December 5th, 2014

It’s time for my annual winter vacation. I will not be posting until I return. While I’m away, enjoy the fine bloggers listed in the blogroll on the right.

I’ll be back on Tuesday, December 23rd.

Speaking of Efficiency

December 5th, 2014

I do know how we can improve the Tax Code: Force Congresscritters to do their own taxes. I have an instructive vignette on why this is the case.

A friend of mine was hired by a major tax software company to be in customer support. He has had to learn about the Tax Code so he can answer questions. Currently, he’s taking training courses. He had this to say recently:

If you say anything about Basis, At-Risk, or Passive Limitations, I’m going to have to cut you. One of the biggest things I’m learning at [Software Company] is our tax code is ****ed and needs serious fixing.

Imagine what would happen if every Congresscritter did their own tax returns by hand. The Tax Code would unanimously be shrunk four hours later. My friend probably didn’t give the Tax Code much thought until he took his new job. I’m certain he agrees with me that using it as a “Swiss Army Knife” makes no sense.

Unfortunately, there’s no chance of meaningful reform with the current President. His goals appear to be to make things worse rather than better. It will be at least 2017 before meaningful tax reform will be on the table.

A Rare Piece of Efficiency from the IRS

December 2nd, 2014

We have to take our victories in dealing with the IRS where we find them. As an Enrolled Agent, every three years I have to renew my license. I go online, check various boxes, note the continuing education I’ve taken, pay a fee, and months later I receive my Enrollment Card in the mail. Indeed, three years ago it took three tries for my card to make it to me (possibly because of my move).

On November 4th I completed my renewal application. In yesterday’s mail I received my new Enrollment Card (postmarked on November 28th). Kudos to the IRS in getting this done efficiently.

Now, if they could only make the Practitioner Priority Service hold times be under an hour….

Mundane Tax Fraud Downs Friend of Cicero Town President

December 1st, 2014

George Hunter will likely be going to ClubFed. He pleaded guilty today to two counts of tax evasion. Mr. Hunter’s company received $1.8 million in two years from Cicero…without a contract. Mr. Hunter is friends with Larry Dominick, the Ton President of Cicero. Cicero is a suburb of Chicago. The Chicago Sun-Times article notes that Mr. Hunter has refused to cooperate with federal prosecutors.

As for the tax evasion, it’s pretty mundane. Mr. Hunter paid his employees in cash and told his employees not to report their income to the IRS. He didn’t, and not paying payroll taxes is a major issue with the IRS. He also failed to file a 2008 tax return when he allegedly made $655,000. Mr. Hunter originally said the charges were brought because he refused to cooperate with authorities. No matter, the charges apparently were true. He’ll be sentenced in March.

Corruption in Chicago? Who would’ve thunk it!

A Ship Over Troubled Waters Sinks Leeds’ Cellino For Now

December 1st, 2014

From the Sport (not Sports) page of the Telegraph and the BBC we find that Leeds beat league-leading Derby two to nil in football (or soccer for us colonials). Derby manager Steve McClaren was quoted by the BBC: “It’s just one of them days, a bad day at the office. We were below our best and when you’re not at your best, you can be beaten.” However, the real news was what happened away from the pitch.

Massimo Cellino owns Leeds United. Unfortunately, he’s also been found guilty of evading import taxes on a boat in Italy. The Football League ordered Mr. Cellino to resign because he was convicted of “…an offence involving a ‘Dishonest Act’….” Mr. Cellino vows an appeal.

In any case, his ouster will likely be very short-term. He can resume his ownership on March 18th; at that point his conviction will be “deemed spent.”

As God as my Witness, I Thought Turkeys Could Fly

November 26th, 2014

Have a Happy Thanksgiving everyone:

One Ringy Dingy, Two Ringy Dingies…

November 25th, 2014

…2400 Ringy Dingies. Yes, I was on hold for two hours today on the IRS Practitioner Priority Service before my call was picked up. It’s November–not a high time for calling the IRS–but add the combination of the IRS Centralized Authorization File Unit taking well over the promised five days to input a faxed Power of Attorney or Tax Information Authorization, lots of notices being issued by the IRS that require a response, and ridiculous hold times are the norm.

Oh, yes, I was told the expected wait time was 30 to 60 minutes. Sigh….

