Last month the IRS sent my wife and me, because we are filing jointly, a notice of deficiency. Here it is, “Summary of proposed changes” for tax year 2015, an increase in tax by $79,952 and the “Substantial tax understatement penalty” for almost $16,000 totaling over $95,000, they would like from me in addition to what I already paid for 2015.
Inside My IRS Notice of Deficiency Disagreement for $95,942 from Udemy and PayPal Double Reporting in 2015
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Now, the good thing to note about this is, it says you may be able to resolve your dispute with the IRS, because I accurately paid my taxes.
I paid tax on all the income I received.
I do not agree with the IRS’ assessment in this letter, now this isn’t the final permanent assessment of the IRS, this is something to be paid attention to though. These little letters the IRS sends, especially if they are certified, definitely need to be taken seriously.
I just sent in another response today and I’m hoping to avoid petitioning the tax court because I paid all my tax.
Here’s what happened.
There was a double reporting of the income and my responsibility now is to do my part to help the IRS become aware of this double reporting of income and help them to get their records adjusted.
I have sent a fax to the number listed on the screen today and a month ago I also sent a reply, which I have not gotten any reply to yet. I sent a letter in the mail immediately to the PO Box listed on this form.
I will also plan to call the IRS in a week or two, I haven’t called yet on that, maybe I should have called earlier instead of sending a letter and waiting a month because it says you are needed to contact them immediately, and that has a deadline of October 15, 2018.
Now, even though I accurately paid my tax and there is a double reporting error, if I don’t do anything about this, the IRS will be wanting that money from me even though by anyone looking at all the facts, they shouldn’t have any right to that.
Fortunately, I want to thank Udemy because while Udemy is responsible for this, Udemy also gave me a beautiful letter, which is nice because I’m a banned Udemy instructor.
The Udemy support did an absolutely outstanding job at giving me a letter to explain this to the IRS, here is what happened, you always want to know.
Udemy paid me on the 1099 miscellaneous form when they also sent the payment via PayPal.
PayPal then reported that income on a 1099 K, which means the income Udemy reported on a 1099 miscellaneous was also reported to the IRS by PayPal, and all of the income I made on Udemy in 2015 therefore was reported to the IRS twice in 2015.
Meanwhile, I didn’t simply subtract the extra reporting on my taxes, and that was not the ideal approach to take with it, and had I looked at it and said, “Wait a minute, I didn’t realize the 1099 k was getting reported to the IRS either.”
I guess, Udemy didn’t realize that the 1099 K form from PayPal was new, the IRS put that out so online sellers would be able to better report income coming through them to the IRS.
So, this new form caught Udemy and me, and I would imagine some others, unaware. I simply accurately and honestly reported my income, I took the income Udemy gave me, I put that on as income, and then when PayPal said, “I got a whole bunch more,” I just subtracted the Udemy Income.
I said, “Well, I already reported that once, I’m not going to report the same amount of income again.”
Now, that was the mistake, Udemy made a mistake, then I made another mistake on top of that.
Never subtract income off the top when you report your income to the IRS.
Another strategy I could have taken, the ideal strategy would have been to immediately get with Udemy and say, “Wait a minute, why am I getting this income reported twice?”
The ideal thing would have been to ask for a corrected 1099 miscellaneous from Udemy two years ago instead of waiting for the letter from the IRS, handling it myself when I submitted my taxes, and then the IRS being like, “Hey, it looks like you got over 600,000 in income, why do you only report $400,000? We think there’s a $200,000 difference here, actually close to $300,000 and you now owe $95,000 more in taxes, we’ll take that as soon as you’ve got it for us.”
Thankfully, Udemy gave me this beautiful letter here and Udemy was very nice on it. They said, “Udemy Inc issued an incorrect 1099 miscellaneous to Mr. Banfield.”
That was very generous, they owned up and said, “Look, we screwed this up,” that was the original sin so to speak, if Udemy hadn’t done that 1099 miscellaneous thing, they stopped doing them the next year, but then I got it good for 2015.
Udemy owned up and said, “Look, we issued a corrected 1099 miscellaneous, which records a zero amount, and it has been filed with the IRS,” I obviously blanked out the tracking number for the purpose of this video.
Now, I’m very grateful Udemy sent me this letter, they didn’t have to take the time to make this easier for me.
