IRS Form 1040 Line 21 and Subsequent CP2000 Notices
IRS CP2000 notices are annoying for a wide variety of reasons but mostly because the IRS assumes that most all items reported on line 21 of IRS From 1040 are subject to self-employment (SE) tax.Much of what goes on line 21 (trustee fees for executors, prizes and awards, gambling winnings, cancellation of debt income, foreign pensions) is NOT subject to SE tax. What is driving this CP 2000 project inside the IRS causing all these no-change audit determinations?First I learned the notices are reviewed inside the IRS prior to issuance, but it appears that the old e-file system did not provide the “dotted line” between the explanation provided on the return and the amount reported on line 21. Second and more importantly even though most of what goes on line 21 is not subject to Self Employment tax, the IRS finds that many taxpayers (and preparers) routinely include items subject to SE tax on line 21. Or in the opinion of the IRS many preparers and taxpayers prepare the form incorrectly without fully recognizing the implications of their entries on line 21. The result is that in many cases IRS’ proposed assessments are correct. The bottom line is to really understand the items being reported on line 21 of IRS Form 1040 and do not report any items here that may be subject to SE tax.