The Dead Need Not Amend (Even When They Have To)

September 25th, 2020

When I eventually go to the pearly gates, I assume I’ll be leaving income tax behind. It would be a rather rude surprise to find I have lifetime employment in the great beyond, too.

This past week I needed to amend a 2019 federal return. A couple left off one item from their return. It had no impact on their tax, but the return did need to be amended. The IRS is now allowing amended 2019 federal returns to be electronically filed, so after obtaining the signature document I efiled the return. That’s a lot more efficient than mailing the return to the IRS.

But the return was rejected, because the spouse was deceased. That was true, and was noted on the originally filed return. The original return was electronically filed, so I couldn’t see why the amended return couldn’t be. Silly me, I missed yet another exception to the ability to electronically file amended returns. You cannot electronically file an amended return if a spouse is deceased. This wasn’t listed in any of the IRS notices announcing electronic filing of amended returns.

Unfortunately, that exception is real and is an IRS issue. My software company confirmed it’s an IRS programming issue and at least for now any amended return with a deceased taxpayer needs to be mailed to the IRS. Still, at least most 2019 amended returns can be electronically filed.

Onwards and Upwards Into the 21st Century!

September 24th, 2020

Yes, the 21st Century began 20 years ago, but today we welcome New York into the new millennium. The New York legislature passed (and Governor Cuomo signed into law) Senate Bill S8832 allowing taxpayers to electronically sign New York signature documents on tax returns. This should go live in the very near future (probably within two weeks).

New York was one of just three states (the others are the District of Columbia and Minnesota) that did not allow e-signatures. Federal e-signatures (and state e-signatures) require a taxpayer to complete “knowledge” questions (so the taxpayers can prove they are who they say they are).

During the peak of the pandemic, New York temporarily allowed e-signatures. It’s about to be permanent, and that’s a good thing for all.

The Perils of Waiting to the Last Minute

September 17th, 2020

The extended deadline for partnership and S-Corporation tax returns was this past Tuesday, and all of our returns were completed and filed that could be (but one). And that one client understood the issues with late filing–but more on that in a moment.

However, we were lucky in that we don’t use software from Wolters Kluwer. Users of that software (such as CCH) could not efile returns on September 15th. That’s an issue when it’s a deadline date. Many years ago, we were impacted when ProSeries (the software we use, made by Intuit) suffered a similar failure on the regular individual deadline date. That year, the IRS extended the deadline by a day. It’s quite possible the IRS will offer such relief to users of CCH this year.

Not only can technology issues happen on a deadline day, but if you wait to the absolute last minute you don’t have time to effectively review the return. This impacted one of our clients. She thought the income number from the partnership should be half of what we’re showing. The numbers on the tax returns exactly match the financial statements, so she needs to review the financials to find the errors. (I did not discover any errors, but she is intimately familiar with the business and errors should stand out more to her.) When you wait to the last day, the clock does strike midnight. She elected to file her return late (possibly using First Time Abatement to avoid penalties) as she wants her return to be correct.

We’re less than two weeks away from the extended deadline for trusts and estates and less than a month away from the extended deadline for individuals. Now is a very good time to send those last documents to your tax professional (indeed, our deadline to guarantee returns are timely prepared was earlier this week). It’s not yet time to panic (except for trusts and estates), but it soon will be for individuals. If you haven’t gotten everything together, you really need to start now. The penalties for late filing are severe, and if you don’t file by October 15th (unless you reside in one of the federal disaster zones) are severe (25% late filing penalty). It’s not a day late and a dollar short; it’s a day late and lots of dollars short.

Hopefully, It Won’t Take Ten More Years for a Resolution (The Trouble Fighting State and Local Tax Agencies)

September 14th, 2020

In 2008, taxpayers in Cook County, Illinois (Chicago) received property tax assessments and believed they were done improperly, including violating the Equal Protection Clause of the Fourteenth Amendment. They challenged it through the county appeals process, but got nowhere. They filed a lawsuit in state court, and the county argued that you can’t challenge the property tax based on the federal constitution in state court. So they filed suit in federal court in 2018, and that case was dismissed because of the Anti-Injunction Act (which prohibits most tax-related suits in federal court). They appealed the federal dismissal, and earlier this year the Seventh Circuit Court of Appeals reversed and remanded the case.