Would the Proprietors of “I Married an Idiot” Commit Tax Fraud?

November 20th, 2014

Sometimes you can’t make this stuff up.

Perhaps you missed the website The website is down, but thanks to the Internet Archive it will continue to be accessible. I’ll leave it to the reader to peruse the web site.

I saw a brief story on Mark Garcia and Patricia McQuarry in the Pioneer Press. It seems that they not only thought they married an idiot, they committed an idiotic form of tax fraud.

The couple, who are married and were the proprietors of the aforementioned web site, decided to claim to have received “…hundreds of thousands of dollars in 1099-OID income and that the entire amount had been withheld and paid over to the IRS on their behalf.” The couple even put down real bank tax identification numbers on their phony paperwork. Unfortunately, the IRS didn’t detect the fraud until after the fact. Yet it was certain that sooner or later the IRS would find the fraud given that the IRS document matching system wouldn’t match their phony paperwork to real 1099s.

One good fraud deserves another, so the couple then bought real estate and transferred it into a trust titled “POKE-A-BOTTOM.” (No, I didn’t make that up.) Then they were facing foreclosure, so they sent fake tax returns and frivolous documents to their bank. (In all seriousness, lying on a loan document can be a federal felony.) “The documents included fake tax forms and a “Bonded Promissory Note” for $10,000,000, along with instructions that the financial institution should use the document to pay off their $266,000 mortgage and keep the remaining funds.” Somehow the bank decided that wasn’t a good idea. I imagine that the RV and gold coins purchased by the couple with some of the proceeds will be used to pay back the United States Treasury.

The couple will have plenty of time to think of non-idiotic behaviors they can do in the future. There wasn’t anything idiotic about their sentencing for one count each of Conspiracy to Defraud the United States and two counts each of False Claims Against the United States: Mark Garcia received 30 months at ClubFed; his wife, Patricia McQuarry, received 40 months.

IRS Clarifies Electronic Signature Requirements

November 18th, 2014

The IRS released a new version of Publication 1345 today (html version only is available for now). Included in it is the following:

Note: An electronic signature via remote transaction does not include handwritten signatures on Forms 8878 or 8879 sent to the ERO by hand delivery, U.S. mail, private delivery service, fax, email or an Internet website.

Thus, if a client signs a signature document in ink, hands it to me, mails it to me, faxes it to me, or uploads it to me via our web portal (or even if he emails it to me), it’s not an electronic signature and I don’t have to check id, etc. (So, mom, I don’t need to see your ID.)

Additionally, the IRS will accept Form 3115 as a pdf attachment to an electronically filed return. This is one less bad thing with the new property repair/capitalization regulations.

The Horrible, No Good, Very Bad Upcoming Tax Season

November 16th, 2014

If you’re a tax professional here’s a warning: The 2015 Tax Season will be one you’re almost certain to remember for all the wrong reasons. If you’re a client of a tax professional be forewarned: Your tax professional will be even more grouchy than usual next year. Why? The upcoming tax season will likely be the worst in 30 years.

There are four reasons for this: tax extenders, budget issues the IRS faces, the Affordable Care Act (aka ObamaCare), and the new property capitalization/repair regulations. Let’s look at them seriatim.

1. Tax Extenders. Stop me if you’ve heard this before: Congress has essential tax legislation, but sits around and does nothing on it until after the November elections. Yes, that’s happened again. If Congress acts on extender legislation in the next couple of weeks, there likely won’t be much of a delay (if any) on the opening of the 2015 Tax Season. However, if Congress dallies or punts this to the new Congress in January, the 2015 Tax Season will be significantly delayed. This will also hurt the IRS’s resources when there’s a lot going on (see below). I’m hopeful that something will be passed by the first week of December but that’s just hope on my part. I have no idea if the extenders will be timely extended.

Odds that this impacts Tax Season: 95%
Odds of a significant impact: 50%

2. Budget Issues the IRS Faces. The IRS’s budget has been cut the last two years. The House of Representatives has done this because of anger over the IRS scandal; it’s clear to any objective observer that the IRS knows more about the scandal than they’ve revealed. The only thing that the GOP can do to impact the IRS is cut the budget.

