Have you ever received a notice from the IRS telling you that you owe money because of a “miscalculation” on your tax return? Millions of taxpayers receive such CP11 notices every year, according to the national taxpayer advocate’s Annual Report to Congress for 2018 (February 2019).
What are these notices? First, let’s clarify what they are not: They are not audit notices. Instead, they inform you that the IRS’ computers found a math or other error on your return for a particular tax year. The notice is actually a “change” to your tax return, generated by the IRS’ computers. It is highly likely that you owe the U.S. Treasury some more money for that tax year.
The mistakes can be math errors. Perhaps you added or subtracted incorrectly. Or perhaps you used an IRS table or schedule incorrectly.
Here are a few examples, quoting from the IRS’ Internal Revenue Manuals:
“A married taxpayer files a separate Form 1040 from his/her spouse under filing status married filing separately, however when figuring the amount of tax on taxable income enters the amount for taxpayers filing married filing jointly.”
The mistake could also be an omission of something that is required in order to substantiate something you entered on the return. For example, “A taxpayer claims an education credit but fails to attach Form 8863 Education Credits.”
Another mistake could be taking a deduction even though you don’t meet eligibility requirements. For example, “A taxpayer claims an Individual Retirement Account (IRA) deduction even though her modified adjusted gross income exceeds the statutory limit allowable for claiming an IRA deduction.”
Let’s say you receive a CP11. On that notice, you’ll find what the IRS believes you owe for the tax year in question, along with some information on the nature of the miscalculations. Take a look at the sample CP11 at irs.gov/pub/notices/cp11_english.pdf.
What should you do after reading the notice? That depends on whether you agree with the IRS. If you do, just pay the amount owed.
If you do not agree, be aware that there is a time limit for “protesting the change.”
How much time do you have? The notice does not give you a due date. However, it does tell you that you have to “contact us [the IRS] in writing within 60 days from the date of this notice.”
It also raises this red flag: “[W]e may forward your case for audit if you don’t justify the reversal and we believe the reversal is in error. After we forward your case for audit, the audit staff will contact you within 5 to 6 weeks to fully explain the audit process and your rights, and you may need to provide an explanation or additional documents. After the audit, you’ll have formal appeal rights, including the right to appeal our decision in the United States Tax Court before you have to pay the additional tax.”
These notices have been scrutinized by the taxpayer advocate over the years. Based on the advocate’s report to Congress, there are some issues: The notices are “confusing and lack clarity.” Further, the report points out that “the way the forms are presented, and choices are displayed, impacts how taxpayers view and interpret the forms, potentially steering them away from exercising their rights to challenge the IRS’s decision.”
The CP11 looks like a bill instead of a statement of an issue that may need further research. So, be alert.
One more thought: If the amount due is nominal, should you just pay it? That depends. If the amount due is caused by a simple math error, my judgment call would be to pay it (but your accountant should be the judge). If the miscalculation is due to an interpretation of a child tax credit or education credit, I would not pay the amount due without a full review. No matter what, make sure you don’t delay responding to the notice.
Here are some additional resources:
“Understanding your CP11 Notice” at irs.gov/individuals/understanding-your-cp11-notice.
If you want to read the advocate’s report, go to taxpayeradvocate.irs.gov/2018AnnualReport.
From IRS’ Internal Revenue Manuals: “Part 21. Customer Account Services; Chapter 5. Account Resolution; Section 4. General Math Error Procedures” (Sept. 4, 2018) at irs.gov/irm/part21/irm_21-005-004r.