Archive for the ‘IRS’ Category

Do Not Blindly Pay IRS Notices, Reason ∞

Monday, March 20th, 2017

One of my clients angrily sent me a message today. She received an IRS Automated Underreporting Unit (AUR) notice alleging that she did not include $50,000 of W-2Gs on her 2015 tax return. She’s a professional gambler, so I looked at her Schedule C and shockingly (not) there was the $50,000 of W-2Gs included in her gross receipts. Attached to the return was a schedule helpfully breaking this out for the IRS (she also received a 1099-MISC that was included in her gambling gross receipts).

The IRS AUR program is a huge (or should I say “bigly”) money maker for the agency. People blindly pay these notices; after all, if the IRS sends it out it must be right? Well, the last survey I saw showed that two-thirds of IRS notices are wrong in whole or in part. AUR notices are not screened before being sent out. The recipient is literally the first person to have read it.

Do not assume an IRS notice is correct.
Most are not. If you blindly pay it, you have agreed to the tax. Had a human taken two minutes to read the return, they would have seen the income and the breakout schedule and the notice would have never been sent. But that simply doesn’t happen with the AUR program.

Additionally, you have a limited amount of time to respond to the notice (typically 30 days). Make sure you timely respond, and if you mail your response send it certified mail, return receipt requested. You want proof your response got there. Be prepared to wait many weeks for the IRS to send you a reply to what you’ve written; the average IRS time to respond to correspondence is now 14 weeks.

My client now understands this issue, and I provided her a pdf of the Schedule C and supporting documents to show that no tax is owed. If you get an AUR notice, make sure you carefully review it and then respond. While blindly paying an IRS notice did not make my Bozo Tax Tips for this Tax Season, I’m definitely considering it for the future.

The Other March 15th Deadlines

Wednesday, March 15th, 2017

Today’s the deadline for filing partnership and S-Corporation returns. An extension is available by filing Form 7004. Most (but not all) states grant an automatic extension. Do realize that if your state charges a tax for your entity (i.e. New York and Illinois), you need to pay that tax even if you file an extension.

There are two other deadlines today. Form 1042-S (report of withholding of foreign individuals) must be filed today, either electronically using the IRS’s FIRE system or by mail. Also, Form 3520-A (Annual Information Report of Foreign Trusts) is due today. An extension is available for Form 3520-A by mailing in Form 7004 (Part III, Code 27). There are ridiculous penalties for late-filing Form 3520-A, so if this applies to you and you’re not ready mail that extension (certified mail, return receipt requested) today.

The Hidden Bitcoin Trap: FBAR

Sunday, February 26th, 2017

A lot of my clients have invested in Bitcoins. For those who aren’t aware Bitcoins are a “cryptocurrency.” For tax purposes, Bitcoins are treated like stocks and bonds; realized gains (and losses) are reported on Schedule D. And that’s everything you need to know, right? Definitely not.

Most holders of Bitcoins use a Bitcoin wallet such as Coinbase or Blockchain. A wallet is used like a brokerage account. That means if you have a foreign Bitcoin wallet, you may have an FBAR reporting requirement.

Coinbase is located in San Francisco; it’s not a foreign financial firm. However, Blockchain is based in Luxembourg. Any American who is using Blockchain who has a tax filing requirement must note they have a foreign financial account on Question 7a. And such an individual may have to file an FBAR (Report of Foreign Bank and Financial Accounts, Form 114) to note this account (if they have $10,000 or more aggregate at any time during 2016). Additionally, it’s also possible such and individual will need to file Form 8938 with their tax return.

I suspect that many holders of Bitcoins and other cryptocurrencies are unaware of this issue. Many Bitcoin holders use multiple wallets and never look at the location of the wallet. Also, many individuals deliberately choose a wallet outside of the US to avoid possible scrutiny. Given that FBAR penalties can be ridiculously high this is an issue that tax professionals and taxpayers need to be concerned about.

While I have used Bitcoin wallet Blockchain as an example, there are many such wallets located outside the United States. I will begin to include such wallets in my list of offshore gambling sites (I’ll probably split the lists next year).

