Assumptions

We have all heard the old saying that "assume" can make an ass out of you and me. But in the case of the IRS assuming can get you a letter. Generally, the letter is everyone's favorite oops notice the CP2000. 

The CP2000 notice is generated when the return the IRS completes from the 1099s and W-2s submitted with your SS number is different from the return you submitted. For example, you forget all about a W-2 and submit your return without it. In a year or so, you will be receiving a CP2000 from the IRS proposing changes to your return based on this other information. Generally, they will be wanting more money. The CP2000 will tell you what was not on the return, how it changed the original return, and how much is now due (with interest and penalties, of course.) There is a response form where you can agree with the changes and make arrangements for paying the amount due or you can challenge the proposed changes. 

I have discussed these notices before and how not to assume the IRS is correct. That is not what this post is about. The issue is the assumptions that generated the notices themselves. Too many of these notices are self-inflicted by a taxpayer who made a bad or self-serving assumption. 

• The 1099 is just for information and I don't have to report it assumption. No. I see this a lot with people who have had a debt, usually credit card, forgiven. A 1099C is generated and it is generally taxable. Anytime you get a form strange to you you need to read it and the instructions (generally on the back.) If you still don't understand, it is time to talk to someone who does.
• The taxes have already been paid assumption. There are two issues here. First, there may have been withholding but that does not mean the amount withheld will cover the tax. Gambling winnings and retirement income, especially premature distributions, have set amounts that are withheld. 20% may taken for Federal withholding on a 1099R but the penalty is 10% and if you are at 15% tax that is 25% and you are short. Even if the withholding covers the tax, remember the missing income is triggering the IRS to look closer at your return. It is better to have it on the return in the first place and take credit for the withholding. The other "taxes have already been paid" issue concerns stock options and gifts that the employer has included in a W-2. Sale of stock triggers a 1099B that needs to show up on the return. When it doesn't, a CP2000 is generated. The IRS has no way of matching the sale with the stock included on the W-2. You have to tell them by properly reporting it on a Schedule D. This also goes for the - I sold some stock/land/property but I lost money so I don't have to report it assumption. 
• If I don't get a W-2/1099, I don't have to report it assumption. If it is taxable income, you have to report it whether you receive the form or not. Failure to do so can result in a letter and cost more in the long run. It's better to wait for the W-2 and call the employer if you are not sure if a W-2 will be issued. A side note. Whenever you are in a new financial situation, it is your responsibility to make sure you understand that how your taxes will be effected and what forms you will be getting. Do the research or talk to your preparer first.

The bottom line is that with taxes, assumptions can come back to hurt you a year or so down the road. It is much easier to do some checking first and handle the issue correctly that deal with a notice later. And it is cheaper. Interest and penalties do add up. And that includes the assumption the IRS notice is correct, check that too.