In that earlier decision, the Court held that not only didn’t Illinois have a “plain, speedy and efficient” method of appealing, they had no method of appealing. “Efficiency is no good to the taxpayers if it means that they cannot bring their equal protection claim in state court.”

And the defendants agree with the taxpayers that they cannot. In their brief, the defendants assert that the taxpayers err in presuming that they can raise their constitutional claims, sharply admonishing that “[t]hey are not free to do so.” Instead, the defendants argue, “the only matter at issue in a Section 23-15 action is whether the assessment of the real estate property was correct.” By the defendants’ own admission, then, the section 23-15 procedures provide no forum for the taxpayers to raise their constitutional claims. Nor have the defendants been able to point to any alternative channels in which these taxpayers can raise their federal constitutional claims in Illinois courts.

That case was decided on January 29th, with the case remanded to the District Court for further proceedings. One would expect that the District Court would then start the process of hearing the case. However, that wasn’t the case.

The District Court put a stay on proceedings, based on the County planning on filing a writ of certiorari (to have the Supreme Court review the case). “The taxpayers now petition for a writ of mandamus, asserting that the district court exceeded its authority when it entered the stay. A writ of mandamus is an extraordinary remedy, not lightly invoked, but it is available in an appropriate case for a litigant who can show that it has no other adequate means to attain relief to which it is clearly entitled.”

The spirit of our mandate in this case was clear. After concluding that the taxpayers lacked a plain, speedy, and efficient remedy in the state courts, we remanded the case to the district court for it to resolve the taxpayers’ claims. Then, mindful that the taxpayers had already spent a decade trying to litigate these claims in state court, and judging the Supreme Court unlikely to grant certiorari, much less to reverse our judgment, we expressly denied the defendants’ request that we stay our remand pending their petition for a writ of certiorari. The district court was powerless to reconsider our decision on this matter and grant what we had withheld.

You may have read about “Writ of Mandamus” in regards to the Michael Flynn case. Luckily, this case is apolitical, and we can see a case where it’s inarguable that mandamus is needed. Basically, lower courts are required to follow orders of higher courts. If a Court of Appeals denies a stay, the District Court can’t substitute its own judgment.

Why am I writing about this case? Because I wanted to illustrate the costs involved and time-frames in fighting local tax agencies. This case began in 2008. It is now 2020. This case will almost certainly not be resolved until 2021, thirteen years after it began. The legal fees are almost certainly in the many thousands of dollars, and there are more to come. At least a resolution shouldn’t take another ten years.

A few years ago, I had a client audited by New York State. New York assessed roughly $10,000 in tax to the client. We believed that New York was wrong on their interpretation of the tax law in question. The client spoke with an attorney in regards to fighting the case, and found it would cost somewhere more than $20,000 to move forward. Spend $20,000 to save $10,000 doesn’t make sense, and we ended up settling with New York State for a somewhat lesser amount (with all penalties being removed).

Still, that case and the Gilbert Hyatt/California Franchise Tax Board case (which began in the early 1990s and is still ongoing) have disillusioned me in regards to most state and local tax agencies. Unfortunately, the decision I’m highlighting today just reinforces my beliefs.

At Least The IRS Could Find 95% of the Returns…

September 3rd, 2020

Two items crossed my in-box within a few minutes of each other this morning. The first was a blog post from the National Taxpayer Advocate requesting that Congress give multi-year funding for modernizing IRS computer systems. The second was a TIGTA report noting the IRS couldn’t find about 5% of tax returns requested.

Do you know anyone who knows COBOL (a computer language)? If you do, the IRS wants to hear from him or her! COBOL dates from 1959 (before I was born). The IRS’s IMF and BMF (Individual and Business Master Files) are older than I am, and run in Cobol on IBM mainframes. They are the oldest computer systems still in use by the federal government! I’ll date myself: I was in the last class at Berkeley to learn computer programming on punch cards. On the bright side, the IRS uses the best of 1950’s technology….

