The IRS has a system error that occurs on individual tax returns that pay self-employment taxes. The system is issuing IRS notices to individual taxpayers in several situations, including:
• Taxpayers who have more than one Schedule C
• Taxpayers who have a Schedule C and S corporation K-1
• Taxpayers who have an S corporation K-1 and health insurance deduction adjustment where the premiums were paid by the corporation are included in Box 1 of the W-2 and have a Schedule C with no health insurance adjustment
The system figures the taxpayer omitted the deduction on Schedule SE when in fact they are not entitled to one. The notice generated claims there has been a miscalculation on the return and has resulted in a refund. In the “Changes to your 2010 tax return” section on the notice, it will state “We changed the amount of self-employment tax on Line 56 of your Form 1040 because there was an error on Schedule SE, Self-Employment Tax.”
If you receive this notice and check, do not cash the check. Contact the IRS about this mistake and write void on the front and back of the check and then mail it back to the IRS. Or contact your helpful CPA.
The IRS is aware of this system error and have taken steps to correct the error.