The IRS Can’t Figure Out Where to Apply an Electronic Payment…Where the IRS Was Told Where to Apply It

November 30th, 2021

My client received a letter from the IRS dated November 22, 2021:

Taxpayer identification number: [redacted]
Tax Period(s): Dec. 31, 2018
Form: 1040

We received a payment of $2,002.00 on Oct. 08, 2020.

We don’t have enough information to apply this payment correctly.

Attach a clear copy of both sides of the canceled check or checks.

If the $2,002.00 you paid is for a bill you received, send a copy of the bill so we can identify the tax period. An incorrect identification could result in a bill for the period you intended to pay….

My client did indeed make this payment on October 8, 2020.  The $2,002 was for an amended 2018 return so the IRS has (already) applied it to the correct tax year.  This payment was made using IRS Direct Pay.  When you use IRS Direct Pay you must specify the tax year, the reason for the payment, and the tax form.  My client correctly noted the tax year (2018), the reason (Amended Return), and the tax form (1040X) when he paid, so the letter is nonsensical.  So why did the IRS send it when they had this information?

The real reason is that my client’s amended return (which was mailed to the IRS on October 8, 2020 and was received one week later) is sitting in a bin in the Austin Service Center waiting to be reviewed.  Yes, the IRS is more than one year behind in processing paper-filed amended returns (I recently had a client who filed eighteen months ago have his amended return processed).  I spoke to the Practitioner Priority Service yesterday (PPS) seeing if I could resolve this over the phone.  The PPS representative told me that the client’s amended return does not even show up in the IRS computer system. This is typical (unfortunately) for paper-filed amended returns.  I was told (a) don’t send another copy of the amended return, (b) respond to the letter (but without sending another copy of the amended return), and (c) you may be asked to resend the amended return if the IRS can’t find it.

Why didn’t we electronically file this amended return? You cannot electronically file pre-2019 federal amended returns; they must be paper-filed.  My client did pay electronically, and he did mail the amended return using certified mail so we are certain the return was received.

This is another IRS issue caused by the IRS’s response to the pandemic.  Yes, the IRS was not at fault for the pandemic, but the ongoing response (did you know that IRS employees are still not completely back at IRS Service Centers?) is a cause of this issue (and many others).  This is costing taxpayers time and money.  It’s also costing the IRS time and money (which means taxpayers) because (a) someone must read the response I sent and (b) my client can–and will be able to–get some penalties and interest abated once this amended return is processed (given that the IRS is at fault for the slow processing time).  This episode also makes the IRS look stupid.  My client told the IRS exactly where the payment should be applied…and the IRS still couldn’t figure it out.

The 2021 Real Winners of the World Series of Poker

November 18th, 2021

Last night, the Main Event of the World Series of Poker concluded.  (While there are still a few events to be decided in the WSOP, this is the event that everyone thinks of as the big one.)  Before  I get to the winners (and the tax impacts), I want to give some credit to Caesars Entertainment.  Generally, the WSOP ran without hitches.  There were worries about Covid (especially given the past history of the Rio Hotel and Casino), but until this week that was basically a non-issue.

The Main Event attracted 6,650 entrants, each ponying up $10,000.  The prize pool was $62,011,250 (the difference is the funds kept by Caesars for running the event).  We focus on the final table of nine, but in actuality 1,000 of the 6,650 received winnings from the prize pool; a minimum cash was worth $15,000.  The winner received a cool $8 million…but that’s before taxes.

One important note: I do need to point out that many of the players in the tournament were “backed.” Poker tournaments have a high variance (luck factor). Thus, many tournament players sell portions of their action to investors to lower their risk (and/or “swap” action with other entrants). It is quite likely that most (if not all) of the winners were backed (or had swaps) and will, in the end, only enjoy a portion of their winnings. I ignore backing and swaps in this analysis (because the full details are rarely publicized). Now, on to the winners.

