Case in point –
Last summer, in July of 2009, clients, a married couple who files jointly, received a CP-2000 notice from the IRS requesting additional taxes for 2007. The issue in question was the taxable portion of a distribution from a Section 529 college savings plan. I reviewed carefully all the charges and payments for the applicable dependent college student and determined that the clients owed “Sam” an additional $30.00, which was substantially less than the amount requested by the IRS.
I composed a cover letter, with an accompanying detailed statement showing how the taxable portion of the distribution was calculated, and sent it to the taxpayers, instructing them to mail the letter to “Sam” with a check for $30.00. The letter and check was mailed to the IRS in mid-August of 2009.
Just last week I received an envelope in the mail from the clients with a copy of a letter (LTR 1687C) they had received from the Internal Revenue Service. The letter, dated June 14, 2010, began with this sentence – “We received a payment of $30.00 on Aug. 28, 2009”. It went on to say that the IRS had no idea what the $30.00 payment was for.
I always tell my clients when sending a check to the IRS, or any other tax authority, to write their Social Security number (or Employer Identification number if a business payment) and the specific tax year and tax form on the check. In this case I would have told the client to write his Social Security number and “2007 Form 1040” on the $30.00 check. Since the check was credited to the correct taxpayer, and information included on the IRS letter indicated that it applied to tax year 2007, I could only assume that the clients followed my instructions properly.
So why did the IRS not know what to do with the check? Did the cover letter get separated from the check?
During the past year the client did not get any further bills or notices from the IRS for the original amount requested on the CP 2000 sent in the summer of 2009 – so at some point the original liability was marked as paid in full.
And why did it take almost a full year before the IRS got around to asking the clients what the payment was for?
I prepared a letter to the IRS explaining the purpose of the $30.00 payment and included copies of my August 2009 letter and the accompanying calculation analysis.
The fact that the IRS sent this letter to the clients, while certainly puzzling, is actually a good sign. This is not the first time I have seen a letter from the IRS asking what a payment was for. It is good to know that if the IRS cannot identify the reason for a payment, or if it receives a double payment or an overpayment, it will write to the taxpayer and ask about it. If it is determined that the payment was made in error the IRS will refund the money.
I don’t know how it is with other states, but if the State of New Jersey received a payment, or an overpayment or double payment, from a taxpayer and it did not know what it was for they would do nothing – just keep the money and spend it on more pork without contacting the taxpayer who made the payment.
Anyway – whenever you receive a letter from the IRS, or any other federal or state tax authority, send it to your tax professional immediately.