handle-notices-and-planning

name

handle-notices-and-planning

description

Respond to an IRS/state notice and run the planning calc by traversing the practice decision tree (identify the notice type & deadline → reconcile the agency figures vs the return → agree/partial/disagree response + substantiation → representation posture: handle vs refer; and for planning: entity-choice SE-tax vs S-corp reasonable-comp → QBI/§199A → retirement & timing levers as scenarios), then return the notice-response plan or the planning scenarios with assumptions and the verify-against-current-law caveat. Reach for this when the user asks 'we got a CP2000 / CP notice — how do we respond?', 'should this client be an S-corp?', 'how do we optimize QBI / retirement / timing?', or 'what's our representation posture?'. Used by tax-preparation-specialist (primary) and tax-practice-lead.

Skill: handle-notices-and-planning

Invoked by: tax-preparation-specialist (primary — the notice response and the planning calc) and tax-practice-lead (the representation posture and the planning offering).

When to invoke: "the client got a CP2000 / CP notice — how do we respond?"; "identify this IRS/state notice and the deadline"; "should this client be an S-corp?"; "how do we optimize QBI / §199A?"; "retirement-plan or timing levers?"; "what's our representation stance — handle or refer?"; any "answer this notice or plan the tax" question.

Output: the notice-response plan (type & deadline, reconciliation, agree/partial/disagree + substantiation, handle-vs-refer) or the planning scenarios (entity choice, QBI, retirement, timing) with stated assumptions and the verify-against-current-law caveat.

Procedure — notices

1. Identify the notice type and the response deadline first. A CP2000 is a proposed change from document-matching — not a bill and not an audit — with a hard response deadline; a CP14 is a balance-due notice; a CP2000/CP3219 can escalate to a statutory notice of deficiency (the "90-day letter"). Traverse the notice branch in ../../knowledge/tax-preparation-practice-decision-tree.md. The deadline governs everything — calendar it before anything else.
2. Reconcile the agency's figures against the return. Match the IRS/state numbers line by line to what was filed — the notice is often right (a missed 1099), sometimes wrong (a basis the IRS didn't have, a wash sale, a already-reported-differently item). You can't respond until you know which.
3. Draft the agree / partially-agree / disagree response with substantiation. Agree → the corrected balance + payment or installment path. Disagree → the explanation + the substantiation (the basis records, the corrected 1099, the code section) that supports the return as filed. Partially agree → both. Respond calmly and on time — a notice answered fast beats one ignored, which becomes a lien or a deficiency.
4. Set the representation posture — know where preparer help ends. A notice-response and a CP2000 reply are ordinary preparer work (with authorization — 2848 POA / 8821). But exam / audit, appeals, collections, and Tax Court cross into representation that a firm handles only to the extent of its credentials (an EA/CPA has practice rights before the IRS; Tax Court requires admission) — refer beyond that to a tax attorney / legal-small-firm.

Procedure — planning

5. Entity choice — model the SE-tax vs S-corp trade-off. For a profitable sole-prop/partnership, compare staying as-is (all net income hit by self-employment tax) vs an S-corp (reasonable wages subject to payroll tax + distributions that aren't) — net of the added cost (payroll, a separate 1120-S, state fees, and the reasonable-comp exposure if wages are set too low). The S-corp wins above a net-income threshold where the SE-tax saving beats the added cost — model it, don't assume it.
6. Layer in QBI / §199A. The 20% qualified-business-income deduction interacts with entity choice: the SSTB limitation (specified service trades phase out at higher income), the W-2-wage / UBIA limits, and the fact that S-corp wages reduce QBI — so the reasonable-comp level trades off SE-tax saving against QBI. Model the interaction, not each in isolation.
7. Retirement and timing levers, then caveat everything. Retirement-plan choice (SEP-IRA vs solo-401(k) vs defined-benefit for high earners) shifts income and builds basis; timing levers (income deferral/acceleration across a bracket, bunching deductions, harvesting losses, estimated-payment timing) smooth the bracket. Present all planning as scenarios with stated assumptions and mark each against current-law verification — thresholds and phase-outs change yearly. Route investment-dependent planning to wealth-management-ria.

Worked example

User: "Client got a CP2000 saying they owe $4,200 on unreported brokerage sales — and separately, they're netting $140K in a Schedule C consulting business. Handle the notice and the planning."

• Notice — type & deadline: CP2000 (document-matching, proposed) — calendar the response deadline first.
• Reconcile: the IRS saw gross proceeds ($60K) with no basis (the broker didn't report basis on older lots) — the actual gain is ~$8K, not $60K. The notice overstates the tax.
• Respond: disagree (partial) — supply the basis substantiation (purchase confirms) and the corrected Schedule D; the real additional tax is ~$1,200, not $4,200. Respond on time with the workpapers.
• Posture: this is preparer work with an 8821/2848 — no attorney needed unless it escalates to a deficiency notice or exam.
• Planning — entity: $140K Schedule C → all subject to SE tax (~$19–20K). Model an S-corp: e.g. $70K reasonable wages + $70K distribution saves SE/payroll tax on the distribution, net of ~$2–3K added payroll/compliance cost → a real saving above the added cost.
• QBI interaction: the S-corp wages reduce the §199A base, so push the reasonable-comp level too low and you gain SE-tax saving but lose QBI — model the combined optimum, and check the consulting-SSTB phase-out against the client's total income.
• Retirement/timing: a solo-401(k) (or SEP) defers income and can drop the bracket; caveat all figures against current-year thresholds and refer the investment allocation to wealth-management-ria.

Guardrails

• Identify the notice type and calendar the deadline before anything else — a CP2000 is a proposed change, not a bill and not an audit; the deadline governs.
• Reconcile before responding — the notice is sometimes right, sometimes wrong; substantiate a disagree with records/code section.
• A notice answered fast and calmly beats one ignored — ignored becomes a lien or a deficiency.
• Know where preparer representation ends — CP-notice replies are preparer work (2848/8821); exam/appeals/collections/Tax Court refer to a tax attorney / legal-small-firm (Tax Court requires admission).
• Entity choice and QBI are one model, not two — S-corp reasonable-comp trades SE-tax saving against the §199A base; model the combined optimum, and reasonable comp too low is an exam exposure.
• Planning is scenarios with stated assumptions — never a promise; mark every threshold/phase-out against current-law verification.
• Investment-dependent planning → wealth-management-ria; the books → accounting-bookkeeping. This is not tax, legal, or accounting advice and does not replace a credentialed preparer — forms, thresholds, and deadlines are volatile; carry a retrieval date. See ../../knowledge/tax-preparation-practice-patterns-2026.md.