Patiently

May 20th, 2020

Two clients asked me about their tax refunds this week. Both had filed several weeks ago, and each had received their state refunds. Neither had received their federal refunds. With the IRS phone lines for practitioners now working (albeit with a reduced staff), I called the IRS for both clients.

The first client’s return was filed at the end of March. The helpful IRS phone agent told me there was a ‘processing error’ with her return, and the problem is normally resolved within one to four days by the “Error Resolution Department.” Unfortunately, that departments isn’t working right now, so her return (and likely hundreds or thousands of others) is waiting for the IRS Service Centers that process returns to reopen.

The second client filed just one week later; their return simply hasn’t been processed. Yes, it was electronically filed, but for some unknown reason it’s sitting in a queue (virtually, I suppose) waiting for some IRS employee to hit “Run.” Again, with no IRS employees working in the Service Centers right now that return could be processed today or a month from today or months from today.

My suspicion is that IRS Service Centers will reopen in June, and that the unprocessed returns and returns waiting for error resolution will be resolved then. On the other hand, if you have to mail a tax return that return will be processed sometime. I have a couple of 2016 returns that had to be mailed, and I told my clients I expect they’ll be processed by year-end.

I’m not optimistic about correspondence sent to the IRS. I have two correspondence audits and several other open issues with the IRS. In good times the IRS can takes many weeks to answer the mail; I’ll be thrilled if I receive responses by October.

Everyone needs to have some patience. This isn’t the choice of the IRS, and they want to resolve all the issues, too.

When the IRS “Helpfully” Changes Your EIN…

May 7th, 2020

Your personal tax records are noted under your Social Security Number. That won’t work for businesses, so years and years ago the IRS came up with Employer Identification Numbers (EIN) to track business accounts. If you form a new business entity, you can obtain an EIN online. The system works well most of the time.

One of our clients, call him James Smith, formed an LLC back in 2007 in Arkansas: James Smith LLC. The LLC made a timely election to be treated as an S-Corporation, and all was well.

In 2010 Mr. Smith got married and moved south to Texas. He closed the first LLC and formed a new LLC, James Smith LLC. Yes, he used the same name. This LLC had two owners (Mr. & Mrs. Smith), and all was well. It was assigned a different EIN—as it should, given it was a different legal entity. This LLC, too, made an election to be treated as an S-Corporation.

Unfortunately, the marriage didn’t last, and Mr. & Mrs. Smith divorced in 2011. They agreed to close the LLC, and they did so, filing final tax returns in 2011. Mr. Smith, though, decided to continue his business and moved back to Arkansas. He formed a new LLC, and, yes, you’re already a step ahead of me, it was called James Smith LLC. He received a new EIN. This LLC also made an election to be taxed as an S-Corporation.

All was well until mid-2017. James Smith LLC was doing well, tax returns were all filed, and all taxes paid. In July 2017 the IRS made an inquiry regarding a payroll tax filing. My client uses one of the large payroll services for payroll, but somehow on a filing the information on one item got garbled in transmission. We replied, the IRS responded a few weeks later saying, “Thank you. We’ve closed our investigation into this matter.”

What we didn’t know is that the IRS employee who received the paperwork decided to help my client. He saw that there were previous EINs issued to James Smith LLC and changed the EIN within the IRS computer system back to the EIN of the Texas entity. Adding to the helpfulness, we were not notified of the change.

We discovered there was a problem when I attempted to efile the 2017 tax return (in 2018). The return would not be accepted. I called the IRS’s efile help desk and was told only what was on the IRS rejection notice was, “There’s a name/EIN mismatch.” Of course, neither I nor my client could figure that out, so we paper-filed the returns (federal and Arkansas).

A few months later we received a letter from the IRS saying we filed the tax return with the wrong EIN, and the EIN we should use is the Texas EIN. We wrote back protesting this, noting that EIN referred to a closed entity in a different state, and the new EIN is what should be used. The IRS’s response? “Use the old EIN.”

