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On Friday Sept 16, someone in the building gave us mailing from the IRS. They were holding it for us and claim that they have been holding it for about 2-3 weeks. The paperwork informs us that the IRS is claiming that the income that I reported in 2019 is now considered unearned unless I prove otherwise by August 29, 2022.

When I got the paperwork I repeatedly called/faxed the person who is handling this case over 3-4 business days and left multiple vm's furnishing my S.S. # and 2 phone #'s and an email how to contact me and that I have pay stubs from an employer that shows that it is earned income but I have not heard back from them despite that the vm says that they'll return my call within 1 business day.

The paperwork states that if I do not reply by that date, "we'll send you a statutory notice of deficiency that gives you 90 days to petition the United States Tax Court."

I live and work outside of the U.S., I have always filed my 1040. I am not sure what made them think that in 2019 anything changed. They had no issue with the 2018 1040 with the same employer, same salary. I wish to get this resolved as I do not want this happening again for 2020 and onward. It's the same employer, same pay stubs.

Can anyone advise me what to do to resolve this?

Here are two pages,  page 1 page 2of the documentation packet, maybe someone would have more ideas how to resolve this now.

This is the explanation from the IRS:enter image description here

(The other pages are a form 12203 to request for appeals review and form 872 consent to extend the time to assess tax and form 4549 report of income tax examination changes where they changed my income to unearned and do my whole 1040 calculations over based on that change. They sent everything 2x, one to me and one to my wife as we report jointly.

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  • Unearned income doesn't normally cause a deficiency; is this income you excluded using FEIE (form 2555[EZ]) they claim should not have been excluded? If 'building' is outside the US -- i.e. they mailed to a non-US address, as opposed to you retrieving it from someplace with a US address -- the normal 90-day period to file in Tax Court is extended to 150 days, see 26 USC 6213. IRS knows the law and if the address they used was non-US the notice should reflect this. Sep 23, 2022 at 6:49
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    Obligatory point: Are you sure the "mailing from the IRS" is not a scam? Are you able to confirm the contact info in the letter starting from known valid contact info for the IRS? I'm seeing a yellow flag that (1) the notice doesn't seem to make sense for your situation and (2) in response to the letter's instructions you have "left multiple [voicemails] furnishing my S.S. #" (something a scammer might want). Perhaps others familiar with this type of notice can help you identify whether the content and instructions are normal or suspicious.
    – nanoman
    Sep 23, 2022 at 10:39
  • They mailed two full packets, 1 for myself and my wife. The documentation has all my numbers I reported that year but the earned income was adjusted to unearned. They are not asking me for anything. Only if I wish to agree I can pay but I can choose to disagree. It has my last for Tax payer id. Everything looks legit to me. How could I tell if it would be a scam? Any suggestions?
    – Mr Monee
    Sep 23, 2022 at 12:52
  • @dave_thompson_085 I didn't leave it out. It looks to me that since I am abroad, they are challenging me to prove that it's earned income. They also are asking me for consular report of birth abroad for all my children and my and my wife's citizenship. I have no idea what brought this up. I have been filing abroad for 20 years. There is not a mention of any wrong doing. My issue is they the person does not answer the phone nor call me back and that I 17 days past the deadline but there was a reason for this.
    – Mr Monee
    Sep 23, 2022 at 12:57
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    @dave_thompson_085 It seems you may not be familiar with FEIE. If the income is 'unearned', it would not qualify for FEIE, and therefore would be taxed [possibly to be reduced by 'foreign tax credits' for taxes paid in country of residence]. Sep 23, 2022 at 15:43

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You're being audited for the tax year 2019. In the audit the examining officer found some mistakes on your return and proposed changes (changing earned income to unearned income). They're asking for specific information, including all the documents they've listed. Form 106 specifically would prove that the income is earned. I'm guessing you're also claiming EITC? They're requiring information that would be needed to substantiate that claim.

When you're audited it's best to have a representative deal with that. In audit, you can be represented by an attorney, EA or a CPA (US). There are quite a few US-licensed tax professionals you can find locally in Israel, or hire someone in the US.

I strongly advise you against doing it yourself. As with any legal action initiated against you by the government, being represented by a licensed and experienced professional will help you tremendously. Yes, that would cost you. Alternatively you can try doing it on your own, but seems like it didn't work all that well for you so far. You may want to consider to just accept the changes and pay the tax, if your cost-effect analysis shows that fighting it is more expensive.

In terms of timeline, since you live abroad deadlines may be extended, some are extended statutorily. That said, if you miss the deadline - you miss the opportunity to resolve the case. If you miss the deadline to provide the information - you miss the opportunity to appeal to the IRS itself, you'll wait for the statutory deficiency letter to appeal to the Tax Court. If you miss that one - you'll have to pay the tax and appeal to the Federal District court for refund. If you miss that - you missed out.

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    @MrMonee If I understand correctly you've been handling your taxes on your own without any professional help. As the result you're now stuck in a situation where the IRS has made an adverse decision against you and you don't know what to do about it. Your behavior so far suggest absolute ignorance as to the rules and to the laws, and that's not a negative statement - it's true for almost anyone in the US, not to mention expats. You can try and handle it yourself. You're likely to only make matters worse, as you've done so far, by doing so. I was being sarcastic. ...
    – littleadv
    Sep 28, 2022 at 2:38
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    @MrMonee ... I don't know how many people you know who went through a legal process initiated against them by the government, but ask around and see how many you can find, and of those - how many were able to go through it without representation at all, let alone were able to go through it without representation and win.
    – littleadv
    Sep 28, 2022 at 2:41
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    @MrMonee someone asked that before, but I'll ask again - why have you received it so late? Was it sent to the address you listed on your tax return? If so - are you actually living there? You see, professionals don't only know how to use the formulas your software uses. They also know the rules, the regulations, the exceptions, and the shortcuts. The IRS has a separate phone line for professionals. Professionals can file motions and appeals, they know how and where and when. You don't.
    – littleadv
    Sep 28, 2022 at 2:45
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    @MrMonee you're missing the point. You were given time to make your case to the IRS agent and you didn't. The IRS agent concluded what they concluded and moved on. They no longer hold the case. Even if you reach them over the phone - that's what they'll tell you. The next step is the statutory deficiency letter and the Tax Court where you petition against it. That's the process.
    – littleadv
    Sep 28, 2022 at 8:02
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    @MrMonee all that said, if you find a professional who's whole practice is dealing with IRS audits - they may know some other ways to handle this which may save you time and money. Which is why I suggest you find one.
    – littleadv
    Sep 28, 2022 at 8:05

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