Congratulations to Koray Aldemir, a native of Berlin, Germany who currently resides in Vienna, Austria. On the final hand, Mr. Aldemir flopped top two pair (holding 10-7 in his hand).  George Holmes, who finished in second place, had a King in his hand.  That was disastrous for Mr. Holmes when a King appeared on the turn.  The remaining money went in on the final card (the ‘river’) which didn’t change the result.  Mr. Adlemir, a professional poker player who is a regular on the high stakes circuit, benefits from the US-Austria Tax Treaty (his income is exempt from withholding by the IRS).  And there’s a taxing reason why Mr. Aldemir moved from Germany to Austria: Austria does not tax gambling income of its residents.  It sure beats the 46% tax rate he’d be facing if he was residing in Germany.

Finishing second place and winning $4,300,000 was (as previously noted) George Holmes. Mr. Holmes, a resident of Atlanta, is an amateur gambler who mainly plays cash games though he plays the Main Event every year.  I estimate he’ll owe $1,802,011 in tax to the IRS and Georgia leaving him with just under $2,500,000 of his winnings to enjoy.

In third place was Jack Oliver. The resident of Manchester in the United Kingdom benefits from both the US-United Kingdom Tax Treaty (gambling winnings are exempt from withholding) and UK law on gambling: His winnings are not subject to tax in the UK. He gets to keep all $3 million of his winnings.  It’s always nice when your after-tax income legally equals your before-tax income!

Joshua Remitio of Gilbert, Arizona (suburban Phoenix) finished in fourth place winning $2,300,000.  Mr. Remitio previously had entered poker tournaments with a maximum buy-in of $300; by far, he was the individual who came out of nowhere.  Arizona is luckily not a high-tax state; I estimate he’ll owe $1,004,393 in tax to the IRS & Arizona and be able to keep $1,295,607 of his winnings.

Finishing in fifth place was Ozgur Secilmis, of Istanbul, Turkey.  The US-Turkey tax treaty exempts his winnings from US withholding. Turkey, like the United States, taxes the worldwide income of its residents.  Also like the United States, Turkey has a graduated income tax.  The top tax bracket (40%) begins at 650,000 TRY (Turkish Lira); the Turkish Lira today is worth $0.09.  I estimate Mr. Secilmis will owe 7,773,055 TRY (or $699,575) to the Turkish Revenue Administration.

The sixth place winner, Hye Park of Holmdel, New Jersey, is a professional poker player who normally plays cash games.  But his foray into the Main Event sure paid off: sixth place paid $1,400,000.  Unfortunately, New Jersey is not a low tax state (plus as a professional gambler Mr. Park must pay self-employment tax).  I estimate he’ll owe just over $650,000 in tax and get to keep just $749,709 of his winnings.  Mr. Park owes the highest percentage in tax (an estimated 46.45%) of any of the final table finishers.

Alejandro “Papo” Lococo of Buenos Aires, Argentina is an MC and also an ambassador for PokerStars (an online poker site).  Finishing seventh earned Mr. Lococo $1,225,000 but that’s before taxes.  The US and Argentina do not have a tax treaty, so 30% of his winnings are withheld to the IRS.  He’ll be able to take a tax credit on his Argentina tax return for the tax withheld to the IRS; that will lower the tax paid to Argentina to an estimated 5% of his winnings ($61,250) and he overall pays $428,750 in tax. His net winnings are $796,250.

In eighth place was Jareth East of Redhill, England won $1,100,000 for his eighth place finish.  A professional poker player, his winnings are not subject to US tax nor does the United Kingdom currently tax gambling.  Yes, Mr. East gets to keep all $1,100,000 of his winnings.

The ninth place finisher was Chase Bianchi. Mr. Bianchi is a former professional gambler (he is now a software engineer), so he won’t owe self-employment tax.  Still, as a resident of Massachusetts he will pay an estimated 37.56% of his winnings in taxes to the IRS and Massachusetts leaving him estimated after-tax winnings of $624,357.

