IRS now says owe money?

Question

My fiancee' got a letter in the Saturday saying that he owes a certain amount of money from 2005 which is now just coming up. He filed for 2006 and 2007 and received his refunds as well as this new stimulus check. But now we're confused as them coming back and saying he owes money from 2005? What could have caused this because he got a refund for 2005 as well. Wouldn't they have kept all his refunds and rebates if he owed money? I dunno we're just confused thanks!

Answer 1

What was this letter?  If it said "We have made an adjustment to your account and you owe...." then he ignored previous letters proposing the change.  It would be odd to be starting an audit this close to the statute of limitations expiring.

Answer 2

It takes a year or two after filing before all of the info is cross checked against the other info reported to the IRS from various places, so this isn't unusual.  They didn't keep his refunds in the meantime because they hadn't recognized the problem.

He should review the letter carefully to be sure it is correct.  If it is, he should pay as soon as possibly to avoid further interest and penalties.  If it isn't correct he should follow the procedures outlined in the letter to explain why it isn't.  

One common situation is where a person sold stocks or mutual funds and "forgot" to report he sale.  The letter they'd get would assess tax on the entire sale price - if they had a basis greater than zero in the item sold, they don't really owe that much, but need to provide the correct info to the IRS.

Answer 3

I'm surprised they didn't ask you to come in for an audit.  Usually they look at your return with you to see that you counted deductions and income correctly.  After which, if they determine that you owe them money they will advise you of the amount (including penalties and interest).

Answer 4

It's a timing issue.  The fact that the 2005 tax return was being audited wasn't noted on his tax account yet, otherwise, they would have held the refunds.

Read the letters carefully.  Does he owe because he forgot to include income or did he have deductions denied?  If deductions, credits or exemptions are being denied, did he ask for the same things on his 2006 and 2007 returns?  Often a denial on one year leads to a denial on later years as well.

Answer 5

IRS does fully review all tax returns and match the w2 with the information provided to them from employers.  IRS does review the actual numbers provided on the tax return but does take time to do it usually 3 years, had IRS finished review the tax return by the time the refunds were to be issued, yes IRS would have kept the money, but since they had not completed their review they had no idea if money would be owed to them.

Now the he owes and he has received all his refunds and rebates then he can full pay IRS instead of requesting an installment agreement.

So he won't have to pay high interest and penalties.