Breaking Bad Hits an IRS Attorney

Wednesday, February 1st, 2017

In the television show “Breaking Bad,” a high school chemistry teacher turns to selling methamphetamine to help his family; that’s a decidedly illegal activity. An IRS attorney is accused of pursuing the same activity.

Jack Vitayanon, an IRS attorney in the Office of Professional Responsibility, was arrested today and charged with conspiracy to distribute methamphetamine. According to the criminal complaint, Mr. Vitayanon has allegedly been trafficking drugs since 2014.

From the ICE press release,

“Selling methamphetamine is a serious crime which is made more egregious when it is committed by a U.S. government attorney assigned to the Office of Professional Responsibility of the IRS,” said Angel Melendez, special agent in charge HSI New York. “People that sell this highly addictive and destructive drug must be brought to justice before more lives are lost to this epidemic.”

The IRS Office of Professional Responsibility is to, “…[S]upport effective tax administration by ensuring all tax practitioners, tax preparers, and other third parties in the tax system adhere to professional standards and follow the law.” A CNBC news story states Mr. Vitayanon worked in investigating complaints against tax professionals for OPR.

Mr. Vitayanon faces several years at ClubFed if found guilty of the charge.

2017 Mailbag #2: The Case of the Deliberately Wrong 1099

Sunday, January 29th, 2017

Our second mailbag post deals with an issue I’ve reported on before: an incorrect information return. Once again, there’s a twist.

In 2015 I did some consulting for them and was paid $10,000; I received a 2015 Form 1099-MISC that correctly noted the income. I just received a 1099-MISC from them for 2016; however, I didn’t do any work for them in 2016. I called them and there response to my asking them to correct the error was “no.” What should I do?

The advice I gave before still applies:

But what if he refuses [to correct the 1099? Here, practicality must be used. Let’s say the total of your gross receipts is $32,000, and the total of your 1099-MISCs (and 1099-Ks) is $29,000. I’d likely just enter the 1099-MISC as received, and lower the “other” gross receipts by the extra $3000. (IRS instructions on information returns state to use the actual number. The problem is that the automated underreporting (AUR) unit will almost certainly send you a notice if you use the wrong number.)

Unfortunately, my correspondent’s total of her correct 1099s exactly equals her gross receipts so this strategy won’t work. I think there are two things she should do. First, send a letter (via certified mail) to the issuer of the incorrect 1099 explaining the situation and requesting that they issue a corrected 1099. Make sure you keep a copy of the return receipt (or tracking).

Second, consider including the 1099 on your tax return and then subtracting out the income (as a “return and allowance”). The IRS suggests (in this situation) that you subtract it out within gross receipts; the problem with that is that you’re almost certain to get an AUR notice. This method is less likely to generate an IRS notice, and your income is still being accurately reported.

What if you’re unlucky enough to get an IRS notice or be audited on this issue? Most of the time the burden of proof is on you, not the IRS; however, with information returns the burden of proof is on the IRS. The only evidence of my correspondent earning this “income” is the Form 1099-MISC. She has a separate bank account for her business; her bank deposits in 2016 exactly equal her gross receipts. Everything backs her story.

Congress changed the law on when 1099s for nonemployee compensation (independent contractors); those 1099s must now be filed by Tuesday, January 31st. One unforeseen consequence for tax professionals (and for recipients of 1099s) is that there will be more issues with incorrect 1099s this year. Hopefully the IRS’s performance on dealing with corrected 1099s will improve. If not, we’ll be dealing with a score of IRS notices on this issue next year.

2017 Mailbag #1: The 1099 Doesn’t Show Up, So I Don’t Have to Report It, Right?

Thursday, January 26th, 2017

It’s time for this year’s mailbag, and we’ll start with a common question: What happens if you’re expecting a 1099 and it doesn’t show up? There’s a twist as you will soon see:

I did contract work for a company and they should issue me a 1099. However, the company closed its doors; the company closed its doors last March (the owner retired) and the owner passed away a month later. If (when) I don’t receive the 1099, do I still have to report the income?

