That Was the Tax Season That Was

October 19th, 2016

Well, my sixteenth Tax Season is in the books. Let’s see what was good, bad, and ugly–and I’ll include a warning for next year.

The Good: First, the IRS did a much better job with the Practitioner Priority Service (PPS). PPS is how tax professionals primarily interface with the IRS. During 2015, hold times were one hour or more…and that was on the good days. What a difference a year makes: In 2016, there were times the hold time was zero. For all the problems the IRS has, kudos on this issue.

And let’s give a thumbs up to Congress–yes, Congress. We had tax legislation for “extenders” that covers not only 2015 but 2016. I know what taxes are for the current calendar year…and it’s not December!

The Bad: Late, late, and later arriving paperwork for clients. Very few K-1s (what partnerships, S-Corporations, and trusts/estates issue) arrived timely. Congress changed the due dates for partnerships to March 15th for next year with the hope that recipients of K-1s would receive their K-1s earlier. Most tax professionals believe (and I agree with them) that all the moving of the due date will do is cause more partnerships to file extensions. Indeed, I expect K-1 paperwork to be even later next year; more, not less, individuals will be forced to file extensions.

The Ugly: I had more and more procrastinating clients. Some of it wasn’t the fault of the clients (again, lots of late arriving paperwork), but some of it was. I’m not happy with the “twin peaked” curve of work that I have. Further, the trends aren’t good for it getting any better next year.

And that’s where the warning for the 2017 Tax Season comes in. Next year there are expanded “due diligence” requirements on tax professionals. This has impacted the Earned Income Credit, but it (a) expands to include the American Opportunity Credit (an education credit) and (b) the Child Tax Credit. Congress, in the PATH Act, mandated this:

The PATH Act also extended due diligence requirements to returns claiming the Child Tax Credit (CTC) and the American Opportunity Tax Credit (AOTC). Last year due diligence only applied to EITC. See “Paid Preparer Due Diligence Penalties” below for information on how IRS can assess penalties.

The draft Form 8867 and draft instructions are available. Something new for next year is that tax professionals not only need to get answers to various questions, we apparently must conduct an interview with the client. That means talking to the client. Consider Joe Taxpayer who submits his paperwork on October 10, 2017. You get to his return on the 14th and discover you need to talk to the client because he’s receiving the Child Tax Credit. There’s an obvious issue with that. Also consider that a typical interview is, say, ten to fifteen minutes. Assume you have 50 clients who need to be interviewed during the year; that’s an additional 500 minutes or eight hours of work. If you have 100 clients who qualify, that’s an additional sixteen hours of work. And there’s scheduling time. And yes, it appears the interview is mandatory.

That’s the warning for 2017: Taxpayers who procrastinate too long may run into an issue with their returns. Tax professionals have even more work coming up. Will tax professionals add an up-charge for this interview and compliance requirements? I’m certainly considering it.

On Disclosure

October 10th, 2016

As you may have heard, there’s a Presidential campaign going on. I try hard to avoid politics in this blog, but one story that came out relates to Donald Trump taking a Net Operating Loss (NOL) on his tax return. Mr. Trump’s former accountant, Jack Mitnick, has talked to the media regarding the returns he prepared for Mr. Trump back in the 1990s. Is Mr. Mitnick supposed to talk about the returns he prepared?

Let’s start with the rules on returns I prepare. Suppose I get a phone call from the Las Vegas Review-Journal asking about a return I prepared for John Smith, a hypothetical client. Mr. Smith is running for office here in Nevada, and the Review-Journal has a copy of his 2008 tax return. I could neither tell the RJ I prepared the return nor could I tell them I didn’t prepare the return.

IRS Circular 230 governs the practice of tax professionals. Tax professionals are to keep client relationships confidential unless the client has authorized me to disclose the information. I’m also a member of the National Association of Enrolled Agents; NAEA rules also require that client relationships be confidential. That’s why when a mortgage company calls me and says that they want confirmation that I prepared the tax returns for Mr. Smith my response is, “Have Mr. Smith call me. If I prepared his returns, I will have him sign a ‘Consent to Disclosure’ notice that authorizes me to disclose information to you (should he wish me to do so).” An IRS regulation requires that the Consent to Disclosure be on my letterhead; thus, I can’t accept the ones that mortgage companies have clients sign. But I digress….

Mr. Mitnick is, of course, retired. He appears not to care about Circular 230 or confidentiality. Still, I think it’s wrong for him to say anything about clients (and former clients). When I retire–and for current clients, no worries, that’s many years down the road (I hope)–I don’t think it’s right for me to author a ‘tell-all’ book about my clients or talk to the media about them. The confidentiality rules should apply for as long as I’m around.

As Relieable as You Might Have Thought

October 9th, 2016

That is not a typographical error in the headline. Yes, I meant to type, “Relieable.” Why? Because of a story of a Tampa, Florida tax professional who was as relieable, err, reliable as the headline.

