Do I really want an IRS audit?

October 9, 2024 6:59 AM

Would it be a terrible mistake to file a tax return at odds with the 1099 I have received?

In 2020, I took my SSA retirement a little early. I soon changed my mind, notified the SSA, and waited for them to tell me what I owed them to return to my previous non-retired status. They finally did this ... two years later! I wrote them a large check for the amount that they had paid in the interim. They cashed it in October 2022, then wrote me a letter in December 2022 stating that they would issue a 1099 for 2023! I protested through my local SSA office, since I had made the repayment in 2022 (and had arranged other matters in accordance with this), but neither that whining, nor a trip to the local IRS office, nor the efforts of my congressperson has resulted in any change.

I now need to file my 2023 tax return next week. I also would like to file an amended return for 2022 which lays out the true circumstances of the transaction - receipt of some SSA retirement in 2022, but the repayment of a much larger sum to the SSA to return me to my un-retired status, for a net deduction, rather than income.

First, is there some arcane rule that neither I nor IRS personnel has been unable to find which would make the payment in 2022 a 2023 event? If so, I can live with that. But if this is just an instance of the SSA's antiquated system being unable to handle this, my inclination is to file the 2023 and amended 2022 returns with an extended explanation (and proof of the 2022 payment). I don't want to be audited, although I can support the accuracy of my return. The movement of the payment to the 2022 tax year would be substantially better for me (in taxes refunded).

I am not going to get a tax professional involved at this point, as I've been that route already (and the taxpayer advocate service, too).I am inviting any and all in the green to weigh in, and expect that I can sort the wheat from the chaff.

posted by bullatony to Work & Money (10 answers total)

"I am not going to get a tax professional involved at this point"

This is precisely what you need to do.
posted by jonathanhughes at 7:19 AM on October 9 [21 favorites]

First, is there some arcane rule that neither I nor IRS personnel has been unable to find

With all due respect to the green, you 100% need a tax professional and not us for this. This is literally what tax professionals do for a living. Don't trust the internet for this. Find a good one in your area, pay the money, explain your situation, and let them help you get this taken care of.

and expect that I can sort the wheat from the chaff.

That's a potentially expensive gamble to take here. Get a professional. This, again, is what they do. Let them do it.
posted by pdb at 7:41 AM on October 9 [2 favorites]

The Social Security Administration Program Operations Manual System (POMS) GN 05002.046, "GN 05002.046 FO/800 Number Referrals to the PSC for Corrected SSA-1099s" describes the procedure field office and 800 number agents are supposed to use to refer cases to a Program Service Center for correction of the benefits statement.

If you can supply evidence that your case meets the requirements here, that may help get the statement corrected. If your field office has been unhelpful, maybe try the 800 number.
posted by grouse at 7:43 AM on October 9 [2 favorites]

First, it's unlikely that you will learn anything here that you didn't get from a tax professional, taxpayer advocate, your local IRS office, and your congressperson.

Plus, if the repayment was on the 2023 1099, then you can simply deduct it from your 2023 benefits. If your marginal tax rates are the same in both years, the net effect would be the same.

However, you say that you "arranged other matters in accordance with this," so perhaps you had a higher rate in 2022. If so, you could certainly file an amended 2022 and new 2023 return reflecting your repayment in 2022. But I would strongly suggest that you pay reflecting the 1099 having been issued in 2023 to avoid possible fines and penalties.
posted by Mr.Know-it-some at 8:15 AM on October 9 [1 favorite]

I would point you towards the bogleheads forum, where there seem to be a lot of folks with deep SSA knowledge.
posted by Dashy at 11:53 AM on October 9 [1 favorite]

Best answer: Thinking about what I'd do .... what, exactly, was the response from IRS around re-issuing the 1099? Was it a lack of response? Or did they say "nope" with no explanation? Or explain at all? Your description is vague on this. What's the opinion of the tax pros you've consulted?

Assuming no big headwinds in the answers to those questions, I'd be tempted to file both returns (2022 and 2023) at the same time with the same letter in each clearly explaining your actions and rationale in it. The idea behind a tax return is that you're the one with all the details, and the IRS depends on individual filers to be honest and correct. So they may read your letter and say "ok, legit" and accept it.

