Excessive FIT withheld from SS

[BP.]

Taxpayers are over age 65. They quit their jobs and began taking Social Security benefits in 2013. Not knowing what to expect as far as tax liability, and saying they had been blindsided many years ago with a big balance due caused by under withholding, they elected to have a large amount of tax withheld from their SS benefits. (Of course, they should have checked with me, but some people think they know best.)

Their combined SS benefits were about $40K, and they had just over $10K in combined FIT withheld. They provided their original SSA-1099s for their tax prep. Their only other income was a small amount of interest and a $4K pension distribution. All of their withholding is due to be refunded. They haven't received their refund yet.

They called IRS about their refund and relayed this info to me:

They were told IRS is questioning their line 40 itemized deductions of $14,600. (!?) They did not itemize; there was no Schedule A. Line 40 $14,600 is the standard deduction for MFJ both over age 65. So that info is weird.

They were also told they are getting a 3176C letter. Looks like this is related to a frivolous tax return filing, but I am not sure.

I suppose this can all be overcome soon when IRS gets the SSA records, and also by sending in copies of the SSA-1099s as a response to the letter when it arrives.

I advised them at their tax prep appt to stop the excessive withholding, but they said they were happy with a big refund, as they want to use it for a big family vacation. Bet this will change their minds!

Does anyone have any advice or experience to share with a similar situation or with such a letter?

Thanks!

[JohnH]

This is a bit unusual. I wonder if this is a situation in which a paper return with the SSA-1099 attached might be a better way to file. . I know it isn't required to do this, but there's no prohibition against doing it this way. It MIGHT head off what you are dealing with here.

Some people just like getting that check from the government. It's a bit eccentric, but not terribly expensive since interest rates are so low. It's like having one of the old Christmas Club accounts that banks & Savings & Loan associations used to offer. I have one guy who pays a $5K estimated tax payment every September, even though he normally gets a refund without it. This year his refund was over $8K (essentially $3K plus his $5K estimated tax payment). I'm sure he will want a 1040ES voucher around August of this year.

[RitaB]

This is not what you asked, but

They called IRS about their refund and relayed this info to me:

If your clients relay info as accurately as mine, I'd wait on the notice.

They did totally blow it on the tax planning, we know that much.

[BP.]

If your clients relay info as accurately as mine, I'd wait on the notice.

Yep, you totally nailed that! Except that the detail on the "Line 40 Itemized deductions" info could not have sprouted from the brains of many or any of my clients.
Getting authorizations from clients today & I'll try PPL.

[BP.]

Agent at PPL said, yes, the 3176C letter re: filing a frivolous return was scheduled to be sent, but for some reason it was not, and the agent was glad of that because "it would have scared the pants off your clients." Thanks, IRS. They have verified the FIT withheld and the refund will be issued . . . sometime.

[Black Bart]

...They called IRS...were told IRS is questioning their line 40 itemized deductions of $14,600. (!?) They did not itemize; there was no Schedule A...

Does anyone have any advice or experience to share with a similar situation or with such a letter?

No I haven't, but on the bright side this lets us know that, in case the tax preparer business eventually falls through, everyone here surely qualifies for an IRS job.

[BP.]

No I haven't, but on the bright side this lets us know that, in case the tax preparer business eventually falls through, everyone here surely qualifies for an IRS job.

Hahahaha, Bart!! Competition will be fierce. I'll brush up on my scaring-the-pants-off skills.

[DaveO]

I have a few elderly clinets that have not had a filing requirement in years but still have withholding worth the cost of a return to get back. I explain to them for two or three years that they can avoid the preparation if they eliminate their witholding. After that I shut up and do the return.

[joanmcq]

So few people have SS withholding it often gets missed by the IRS. I don't know if the SSA is late in sending out the info to the IRS or what. But I can see where given the details of the return, it would have been kicked out by the computers. That's a lot of withholding for SS.

[Black Bart]

Hardly a good deed goes without punishment

I have a few elderly clinets that have not had a filing requirement in years but still have withholding worth the cost of a return to get back. I explain to them for two or three years that they can avoid the preparation if they eliminate their witholding. After that I shut up and do the return.

I do this occasionally and really should more often, but somehow they don't seem to get it, or the explanation falls flat...or something.

For example, this year I made the same speech to a client. But see, the thing is he likes to "chat" about politics, the world situation, this, that, and t'other -- plus (doing a little homemade therapy here) I think it gives him a sense of self-worth to be filing and "paying his taxes" (although no tax is actually paid in the end). Anyway, I also like to hold forth on the great issues of our times (and he's a pretty interesting guy to talk to -- a knowledgeable character), but was willing to make the sacrifice, open my economic vein, and tell him he could forget he whole thing if he'd just tell 'em to stop withholding. Problem is, apparently I'd made the exact same speech to him before because he replied "That's what you told me last year! Are you trying to get rid of me?"

I apologized for my "offense" and got his ruffled feathers smoothed back down, but I think maybe I'm done with this -- it's just too hard to beat human nature.

[JohnH]

Whenever we touch on the "general therapy" aspect of our business, I'm reminded of this old Bob Newhart sketch:

http://www.youtube.com/watch?v=_gyL1QFcls0

[BP.]

DaveO, Black Bart, I too have about a half dozen or so of this sort of client. Being a non-filer is anathema to them. Added another to the group this year. A hard working pipeline guy went on disability and did not need to file. He seemed lost when I told him that. When I said we could file anyhow, he was visibly calmed. I charged him a small amount, and he added 50% more to the check he gave me.

[Black Bart]

On the other side of the coin, about ten years ago (paper filing at the time) I had a little old lady client who retired and her pension, savings interest, and SS weren't enough to require filing. I so advised her and she said "I've been filing for 50 years and I just don't feel safe not filing after all these years." We reviewed the filing requirements and I assured her I'd take care of anything that came up. No soap. She wanted to file. We did. Second year-same story-more explanation-no effect-no change. Third year; we do it all again. Fourth year, a strange thing happens; several months after we file she brings in an IRS letter stating it is NOT necessary for her to file a tax return. I say strange because I've never seen such a letter before or since (didn't know one existed - maybe you guys did/do).

But even stranger was her reaction to it. She said, and I quote, "I was so surprised!" (which absolutely surprised and flabbergasted me). While she didn't say she thought I'd been filing her unnecessarily, the unspoken implication was there. I couldn't think of anything to say, she left quietly, and I haven't seen her since. If there's a moral to this little story, I guess it's that you just never know about people.

[taxxcpa]

I've have one return I do for a person whose only income is social security. I can't even e-file it unless I put in come kind of other income for a dollar or two.

Since her fiancee is a client and wants me to file it, I do it at no charge.

[Burke]

On the other hand..... I had a elderly client one time --- years ago -- who would NOT do withholding, (or estimated.) She promptly paid her taxes at the appointed time, ie. April 15, every year. When the IRS sent her nasty letters about penalties and such, she replied in writing to them something to the effect, "....come and get me, because I'd just as soon die in one of your jails, as in a nursing home." She never heard from them again.