Here’s a table summarizing the tax bite:

Amount won at Final Table $24,125,000
Tax to IRS $3,676,973
Tax to Turkey Revenue Administration $699,575
Tax to Georgia Department of Revenue $247,250
Tax to New Jersey Division of Taxation $122,671
Tax To Arizona Department of Revenue $102,944
Tax to Administracion Federal de Ingresos Publica (Argentina) $61,250
Tax to Massachusetts Department of Revenue $50.000
Total Tax $4,960,663

That means 20.56% of the winnings at the final table goes toward taxes.

Here’s a second table with the winners sorted by their estimated take-home winnings:

Winner Before-Tax Prize After-Tax Prize
1. Koray Aldemir $8,000,000 $8,000,000
3. Jack Oliver $3,000,000 $3,000,000
2. George Holmes $4,300,000 $2,497,989
4. Joshua Remitio $2,300,000 $1,295,607
5. Ozgur Secilmis $1,800,000 $1,100,425
8. Jareth East $1,100,000 $1,100,000
7. Alejandro Lococo $1,225,000 $796,250
6. Hye Park $1,400,000 $749,709
9. Chase Bianchi $1,000,000 $624,357
Totals $24,125,000 $19,164,337

The players from the United Kingdom did better than their results with Mr. Oliver finishing in second place and Mr. East finishing in 6th place based on after-tax winnings.  Mr. Park fell to eighth place (from sixth) because of taxes.

The Internal Revenue Service did not end up with taxes that exceeded the first place winnings; the agency will have to be content with finishing in third place (based on pre-tax prizes).  With three winners exempt from US taxation, the IRS didn’t rack in its usual haul.  Indeed, the tax agencies ended up exceeding only second place money this year due to those three individuals also being exempt from taxes in their home countries. Still, you can’t say that the IRS didn’t do poorly because the house always wins.

Why Did the WSOP Change the Rules on Lammers?

November 16th, 2021

With the World Series of Poker (WSOP) winding down (the Main Event champion will be crowned Wednesday evening–and, yes, I will have my customary post on the real winners of the WSOP on Thursday), an issue arose late in the series.  Why did the WSOP change the rules on players cashing in lammers?

For those of you not in the poker world, let me explain.  “Lammers” are the nickname for satellite chips.  The World Series includes all sorts of tournaments, from the Main Event (which costs $10,000 to enter), numerous other tournaments costing $500 to $10,000 which award WSOP commemorative bracelets, daily tournaments costing $100 to $500, and satellite tournaments.

Satellite tournaments allow someone to enter a larger buy-in tournament without spending the full price.  Let’s say you have $1,080 and want to enter the Main Event.  You could play a one-table satellite.  This mini-tournament has ten players; $1,000 of the $1,080 entry fee goes to the prize pool with the WSOP keeping $80 per player for running the tournament.  The tournament awards twenty $500 buy-in chips (called “lammers”) that can be used to enter any event at the WSOP.  The WSOP has satellite tournaments costing $100 and up awarding various numbers of lammers.

These lammers have printed on them, “No Cash Value.”  The problem with that is obvious: there is value with the lammers.  If you have 20 lammers, you can buy into the Main Event, so each lammer really has a value of $500.  An individual lammer cannot be turned into cash from the WSOP (the Rio Hotel, where the WSOP is being held, will not buy your ‘excess’ lammers).  However, every year there is a brisk trade in lammers.  Many players just play satellite tournaments, collecting lammers and selling them to other players.  The players buying the lammers simply go to the cashier and use the lammers to buy into whatever event they wish.

Until November 8th the WSOP didn’t do a thing about this.  Then Shane Schleger, a professional poker player, noted:

There was lots of speculation about why this happened.  Most of the speculation called it greed by the WSOP (unused lammers are completely worthless once the WSOP is over); I believe that’s almost certainly wrong.  This has nothing to do with greed by the WSOP.  Instead, it has everything to do with tax law.  Indeed, there are two separate issues in play.