Unfortunately, we have got this far in where now I have this notice of deficiency here that, if this is not responded to, I may need to hire an attorney to help. I figure, if I can’t successfully explain this to the IRS myself, which it looks pretty straight forward at this point.
If I can’t successfully explain it to whoever is working on this at the IRS, then maybe I need to hire an attorney to petition the tax court to make sure that these very simple facts can be effectively presented in the tax court because, you could say, “Yes, it’s not fair, they’re taxing you twice, that doesn’t matter.”
This is the situation as it stands today, and what I’m grateful for is the recognition that there is a real person on the other end of this letter. There is not some big organization that I’m blindly interacting with.
There is a real person who hopefully just picked my facts up and rolled their eyes or whatever off the machine at the IRS office in Atlanta, Georgia, and they took the cover letter and looked at it, took the papers I sent and stuck them in a folder or file or scanned them somewhere for the records, and put that in a file, and then probably five other people end up working on it, however it works.
There are real people on the other end of this issue, that helps me to see that this is nothing personal either, this is not, “Oh, the IRS is evil,” the IRS got data saying that the income that was given to me was several hundred thousand dollars less than what I said was given to me.
That’s not their fault, they are just automatically saying, “Hey, we got this reported, you only reported this.”
The IRS actually gave me the benefit of the doubt. What they have presented, these numbers are actually nicer than the 306,000.
They basically assumed that the only difference in the income I reported was the additional income on the PayPal 1099K. I actually reported something like, I don’t know, 30 or 50 thousand dollars more than and the difference was less than $306,000 because I reported more income to the IRS than what was reported to the IRS, minus this little double reporting.
The IRS actually gave me the benefit of the doubt that I just reported everything else accurately and just reduced the PayPal one by a few hundred thousand dollars.
I actually got that and thought, “Wow, that’s a really nice starting point,” they gave me the benefit of the doubt that I didn’t get any other income besides what was reported to the IRS. With the way my business works, I get income consistently that’s not reported to the IRS. I always report the income I get to the IRS because it’s just stupid not to and I want to be able to sleep at night.
I don’t want to be afraid of the IRS coming to get me for $95,000.
This is bad enough, when I did everything honestly, this was bothering me earlier, I actually cried a little bit about it, I said, “I just want this to be over with, I honestly paid taxes on all the money that I earned in 2015, and it’s ridiculous I’m getting a $96,000 bill for more, that’s more tax than I even paid in 2015.”
It’s nice that I have this to share with you though, because I realized I’m not the only one that got a notice of deficiency for 2015 this year. In fact, there are probably hundreds, if not thousands of people who got notice of deficiencies from the IRS in 2015.
It’s nice that I don’t see the IRS, the people that work there as monsters, I see that I’m interacting with mostly other good people who are trying to go to work, provide income for their family, have a comfortable life. These are other people just like me that are working at the IRS.
I’ve been a police officer, I know that it’s ordinary people doing these jobs, it’s not some demon or monster that just hates you.
It’s nothing personal, this happened because of automation, this is an automatic check where the IRS checks their records, and then compares them to what I received.
Now, the one thing I found off, if the IRS gave me a survey on the quality of their service, I would note that Udemy says they submitted a corrected 1099-Miscellaneous on May 2, 2018.
This letter from the IRS came in July 18, 2018, that means two months after a corrected 1099-Miscellaneous was submitted. Then, the IRS I guess did not check the records again before sending the notice of deficiency.
I would think if someone sent a reply and they said in it a corrected 1099-Miscellaneous was sent, you would double check that before sending another one.
However, I don’t know exactly how the process works, I did my own replies to this and I think maybe for tax court time, if we need to go there, it says, “You may be able to resolve this directly without going to US Tax Court.”
I would certainly prefer to do it that way because I’ve already spent enough hours thinking about this. I haven’t worried that much about it, in fact, I may be even have had a little bit of attitude about it, I’ve been checking the mailbox and thinking, “I wonder if the letter from the IRS is here telling me I’m right and they’re sorry.”
They send you something before a notice of deficiency and it’s not certified mail.
I tell you the day I got two certified letters from the IRS with this notice of deficiency, there was some puckering in the lower regions of my bowels.
You know it’s serious when they send you certified mail, because then they can prove you actually received it.