Why doesn’t the IRS take their paper records and digitize them? Some of it has to do with the legacy systems they are run on. A lot of it has to do with inadequate funding.

Seriously, this is a problem. In our office, we don’t keep paper records. We scan everything (and return all paper to our clients). The IRS does this for electronically filed tax returns, but not for all paper returns. Indeed, the TIGTA report notes that 347 of the IRS’s 956 forms cannot be electronically filed (that’s more than 36%). The IRS has 468,000 cubic feet of storage available on their campuses. Additionally, Federal Record Centers store about five million cubic feet of IRS records! The IRS spends $57 million a year on storing and retrieving this mountain of paper.

To give an idea of how large this is, my house is 2400 square feet with (I believe) 10 foot high ceilings (because of the heat in Las Vegas). That’s 24,000 cubic feet. So IRS paper records would fill more than 227 of my sized home. It’s frightening to think of all that paper.

The Taxpayer Advocate noted the IRS needs $2.5 billion over six years to complete its (hoped for) modernization program. They received $150 million in the 2019 fiscal year and $180 million in the 2020 fiscal year for modernization. At the current rate, it will take more than 12 additional years to complete it.

The TIGTA report looked at the ability to get specific pieces of paper. Retrieving that paper is necessary for audits and many other required IRS tasks. TIGTA had requests sent through normal channels for tax returns and examination case files. Most of the time the records could be found. However, 6% of examination case files and 3% of tax returns could not be located. An additional 23% of examination case files and 10% of tax returns were not provided timely.

The TIGTA report should be looked in its entirety for a depressing picture of the reality (vis-a-vis computer systems) at the IRS. It’s not that IRS management disagrees with TIGTA on the recommendations that TIGTA made (they agreed with the four recommendations in the report); rather, the problem is that the IRS almost certainly doesn’t have the money to complete the necessary tasks.

Here’s an example from real life: A fellow tax professional’s client mailed in a Form 1040X last year. That client just received a letter stating, “We have a record of receiving your Form 1040X for the 2018 tax year. We cannot find it. Please send another signed copy by mail to this office….”

I’ve been impacted by this. I had a client a few years ago request an ITIN (Individual Taxpayer Identification Number) for his child. The ITIN unit managed to lose the paperwork (sent by certified mail) three times, including once when it was hand-carried to them by the Taxpayer Advocate Office! (Thankfully, the Taxpayer Advocate kept a copy and the fourth time was a charm!)

Do I think Congress will loosen the purse strings here? Well, maybe before I retire….

IRS Extends Tax Deadlines for Victims of Iowa Derecho & California Wildfires

August 25th, 2020

The IRS announced yesterday that they have extended tax deadlines for victims of both the derecho that hit Iowa and the ongoing California wildfires. The specific counties impacted can be found on the Federal Emergency Management Agency (FEMA) website.

For both disasters, tax deadlines are extended that began on August 10th for the derecho and August 14th for the wildfires until December 15th. This impacts 2019 personal tax returns on extension, business returns on extension, payroll tax filings, and estimated tax payments. California’s Franchise Tax Board automatically extends deadlines for federal disasters, so those impacted have identical extensions for California taxes. I assume the Iowa Department of Revenue will similarly extend Iowa deadlines.

Unfortunately, it looks like we’ll also be looking at victims of Hurricane Laura in Texas and/or Louisiana later this week. The IRS recently posted information on safeguarding records for natural disasters; your insurance company likely has additional information available. The cliche is that an ounce of prevention beats a pound of cure–but it is good advice.

More on the IRS Daily Fantasy Sports Memo (“DFS Is Gambling”)

August 20th, 2020

There has been some speculation in the gambling world on (1) why did the IRS memo on Daily Fantasy Sports (DFS) suddenly appear, and (2) is the IRS correct about the non-precedential memo?

Chris Krafcik on Twitter asked, ” Has anybody gotten to the why of the IRS DFS memo? Working backwards from the targets (DFS companies [i.e., DK [DraftKings] and FD [Fanduel]]), and having observed what I have of gambling industry lobbying skullduggery, fair to ask, imo, whether IRS was lobbied by a DK-FD competitor.”

