IMRS Issue 12-0001719 – CP2000 notices for self-employment tax
Issue: Several tax practitioners complained that they are receiving erroneous CP2000 notices for self-employment tax imposed on whatever amount is shown on line 21 of Form 1040.
Response: During full examinations, the Small Business and Self-Employed business unit found that income subject to self-employment tax was reported incorrectly on Line 21 (other income) of Form 1040 and no self-employment tax was paid. SB/SE recommended that the Automated Underreporter program pursue self-employment tax issues.
AUR tested self-employment tax cases for tax years 2006 through 2008, and verified that there was significant noncompliance. In an attempt to close the tax gap, AUR issues a notice proposing self-employment tax when it can’t determine whether income on Line 21 is subject to self-employment tax. When taxpayers receive a notice proposing self-employment tax and the proposal is incorrect, they should respond by explaining why self-employment tax is not applicable. We regret any burden on compliant taxpayers. We continuously analyze case results and are working to develop better business rules for all cases, including these self-employment tax cases. We also use all input to update both our operating procedures and training materials.
AUR tax examiners are required to review entries on the dotted line part of Line 21 on both electronic and paper tax returns; system availability became available for electronic returns beginning with tax year 2011. However, tax examiners are still unable to view written attachments at this time due to system compatibility issues. AUR is aware.