Yes, you need to report the income. All income is taxable unless Congress exempts it. Yes, the company you did work for is supposed to issue you a Form 1099-MISC. But whether or not you receive a 1099 doesn’t change whether income is taxable or not. You were paid for services, and that’s income. Simply total what you received and include it in your gross receipts for your business.

Sure, the executor of the owner’s estate is supposed to take care of all responsibilities. That includes the final tax returns and any information returns that must be filed. Interestingly, one of my clients just received a 1099 for 2014. The situation appears similar to my correspondent’s. It turns out the owner passed away and the estate was handled through probate. It took two years for the final tax return and the associated information returns to be prepared. It’s a non-issue for my client; he included the income on his 2014 tax return.

Remember, simply report all of your income regardless of whether or not you receive a 1099 (or other paperwork). It’s easier to sleep at night when your tax return is accurate.

My E-Services Follies

Thursday, December 15th, 2016

The IRS is trying to become a bit more security conscious. As part of their efforts, the IRS is having all e-Services account users who use the IRS’s “Transcript Delivery Service” re-validate their identities. Letters are being sent to impacted tax professionals. I received such a letter last week so I had the joy of re-validating my identity.

The IRS wants tax professionals to do this online using the “Get Transcript” online registration. I started to do this, entering my name, address, date of birth, social security number, and tax filing status. The IRS system said the information I entered wasn’t correct. I tried again, making sure I didn’t make any typographical errors. It was correct. I hit “Enter” and, of course, the IRS said it was wrong. Further, because it was wrong they locked me out of the system for 24 hours.

So I called the IRS e-Services help desk to re-validate my identity. After being on hold for 30 minutes, a gentleman picked up, but told me his computer was down so he transferred me to someone else. The new hold time was going to be an hour, and I had an appointment, so this got pushed back a day.

The next day I tried again online. The IRS application accepted that I knew my name, address, and other information. It accepted that I knew my credit card number. It then sends you a text message on your phone. Just one step was left: Entering that number on the screen and I would be re-validated! I got the text just moments later, entered it in, and…the system crashed.

Well, if it worked once it would work again, right? Wrong. When I entered my name and other personal information the system told me I had mis-entered the information and it was locking me out. I called IRS e-Services. After being on hold for 21 minutes a woman picked up and was able to ask me the same questions that the IRS computer did (I also had to read a code off the letter I had received). I’m now validated as me!

Seriously, I’m underwhelmed by this process. This is a prototypical example of a kluge (“A Workaround or quick and dirty solution that is clumsy, inelegant, inefficient, difficult to extend and hard to maintain.”). There’s no reason the IRS system accepted my personal information only one of four tries (it was entered correctly all four times). There’s no reason it should crash as frequently as it does. If you’re an IRS e-Services user, maybe you’ll get lucky and be able to re-validate your identity online…but don’t count on it.

IRS Appeals Implements Stupid Policy of Not Sending Initial Contact Letters

Tuesday, December 6th, 2016

I have a client who filed a Tax Court petition in late September. She is disputing additional tax from an Automated Underreporting Unit (AUR) notice. She didn’t respond to the initial AUR notice, so the way to resolve this is to file a Tax Court petition and get this in front of IRS Appeals. I have a Power of Attorney for my client; I expected to hear from IRS Appeals in three to five months.

When I got in yesterday morning I had a message from someone identifying themselves as an IRS Appeals officer out of Philadelphia. When I returned the call I discovered he was the assigned Appeals Officer in the case. I also discovered that:

– In the past for a case sent to Tax Court the IRS sent a letter to the petitioner (and her representative) noting that the case was being assigned to an IRS Appeals Officer with the hope of settling the case;
– IRS policy has changed, and these letters are no longer being sent;
– Now the initial contact would be by phone with no letter being sent; and
– Even after my calling the Appeals Officer there’s no way for me to receive correspondence showing that the Appeals Officer has been assigned to the case.

In this particular case I am certain that this Appeals Officer is working on the case (he had details of the case that were not public). However, I do not want to just take the say-so of a voice on the phone. Hasn’t the IRS Appeals Office heard of identity theft? Perhaps they’ve heard of the IRS Phone Scams? This week also is “National Tax Security Awareness Week;” it appears that the IRS Appeals Office should consider how their security appears to tax professionals.

