IRS audit

[PigletsMommy]

Any tax gurus out there??? So the IRS has decided to audit my 2008 taxes... I thought I had this taken care of but then today I received a very confusing letter from the IRS. Why can't they just be straight forward instead of talking all this mumbo jumbo carp that doesn't make any sense!

A little background...In 2008 I was off of work for 3 months due to some complications from my pregnancy and filed short term disabiltiy. I was able to go back to work before the baby was born and work until the day before I delivered. Then filed my short term disability again, received my benefits for the 6 week post partum time. For taxes I received 2 different W2 from the STD company. The one for the pregnancy showed taxes taken out, and reported as regular wages. The one for post partum, was listed in box 12, letter J (third party sick pay). I contacted the company, and they admitted they were wrong. They were not suppose to withold taxes, sent me a new W2 and a refund of the money they took out.

It is my understanding that this 3rd party sick pay is non-taxable, as I paid taxes on it when I paid the premiums. Someone please tell me I am right!!

A few months ago I got the 1st letter from the IRS stating I owed them over $1500 on the 1st W2. I mailed them a letter with a copy of the corrected W2 stating that this income is non-taxable sick pay. Now to the part I am confused with... they want to know what portion of the total premiums were paid by me (all of it) or my employer. How do I find that out? I no longer work for this company. Do I need to call them and get proof that I paid the premiums? Or call the STD company?

Then the IRS letter goes on to say "If you dont agree with our proposed changes, plase write to us and tell us why. If you agree with our proposed changes, plase sign the 'Consent to Tax Increase' at the end of this letter." Didnt I already do that when I mailed them & told them I didn't agree originally? They are also saying they are now charging interest on the amount they calculated that I owe. I'm so frustrated. I don't think I owe them anything.

 

[clh2]

The IRS specifically asked for what percent of the premium you paid for, vs what percent your employer paid for. (I.e. my employer pays for 80% of the health insurance premium and I pay 20% - I'd use disability as an example, except my employer pays 100%)

I'm guessing that if your employer pays any portion of the premium that the IRS is going to want taxes paid on a pro rata basis.

Is your employer still in business? Can you call the HR department and find out what the per cent that they paid on this premium? It should be pretty easy for the benefits person to get this information for you. (Actually - I think my employer actually gives us a "benefits" statement every year that states how much they pay for these types of benefits.)

 

[mom2alix]

Do you have any old check stubs from this employer? I know my pay stub used to indicate which insurance was paid pre-tax vs. what was post tax.

 

[msmayor]

2008 is only two years ago...did you keep your final pay stub of the year with your copy of your tax return? (always a good idea). That pay stub should indicate what amount was taken out to pay this premium.

 

[crisi]

Were your premiums paid before tax or after tax? Often, short term disability is taxable. If your premiums were paid as part of a cafeteria plan, the payments are taxable. (i.e. if your employer "gives you" $400 to spend on benefits). i.e. it really depends on how your employer set up the disability program.

I am not a CPA, you should contact a CPA or tax advisor. If you don't want to do that, call the HR department. Ask for your final W2 for the year (they should be able to provide a copy if you don't have it) and a benefits letter stating you paid all premiums on short term disability. You are in a correspondence audit, not a huge deal. Send them back a letter explaining your position - cite the part of the tax code where it says if you paid the premium it isn't taxable (a librarian can look this up for you and provide the cite), all documentation, your W2, the letter from your former employer, and send it in. The letter needs to be very clear and professonal. No whining. State what they claim, cite the code then say "per the attached documentation...."

For my company I pay long term disability payments in a fashion where the payments would not be taxable. Short term disability is covered by my employer and is taxable. And they screwed up my maternity leave as well - not taxing it and then I had to do an amended return - and pay interest.

 

[bettymae1121]

I'm no expert, but I believe if premiums are paid pre-tax then the benifits are taxable. My employer covers 90% of my disability insurance, but the little I do pay comes out pre-tax. Even if you did pay for the premiums 100% out of pocket, if it was taken out pre-tax then as far as I know, you'd owe taxes on the money the policy paid out.

Here's a link to a page that backs up what I'm posting. As always, advice on an internet board is worth what you pay for it, so always double check with a true expert in real life!

http://www.bankrate.com/brm/itax/tax_adviser/20080701-disability-income-a1.asp

 

[PatsMom]

General rule of thumb is that if the premium is paid by the beneficiary with money already taxed, benefits are non-taxable if paid. If the employer pays the premium or deducts them pre-tax from the paycheck, then benefits are taxable.

 

[thebigkahuna]

From personal experience....just call them. They are very helpful and are actually pleasant to talk to. They will honestly answer all your questions, and really aren't the gargoyles everyone (not *here* on the Dis, I mean everyone as in the general population of the United States) makes them out to be.

I actually felt relief after talking to them on the phone, because I completely agree about the letters being gibberish!

Good Luck!

 

[PigletsMommy]

Thank you all for your replies.

I spent quite a bit of time this morning on the phone with them. Then end result...

IRS: "Mrs C, I went ahead & put a note on your account for the person who sent you the letter. They apparently did not understand the paperwork that you had already sent them. I've asked them to review it again."

So I was right & they are fixing it. Hopefully this will be the end of it. I'm in the middle of moving right now & searching thru paperwork is the last thing I want to be doing.

For those that asked, this was not a cafeteria plan. I paid 100% of premium out of post-tax dollars.

 

[crisi]

Thank you all for your replies.

I spent quite a bit of time this morning on the phone with them. Then end result...

IRS: "Mrs C, I went ahead & put a note on your account for the person who sent you the letter. They apparently did not understand the paperwork that you had already sent them. I've asked them to review it again."

So I was right & they are fixing it. Hopefully this will be the end of it. I'm in the middle of moving right now & searching thru paperwork is the last thing I want to be doing.

For those that asked, this was not a cafeteria plan. I paid 100% of premium out of post-tax dollars.

Reply to the audit. If necessary, just stick what you sent them last time in an envelope registered mail. Do NOT take the word on the phone of someone who added a note to your file - down that path leads pain and misery with the IRS. (What note in the file?, there is no note, you ignored the audit letter. Ignoring the audit letter is bad.) Get everything in writing. The last thing you have in writing is an audit letter. Answer it in writing. Even if that means stopping to dig through packed boxes. Yes, its a pain, this is the IRS.

I am not a CPA or registered agent. I used to be a tax professional and have an accounting degree. I LIKE the IRS (no, really, I do - most of the time they actually do a good job), but don't fall for the "there is a note in your file" bit - because if this time she didn't put a "note in your file" you could end up in front of a judge.

 

[sookie]

I agree with the previous poster! I always follow up a phone coversation like this with documentation in the mail - and make it certified mail, RRR. Just incase - that way you are covered. The IRS is a huge department, things get jumbled in SMALL departments - just cya!