For years the WSOP has played “wink-wink” in regards to the active market in lammers.  Unless the individuals running the WSOP were blind (and they’re not), they knew about the active marketplace in lammers.  This benefited the WSOP greatly because more individuals played satellites leading to more entrants in all their tournaments.  If the WSOP could, they would want the lammer marketplace expanded. 

Unfortunately, we have to juxtapose the way poker players want the poker world to work with how the IRS and the Financial Crimes Enforcement Network (FINCEN) demand it work.  We have to go into two areas to understand this: the rules regarding issuance of W-2Gs and FINCEN rules regarding cash and cash equivalents.

The WSOP is required to issue W-2Gs (or Form 1042-S for a non-American) if someone wins a prize in a poker tournament of more than $5,000 in cash (or cash equivalent) net of the buy-in.  Assume those lammers have cash value; that means the WSOP would be required to issue a W-2G if someone wins a one-table satellite awarding $10,000 in lammers.  It takes time and costs money for the issuance of a W-2G.  Indeed, the reason why the minimum prize for the WSOP main event is $15,000 relates to the IRS rule on issuing W-2Gs.  That’s a $5,000 net profit and a W-2G is not required (where it would be at $15,001).

Unfortunately, the IRS, FINCEN, the Nevada Gaming Control Board, or Caesars internal auditing likely noticed the wink-wink.  (Caesars Entertainment owns the WSOP.)  Gambling is heavily regulated, and the amount of paperwork required for a casino is staggering.  (That’s a subject for another day, but whatever you think it is, the correct answer is almost certainly to double or triple what you think.)  Paperwork has to be completed exactly right, too.  If there’s an active marketplace in satellites that the WSOP condones, then paperwork must be issued.  Thus, the order came from ‘higher up’ to put an end to the wink-wink.  If lammers can only be used to buy into another tournament, they truly have no cash value because they cannot be sold and turned into cash.

Second, casinos are financial institutions under the Bank Secrecy Act and are regulated by FINCEN.  Casinos must issue Currency Transaction Reports (for casinos, CTRCs) and Suspicious Activity Reports just like banks.  Indeed, the Bicycle Casino in Bell Gardens, California was just fined $500,000 for not complying with money laundering laws.  If lammers are being used as cash (which they were), then they fall under BSA reporting.  That would be a near impossible task for the WSOP to deal with.  Thus, one of FINCEN, the Nevada Gaming Control Board, or Caesars internal auditing had a second reason to put a stop to the trade in lammers.

If greed had won out, the wink-wink would have continued forever.  Instead, the real world intruded.

 

IRS: Per Diem Is Food Provided by Restaurants

November 16th, 2021

For tax years 2021 and 2022 taxpayers are allowed to deduct 100% of business meals provided by restaurants (per § 274(n)(2)(D) of the Internal Revenue Code).  One question that I had was how the per diem would be treated.

Taxpayers have a choice for deducting meal expenses.  They can take actual expenses or they can use the per diem meal allowance.  These rates are published by the General Services Administration (GSA) for the continental United States.  While actual expenses tend to give a higher deduction, the per diem is a good tool for individuals who keep poor records (but can prove their business travel).  Do note that you must use one method for the entire year (actual or per diem); you cannot use actuals where you have records and the per diem where you don’t.

For most tax years, meals are at 50% of actual expenses.  Say you spend $1,000 on business meals; you’re tax deduction is $500.  But as noted above for tax years 2021 and 2022 you can deduct 100% of meals provided by a restaurant.  Today, the IRS released Notice 2021-63.  It states:

Solely for purposes of § 274(n)(2)(D), a taxpayer that properly applies the rules of Rev. Proc. 2019-48 may treat the meal portion of a per diem rate or allowance paid or incurred after December 31, 2020, and before January 1, 2023, as being attributable to food or beverages provided by a restaurant.

