Archive for the ‘IRS’ Category

The Form 3115 Conundrum

Monday, January 26th, 2015

[Accounting Today readers: Here’s a link to Fail, Caesar.]

Form 3115 is the form used to request an accounting method change. For example, if your business is changing from cash to accrual, this form is filed. Many such changes are automatic; you just notify the IRS, file the paperwork, and life moves on. Of course, even the simple is complex: Form 3115 gets filed twice: once with your tax return, and once to either Ogden, Utah or to Washington, DC.

This year there’s a conundrum faced by tax professionals: Do we need to file a Form 3115 for every taxpayer who has equipment, depreciation, rental property, inventory, etc.? And no one seems to know the answer.

The cause of the problem is the new repair/capitalization/property regulations. These new regulations are effective for the 2014 tax year, and specify how certain things are supposed to be done. Why is this a big issue? Because Form 3115 is complex: The IRS estimates it will take 24 work hours to complete one form for one client.

It’s a certainty that companies that manufacture or have inventory will need to file Form 3115 with their returns. But what about someone with a side business? A couple who rents out their old home? There is a 12-page thread on TaxProTalk on this subject and I don’t think anyone there has a good handle on this.

Let’s take a real world example: John and Mary Smith. The Smiths own one residential rental property here in Las Vegas. The property has been depreciated for the last five years. In 2013, they put in a new garage door and are depreciating it. Their tax return is otherwise quite blase: they have wage income, a home mortgage, property tax, and some minor investment income.

I still don’t have a good answer for this. I’d love to hear from other tax professionals on this issue.

Waiting for Godot

Wednesday, January 14th, 2015

Yesterday, I called the IRS on behalf of a client. The client’s 2013 tax return was not processed correctly, so we had to file an amended return. The client received a CP503 notice demanding payment; however, we believe that she will actually receive a refund. It’s been four months since the amended return was received. It will likely be another four months before the issue is resolved…and it might be longer. The IRS put a 15-week hold on collection activities, so my client’s issue was resolved (for the moment).

But for the taxpaying public it’s gloom and doom this year when dealing with the IRS. IRS Commissioner John Koskinen sent a memo to all employees on Tuesday:

There is no way around the severity of these budget cuts without taking some difficult steps. Congress approved a $10.9 billion budget for us, which means we must absorb a cut of $346 million during the remaining nine months of the fiscal year. But that really amounts to a total reduction of about $600 million when you count another $250 million in mandated costs and inflation. This is the lowest level of funding since 2008, and the lowest since 1998 when inflation is considered.

In the memo, Commissioner Koskinen noted that there will be delays to IT work, less enforcement, and cuts in overtime and temporary staffing. For the public, interfacing with the IRS will get worse:

o Delays in refunds for some taxpayers. People who file paper tax returns could wait an extra week—or possibly longer—to see their refund. Taxpayers with errors or questions on their returns that require additional manual review will also face delays.
o Increasing correspondence inventories. We realize there will be growing inventories in Accounts Management, and taxpayer correspondence will face lengthy delays.
o Taxpayer service diminished further over the phone and in person. We now anticipate an even lower level of telephone service than before, which raises the real possibility that fewer than half of taxpayers trying to call us will actually reach us. During Fiscal Year 2014, 64 percent were able to get through. Those who do reach us will face extended wait times that are unacceptable to all of us.

What this means for you and I is that we have deadlines, but there’s none on the IRS. If you’re going to call the IRS, expect very lengthy hold times; yesterday I was on hold for 101 minutes before speaking with an IRS representative. I expect the hold times to get far worse as we head into Tax Season. If you’re sending mail to the IRS, you will be waiting for a response for weeks to months. Given the volume of mail, this will lead to more individuals mail not being responded to in a timely manner; this will lead to more Tax Court petitions being filed.

Back in December 2013 I sent a letter to the IRS on behalf of a taxpayer who had an issue with an electronic payment. I received the response to that letter last week. Humorously, the IRS had first said they lost my letter. (It was sent certified mail, return receipt, so I knew it was received.) This kind of delay is going to become the norm.

What can the taxpaying public do? First, don’t take out your anger with IRS employees; it’s not their fault. Almost all IRS employees do try their best. As Commissioner Koskinen said, “But I know firsthand the commitment and dedication you and your colleagues have to the nation and to taxpayers, and I know you will continue to do your best even as we are forced to do less than all of us want.” Yes, the IRS partially brought this on themselves with their obfuscating responses to the IRS scandal, but that has nothing to do with the rank and file IRS employees.