I sent a response to the nicer version of this they sent before. There is a step before the notice of deficiency where they are basically asking, “Hey, we think you might have paid less tax and we’re considering increasing it this amount, what do you think of that?”
I said, “No.”
I said the same stuff I’ve said to you here.
The difference is, I did not have this letter from Udemy and I don’t think Udemy had actually filed the corrected 1099 when that first IRS letter came.
I’ve made this with the purpose of making the process easier for you because this actually hasn’t been that bad for me. This has been pretty easy to deal with.
I have told you all the things I’ve already thought about and it’s easy because I honestly reported my income, Udemy is owning the accounting error.
This is about as easy as one of these gets, I think, or pretty easy. I am doing this because I hope it’s a little bit easier for you, if you just got your notice of deficiency, to look at it and wonder what to do next, how to think about it and how all of this works.
I don’t know how all of this works, I do know you want to respond and stay on top of this, the worst thing to do in this situation is just to throw it out and hope it will go away.
Even if you have responded and stay on top of it, this is a good opportunity for fear, anxiety, worry and frustration to come in.
I’ve done really well with not getting into that, I have even done a little mantra like “I love the IRS, I love the people working at the IRS,” because I see the bigger picture of it.
The IRS is actually only composed of people going to work, plus ideas and beliefs we have.
It seems like this big threatening Internal Revenue Service organization that can send people to prison and when you think more about how it works on a day-to-day basis, it actually seems small and fragile, there is relatively a small number of people that work to the IRS, compared to the whole number of people in the United States.
This basically is a system founded on trust and automatic reporting. This system relies almost totally on user self-reports, plus employer reports, which are also then self-reported.
If the people were not completely, nearly completely obedient to the system, it wouldn’t work at all.
This only works because almost everyone does go along with it, almost everyone is honest and reports the income. It makes it easy then for the smaller amounts of dishonesty, for the small number of people that work at the IRS, to go look for those.
For example, my mother had an ex-husband who committed tax fraud on their taxes around when they got divorced and the small number of people that worked at the IRS then went after that.
It’s amazing these big systems often we just demonize blindly, it’s like “Wow, I’m amazed this even works.”
Then, it’s not so amazing when something like this happens, it’s not, “This horrible thing happened.”
This is something that I can share some useful experience about today. This is a personalized learning opportunity to me from the universe and maybe this is a sign that getting an accountant would be a good idea for doing my taxes the next year because I’ve done my taxes every year except once, I went to H&R Block.
The advantage of doing taxes myself is, I stay on top of my business tax all the year, I know all times throughout the year what my tax liability is roughly.
I make all my payments and this helps me plan my business out, to say, “Okay, I know what my tax liability is, I know if I spend money like this, I can expense all that, but if I spend money like that, then I will need to do a more complicated accounting with it.”
This can help me make some decisions in my business as well and set my business up in a way that is conscious of the tax implications of it.
For example, with capital gains, buying and selling, you buy, and then you want to hold for at least a year. Ideally, if it’s going up, you can sell at a lower tax rate. At the same time, then I imagine an accountant might have caught this little error that now is a $96,000 tax bill until we all get on the same page.
Really, just the IRS, the people working on this individual file, all we need to do is just get on the same wavelength like, “You poor reported the right income, we’ve got the data to show that now, all right, we’re done with this.”
It’s really just a mental syncing up of records.
It’s nice to do this without hate, hostility, frustration, a bunch of anxiety, fear and worry.
I actually was kind of excited like, “I bet I can make a video about this,” and then I started getting into the, “I wish this to be over and done with, what useful can come out of this?”
I said, “Oh, it’s time to make a video about it today.”
Here we go, I made a video about this today, and I hope this is helpful for you.
Thank you very much to Udemy, I don’t know if anyone from Udemy is reading this, but thank you.
I’m really grateful they gave me this letter, I just sent this in today, the IRS did not have this letter before today. It’s got the tracking, you would hope they would go check to verify that the corrected 1099-Miscellaneous was sent, and then this will all just disappear very smoothly.
Now, this goes along great with all the other videos I’ve posted on various things. It’s just another day in business with Jerry Banfield.
Thank you very much for reading or for watching the video at the top of this post.
I love you, you are awesome.
If you found anything you have enjoyed or is helpful, will you please leave a like on this video because you will feel great knowing you are helping other people watch this?
Edits from video transcript by Michel Gerard at www.michelgerardonline.com.