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New Tax Form May Be An Olive Branch From IRS
Beginning in October, the Internal Revenue Service will begin mailing a new type of letter notice to individuals in an effort to reach a wider group of taxpayers.
Known as the CP 2057, the notice will be electronically generated and is expected to note only that the taxpayer may not be reporting enough income on their income tax returns. Although commentators are suggesting the CP 2057 is akin to an olive branch being extended, as with all notices issued by the IRS, the CP 2057 needs to be taken seriously.
The CP 2057 essentially directs its recipient to confirm and coordinate information collected by others, such as employers, banks and businesses. It instructs the taxpayer to double-check their returns and, to the extent necessary, file an amended return using Form 1040X.
Unlike other notices issued by the IRS, the CP 2057 does not specify an additional amount of tax owed. In doing so, the IRS is giving taxpayers time to correct any errors without the penalties that typically flow from reporting errors.
For instance, a CP 2057 may result where a taxpayer errs when reporting interest income and the IRS receives an accurate statement from a third-party. Using a computerized system, the IRS will automatically generate a CP 2057. Form 1099s generated by businesses relying on independent contractors, W2s from employers, and K1s from partnerships will all be collated by the Service for use in this process. As a result, the IRS contends it is meeting two related goals: (1) allowing taxpayers to correct underreporting of income without extensive involvement with the Service; and (2) reducing the number of Service staff dedicated to determining whether such a notice is required.
By way of contrast, readers may be familiar with another type of letter notice issued by the IRS, the CP 2000. Unlike the CP 2057, the CP 2000 proposes specific changes to income, deductions and the like on an individual's tax return. As a result, the CP 2000 may either propose an increase or decrease in an individual's tax liability. If a taxpayer receives a CP 2000 and does not response by the date shown on the notice, the IRS assumes the proposed changes are correct. The CP 2000 also highlights what a taxpayer should do if he or she agrees or disagrees with the IRS proposal.
Finally, it should be noted that the CP 2057 will indicate that the IRS will scrutinize a taxpayer's subsequent-year tax return to ensure that similar reporting issues are not recurring. This fact highlights the significance of the CP 2057, notwithstanding its apparent mechanized and forgiving nature, and not withstanding its less demanding nature as contrasted with the CP 2000.
Note : In an update to the Legal Ease column published last month concerning reverse mortgages, readers should be aware that the Housing and Economic Recovery Act of 2008, which goes into effect Oct. 1, offers greater protection for borrowers. For instance, fees that lenders may charge for reverse mortgages will be capped at a maximum of $6,000.
Additionally, lenders will be prohibited from requiring borrowers to purchase insurance or other financial products as a condition to securing the reverse mortgage.
"Courtesy of The Phoenix, www.phoenixvillenews.com"
If you have any questions or concerns regarding the tax changes for the tax year, please don't hesitate to contact any of our tax staff at (510) 235-1044.
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