This has caused multiple issues with the IRS. We have multiple prior (to 2018) payroll tax mismatches. We were just notified this week by an IRS Revenue Officer that my clients Form 941 for the fourth quarter 2018 wasn’t filed. It was filed–timely—by one of the large payroll firms…but not under the Texas EIN. I explained everything to the Revenue Officer, but we still had to prepare a new Form 941.

There are multiple lessons here. First, if you close an entity and start a new one, change the name slightly. If my client had used James Smith & Associates, LLC for the Texas entity and James L Smith LLC for the new Arkansas entity, it’s probable none of this would have happened.

Second, the IRS absolutely should ask taxpayers before changing an EIN. Had that IRS employee asked us we would have explained why the old EIN couldn’t be used.

Finally, when a mess like this happens it will tend to linger for years. We still have four unresolved issues with the IRS all stemming from this helpfulness. While I do expect them to all be successfully resolved, this has added costs and stress for my client for no good reasons. And if you are reading some sarcasm in what I’m saying in this post, you’re right.

Ten Days (More Kudos to the IRS)

May 6th, 2020

We owe tax almost every year. Yes, I make estimated payments, but my business has been growing, investments are making money, so my tax bill goes up every year. That means when I initially looked to see when our stimulus payment (aka “Recovery Rebate” payment) would come on the IRS’s “Get My Payment” website, nothing showed for us.

Additionally, we always file an extension as we wait for a K-1 that shows up in late July or early August every year. The IRS’s website was designed for 2019 filers; the IRS later added 2018 information. That was another reason it didn’t work for us.

On the weekend of April 25th, the IRS added 2018 capability and the ability for those who file $0 returns to use the Get My Payment website. (Zero dollar returns are common for individuals who file extensions, paying the tax they owe, and then later file the actual tax return.) On April 25th, I entered the required information.

On Monday, May 4th, the website noted that the stimulus payment would be direct deposited on Wednesday (May 6th). The IRS was wrong: the money was in the account on Tuesday (May 5th). That’s ten days, and the IRS deserves kudos for this. Indeed, given the constraints the IRS is operating under, this is a superb performance.

Yes, more work is needed for the Get My Payment website. It doesn’t work for expatriates (individuals residing outside the United States), many of whom do qualify for the payments. But overall the IRS deserves praise for getting this done and being able to serve most Americans within 30 days of the legislation passing.

When the IRS Adds a Digit…

May 4th, 2020

Clients of ours filed their tax returns 15 days ago, and this morning received their refund from the IRS. They were expecting $523 and they got that, and just a bit more: The direct deposit was $3,523!

The clients had already looked at their return, and it showed $523 as the refund amount (and I pulled it up, and verified that). We looked at the IRS’s Where’s My Refund website and it shows $3,523. My clients called the bank and verified that the refund that was deposited was $3,523.

My clients are not entitled to the extra $3,000. As much as they’d like to keep the money, that’s not allowed. And it’s clearly an error. Their return is straightforward (they’re retired, and they received the same 1099-R’s and social security as in past years). There’s no new 1099-R with an extra $3,000 of withholding. (We also both double-checked the withholding amounts on the return, and they are correct.)

The IRS does have guidance on what to do in this situation: Tax Topic 161 covers an erroneous refund. In case of a direct deposit, you contact your bank’s ACH department and have them return the funds. You also must call the IRS and explain what’s happened. Additionally, there should be a letter issued by the IRS sent to you as to why the IRS changed the refund amount. We’re going to allow a week for that letter to show up, but come next Monday the clients will be returning the funds.

Unfortunately, as of today there’s no way for the clients to call the IRS up and explain what’s happened (all IRS phone lines are down). If they were to mail a letter, it might be months before someone reads it. All they can do is call the IRS up when phone lines reopen.

By the way, suppose you receive someone else’s refund; can you keep the money? No, that’s likely theft. Indeed, there have been prosecutions when this has happened. There almost always is no free money.

PPP: When Free Money Isn’t So Free

May 1st, 2020

The Paycheck Protection Program (PPP) loans seem too good to be true. You get money for paying employees and necessary expenses, and they might not have to be repaid! It’s free money.

Well, not so fast.

