Bob, one of our employees, came to my office yesterday and said he needed some help.
Wednesday’s mail had brought him a notice from the IRS. According to the letter, he owed them $2,544 (including interest and penalties) from underpaying his 2005 taxes.
The only explanation: records indicated he had received a distribution from Mercer that he had not reported.
Oh, and the last paragraph mentioned, by the way, that if immediate payment was not received by the IRS by August 17, legal action against his assets would be taken.
Why was Bob coming to ME? Well, Mercer had been the record keeper of our 401(k) accounts (under a prior company owner) until April, 2005. Most of us had rolled over our 401(k) accounts to new ones under the new company, but Bob had about $6,000 in after-tax money in his account, so he took it out in cash and rolled over the rest.
That shouldn’t have had any tax consequences for Bob. He told me he knew he still had his copy of the 1099 from Mercer showing no tax was owed. He just wondered if I had a contact at Mercer he could call to find out what they’d sent to the IRS.
I didn’t have a contact PERSON, but I had a toll-free phone number!
Bob brought in the 1099 and a copy of his old account statement. (Note – always keep all financial records for at least 3 years!) Armed with that, we quickly learned from Mercer that all they had reported to the IRS was the total amount of his distribution, NOT whether or not it was taxable.
Next I had Bob call the IRS. It took him nearly a half-hour to get to the person who could actually help him, but finally he managed.
IRS: “Do you have your copy of the 1099?”
Bob: “Yes, it’s right here.”
IRS: “What is the amount showing in box 2A?”
IRS: “Okay. That’s all we needed. We assumed that distribution was taxable, but it wasn’t. Your case will be shown as resolved and you don’t owe anything. Thank you for contacting us. Goodbye.”
They didn’t demand a copy; they just took his word for it and wiped out his phony “underpayment” along with the penalties and interest they had already applied. Kinda. “Wham, Bam, Thank-you Ma’am.”
SO, why didn’t they just ASK for a copy of the Form 1099 to be sure before they sent him the nasty “Pay us or else!” letter?
Because they’re the IRS, and they didn’t HAVE to.
Right. (So much for “a kindler, gentler IRS.”)