Donna Demps was found guilty of wire fraud and aggravated identity theft. Here’s what the DOJ press release states:

According to testimony and evidence presented at trial, Demps formed the Florida corporation “D&D Honest Relieable [sic] Tax Services LLC.” She then used the corporation to open bank accounts into which she electronically transferred tax refunds obtained by stealing the identities of real people, many of whom were veterans, disabled, elderly, or otherwise unable to care for themselves. Demps never registered her tax preparation service with the Internal Revenue Service since she would have had to reveal that she was an eight-time convicted felon. Through her bank accounts, Demps stole more than $120,000 over a one-year period.

So we have someone opening up a corporation ending in “LLC” (limited liability companies are not corporations), with a misspelling of ‘reliable,’ and then stealing identities. There’s not much to add here, except that Ms. Demps will likely be spending quite a bit of time at ClubFed.

On 1099 Due Dates in 2017

October 4th, 2016

You may have heard that Form 1099-MISC’s must be filed earlier next year. That’s true, but it only impacts some of the 1099s. Let’s look at the IRS instructions:

New filing date. Public Law 114-113, Division Q, section 201, requires Form 1099-MISC to be filed on or before January 31, 2017, when you are reporting nonemployee compensation payments in box 7. Otherwise, file by February 28, 2017, if you file on paper, or by March 31, 2017, if you file electronically. The due dates for furnishing payee statements remain the same.

What this means is that only 1099-MISC’s for independent contractors (nonemployee compensation) must be filed by January 31st, whether you file by paper or electronically. All other information returns, including 1099-MISC’s reporting “Other Income,” will have the same deadlines as this past year: paper returns on or before February 28th, and electronic on or before March 31st.

I’m certain there will be confusion this coming year over the deadline. Of course, there’s no penalty for filing all your information returns by January 31st (whether required or not).

Prepare to Panic

October 3rd, 2016

No, I’m not talking about the two choices in this year’s presidential election. Rather, I’m talking about the situation if you have yet to send your tax paperwork to your tax professional. It’s just about time to panic.

Mind you, if your return is simple and straightforward, take care of it now: The deadline is in exactly two weeks. If your return has any sort of complexities, you must start working on it immediately. Your tax professional will need time to get your return done right. You need to turn in that paperwork post haste. Yes, if you’ve procrastinated you need to stop, sit down, and take the time to get things done.

If you file late, it’s as if you never filed your extension. So sit down, and get everything done now. Or you may be paying a significant monetary penalty if you don’t.

If You’re a Celebrity…

October 2nd, 2016

…It pays to file and pay your taxes. This goes even for those behind the scenes.

Mario Winans is a record producer, a singer, and a songwriter. He’s won a Grammy Award for Best Gospel Performance. He may be best known for “I Don’t Wanna Know,” a single that reached #2 in tghe United States. Mr. Winans has been successful, earning $2.8 million (gross income) from 2008 through 2012. We know how much he paid in taxes, and that’s the problem: He didn’t pay anything. Did he have some tax shelter, or perhaps a Net Operating Loss he took advantage of?

No, he simply didn’t file returns. That’s not a good idea, and it became an especially bad idea when the IRS figured this out. Mr. Winans pleaded guilty on Thursday; he faces up to two years at ClubFed, restitution of $434,968, and a possible $200,000 fine.

As usual, it’s always a lot easier to simply pay your taxes…especially if you’re a celebrity. Here’s Mr. Winan’s in “I Don’t Wanna Know;” I guess he now knows that filing and paying his taxes would have been a better idea.

Another Incorrect IRS CP2000 Notice

September 28th, 2016

One of my clients received an IRS CP2000 notice today alleging he did not include $1000 of ordinary dividend income. And the IRS was correct: She forgot to provide me the 1099-DIV. Yet the IRS, in the same notice, states that the client included $1000 in qualified dividends on the same stock.

This may sound familiar, and it should; back in March a client had a similar experience.

I will repeat what I said then: It’s impossible to have qualified dividends without having ordinary dividends. The IRS notice my client received today is wrong. Given I’ve seen two such notices it appears there is a systemic issue; I’ve reported it to the Taxpayer Advocate’s systemic issue hotline. If any other practitioners see similar incorrect notices, I urge you to do the same.

If you’re a taxpayer and receive an IRS notice, do not blindly assume it is correct. Show the notice to your tax professional. Your tax professional can look at your return and see if it is correct or not. IRS statistics show that two-thirds of IRS notices are wrong in whole or in part. The IRS has publicly stated that they know they send out incorrect notices, but it’s a profit center so they’ll keep sending them out.

As for my client, the IRS alleged my client owed a bit over $300. In truth, my client owes a touch over $100. A reply to the IRS notice has been sent and in about ten weeks we’ll hear back that we’re correct. My client has already paid what we believe the balance to be.

As The Caesars Turns, Episode 2

September 27th, 2016

Caesars Entertainment Operating Company (CEOC) today announced that they reached a restructuring agreement with its major creditors. The deal will likely allow CEOC to emerge from bankruptcy early in 2017. The settlement must be finalized and will require approval of the bankruptcy court.