Yesterday, the IRS released Notice 2020-32. The notice, which runs seven pages, can be boiled down to one very long sentence:

Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.

In English, if your PPP loan is forgiven, you cannot take a deduction for any expenses related to the income that isn’t taxable. Now, how forgiveness is determined isn’t certain at this point, but the IRS’s view is that expenses that result in tax-exempt income aren’t deductible.

So let’s say you have a loan that is forgiven of $10,000. Is it better to pay back the loan (the interest rate is 1%), and not lose the tax credits for employee retention, or lose the business expenses and tax credit? Since we don’t yet know the full details on forgiveness it’s not possible to say much more here, but I strongly suspect the answer will be, “It depends.”

Senator Chuck Grassley (R-Iowa), chair of the Finance Committee, wasn’t happy with the IRS decision. He’s quoted in the Wall Street Journal: “The intent was to maximize small businesses’ ability to maintain liquidity, retain their employees and recover from this health crisis as quickly as possible. This notice is contrary to that intent.” So it’s possible Congress will override the IRS’s view on this. We will just have to wait and see.

IRS’s “Get My Payment” App Now Works for Filers Who Neither Owed Tax Nor Received a Refund

April 27th, 2020

Kudos to the IRS. The IRS’s “Get My Payment” App was updated again this weekend, and now works for just about everyone. The last group of individuals who couldn’t use the app–those who filed returns and neither owed tax nor received a refund–can now use the app and enter their banking information.

Given that this is a program less than a month old, I must give lots of credit here to the IRS. They have gotten it up and working for most everyone. And they’ve distributed nearly 100 million payments. There’s really nothing to complain about here.

Professional Gamblers (and Other Gambling Businesses) Now Eligible for PPP Loans

April 24th, 2020

The Small Business Administration today released new guidance on the Paycheck Protection Plan (PPP) loans. Included in the guidance is an FAQ that states:

Are businesses that receive revenue from legal gaming eligible for a PPP Loan?

A business that is otherwise eligible for a PPP Loan is not rendered ineligible due to its receipt of legal gaming revenues, and 13 CFR 120.110(g) is inapplicable to PPP loans. Businesses that received illegal gaming revenue remain categorically ineligible. On further consideration, the Administrator, in consultation with the Secretary, believes this approach is more consistent with the policy aim of making PPP loans available to a broad segment of U.S. businesses.

This means that as of today professional gamblers are now eligible for PPP loans. If you’re a professional gambler and are out of business, now is the time to apply with your bank. While there was additional funding for PPP loans approved this week, it will likely be used up quickly. Do note that if you partake in any illegal gambling activities you remain ineligible for PPP loans.

Additionally, small pubs with gambling activity (very common here in Las Vegas) are eligible for PPP loans.

IRS’s “Get My Payment” App Now Works for Most 2018 Filers

April 24th, 2020

If you filed your 2018 return but haven’t filed 2019, and you wanted to update your information on the IRS’s “Get My Payment” App, you’ve been frustrated because it hasn’t worked. Last night, the IRS updated the information to include such individuals in the app, and most (but not all) can now enter their banking information for direct deposit of the stimulus checks. It’s worth trying if you (like me) are in that situation. I was able to enter my banking information, so I should receive a direct deposit in the next couple of weeks.

There is one group of taxpayers who will not be able to use the app: Those with $0 balances who filed. If you filed your 2019 return (or 2018 return if you haven’t filed 2019) and the tax due was $0 (neither owing tax nor receiving a refund), the app will not work for you, and you will have to wait for a check in the mail (unless the IRS makes another update to the app).

When Will the Stimulus Checks be Mailed?

April 23rd, 2020

Something I missed was an article in the Washington Post giving details of mailing stimulus payments. The Motley Fool took it and laid out the dates that stimulus payments will be mailed. I note those dates below.

But there’s another issue: Let’s say your Adjusted Gross Income (AGI) is $55,000 and you haven’t filed your return. You file it on May 1st. Will you get your stimulus check the week of May 29th (assuming you don’t use direct deposit)? Probably not. (The IRS will be mailing checks out for that AGI range that week.)

