Why can an IRS notice show a massive balance due when the taxpayer knows the return was not really that wrong?

Question

AcadiFi · Accepted Answer

A large IRS notice does not always mean the tax is truly that high. Sometimes the IRS sees gross proceeds or third-party information without the taxpayer's missing offsetting facts, such as basis, selling costs, or other supporting detail. In that situation, the proposed balance can be dramatically overstated until the missing data is supplied.

Example: Crestview Holdings receives a notice proposing $85,000 of tax and $16,000 of penalties for a year that included securities sales. If the IRS matched Forms 1099-B showing sales proceeds but did not have correct basis information, it may compute tax as though the entire proceeds were gain. If the actual basis on those sales was $310,000 and selling costs were also relevant, the correct liability could be far lower once the documentation is presented.

The EA response is procedural and calm: read the notice, identify what data the IRS used, gather the missing support, and respond within the required timeframe. Basis cases especially punish delay because statements, confirmations, and records become harder to recover over time. The worst move is assuming the proposed amount is automatically final or ignoring the deadline. These notices are often fixable when the underlying reporting gap is understood early. Practice more in our EA question bank.

Why can an IRS notice show a massive balance due when the taxpayer knows the return was not really that wrong?

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