The reality is far more mundane. John Brennan, who often writes on gambling, has an article today on the DFS memo. He quotes Jason Robins, CEO of DraftKings, from his conference call with gaming analysts last week:

We have been involved in [an] audit with the IRS for many years, and this was a memo that has no force of law and is non-binding,” Robins said. “In our view, the analysis is deeply flawed. …” [Emphasis added]

Let’s assume that DraftKings raised the issue in the audit that DFS wagers are not gambling for purposes of federal tax law because of the Unlawful Internet Gambling Enforcement Act (UIGEA) (which is a near certainty). The UIGEA contains a carve-out for DFS specifically exempting it. The IRS auditor did not know whether the UIGEA carve-out applied to the wagering excise taxes, and his or her manager didn’t know. They did what they were supposed to do: They asked the IRS Chief Counsel Office how this should be treated. This memo is the response to that inquiry. (It’s highly unlikely this memo is the result of a competitor’s actions.)

The next question is whether or not the IRS memo reaches the correct conclusion. As I previously noted, I think it does. As noted in the memo, wagering is not defined in the Tax Code. But Court decisions are unanimous in what to do when a term isn’t defined. From Tschetschot v Commissioner (T.C. Memo 2007-38):

When a term is not defined, we must apply the term’s “plain, obvious, and rational meaning.” Liddle v. Commissioner, 103 T.C. 285, 293 n.4 (1994), affd. 65 F.3d 329 (3d Cir. 1995); see also Boyd v. United States, 762 F.2d 1369, 1373 (9th Cir. 1985). According to the dictionary, a “wager” is defined as “something risked or staked on an uncertain event” or “a bet”. Random House College Dictionary (1968). Similarly, “to wager” is defined as: (1) Something risked or staked on an uncertain event; bet; (2) the act of betting. Random House College Dictionary (1973).

We can also look to the UIGEA for a definition of wagers. Indeed, DraftKings argues that because of the UIGEA, DFS is not wagering (gambling). Let’s look at the definition from 31 U.S.C. § 5362 (1):

(1) Bet or wager.—The term “bet or wager”— (A) means the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome; …(E) does not include— … (ix) participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization (as those terms are defined in section 3701 of title 28)….

First, I agree that DFS companies (such as DraftKings) are exempt from the UIGEA. 31 U.S.C. § 5362 (1)(E)(ix) is quite clear about that.

However, this has nothing to do with how wagering is treated under the Tax Code (aka the Internal Revenue Code); that’s a different section of the United States Code (Title 26). But we can look at the overall definition of what wagering is from the UIGEA, even though the UIGEA doesn’t apply to DraftKings, to see how the definition of wagering does apply to them under Title 26 of the U.S.C. As I wrote back in 2014,

…[T]here are plenty of IRS and Tax Court rulings on this, and all say basically the same thing. For something to be gambling, three elements must be present:
1. A prize;
2. Chance; and
3. Consideration.

The IRS memo and common sense tells us that DFS has at least an element of chance. No rain is predicted for a football game, and it rains impacting play. Or a pitcher pulls his hamstring and only pitches two innings. Or, well, you get the idea. The examples are too numerous to mention and all of them back the IRS’s view that there is an element of chance to DFS.

I do agree that DFS is an activity where skill predominates. As I have written many times, poker is also a game where skill predominates over luck. But that’s irrelevant for the Tax Code; legally, poker is a form of skillful gambling. So is DFS. But it’s gambling no matter what the DFS companies may want to say.

The conclusion I reached last week still holds: The DFS companies have little chance of prevailing on this issue. I reached that conclusion in 2015, and nothing has changed. They would be far better off trying to lobby Congress for an exclusion in the Tax Code than fighting the IRS on this.

That Direct Deposit from “IRS TREAS 310” Is Legitimate

August 19th, 2020

Taxpayers who filed after April 15th are being paid interest on their refunds. The IRS issued a press release earlier this week, stating:

This week the Treasury Department and the Internal Revenue Service will send interest payments to about 13.9 million individual taxpayers who timely filed their 2019 federal income tax returns and are receiving refunds.