This is excellent news for individuals using the per diem rate.  You, too, get the benefit of the 100% meals deduction for 2021 and 2022.

IRS’s “ID.me”: Not Ready for Prime Time

November 15th, 2021

This afternoon, I needed to upload an IRS Power of Attorney form to the IRS’s CAF Unit.  The IRS advised me (on the login screen) that I should obtain an account on ID.me.

The IRS rightly wants to make sure that tax professionals are who they say they are.  So the IRS has partnered with ID.me to verify identity for tax professionals.  In theory, the process will be mandatory sometime during the Summer of 2022.  If you’re a tax professional tempted to start now with ID.me, I strongly advise waiting.

The ID.me process is both biometric and checking your credit record (to make sure you’re you).  You upload a picture of your driver’s license (or similar ID), a video capture, and enter your social security number.  In theory, it’s straightforward.  I recently used the Clear application to do a similar check for Covid vaccination without any issues.

Unfortunately, ID.me isn’t Clear.  I couldn’t use my phone’s camera for my driver’s license (but a scan worked just fine).  I couldn’t use my computer’s webcam for a video (but my phone worked fine for that).  And each time it failed, I had to shutdown the browser window and start over.

Once I had my ID.me setup, the program says it will take you back to the IRS.  Instead, I saw the following:

Yes, this is a new product and bugs are always going to happen.  But I think the IRS needs to do some additional extensive testing before this goes fully live.  As I noted, that date is sometime next summer so there’s plenty of time.  Until then, tax professionals should use the option to login using their IRS ID and skip ID.me.

Evergreen Post: IRS Sending Erroneous Balance Due Notices

November 5th, 2021

Many of our clients have authorized us to receive IRS notices for them.  Yesterday, we received three “balance due” (CP14) notices.  I was quite surprised, as all three individuals paid their tax by electronic debit with the filing of their tax returns.  I ran account transcripts, and all show $0 balances (they did indeed pay, and the IRS shows the payments).

As a reminder, I’ve noted this issue in years past.  The IRS has apparently decided this isn’t worth fixing.  So let’s look at the costs of this: The IRS wastes taxpayer funds by knowingly sending out erroneous notices.  They waste taxpayer’s time because these notices will cause either the taxpayer or their tax professional to investigate.  This will cause more taxpayer funds being spent, as IRS employees get needless phone calls.

The solution for the IRS is to wait one or two “cycles” to allow the payments to post.  (The IRS computer system is old.  It uses batch processing, so when a return is filed with electronic debit the return might be in cycle 17 while the payment will be in cycle 18 or 19.)  The IRS changed this for the regular due date (April 15th) but doesn’t think this is worthwhile to change for returns on extension.  The IRS is wrong, but I’m not going to win this fight.

This does bring up some standard rules about IRS notices:

  1. Do not assume the notice is correct.  Per IRS statistics, two-thirds of IRS notices are wrong in whole or in part.
  2. If you use a tax professional, let him or her know immediately about the notice.  IRS notices do not get better with age.
  3. If you do need to respond, make sure you respond timely and use certified mail, return receipt requested.  You want proof the IRS received the response.

So if you’ve paid your tax and receive a CP14 notice alleging you didn’t, check to see if your check (or electronic payment) cleared.  If it did, most likely this is a timing issue.

IRS Efficiency and Inefficiency

October 7th, 2021

It was with fear and trepidation I logged onto IRS eServices this morning.  This is the portal that allows me to download transcripts for clients from the IRS (when I have an authorization).  On September 16th, I had electronically uploaded a Power of Attorney for a client.  It’s been taking the IRS months to process them.  However, this morning I was able to download transcripts for that client!  It’s not that a three-week processing time is great; rather, compared to what we’ve been dealing with the CAF unit does appear to be making progress on the backlog.

