to engage a tax advisor depending on the level of mess you are left with. Hopefully vanguard did it properly and you are just left with paying the tax bill. I'd pay it all if you can swing it.

Edit - I see you can now roll it directly from 401k to Roth. I guess that changed in 2008.

Nevertheless, you still owe the taxes
Last edited by JBTX on Fri Aug 25, 2017 6:38 pm, edited 1 time in total.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by gator1 »

Katietsu wrote: Fri Aug 25, 2017 6:11 pm You need to start by getting a copy of the 1099-R from the 401k provider. Then you need to correctly do your taxes. Otherwise, there is no way to know if the amount the IRS says you owe is correct. Do you know whether or not the IRS included a 10% penalty for early withdrawal? If you had done the taxes correctly, you would have reported a retirement distribution. This amount would have been included as part of your AGI. But you would have also reported that the money went into the Roth IRA and hence avoided the 10% early withdrawal penalty. We need to know the 1099-R box 7 code to know whether the IRS had the right information to not apply the 10%.

So, it sounds like it was a roller directly from 401k provider to Vanguard into a Rollover IRA, which was then transferred to a Roth IRA. No taxes withheld. 1099-R box 7 code is 02 from Vanguard. Not sure who the 401k provider was yet. But sounds like if it went from them directly to Vanguard into Rollover IRA no taxes would be withheld right? The check was made in Vanguards name(and I guess mine?).
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by gator1 »

JBTX wrote: Fri Aug 25, 2017 6:33 pm Its been a while, but my recollection was you had to roll a traditional 401K into a Traditional IRA first, then roll the traditional IRA into a Roth IRA. I didn't think you could roll it directly into a Roth IRA. Perhaps that is the way Vanguard did it, but I wouldn't assume anything.

You may have a mess here. You could have inadvertantly liquidated your 401K. I would talk to Vanguard first and see what happened, and you may have to engage a tax advisor depending on the level of mess you are left with. Hopefully vanguard did it properly and you are just left with paying the tax bill. I'd pay it all if you can swing it.
Correct. It went T401k-TIRA-RIRA. I believe Vanguard did everything correctly. If memory serves correctly I asked it to be transferred to Roth as that's where the rest of the money with Vanguard was/is. It sounds like I'm going to have to lump sum it off and call it a day.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by JBTX »

gator1 wrote: Fri Aug 25, 2017 6:38 pm
JBTX wrote: Fri Aug 25, 2017 6:33 pm Its been a while, but my recollection was you had to roll a traditional 401K into a Traditional IRA first, then roll the traditional IRA into a Roth IRA. I didn't think you could roll it directly into a Roth IRA. Perhaps that is the way Vanguard did it, but I wouldn't assume anything.

You may have a mess here. You could have inadvertantly liquidated your 401K. I would talk to Vanguard first and see what happened, and you may have to engage a tax advisor depending on the level of mess you are left with. Hopefully vanguard did it properly and you are just left with paying the tax bill. I'd pay it all if you can swing it.
Correct. It went T401k-TIRA-RIRA. I believe Vanguard did everything correctly. If memory serves correctly I asked it to be transferred to Roth as that's where the rest of the money with Vanguard was/is. It sounds like I'm going to have to lump sum it off and call it a day.

I went back and looked and now apparently you can directly roll from 401k to Roth. That wasn't the case many years ago when I did my first 401K roll overs. My recollection is unless you instructed them to withhold taxes, they assume you will pay them.

Gator as in Florida Gator? If so me too. 8-)
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by 8foot7 »

You will not get an offer in compromise unless you are beyond destitute and even then it's iffy. For 5k put it on an installment to get them out of your hair and then pay it off ahead of schedule if you can.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by billern »

Make sure they are not assessing an early withdrawal penalty. If the IRS thinks you took the funds personally (and did not roll it over to a qualified account), they will be assessing a 10% early withdrawal penalty. Look for a line item that is 10% of the distribution on the letter from the IRS. You should not be assessed this as a rollover (or a conversion) is exempt from this.

