A recent National Association of Enrolled Agents (NAEA) survey found that over half of the participants stated that their clients who received CP-2000 notices, got them because they had not reported income from a 1099 that they were issued. Is this just a factor of the ‘Gig Economy?’
According to Investopia, in a gig economy temporary, flexible jobs are commonplace and companies tend toward hiring independent contractors and freelancers instead of full-time employees. A gig economy undermines the traditional economy of full-time workers who rarely change positions and instead focus on a lifetime career.
This would be mostly alternative ways to make money like Uber or AirBNB. Although the taxpayers receive the money from these services, they tend to forget all about the money when tax time rolls around.
I know that I have had about five or six clients that either rented out their home via AirBNB or drove for Uber and did not claim their income on their tax returns. One reason as to why this happens is that both Uber and AirBNB do not send you a 1099 in the mail like you might receive with your job.
They will send you a message either through their app or via text message letting you know that your tax information is ready. According to the survey, a similar percentage of people received a CP-2000 Notice because they did not know how to handle Form 1099-B or Schedule K-1.
In regard to Form 1099-B, most brokerage companies send these forms electronically. Just like the person that receives a 1099 from Uber or AirBNB, the taxpayers know they have investments. But since they typically have financial advisors that manage their portfolio, they aren’t forced to think about their investments every day.
The third biggest reason why taxpayers get CP-2000 Notices is that they file before they receive all of their information documents. For example, we have all seen the commercials from the big tax chains right around the time that we can start e-Filing where they are telling you that you can file your return without your W-2 Form.
You just have to bring your last pay stub. Problem is, a W-2 probably isn’t your only source of income. W-2 Forms are due to the employee by January 31st, while 1099 Forms are due February 15th.
When NAEA Members were asked what the biggest mistake was when their clients received these notices, more than 65% responded “all of the above” when presented with the following options:
Waiting too long to respond
Not responding at all
Simply agreeing to the updated total without consulting a tax professional
All of the above
From my experience, waiting too long to respond is probably the biggest issue I see, right next to just not responding. But what is worse is that if you see these notices as much as a professional sees them, you learn to amend the tax return as the response to the notice.
Almost eight times out of 10, the IRS makes a mistake on the amount that a taxpayer owes on these notices.
The survey was conducted by the NAEA, whose members include Enrolled Agents who are the only tax professionals federally licensed to represent taxpayers before all administrative levels of the Internal Revenue Service. The survey was conducted between June 21 and July 7 of 2017 and yielded 2,285 responses, all from Enrolled Agents, two thirds of which had 20 years or more of experience.
I am a member of the NAEA, but somehow I missed this survey in my email. The responses from the other Enrolled Agents were spot on and I certainly would have answered in the same way.
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...