The interest payments, averaging about $18, will be made to individual taxpayers who filed a 2019 return by this year’s July 15 deadline and either received a refund in the past three months or will receive a refund. Most interest payments will be issued separately from tax refunds.

In most cases, taxpayers who received their refund by direct deposit will have their interest payment direct deposited in the same account. About 12 million of these payments will be direct deposited.

Everyone else will receive a check. A notation on the check − saying “INT Amount” − will identify it as a refund interest payment and indicate the interest amount.

Several clients asked this morning about mysterious direct deposits from “IRS TREAS 310,” wondering what these were. That’s the interest on your refund from April 15th until the date you filed.

Do note that the interest you receive is taxable. You will receive a Form 1099-INT in the mail from the IRS next January and you will need to include that on your 2020 tax returns.

Burying Your Head in the Sand

August 17th, 2020

One of my favorite sayings (and I am not the one who came up with it) is “The Tax Code Giveth, The Tax Code Taketh Away.” It’s not fair, but we have to live with it as it is, not how we want it to be. Only Congress can change the Tax Code because it’s law.

Last week, I reported on the IRS releasing a Chief Counsel Memorandum where the IRS concludes that Daily Fantasy Sports (DFS) companies are liable for the Excise Taxes on Wagering. (Back in 2015 I came to the same conclusion as the IRS.) Per published reports, Jason Robins, the Chief Executive Officer of DraftKings, disagrees. The Wall Street Journal notes [pay link]:

“This was a memo that has no force of law, is nonbinding and [in] our view is deeply flawed in its analysis,” Mr. Robins told analysts. “Our position continues to be, which we believe has been reaffirmed through state legislatures and courts throughout the country, that [daily fantasy sports] is not wagering.”

First, state law and state courts do not change federal tax law. A state can call an activity a non-gambling contest but it can still be considered wagering (gambling) under federal law. We have a dual system of taxation in the United States, and state tax law and federal tax law differ in numerous respects.

Second, some states have concluded that DFS is gambling. For example, Nevada did so. Of course, a company executive will put the most positive light on something.

So I’m going to assist Mr. Robins with some information about the Federal Tax Code. Back in 2014, I wrote:

[T]here are plenty of IRS and Tax Court rulings on [what wagering/gambling is], and all say basically the same thing. For something to be gambling, three elements must be present:
1. A prize;
2. Chance; and
3. Consideration.

Clearly daily fantasy sports have elements 1 and 3. There’s a prize and there’s a cost to enter each event. Is there chance?

Gambling does not have to be 100% chance to be considered gambling. For example, poker is considered gambling under US tax law yet there’s plenty of skill involved with it. (Indeed, I’d argue that skill predominates over luck; however, there’s absolutely an element of luck in poker.) Let’s look at what’s involved with a daily fantasy sports contest. You generally select a team to play in a day’s events. Let’s say you selected Carlos Boozer and Shane Battier for today’s NBA daily fantasy sports contest. Those players scored 8 and 3 points, respectively. On the other hand, had you selected Taj Gibson and Chris Bosh you would have done far better; they scored 20 and 28 points. Yet before a single game who know what each player will score? If you had selected NBA star Lebron James you would normally do quite well; however, he didn’t play today.

The IRS Chief Counsel memorandum notes that there can be skill and the ‘contest’ can still meet the definition of a wagering activity:

In [Revenue Ruling 57-521], the contest participant’s own skill was the only factor involved in winning the puzzle game and there was no chance element at all. In contrast, DFS participants merely select a lineup for their simulated teams and have no ability to exercise control or influence over the actions of the players participating in the game and who earn the participants their fantasy points. DFS participants may be educated on the sports games, players, expected weather conditions, and other factors. Regardless of how educated a DFS participant is, their chosen player(s) may perform poorly that day, become injured, not play in a given game, or be affected by uncontrollable circumstances such as weather and officiating. The existence of chance indicates that DFS contests are distinguishable from the type of contest described in Rev. Rul. 57-521. We conclude that the “skill” involved in selecting fantasy players is similar to the skill involved in selecting winners of individual professional sports games, horse races, or other traditional sports gambling activities.

