IRS Penalty Letter

We – PayrollOnABudget.com - received a notice today from the IRS that said one of our clients owed $3500.00 in taxes for 2004.  It was a form CP220 with no explanation of the taxes due just the penalty and interest calculations.  That seemed strange so I called the Practitioners Hotline I wanted to find out what taxes were due.  The nice young lady at the IRS told me it was from the reconciliation of the W3’s and the 941’s.  That seemed strange so she checked a little more for me. 

She told me there were 31 1099-Rs and no Form 945 had been filed for them.  The IRS just assumed that the money was due to the IRS and sent a notice with out explanation.  If you don’t work with the IRS all the time you might not realize that that is a little unusual.  Normally they explain exactly what tax is due and why.  Not that they are right but they are certain.

 We don’t do 1099Rs for this client.  I called the client and asked about their 401K plan for that year.  Sure enough they had 31 1099-Rs which had $3500.00 of withholding.  Employees who had terminated and left the 401K plan and did not roll over their account.  My client called T. Rowe Price who was the plan administrator and Trustee.  Seems like T. Rowe had a computer glitch for 2004 and most of their 401(K) Form 945 for their clients were filed with the wrong tax ID number.

It makes me wonder how many companies just wrote a check to the IRS to fix a problem that T. Rowe Price caused.  Wrote a check for money that was not really due. 

According to the IRS’s own Tax Payer Advocate 40% of all employment tax notices the IRS sends out are settled for zero dollars.  Add to that those that are paid because people either don’t understand, are too scared to fight, are too lazy to fight, its too expensive to fight or are just paid because the IRS has to be right!  The odds are that if you receive employment taxes notice you really don’t owe anything.  What a deal from our kinder and gentler IRS (they have dropped that marketing phrase).