Disclaimer: I am a CPA and I have seen CP2000 notices for my clients for unreported 401k distributions. In every case, the IRS has tried to assess this penalty. In some cases it is correct but they will generally make the assumption and assess the penalty without regards to your facts and circumstances.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by BolderBoy »

gator1 wrote: Fri Aug 25, 2017 2:58 pmI opened the mailbox the other morning to find a letter from the IRS. It's a CP2000 stating I owe $5,000+change(including penalty+interest) from 2015.
You might call the IRS, explain what happened (take responsibility) and ask that they waive the penalty so you can s-t-r-e-t-c-h to pay the entire bill at once, else you may need a payment plan.

They will often waive the penalty for first time offenders.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by Indexboss »

I've had a tax issue with the IRS which stated I owed them $2600. I replied with a simple letter I typed up myself and they accepted my response :sharebeer and changed the balance due to 0.00

It was well worth the time it took to write the letter. I called my tax guy, who said I was SOL. I've found that the IRS is far easier to deal with than most people claim. I've talked to others with similar stories. The worst I would be out for writing the letter was a months worth of interest or so.

IIRC they charge 3.00 percent interest. I wish I could invest somewhere with guaranteed 3 percent!

Disclaimer: I'm no expert on this stuff, and have had only 1 dealing with the IRS besides paying yearly taxes.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by bogleblitz »

I also received a CP2000 tax letter this week regarding 2015 tax.

It is related to unemployment money I didn't file. I owe like $700 and I paid it.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by gator1 »

JBTX wrote: Fri Aug 25, 2017 6:41 pm
gator1 wrote: Fri Aug 25, 2017 6:38 pm
JBTX wrote: Fri Aug 25, 2017 6:33 pm Its been a while, but my recollection was you had to roll a traditional 401K into a Traditional IRA first, then roll the traditional IRA into a Roth IRA. I didn't think you could roll it directly into a Roth IRA. Perhaps that is the way Vanguard did it, but I wouldn't assume anything.

You may have a mess here. You could have inadvertantly liquidated your 401K. I would talk to Vanguard first and see what happened, and you may have to engage a tax advisor depending on the level of mess you are left with. Hopefully vanguard did it properly and you are just left with paying the tax bill. I'd pay it all if you can swing it.
Correct. It went T401k-TIRA-RIRA. I believe Vanguard did everything correctly. If memory serves correctly I asked it to be transferred to Roth as that's where the rest of the money with Vanguard was/is. It sounds like I'm going to have to lump sum it off and call it a day.

I went back and looked and now apparently you can directly roll from 401k to Roth. That wasn't the case many years ago when I did my first 401K roll overs. My recollection is unless you instructed them to withhold taxes, they assume you will pay them.

Gator as in Florida Gator? If so me too. 8-)
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by gator1 »

Indexboss wrote: Sat Aug 26, 2017 12:08 am I've had a tax issue with the IRS which stated I owed them $2600. I replied with a simple letter I typed up myself and they accepted my response :sharebeer and changed the balance due to 0.00

It was well worth the time it took to write the letter. I called my tax guy, who said I was SOL. I've found that the IRS is far easier to deal with than most people claim. I've talked to others with similar stories. The worst I would be out for writing the letter was a months worth of interest or so.

IIRC they charge 3.00 percent interest. I wish I could invest somewhere with guaranteed 3 percent!

Disclaimer: I'm no expert on this stuff, and have had only 1 dealing with the IRS besides paying yearly taxes.
That seriously worked? What all did you put in the letter do you remember? I need to respond to them via snail mail using this form they sent me and have it delivered by the 13th. I don't want to miss that deadline or it sounds like things can get ugly. Should I write this letter and include it with that form? I essentially have 2 options according to this form: I can agree to the entire amount and give up my right to challenge it or I can disagree to it stating why and provide documentation with what I disagree with. I guess if I want to write a letter I shouldn't agree to everything then? I just don't want to end up in tax court. But it sounds like that's if one never responds to them or requests to fight it there?
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by JBTX »

gator1 wrote: Sat Aug 26, 2017 8:51 am
Indexboss wrote: Sat Aug 26, 2017 12:08 am I've had a tax issue with the IRS which stated I owed them $2600. I replied with a simple letter I typed up myself and they accepted my response :sharebeer and changed the balance due to 0.00

It was well worth the time it took to write the letter. I called my tax guy, who said I was SOL. I've found that the IRS is far easier to deal with than most people claim. I've talked to others with similar stories. The worst I would be out for writing the letter was a months worth of interest or so.

IIRC they charge 3.00 percent interest. I wish I could invest somewhere with guaranteed 3 percent!