“It’s important to recognize that a lot of work needs to be done in the next few weeks. Will there be bumps along the road? Yes. Is this a durable deal? Yes,” said Bruce Bennett, a lawyer for Jones Day representing junior creditors.

The deal will have CEOC merge with Caesars Acquisition Company, with first tier lenders getting about 115 cents per dollar, first lien holders getting 109 cents, and junior debt holders getting between 66 cents to 83 cents on the dollar.

But not everyone is settling. Trilogy Capital Management has $22 million of CEOC’s unsecured bonds and will pursue its lawsuit against the casino giant. The next hearing in Trilogy’s lawsuit against CEOC is scheduled for October 6th in New York. Trilogy is asking for $160 million in the lawsuit. The lawsuit, if it goes to trial, would likely confirm or deny whether Caesars truly split into a “good” Caesars and a “bad” Caesars (as Trinity and others claimed).

Tune in next week to see what happens with Trinity’s lawsuit and whether any other obstacles appear for the closure of the bankruptcy of CEOC.

California Cities Eye Netflix as a Revenue Source

September 25th, 2016

“Don’t tax you, don’t tax me. Tax that fellow behind the tree.” — Russell B. Long

The city of Pasadena, California (home of the Rose Bowl and annual Rose Parade) voted to expand their telecommunications tax to include streaming video services such as Netflix. The tax rate is 9.4%; the tax will begin on January 1, 2017.

The Pasadena Star-News noted,

Councilman Tyron Hampton called the decision “ridiculous” on Friday and said he hopes the council will take up the topic.

“Cable has been a hardship for many families and now we’re going to add a hardship to them,” Hampton said. “Next we’ll be taxing you for streaming music on Pandora. This is ridiculous.”

There is absolutely no truth to the rumor that Pasadena will be bringing up a tax on Pandora at their next city council meeting. (Seriously, I made that up.) But it does show the desperation of California cities to balance their budgets. And the biggest culprit are pension costs.

The crisis dates back to the late 1990s, and the dot-com bubble. California tax revenues were increasing rapidly thanks to the stock market, so everyone drew straight lines going up, up, and up. California legislators and the then Governor Grey Davis forgot this song:

But I digress….

The Howard Jarvis Taxpayer Association isn’t enamored by the new tax, and I suspect a lawsuit is in the future. Still, there’s no doubt in my mind that Californians need to watch their wallets (which is nothing new, and one of the reasons I now reside in Nevada).

As the Caesars Turns

September 22nd, 2016

There have been more developments in the Caesars bankruptcy. First, Caesars Entertainment said it is offering an additional $1.6 billion for junior creditors of Caesars Entertainment Operating Company (CEOC) in the contentious bankruptcy. The stock market reacted favorably to the news Caesars stock went up 21% today.

The underlying issue in the bankruptcy is whether Caesars management deliberately created a “bad” Caesars (CEOC) and a “good” Caesars (everything else). Junior creditors are accusing Caesars of exactly that. Lawsuits on this issue are on hold but unless a court extends an injunction they’ll start moving forward in October.

Earlier this month Judge Benjamin Goldgar ruled that junior creditors are within their rights to have top management at Caesars complete financial disclosure statements. As Bloomberg reported,

Apollo co-founder Marc Rowan, company principal David Sambur and TPG co-founder David Bonderman must provide the information to a committee of dissident creditors who are fighting a reorganization proposal for Caesars, U.S. Bankruptcy Judge A. Benjamin Goldgar ruled. That plan would release the men from any legal liability related to the Las Vegas-based gambling company’s bankruptcy. The bondholders say the men shouldn’t be shielded from lawsuits related to the bankruptcy.

But is $1.6 Billion more enough? Given that an independent examiner said Caesars could be liable for over $5 billion in damages, I suspect junior creditors may be thinking “no.” Caesars management is threatening to put all of Caesars in bankruptcy, with the obvious implication that you might get a lot less if the bankruptcy expands. Perhaps the junior creditors are thinking that this is a sign of desperation; that they’ll get 100% of their debt back by either lawsuits or a full bankruptcy; or that Caesars will increase their offer yet again in the future.

When the bankruptcy began I asked and answered some questions:

How long will the bankruptcy process take? A long time…

Who will profit from the bankruptcy? That’s a question with a sure answer: the lawyers…

Why aren’t all of Caesars’ hotels included in the bankruptcy? If you look at the list, some of the hotels are merely operated by Caesars and won’t be included in the bankruptcy even if the second-tier debtholders win. However, it is definitely possible that the bankruptcy could expand and take in more of Caesars than just CEOC…

Could some of Caesars’ properties be sold?
Definitely. If this does not end up being a prepackaged bankruptcy, then each tier of debtors will propose a plan. One plan could be to auction various properties, so it’s definitely possible.

Nothing has caused me to change my opinions on any of these answers. The soap opera, er, bankruptcy began in January 2015; if you placed a bet on it reaching two years without resolution, your bet looks like a winner to me.

So stay tuned soon for the next exciting episode of “As the Caesars Turns.”