Monday, June 19, 2017


ü  Despite being in “the business” for 45 years, I usually learn one or two new things from the various monthly and quarterly print publications of the National Association of Tax Professionals.  The latest issue of TAXPRO MONTHLY provided the following –

Did you know that ‘CP’ stands for ‘Computer Paragraph’?  So CP2000 stands for Computer Paragraph 2000, an automated letter that is triggered by discrepancies on the tax return.” 

The form letter that you receive from the IRS indicating something may be wrong or missing on, or requesting additional information for, your 1040 (or 1040A) is identified by numbers, or numbers and letters, preceded by “CP”.  I actually never, until now, actually knew what the “CP” stood for.

The article in this issue about responding to a CP2000 reminded me of the importance of properly dealing with IRS and state tax agency letters, notices and statements.  If you receive a form letter or notice from the IRS or your state DO NOT IGNORE IT – the issue will not just go away!  And DO NOT PUT IT ASIDE TO DEAL WITH IN THE FUTURE.  Review it immediately.  If the return in question was prepared by a professional tax preparer SEND THE LETTER OR NOTICE TO YOUR TAX PREPARER IMMEDIATELY!

In my experience at least 2/3, if not 3/4, of all such notices are wrong – more with state notices than federal ones – but they definitely do need to be responded to promptly.

And, while the IRS or state wants you to respond promptly, do not expect a prompt response to your reply from the government.  In about 45 days after you rely to an IRS notice or letter you will receive a form letter from “Sam” saying that they need an additional 45 days to properly review and process your response.  45 days later you will receive a second letter telling you they need another 45 days.  When dealing with any government agency you need patience.

ü  As a point of information, all my writings about federal tax planning and preparation, here at TWTP or in any of my electronic or print publications, applies to a taxpayer who lives in a “non-community property state”, which most states are. 

The specific rules and regulations that apply to community property states are, to be honest, somewhat FU-ed.  In my 45 years as a paid preparer I have never had to deal with community property state issues, and certainly never will going forward.  So I have never had the need, or desire, to research community property state rules and regulations.

FYI, the current community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.  Alaska is an opt-in community property state that gives both parties the option to make their property community property.  So if you live in one of these states you may need to check on some of what I discuss here at TWTP with a local tax professional.

ü  A recent discussion with a client and friend had me do some research to verify what I had believed to be true regarding the tax basis of jointly-held investments for a surviving spouse.

What I had believed to be true was indeed true –

If investments are jointly owned by a married couple in a non-community property state (important) – stock, bonds, and mutual fund shares held in a joint brokerage account, or real estate jointly owned - and one spouse passes, the deceased spouse’s half of the investments will receive an automatic “step-up” in basis to the federal estate tax value, even if no federal estate tax return is filed or no estate tax is due.  This is generally the market value of the investment on the date of death of the deceased spouse, but could also be the market value 6 months from the date of death if this alternate valuation is elected on a federal return.    

My discussion with the friend and client, a stock broker, also verified what I suspected.  If a beneficiary sells a stock that he or she inherited, the cost basis reported on the Form 1099B issued by the brokerage, whether or not the sale involves a “covered” investment, will not necessarily report the correct tax basis of the investment – the “date of death” value – even if the deceased and the beneficiary had the same broker.  It may – but only if the individual broker has made the proper adjustment to the cost basis in the internal brokerage reporting system.

So it is very important for your tax professional, or you if you are self-preparing, to independently verify the correct cost basis for inherited investments sold to determine if any adjustments are needed to the Form 1099B numbers.


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