IRS asleep SS&Med.taxes deducted

[Gretel]

I am stunned. Client, single, who prepared her own tax return all prior years, brings me her stuff and last years taxes.

1. She did not calculate her EIC and IRS send her a CP21B telling her that she will be getting an additional refund for her EIC. That is a first for me

But here is the killer:

2. She added her FIW, SS, and Medicare and put total amount as taxes withheld on her 1040 and got all of it back, no questions asked.

I am speechless. This is going on for years. What on earth is going on?

[Black Bart]

They ARE asleep -- never heard of so bold an error as that being ignored. But apparently the virus is catching. I came across one year before last; guy made a $3K contribution to an IRA, but in the same year took a $10K distribution, claimed RSC credit on 8880 for the $3K and it sailed right on through with the big $10K withdrawal sitting right there on the 1040 front page plain as day, but not entered on 8880. Was never billed for it.

[DaveO]

You just never know. I had a brother and sister who come in together who are both deaf. When I asked about IRS contributions they both indicated $200 per month so I claimed a $2400 deduction for each. They both got IRS notices disallowing all but $1800 of the deduction. I consulted their investment advisor and found that they had indeed contributed $200 per month, starting in March. I wrote identical letter to the IRS for each of them. They billed the sister and closed the brothers case with no change.

[taxea]

you all need to hold your breath until the statute of limitations runs out. If they find the error in time they will go back and check the prior 6 to 10 years.

[Koss]

SS and Medicare...

The IRS computer systems normally recognize errors in the amount of federal tax withheld. If the IRS failed to catch this kind of error, that is indeed shocking.

But I have been doing income taxes for waaaay too many years, and I have a rather arcane theory about what may have happened.

The taxpayer overstated her federal withholding by the amount of social security and medicare tax withheld.

She also failed to claim the Earned Income Credit.

If the taxpayer is single with no qualifying children...

And the IRS corrected both errors simultaneously...

Then the net result is no change in the amount of the refund.

Because EIC for a person with no qualifying children is equal to the amount of medicare and social security tax on the wages.

No, really. That's how the formula works.

For example, for 2012, if the income is between $5800 and $5850 with no qualifying child, the amount of EIC is $446.

The midpoint of this range of income is $5825.

And 446 divided by 5825 is 0.0765.

There's a little more to it. The credit maxes out in a plateau. So it isn't always equal to 7.65%. But for an awful lot of people without a child, the amount of EIC really is the same as the FICA withholding.

Gretel--

Did your client actually receive a second check for the EIC?

I'll bet she didn't. I've actually seen those letters before. The letter is mailed separately from the refund check. But the IRS often corrects the missing EIC before issuing the refund. So in a typical case, the taxpayer would only get one refund, for an amount greater than what was reflected on the return.

If your client got a check for the amount she was expecting...

Then the IRS may have corrected her withholding, and added the EIC, all at the same time...

And the net result was no change in the amount of the refund.

Are you sure your client didn't get a second letter explaining that they corrected the withholding?

She probably thought that letter was a mistake, and just ignored it. Maybe even forgot about it. After all, they didn't actually reduce her refund. LMAO

BMK

[Koss]

Six to ten years?

you all need to hold your breath until the statute of limitations runs out. If they find the error in time they will go back and check the prior 6 to 10 years.

The statute of limitations is three years.

They can't go back any further except in cases of fraud.

What Gretel is describing is not fraud. It's clearly an honest mistake.

See my comments below. If the taxpayer is single with no qualifying children, and her income was low enough to qualify for EIC, then the amount of the error she made--the error in the federal withholding--was only a couple hundred dollars.

No one in the fraud division at the IRS would spend more than two minutes looking at this case.

The case would never even be referred to the fraud group.

As I explained in my comments below, I'm not sure the taxpayer really got more than she was entitled to.

But if she did, it wasn't fraud. After three years, she's off the hook.

BMK

[ruthc]

Koss.....Great Expllanation!

Koss,
You gave a great explanation of the situation. Sounds like this is what is happened. Amazing how the numbers come together and make sense for a change. Thanks a lot!

[Gretel]

Gretel--

Did your client actually receive a second check for the EIC?

Burton, thank you so much for this explanation. As always: excellent. However, it does not apply to my client. Just got off the phone. She did receive the check and altogether two letters but both pertaining to EIC. In find this very scary. If I find out anything that will explain this, I surely will post.

[Koss]

Second check?

Burton, thank you so much for this explanation. As always: excellent. However, it does not apply to my client. Just got off the phone. She did receive the check and altogether two letters but both pertaining to EIC. In find this very scary. If I find out anything that will explain this, I surely will post.

That's interesting. I would still be curious to know the amount of each check she received. Of course, those numbers alone wouldn't allow anyone to draw any conclusions. You have the tax returns in front of you. And the letters she received may well have concrete amounts.

I don't mean to be skeptical, but have you actually seen the letters?

And even if it appears that the IRS never caught the inaccurate withholding... I don't see how anyone could be 100% certain unless you had a photocopy of both refund checks, or a record of the deposits to the taxpayer's bank account... or... a transcript.

This could be a strange case in which the IRS failed to recognize a serious error on a paper return. I'm not saying it's impossible. I've seen the IRS do some d**n strange stuff over the years. But I've also become very jaded and skeptical of information that clients give me verbally. They often don't give us all the relevant facts. Without a paper trail, information provided by clients is often unreliable.

I guess what I'm really trying to say is this: You have copies of the tax return that has inflated federal tax withheld. You have copies of letters indicating that the IRS refigured the return to add EIC. You have stated that the client received one refund check after filing the return, and then received a second refund check after she received the letter, or letters, about EIC.

Let's assume that all that information is accurate.

How do you know that the first refund check wasn't reduced to account for the inaccurate withholding on the tax return?

Because the client said so?

I'm just playing devil's advocate here.

The error the client made indicates that she is so naive that you simply cannot accept anything she tells you at face value.

BMK

[Gretel]

Burton

Burton, I will find out about the amount of the first check. I do have the letter and was already astonished that the IRS gave her the EIC voluntarily. She only came to me because she is very sick this year. I did not expect any problem with one small W-2. One never knows. It actually took me hours to get over that shock.

[Burke]

I do have the letter and was already astonished that the IRS gave her the EIC voluntarily.

They do this all the time. I think Congress directed the IRS a while back to seek out qualifying persons who did not take EIC when circumstances indicate that they are eligible. I have seen it happen several times to TP's. This year the software will not auto-calculate unless you answer the EIC questions. It's easier to miss if you don't know the thresholds.

[Gretel]

Confirmed

I did not see the check but my client looked at her bank records and the IRS has indeed paid her back the full amount. Now we now how to get to money.

[ddoshan]

Have seen a few cases where the IRS computed the EIC for clients (W/O a qualifying child) when none was appropriate for various reasons such as a client having a qualifying child but not claiming that child. The returns submitted even had No beside the line for the EIC.