The issue here is it takes time for both a tax return to get into the IRS computer system and for the IRS to mail a check. First, it takes four weeks (on average) for a return to post into the IRS computer system from date of filing. Second, it takes two weeks (on average) for the IRS to issue a check. That is, if the IRS hits a button to issue you a check today, you would receive that check in two weeks.

So let’s look at the mailing dates:

  • AGI of $10,000 or less: Week ending April 24
  • AGI of $10,000 to $20,000: Week ending May 1
  • AGI of $20,000 to $30,000: Week ending May 8
  • AGI of $30,000 to $40,000: Week ending May 15
  • AGI of $40,000 to $50,000: Week ending May 22
  • AGI of $50,000 to $60,000: Week ending May 29
  • AGI of $60,000 to $70,000: Week ending June 5
  • AGI of $70,000 to $80,000: Week ending June 12
  • AGI of $80,000 to $90,000: Week ending June 19
  • AGI of $90,000 to $100,000: Week ending June 26
  • AGI of $100,000 to $110,000: Week ending July 3
  • AGI of $110,000 to $120,000: Week ending July 10
  • AGI of $120,000 to $130,000: Week ending July 17
  • AGI of $130,000 to $140,000: Week ending July 24
  • AGI of $140,000 to $150,000: Week ending July 31
  • AGI of $150,000 to $160,000: Week ending August 7
  • AGI of $160,000 to $170,000: Week ending August 14
  • AGI of $170,000 to $180,000: Week ending August 21
  • AGI of $180,000 to $190,000: Week ending August 28
  • AGI of $190,000 to $198,000: Week ending September 4
  • All other checks: Week ending September 11

So let’s say you did not have a 2018 filing requirement, and you file your 2019 return with an AGI of $65,000 and owe tax; your check would be issued the week ending June 12. But let’s say you file your return on June 13th; in that case, your check would be issued at the end (the week of September 11th).

We believe that if you are “missed” by the IRS you can use the IRS’s Get My Payment tool after your return is filed to convert your check to a direct deposit.

A key point is that these are the dates of mailing, not the date your check is generated. So you need to subtract two weeks for the date the check is generated. You also need to subtract four weeks for the date a return gets into the IRS computer system. So for a check to be issued the week of June 12th, a return needs to be in the system six weeks earlier, or by the week of May 1st. Now, I am making assumptions based on my knowledge of how the IRS works but I believe them to be accurate.

What this means is that now is the time to file tax returns if you want your stimulus payment. The IRS saying the sooner the better is correct.

Why “Get My Payment” Doesn’t Work for 2018 Filers who Owed Tax and Haven’t Filed 2019 Returns

April 16th, 2020

UPDATE: The IRS updated the app; as of April 24th, the app now works for most 2018 filers. See my new post.

So let’s say your income was low enough in 2018 so you qualify for a Recovery Rebate/Economic Impact (aka stimulus) payment. You go to the IRS’s “Get My Payment” app, enter the information, and see the message:

According to information that we have on file, we cannot determine your eligibility for a payment at this time.

You want to enter your banking information to get a direct deposit. It turns out that you have two options: Receive a paper check during the next few weeks (to months), or file your 2019 tax return. The IRS added the following message regarding 2018 filers:

2018 Filers: If you need to change your account information or mailing address, file your 2019 taxes electronically as soon as possible. That is the only way to let us know your new information. [emphasis added]

So if you are an individual who will qualify based on 2018 or 2019, file 2019. If you’re an individual who will not qualify based on 2019 but do qualify based on 2018, you cannot enter banking information in the “Get My Payment” app. You’re stuck receiving a paper check sometime (unless the IRS updates the app).

Additionally, if you moved you should contact the IRS when they reopen to provide your new mailing address. I would suggest a phone call given that it will take weeks to months for the IRS to process paper change-of-address forms. I also strongly suggest maintaining a forwarding order with the Postal Service.

I would hope the IRS would change their app so that individuals like me who cannot file for months (I’m waiting on a K-1 that usually shows up in late July or early August) could enter their banking information. Unfortunately, it looks like I’ll get a paper check this summer.