Disclaimer: I'm no expert on this stuff, and have had only 1 dealing with the IRS besides paying yearly taxes.
That seriously worked? What all did you put in the letter do you remember? I need to respond to them via snail mail using this form they sent me and have it delivered by the 13th. I don't want to miss that deadline or it sounds like things can get ugly. Should I write this letter and include it with that form? I essentially have 2 options according to this form: I can agree to the entire amount and give up my right to challenge it or I can disagree to it stating why and provide documentation with what I disagree with. I guess if I want to write a letter I shouldn't agree to everything then? I just don't want to end up in tax court. But it sounds like that's if one never responds to them or requests to fight it there?
I'd be shocked if a letter would cause the IRS to forgive a legitimate amount owed that was not paid due to taxpayer error.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by tomd37 »

After reading the original post and associated comments thereafter, I've arrived at the conclusion that if one does not know where they are going (especially with tax related items) they are best not going there on their own without some idea of the consequences they might face. :oops:
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by spectec »

I doubt you'll get it forgiven or reduced. Offer in compromise is a waste of your time.

You say that paying it all at this time is somewhat problematic. If you can't pay it all, an Installment Agreement is very easy to set up. You'll pay a one-time fee for setting up the I/A and then you'll pay a combination of interest plus a Failure to Pay penalty. The total of the interest and penalty is about 3/4 of 1% per month, or the equivalent of paying interest on the money at 9% per year on the unpaid balance. You have to decide if gaining extra time to pay is worth the cost. An I/A won't get you in trouble and it won't cause IRS to take a closer look at you now or in the future. They approve them all the time.

Your can set up an I/A online in about 10 minutes, you can call and set it up on the phone, or you can apply buy mail. If you do it online, you get instant confirmation that it's been handled and you can forget about it aside from making the monthly payments. You can pay by check, bank draft, or by setting up an EFTPS account. Finally, even if you set up an installment agreement, you can prepay the balance in full at any time and the 3/4 of 1% per month stops at that moment.
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Indexboss
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by Indexboss »

My situation was different. In summary, I placed 10K as 2 years contribution in a rIRA. A few days went by and I decided I better research it more, so I called the broker and had him cancel everything. The money had already been transferred. The money was returned to me, the same exact amount. The broker or whatever he was, unbeknownst to me, returned the funds as "excess contribution." The mutual fund company sent a tax form to the IRS showing a non-qualified deduction of 10K. About 2 years later, I received a bill from the IRS saying I owed $2600. 10% penalty per year plus interest. My options were to pay the bill, contest it and offer an explanation in writing, if they found my response inadequate I would still be responsible for the bill plus interest. I could then contest it in tax court after that.

I looked into the issue and contacted my tax guy. Knowing what I know now he probably is not familiar with rIRA's. He said that I was SOL because the money had not been in there 5 years but suggested I send a letter explaining everything.

I wrote a one page letter explaining what I did, how no money was made in the IRA, explaining a cool off period under state law, and so on. The replied about a month later saying my response was accepted and the balance was $0.00

Now that I know a little more about, I believe they realized that it was not a return of excess contributions or earnings, but a withdrawal of contributions that you can make at any time. But the letter worked. It was not written by a professional, just a 27 year old kid with no idea what I was talking about.
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Re: IRS CP2000 Tax Bill Letter - Please Help

Post by MarkNYC »

gator1 wrote: Fri Aug 25, 2017 2:58 pm I opened the mailbox the other morning to find a letter from the IRS. It's a CP2000 stating I owe $5,000+change(including penalty+interest) from 2015.

What type of penalty was listed, and how much is it in relation to the additional tax?

In the vast majority of cases, a CP2000 letter that results in additional tax should have no penalties, only tax plus interest. The late payment penalty of .5% per month only applies to the tax shown on the original tax return that remains unpaid after April 15th, If the additional tax is not paid within 21 days of the assessment letter, which comes after the CP2000 letter, then the late payment penalty may get assessed.

If there is a 10% early distribution penalty (as billern suggested), you should be able to get that abated based on the "02" code in box 7 of the 1099-R indicating an exception to the 10% penalty.

In rare cases, when the additional tax is the greater of $5K or 10% of the corrected total tax, then a 20% negligence penalty would likely be assessed for "substantial understatement" of tax.
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