I received a CP2000 for my 2022 taxes with a $7K penalty. Do I need to agree with the terms or can I disagree and file a 1040X to add the missing 1099-R?
Make sure to read the entire notice.
Usually, if you don’t agree with the proposed assessment, you don’t need to file an amended return.
Brett said:
Make sure to read the entire notice.
Usually, if you don’t agree with the proposed assessment, you don’t need to file an amended return.
The CP2000 seems right, but I’m missing info on a retirement account transfer. I don’t want to pay $7K. How can I submit the 1099-R that proves the extra income I just forgot on my original return?
@Grey
If the CP2000 is correct, then you’ll owe the tax listed on it. If you had included that income in your original tax return, you would still owe tax on it unless they didn’t take into account any withholding from the transfer.
Did the IRS consider the $2K you had withheld in their numbers? Was this an early distribution? Are they applying the 10% early distribution penalty? Were you eligible for any exception to the penalty on any part of the distribution?
@Bao
What was your other income in 2022? How much did you take out of the 401k? Did you file as Single?
Bao said:
@Bao
What was your other income in 2022? How much did you take out of the 401k? Did you file as Single?
I had a regular full-time income of about $60K. Yes, I filed single.
@Grey
So, your regular income was $60K? How much did you withdraw from the 401k? I noticed you mentioned this was an early distribution in another comment.
Bao said:
@Grey
So, your regular income was $60K? How much did you withdraw from the 401k? I noticed you mentioned this was an early distribution in another comment.
I withdrew $24K. I’m not even close to retirement age.
@Grey
Here’s how the tax situation looks for the unreported income:
- Original tax:
- AGI = $60K
- Taxable income = $60K - $12,950 = $47,050
- Tax = $4807.5 + 22% * (Taxable income - $41,775) = $4807.5 + 22% * (47,050 - 41,775) = $5968
- Tax with distribution:
- AGI = $60K + $24K = $84K
- Taxable income = $84K - $12,950 = $71,050
- Tax = $4807.5 + 22% * (71,050 - 41,775) = $11,248
- 10% early distribution penalty = 10% * $24,000 = $2,400
- Total tax + penalty = $11,248 + $2,400 = $13,488
- Additional tax = Tax with distribution - Original tax = $13,488 - $5,968 = $7,520
- Subtract $2K withholding = $7,520 - $2K = $5,520 tax due.
It seems like the notice considered the withholding and the early distribution penalty. The $5,520 difference and the $7K in the notice likely include penalties and interest, possibly a 20% accuracy-related penalty.
You could try to get the IRS to remove the penalties, but you’ll still owe the unpaid tax and interest.
@Grey
Keep in mind, if you live in a state with income tax, once you resolve this with the IRS, they will inform your state about the extra income, and you may get a bill from them too.
@Bao
Yes, it was an early distribution. I didn’t see anything about an assessment for the early 10% penalty.
@Grey
If the proposed assessment is correct, just sign and date the agreed response page and send it in.
You can appeal the penalty for Reasonable Cause after you get the first notice asking for full payment.
Request the penalty abatement using Form 843:
Grey said:
@Brett
What are my chances of not having to pay much or anything close to $7K once I appeal?
Almost none. You’ll need to explain what stopped you from filing a complete and accurate return and paying the right tax on time.
Mention that this is the first time you’ve had an issue like this. First Time Abate procedures usually don’t apply to this penalty, but it’s still worth mentioning.
@Brett
Are you saying zero payment or zero chance I’ll have to pay the full amount? What’s the point of the abatement form?