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On May 24, 2001, respondent sent a letter to petitioners
requesting an explanation of the IRA deduction. In an undated
response Mr. Guerrero conceded that the IRA deduction was
erroneous, and he asked the IRS to recalculate petitioners’ 2000
income tax liability. The IRS did so and sent petitioners a
notice dated July 23, 2001, advising them of their corrected
income tax liability based on petitioners’ concession. According
to the notice petitioners had overpaid their corrected income tax
liability for 2000 by $737.46, which the IRS refunded to them.
Less than a year later, on April 22, 2002, respondent issued
to petitioners a CP-2000 Notice proposing further changes to
their 2000 return. As reflected on the notice, respondent
increased petitioners’ taxable pension and annuity income by
$85,706, the amount petitioners had asserted was not taxable on
their original 2000 return. The CP-2000 also made a
computational adjustment decreasing petitioners’ personal
exemptions, determined that petitioners owed additional income
tax of $39,988, proposed a 10-percent early withdrawal penalty
pursuant to section 72(t) of $8,571 and an accuracy-related
penalty pursuant to section 6662(a) of $7,998, and determined
that petitioners were liable for interest accrued through May 22,
2002, pursuant to section 6601, of $3,735.
On July 15, 2002, respondent issued to petitioners a notice
of deficiency for 2000. Petitioners did not petition the Tax
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