IRS notice rejecting amended return- penalties not caclulated

[Drphibes]

IRS sent a notice to a client about 2019 missed stock sales, bottom line from IRS was incorrect so we e-filed an amended return and paid tax in Oct 2021.  Taxpayer just received a notice saying "We are unable to accept your amended return as filed.  Your amended return did not include the penalties as shown on out previous notice" with the notice continuing to tax/penalty assess them on the stock sales with no basis. In 30 years of tax preparation with 700+ individual returns per year, I have never seen an amendment rejected for such a reason.  Anyone seen this before?

[BobKamman]

Did IRS send a CP-2000 that proposed tax and the 20% penalty for "substantial understatement" because the balance due was more than $5,000?  Did the amended return still show a balance due of more than $5,000?  The usual way to answer a CP-2000 is with a letter, not a 1040-X.  You can include a revised Schedule D as an attachment to the letter.  The letter should address the penalty issue.  Sounds to me like IRS is saying, "Nice try but you still owe the 20%."  

[Drphibes]

Yes on the understatement of income penalty.  Original notice had them paying about $17,000 in tax, 1040-x was about $5,600.  BUT, (just looked up)  the instructions for 1040-X specifically state that if filed after the normal due date, do not calculate penalties and interest, the IRS will adjust accordingly (see also Topic 308 Amended returns, Balance Due).  I have 2 other crazy notices like this where e-filed amended returns are being ignored despite the taxpayer having every right to file one.  You can't reject an amended return based on not calculating penalties since the instructions say not to do that.  Someone just does not want to do the adjustment.  Having a crazy off-season of IRS missed tax payments, estimated payments not being credited, and other time killing notices.  To be frank, have not had any kind of a real "off-season" in 3 years. 

[BobKamman]

You don't answer a CP-2000 with a 1040-X, so the 1040-X instructions are irrelevant.  Follow the CP-2000 instructions, which tell you not to file an amended return.    You check the box for total or partial disagreement, and explain your reasons.  If you want to contest the Section 6751 penalty, you can do that, but it's difficult when you fail the $5,000 test.  

The next step should be for IRS to send you a revised CP-2000, including a revised penalty.  But it's getting close to the end of the fiscal year (September 30), so don't be surprised if they just rush it straight to Notice of Deficiency.  

[Drphibes]

I call BS on this.  The taxpayer has every right to file an amended return within the prescribed time limits of the law.  The IRS does not like it as their antiquated systems can't match up the 1040X filing with the part of the IRS that sent the notice.  That is not the taxpayers fault or responsibility.  I have been filing 1040X's for nearly 30 years from CP2000 notices and such and it is only in the last year or so that there have been problems due to the computer system disconnect and lack of IRS manpower for someone to actually read the amended return and look at the attachments.  Every amendment specifically states that the 1040X was initiated by a CP2000 or other notice (with a copy .pdf attached if e-filed or a copy stapled if paper filed) and the response back on the notice is that the taxpayer filed a 1040X to resolve the matter.   It is up to the IRS to sort it out after that.

[BobKamman · Accepted solution]

It is up to the preparer to help the client deal with IRS in the most efficient manner, which usually means following IRS instructions.  You can file an amended return, which even if e-filed goes to one city and sits in one place for ten months before being worked.  Or you can answer the CP-2000 notice, which is being worked in another city by an IRS employee with deadlines who is not trained to process 1040-X forms.  Or you can mix and match, sending a 1040-X to the wrong address and figuring IRS deserves a square peg pounded into a round hole because your client forgot about a brokerage account.