However, as you recognize, an inconsistent 1099 is a pretty quick ticket to auditland. My understanding is that so long as you have actually filed a return and made payments without fraudulent intent, there won't be giant penalties (etc) from an audit, and that worst case here is that you don't win and have to pay the taxes on a 2023 event. But, it does mean an audit. I've also heard that IRS people are actually ... great and competent, so I wouldn't worry about an audit if you have filed in good faith. But still.
posted by Dashy at 1:51 PM on October 9

Response by poster: Back to clarify. I needed a reissued 1099 from the SSA which would acknowledge the repayment in the 2022 tax year, rather than 2023. I have the image of the cashed check from October 2022, I have the 12/22 letter from the SSA acknowledging receipt of the repayment in that tax year, but they have, to date, been completely unresponsive to me, to the local SS office, to the local IRS office, and to my congressperson, who has had a liaison working on it since May.

There is some tax obligation significance to the repayment because I made a withdrawal from a tax-deferred account which I anticipated would be offset by the significant deduction I'd receive when the repayment was acknowledged.

Thanks for all your input.
posted by bullatony at 3:24 PM on October 9

Best answer: If the IRS doesn't like your return (or doesn't read your letter and fails to take it into account) the first step is that they send you a letter notifying you that according their calculations there is a mistake in line xx of your return and that they have recalculated your taxes and penalties so that you now owe them $zzz. At that point, you can either pay or appeal. The appeal is where you present (again!) all of the documentation with a better chance that someone will read it more carefully. I've gotten these letters a few times. Depending on the situation, sometimes a written reply from me pointing out the IRS mistake/misunderstanding was enough to get it resolved. Other times, my accountant has called the IRS and talked with an agent about the situation in order to get completely clarity about what information is needed and who to send it to.

In my experience with the IRS the probability of getting this first letter is very high even if you are in the right. Whether you will win in the long run, I don't know enough to even guess. But I think you should be prepared to have to deal with the IRS more than once. If you would want help from an enrolled agent at that point (accountants approved to talk to the IRS) you might consider getting them involved now to increase the odds that things will work out the way you want. On the other hand, if you estimate the cost of having to pay things the other way isn't too bad and you are confident in your case, then doing it on your own could make sense.
posted by metahawk at 3:25 PM on October 9

Given that you can provide a copy of the cashed check, it seems obvious to me (a random person on the internet and not an IRS expert) that should be the obviously correct way to do it once a reasonable person looks at the facts.

I think that with the evidence of the cashed check, I would probably go ahead and file the amended 2022 return with the payment and 2023 returns without it, including the appropriate documentation with both of them. They will probably get processed separately so you need to have a full copy of the documentation for each return.

The biggest risk that I see is if you lose you could end up having to pay the 2023 tax with interest before you can get the extra money paid in 2022 back. A headache but hopefully one that won't happen.

The key thing though is that usually when the IRS objects to this kind of thing the review is focused on the specific item - it does not trigger a wholesale audit of your entire return unless it turns up something that makes them suspicious of other items on the return. So, high probability of having to interact with IRS multiple times over many months but, in my limited experience, unlikely to trigger an audit of your full return.
posted by metahawk at 5:43 PM on October 9

I have dealt with the IRS for similar (but not the same) issues. Quite frankly, I found the IRS personnel to be reasonable and responsive. Any final determination (not in my favor) they gave me was backed up with a cite of a rule or with a lengthy explanation of why.

I agree with metahawk above. I would file the amended 2022 and the 2023 as you believe to be correct. When (if?) you get questioned, just be prepared (as you seem to be already) to back up your decision with logic and specific rules if possible. If they disagree, ask why you should not file the taxes on the appropriate cash basis not on the SSA issuing an incorrect 1099. Explain how you attempted, several times, to get the SSA to correct it and their response was no response or an inadequate response.

If you do not get a satisfactory explanation from the initial field person who ends up handling your case after you resond to the initial letter, ask to speak to a supervisor. They are busy at the IRS, but I found them to be reasonable. They appreciate that speaking to the IRS is often fear inducing or anxiety provoking.

My guess is that there is somewhere on the IRS website guidance on what to do if you are issued an incorrect 1099. I guarantee you are not the first person to encounter an incorrect 1099. I would even consider calling them without giving your name and asking what they advise you to do. If you remain anonymous, you can always ignore their advice.
posted by JohnnyGunn at 10:18 PM on October 9