In my view, and the current state of the Federal Tax Code, it’s quite clear that a DFS contest is a wagering activity. It meets the specifications of wagering. There is consideration, there is a prize, and there is an element of chance (luck). Bluntly, Mr. Robins can educate the world on the skill needed to be a winner in DFS (and he is absolutely correct on the skill needed); however, under the Tax Code this is clearly gambling (wagering). Basically, Mr. Robins’s argument is irrelevant.

The only way this changes is to change the Federal Tax Code. That would require Congress to add a new section to the Tax Code specifically stating that DFS is not a wagering (gambling) activity.

If I were an auditor of a DFS firm, I would be insisting DFS companies either pay the wagering excise taxes or add a reserve for them. To put it in sports terms, the Pittsburgh Pirates have a better chance of winning the 2020 World Series than the DFS companies do of not having to pay the wagering excise taxes.

Deja Vu Again, and Again,…

August 15th, 2020

Multiple clients of ours filed tax returns near the July 15th deadline and mailed payments to the IRS. And, as usual, these clients received IRS CP14 notices stating they hadn’t paid their taxes (when they had). What should they do?

First, ignoring an IRS notice is generally not a good idea. IRS notices do not improve with age.

The simplest thing to do for individuals is to attempt to view your tax record online. If you can, view your Account Transcript for 2019. If it shows a $0 balance, the IRS has corrected the issue and you can ignore the CP14 notice.

(I have to use “attempt” because the IRS online system works for only half of those who try. For example, the system works for me but does not work for my business partner.)

But what if your check has cleared and the payment hasn’t been noted? Get copies of the front and back of the cleared check. With that, the IRS can trace where the check went. I’ve seen checks applied to the wrong account and the wrong tax year. If your check cleared more than two weeks ago, there’s a problem and you, or your tax professional (if you have authorized him or her) will need to call the IRS and resolve the issue. (If the check cleared in the last two weeks, you need to give the IRS a little more time to update their records.) This can usually be done over the phone.

Three issues this year have made matters worse. First, IRS computers are programmed to allow an extra “cycle” (to allow payments received to be entered into IRS computers) before sending out CP14 notices after April 15th. It appears the IRS hasn’t changed their programming for the July 15th due date, so there’s no extra cycle after July 15th.

Second, because of Covid mail has slowed. One of my clients mailed his payment (using certified mail) on July 14th from Reno; it wasn’t received in Cincinnati until July 23rd. In the past, that letter would take two or three days; this year, it took nine.

The third issue is that at least for Nevadans, we’re no longer mailing payments to San Francisco. This year Nevada, Oregon, and Arizona residents send their payments to Cincinnati. That’s much further away with corresponding later delivery dates. That hasn’t helped.

Individuals have it quite good: Things are far, far worse for businesses, trusts/estates, and anyone else making payments directly to IRS Service Centers. Simply put, the IRS has a backlog of over 10 million pieces of mail to open. Many of those include checks. The IRS knows of the issue, but until this backlog is resolved (and that will take months), there’s little that can be done. The IRS issued a statement acknowledging this issue:

Pending Check Payments and Payment Notices: If a taxpayer mailed a check (either with or without a tax return), it may still be unopened in the backlog of mail the IRS is processing due to COVID-19. Any payments will be posted as the date we received them rather than the date the agency processed them. To avoid penalties and interest, taxpayers should not cancel their checks and should ensure funds continue to be available so the IRS can process them.

To provide fair and equitable treatment, the IRS is providing relief from bad check penalties for dishonored checks the agency received between March 1 and July 15 due to delays in this IRS processing. However, interest and penalties may still apply.

Due to high call volumes, the IRS suggests waiting to contact the agency about any unprocessed paper payments still pending. See www.irs.gov/payments for options to make payments other than by mail.

So if you get a notice alleging you didn’t pay and you did, relax. This is probably a timing issue that will self-resolve. And a reminder that whenever you send something to a tax agency, use certified mail. This gives you proof you mailed it on the date noted. If that was done timely, the IRS will consider your action timely even if the IRS untimely opens the mail.