Unfortunately, the budget cuts impact service that the public and tax professionals receive. Additionally, the cuts limit the IRS’s ability to adapt to new legislation. It’s not a recipe for good service. Given the major changes coming for the 2015 Tax Season, it’s a recipe for disaster.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 80%

3. The Affordable Care Act (aka ObamaCare) This is the first year that reporting on health insurance is required on tax returns. However, reporting isn’t required this year by insurance companies. Insureds who believe they qualify for an exemption must apply for that exemption; that exemption must be noted on the return.

For most individuals, the new law will not change their taxes. They have employer provided health insurance. However, for the other 20% the new law will change their returns. They’ll have their own insurance, or receive a subsidy, don’t have insurance, have an exemption, or any of the other ‘edge cases.’ There are two new forms that tax professionals will have to deal with, and the complications are an unknown.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 100%

4. The New IRS Property/Capitalization Regulations. The IRS announced final regulations for repair/property/capitalization regulations in 2013. These regulations impact anyone who owns property, leases property, or produces property. This means you’re impacted if:

- You’re a business entity that manufacturers anything (you produce property); or
- You’re a business entity or an individual with a business that has depreciation; or
- You’re an individual (or a business) that owns rental property.

It might be easier to list those taxpayers who aren’t impacted by this: The typical family who works, owns a home, and has a simple situation. Put another way, if you file a Schedule C, E, or F, or you file a business return, you will likely be impacted by this change.

So Russ, you ask, what’s changing with these new regulations? Since most of you aren’t tax professionals and don’t care about the minutiae, the IRS changed the rules on what must be capitalized (and depreciated over time) and what must be expensed. That didn’t seem like such a huge deal back in May when I first heard about this (at a continuing education course). However, how the IRS is implementing this change will impact you if you’re a taxpayer impacted by this.

At the continuing education course I took, we were told that every impacted taxpayer would need to sign a statement noting compliance with the new regulations. That didn’t seem too bad–get a draft statement, and make the necessary modifications depending on the type of business. Unfortunately, that’s not what’s going to happen.

Instead, the IRS wants every impacted taxpayer to include Form 3115 on their tax return. This form is anything but easy or straightforward. You must make several calculations based on the past. The IRS estimates that it will take a taxpayer, on average, 23 hours and 48 minutes to be able to complete and file just this form. This is nuts.

No wonder Joe Kristan (via Tax Analysts) reported the following:

Participants in the tax methods and periods panel at the American Institute of Certified Public Accountants fall Tax Division meeting in Washington said that some taxpayers don’t want to pay the high costs associated with going through years’ worth of records to calculate a precise section 481(a) adjustment required under the final regulations (T.D. 9636). The cost of that level of compliance could be more than the entire cost of preparing their returns, practitioners said, adding that the taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero. [emphasis in original]

Joe calls this insane; I agree completely. Yet as of now I’m required to do this procedure. No wonder it was stated, “…taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero.” Consider a hypothetical client, Joe Lessor. Mr. Lessor has one rental property he’s leased out for the last four years. He has rent received, a mortgage, property tax, management fees, and every so often repairs. Do you think he’s going to pay me an additional $5,000 to get his return done to comply with this requirement? Or do you think he’ll tell me to make the numbers zero because the return was done right in the past and it will be done right in the future? (If you don’t like this scenario, choose your own.)

But there’s more. Form 3115 is (at least with my tax software) not a form that can be electronically filed. That means the IRS will have a lot more paper returns this year. Given the IRS’s staffing issues, that sure figures to work well.
UPDATE: Form 3115 can be attached as a pdf to electronically filed returns. That’s been clarified in Publication 1345. Thus, it can be (effectively) electronically filed.

I am hopeful that the IRS’s view on this will change. I know that the AICPA sent a request to the IRS for a de minimis exception to this. Maybe the IRS will see the light.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 100%

The 2015 Tax Season looked to be bad just given the first two issues. Adding ObamaCare and the new property/capitalization regulations to this just makes what was going to be a bad tax season into what will likely be a disastrous tax season. Nina Olson, the National Taxpayer Advocate, compared the upcoming tax season to 1985. In that tax season, the IRS Philadelphia Service Center “lost” about 20% of the paperwork they received. (This was back when returns were all paper-filed.) This will likely be a very bad tax season for tax professionals and taxpayers.