Social Security Disability Lump Sump Payment

[Chowdahead]

I have a client, who is also a family member, who received about a lump sum payment of about $25K in Social Security Disability payments. The lump-sum payment covered 3 years of benefits, 2007-2006-2005. Last year, when he filed, I used the Worksheet within ATX to determine if any of it was taxable.

The SSA provided him with a breakdown of the amounts applicable to each year. The worksheet indicated no tax was due, because his income was low those years and the amounts of disability payments were low enough when spread over the 3 years.

In December he received a letter from the IRS stating that he failed to report the earning and he owes them. I have power or attorney.

It seems that ATX doesn't e-file the worksheet, so the IRS probably never saw the calculation of the lump sum over the 3 years. Does he have to take a hit on the tax all in one year? I was under the impression that the worksheet existed for the very purpose to determine if the payments were not taxable....

[TAXBILLY]

The IRS does not want the worksheet attached to the return (see Pub 915) so ATX did it correctly.

I don't e-file but on a paper return one must put the letters LSE on the Social Security line. I always highlight it in yellow.

In your case I would provide the worksheet in response to the letter. Before doing that however it's always a good idea to double-check the numbers.

taxbilly

[mcb39]

The ATX software puts those letters on the line right behind Social Security payments.; so either someone missed that or the calcualations were incorrect. My guess is the first. I had one come back because someone didn't dig deep enough and find attached a Form 982 and explaination why Cancellation of Debt wasn't claimed. Client was in prison and had NO assets. so was exempt. I called the IRS and the "nice lady" said, "Oh, someone missed seeing that form attached!" I faxed them all the information and we haven't heard a word since. (Which brings up once again Taxbilly's reference to lack of competence in certain areas, which is so frustrating for us at times). :dunno:

[kcjenkins]

Hey, didn't you read about all the CP-22a sent out in error? This is just another example of the same sort of problem, The new IRS may claim to be 'kinder', but it sure is not more 'accurate'.

I just had an interesting conversation with the practitioner priority group regarding a recent notice sent to a client claiming that they were in a presidential declared disaster area and the interest/penalties were reduced for 2007. The notice, however, was charging them $ 182.75 in additional penalties.

Problem was that the 2007 return was timely filed at 4/15 and so was the balance due. The 2210 calculated the correct penalty and it was paid with the return.

Curious as I was, I could not figure out why they would be asking for more money, particularly this far down the road. Well, I had a few moments and called the PPG. It turns out that she could not explain it either and reversed the penalty and will refund the $182.75.

I asked what the problem was, she claimed that they had to recalculate the penalty. I replied, then, my tax software was incorrect? She then said, "No, uh, they told us that if we got any of these inquires to reverse the charges and refund the amount." She also said the IRS tried to stop the notices but many went out before the stop was put in place.

I asked if a letter would be sent to the taxpayers detailing the adjustment and showing no balance due.

Her answer, "No".

I asked if the penalties will be automatically adjusted out for people who received the notices but did not call the IRS or inform their preparers.

Her answer, "No".

I asked if refunds would be sent to those who erroneously paid if they or their reps never contacted the IRS.

Her answer, "No".

I guess I will be asking every client I see in the next few months if they received one of these notices and paid without telling me. I'd advise you all to do the same.