Common IRS Mistakes
Be sure to not automatically agree with the changes shown on the IRS notice. Common IRS errors include:
(1) Stock sales. If you did not report a stock sale, the IRS only has the 1099-B with the gross sales receipts and not the cost basis. So, the IRS will say that the full amount of the stock sales receipt is taxable income without considering your cost basis. For example, if you sold 1,000 shares of XYZ company for $15,000 and you purchased the 1,000 shares of XYZ company 5 years ago for $10,000, the IRS will say that you have a $15,000 capital gain. But you really only have a $5,000 capital gain when you factor in the $10,000 cost basis.
(2) 1099-NEC or 1099-MISC. If you forgot to enter a 1099-NEC or 1099-MISC on a Schedule C of your tax return, the IRS will claim the full amount of the 1099-NEC or 1099-MISC as taxable income, but usually with a 1099-NEC or 1099-MISC you can claim expenses on your Schedule C to reduce the amount of taxable income.
(3) Tax exempt income. The IRS will sometimes say that tax-exempt investment income such as dividend income from a 401(k), IRA, pension account, or municipal bonds is taxable income. You just need to let the IRS know that the investment income is from a tax-exempt account.
(4) Wrong income. The IRS computer system processes billions of W-2 and 1099 forms each year and mistakes happen. If a W-2 or 1099 was incorrectly assigned to you, you need to explain to the IRS that the W-2 or 1099 does not belong to you.
(5) Double-counted income. The IRS computer system sometimes double counts a W-2 or 1099. Also, you could have reported the income in an incorrect place on the tax return. The IRS may move the income to where it thinks it should be reported without removing the income from where you reported it on the tax return. For example, you may have reported $5,000 of consulting income on Form 1040 Line 1h as Other Income, but the IRS expects the $5,000 to show up as gross receipts on Schedule C. The IRS may tack on $5,000 of income on your Schedule C without removing the $5,000 in income you reported on Form 1040 Line 1h.
(6) Data input error. Data from your tax return, W-2 or 1099s can be entered wrong or scanned wrong into the IRS computer system. Alternatively, the company you work for could have had a data input error in your W-2 they sent to you and the IRS or the financial institution that sent you a Form 1099 could have had a data input error in the Form 1099 they sent you and the IRS.
(7) Wrong payments. The IRS may have not correctly entered any estimated tax payments or tax refunds applied to the following year. The payment may have not been posted at all or may have been posted to the wrong year.
(1) Stock sales. If you did not report a stock sale, the IRS only has the 1099-B with the gross sales receipts and not the cost basis. So, the IRS will say that the full amount of the stock sales receipt is taxable income without considering your cost basis. For example, if you sold 1,000 shares of XYZ company for $15,000 and you purchased the 1,000 shares of XYZ company 5 years ago for $10,000, the IRS will say that you have a $15,000 capital gain. But you really only have a $5,000 capital gain when you factor in the $10,000 cost basis.
(2) 1099-NEC or 1099-MISC. If you forgot to enter a 1099-NEC or 1099-MISC on a Schedule C of your tax return, the IRS will claim the full amount of the 1099-NEC or 1099-MISC as taxable income, but usually with a 1099-NEC or 1099-MISC you can claim expenses on your Schedule C to reduce the amount of taxable income.
(3) Tax exempt income. The IRS will sometimes say that tax-exempt investment income such as dividend income from a 401(k), IRA, pension account, or municipal bonds is taxable income. You just need to let the IRS know that the investment income is from a tax-exempt account.
(4) Wrong income. The IRS computer system processes billions of W-2 and 1099 forms each year and mistakes happen. If a W-2 or 1099 was incorrectly assigned to you, you need to explain to the IRS that the W-2 or 1099 does not belong to you.
(5) Double-counted income. The IRS computer system sometimes double counts a W-2 or 1099. Also, you could have reported the income in an incorrect place on the tax return. The IRS may move the income to where it thinks it should be reported without removing the income from where you reported it on the tax return. For example, you may have reported $5,000 of consulting income on Form 1040 Line 1h as Other Income, but the IRS expects the $5,000 to show up as gross receipts on Schedule C. The IRS may tack on $5,000 of income on your Schedule C without removing the $5,000 in income you reported on Form 1040 Line 1h.
(6) Data input error. Data from your tax return, W-2 or 1099s can be entered wrong or scanned wrong into the IRS computer system. Alternatively, the company you work for could have had a data input error in your W-2 they sent to you and the IRS or the financial institution that sent you a Form 1099 could have had a data input error in the Form 1099 they sent you and the IRS.
(7) Wrong payments. The IRS may have not correctly entered any estimated tax payments or tax refunds applied to the following year. The payment may have not been posted at all or may have been posted to the wrong year.