The IRS recently mandated that, “ALL initial taxpayer contacts to commence an examination must be made by mail using approved form letters. [emphasis in original]” Similar rules now apply for payroll tax examinations and FTD Deposit Alerts. The Appeals Office policy of calling first is, to be blunt, stupid.

An initial contact letter (or fax) costs a couple of dollars to send out. It informs the taxpayer and his representative that a specific individual has been assigned to the case, their contact information (address, phone and fax numbers), and gives official notification of the assignment. (It also usually gives the name of the Appeals Officer’s Manager.) The cost for sending out this letter is likely less than five dollars. This is a minimal cost. I don’t know exactly how much the Appeals Officer I spoke to yesterday makes, but I can guarantee he spent more than five dollars worth of his salary proving to me that he was assigned to the case.

Hopefully the powers that be at the IRS will realize that this is a very penny-wise, pound-foolish policy. In these days of identity theft and phony IRS phone calls how am I to know that Appeals Officer Smith really is an Appeals Officer rather than a scammer?

IRS, please reconsider.

Your Tax Professional, A Cop

Thursday, December 1st, 2016

Las Vegas Police Department Logo

When I flew to visit my mother for Thanksgiving, I had to show my driver’s license to get through TSA security at the Las Vegas Airport. That’s not a surprise. When I prepare my mother’s tax return for 2016, I am required to note my mother’s drivers license number, the date it was issued, the date it expires, and the state it was issued by. No, I am not making this up.

I have become a cop. And I’m not happy about it.

The IRS (with the tacit support of tax software companies) has pushed this requirement on to tax professionals. Sure, it only takes two minutes to enter this information (four minutes if married filing jointly), so for a return it’s not that big of a deal. Multiply that by 500 returns, and you have 1,000 minutes. That’s nearly seventeen hours of work (likely more, as most of my clients are married).

Yes, this will aid in preventing some identity theft. Yes, some states have already required this information. (I know that Alabama did for 2015 tax returns.) Yes, I won’t need to reenter this for 2017 tax returns (unless the driver’s license information changes). But this is another 17 hours I don’t have during tax season.

Unfortunately, there’s more. When Congress passed the PATH Act, Congress increased due diligence requirements on tax professionals when preparing returns where taxpayers claim the Earned Income Credit, the Child Tax Credit, the Additional Child Tax Credit, and/or the American Opportunity Tax Credit. The instructions note that tax professionals must,

Meet the knowledge requirement by interviewing the taxpayer, asking adequate questions, contemporaneously documenting the questions and the taxpayer’s responses in your notes, reviewing adequate information to determine if the taxpayer is eligible to claim the credit(s) and in what amount(s)….[emphasis added]

We don’t have many clients that take the Earned Income Credit. However, we have plenty of clients that take the Child Tax Credit (and/or the Additional Child Tax Credit) and the American Opportunity Credit. Tax professionals must now conduct an interview. Once again, there goes ten to fifteen minutes of time (that’s our estimate of the interview length). If we have 100 clients who take these credits, that’s another 21 hours of work.

Together, that’s nearly a 40-hour week. Yes, 2016 tax returns will cost more to prepare.

But that’s not all. Consider John and Jane Doe. They have a very simple return: W-2 income, a few deductions, and the usual 2.2 children. They drop off their paperwork in late March, and are surprised to discover they will go on extension. “Why?” they ask. That’s because their tax professional doesn’t have any interview spots available until after the April tax deadline.

The actions of the IRS and Congress have laudable goals. Reduction of identity theft and eliminating people incorrectly claiming tax credits are good ideas. However, because of the additional work, most taxpayers are going to discover that tax professional’s deadlines are very strict for 2016 returns. I know ours will be.

If you are a tax professional it’s probably worth revising your Engagement Letters to note these new requirements. And if you happen to have a spare cloning machine, please call me.

That Was the Tax Season That Was

Wednesday, 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.