However, with every step forward there’s a step backwards.  A different client received a CP2000 automated underreporting unit (AUR) notice.  We disputed that, and sent a letter to the IRS explaining why the IRS is wrong.  A month ago we received the usual “We need another 90 days to get to your response”  from the IRS.  In yesterday’s mail that client received a Notice of Deficiency.   The IRS had not even gotten to the response we sent in!  If anyone is wondering why the Tax Court docket has ballooned, here is Exhibit A.  Indeed, if the IRS doesn’t reply to the response we sent in the next two months there will be yet another case in their docket (the AUR notice is clearly wrong).

 

Prepare to Panic!

September 29th, 2021

As I write this, it’s September 29th. Two weeks from Friday is October 15, 2021. That’s the deadline for individual taxpayers on extension to file their tax returns (except for those in disaster areas such as the hurricane that impacted New Jersey, New York, Pennsylvania, Louisiana, and Mississippi). If you have yet to send your paperwork to your tax professional it’s past the time to do so. Yes, it’s time to panic!

If your return is simple and straightforward, stop procrastinating and get it done and filed. If your return has any sort of complexities, you must start working on it now. Your tax professional needs time to get it done correctly. You need to turn in that paperwork post haste. If you’ve procrastinated, stop, sit down, and get it done–NOW.

It may already be too late for your return to be timely filed with many tax professionals. For example, our official deadline was September 15th. We’re not horribly behind, but I can state that if one of our clients procrastinates beyond this weekend there could be issues.  And I can guarantee if you drop off your paperwork with us on October 13th your return is almost certainly not going to be timely filed.

If you file late, it’s as if you never filed your extension. So sit down and get everything done now! Of course, if you like paying a 25% penalty, continue procrastinating.  After all, tax professionals are far less busy after October 15th.

The WSOP and Taxes (2021 Update)

September 26th, 2021

The World Series of Poker will begin here in Las Vegas on September 30th.  While attendance is likely to be less than in previous years (it’s still difficult to travel internationally to the United States), thousands of poker players will be heading to the Rio Hotel with the hopes of winning a bracelet.  The biggest news isn’t tax-related; rather, all participants (and spectators) most be fully vaccinated against Covid.  From a tax standpoint, nothing has changed from this update I wrote in 2018.

For those of you attending, good luck!

 

It’s Deja Vu All Over Again: IRS *Again* Mailing Erroneous CP259F Notices

September 20th, 2021

One would think that the IRS would learn from its mistakes.  One would be wrong (at least, in this case).  Back in November 2020 I wrote a post titled, “IRS Mailing Erroneous CP259F Notices.”  That post dealt with taxpayers who filed split-interest trust returns (Form 5227) timely and received notices stating they had not filed those returns.  And as Yogi Berra would say, it’s deja vu all over again.

Yes, the IRS sent those same notices out this year.  Yes, the returns have been filed and are sitting in bins somewhere in Ogden, Utah waiting to be processed.  Yes, you should not respond to those notices and send a second copy of your Form 5227 to the IRS.  (Normally, you should always respond to IRS notices but this is an exception.)  As the IRS said last year, (a) if you send a second return it could be processed before the first return (causing another set of issues), and (b) sooner or later the backlog will be cleared.  (Note: If you didn’t file your Form 5227, you should, of course, respond to this notice.)

As I said last year, this faux pas is another reason why using certified mail is essential when sending anything to a tax agency.  With the volume of paper waiting to be processed, it’s inevitable that something is going to be lost.  (Not to mention the report that the IRS “helpfully” destroyed 30 million documents in March 2021.)  If you have your certified mail receipt that will hold up as proof of filing.

I am going to add some parting remarks to the IRS.  As I just told a client, “This is incredibly stupid.  The IRS was made aware of this issue last year and obviously did nothing.  This will cause even more phone calls to the IRS (you currently have a 3% chance of reaching a human if you call the IRS), and more mail sitting in trailers.  The IRS should have turned off the automatic generating of these notices.”