Second, document everything. If you mail something to the IRS, send it certified mail, return receipt requested. If you call the IRS, document who you spoke to (especially if the call relates to an examination/audit). At the beginning of any call with an IRS employee, they will state their name and badge number. You may need this information later.

Third, if you work with a tax professional get your paperwork to him or her early this year. This return season would have been challenging without the IRS issues; it will likely be one for the record books (and not in a good way). I expect my firm’s deadlines for clients to be applied to all this year.

Finally, be very patient. The IRS will eventually get back to you. If you have an issue and have to call the IRS, try first thing in the morning (especially if you live on the East Coast) or at the end of the day (especially if you live on the West Coast); avoid calling on Mondays.

I wish I had good news here, but the reality is that dealing with the IRS over the next few months will be a very unpleasant experience.

Business EFiling Reopens on Friday

Wednesday, January 7th, 2015

The IRS will reopen business electronic filing this Friday, January 9th. This is just for prior-year business returns (2012 and 2013). Current year (2014) business return electronic filing opens on Tuesday, January 20th — the same day that the IRS will begin accepting 2014 individual returns. Prior-year individual returns (2012 and 2013) can also be electronically filed beginning on January 20th.

1099 Time (2015 Version)

Saturday, January 3rd, 2015

As we start 2015, we’re running some repeats of important issues.

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)

Otherwise, you need to send a Form 1099-MISC to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your accounting software (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing might be easier than electronic filing.

If you wish to file paper 1099s, you must order the forms from the IRS. The forms cannot be downloaded off the Internet. Make sure you also order Form 1096 from the IRS. This is a cover page used when submitting information returns (such as 1099s) to the IRS.

Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-MISC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement.

Finally, there are strict deadlines with information returns.  Here are the deadlines for 2014 information returns:

  • Monday, February 2nd: Deadline for mailing most 1099s to recipients;
  • Monday, March 2nd: Deadline for filing paper 1099s with the IRS (postmark deadline); and
  • Tuesday, March 31st: Deadline for filing 1099s electronically with the IRS.

Remember, if you are going to mail 1099s to the IRS send them certified mail, return receipt requested so that you have proof of the filing.

It’s Time to Start Your 2015 Mileage Log

Saturday, January 3rd, 2015

I’m going to start the new year with a few reposts of essential information. Yes, you do need to keep a mileage log:

Monday is the first business day of the new year for many. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log.

Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you likely need a paper log.

The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 40,315). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car.

Here’s the other things you should do:

On the cover of your log, write “2015 Mileage Log for [Your Name].”

Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:

1/5 40315-40350 Office-Acme Products (1234 Main St, Las Vegas)-Office,
Discuss requirements for preparing tax return, year-end journal entries

It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.575/mile, the 35 miles in this hypothetical trip would be worth a deduction of $20. That deduction does add up.

Some gotchas and questions:
1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.

That said, if you backup (or transfer) your phone app on a regular basis, and can then print out those backups, that should work. The regular backups should have identical historical information; the information can then be printed and will function as a written mileage log. I do need to point out that the Tax Court has not specifically looked at mileage logs maintained on a phone. A written mileage log (pen and paper) will be accepted; a phone app with backups should be accepted.

2. I have a second car that I use just for my business. I don’t need a mileage log. Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.

3. Why do I need to record the starting miles for the year?
There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.

So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.

2014 Tax Offender of the Year

Wednesday, December 31st, 2014

It’s time again for that most prestigious of prestigious awards, the 2014 Tax Offender of the Year. The winner of this award must do more than just cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Once again, there were plenty of nominees.

The Miccosukee tribe is still having its battles with the IRS. The tribe is exempt from taxes but its members are not. The tribe has refused to send financial documents to the IRS. The tribe appealed the most recent order that they do provide the data; a ruling is expected soon from the 11th Circuit Court of Appeals. If the tribe loses this round, the battle will likely be over.

Another nominee was John Koskinen. If that name sounds familiar to you, it should; he’s the IRS Commissioner. Mr. Koskinen testified to Congress that, “I’ve tried to tell you the truth every time I’ve been here.” I had a simple question for Mr. Koskinen: Why doesn’t that quote read I’ve told you the truth every time I’ve been here? The obfuscation by the IRS on the current scandal has led directly to the IRS’s budget being cut.

Charles Waldo received a nomination for allegedly emulating Steven Martinez. (Mr. Martinez won the 2012 Tax Offender of the Year award for hiring a hit man to eliminate witnesses against him in a tax fraud case.) Mr. Waldo was arrested on a 50-count indictment for insurance fraud, tax evasion, felony vandalism, and a high speed chase in California. While awaiting trial, Mr. Waldo allegedly hired a hit man to kill witnesses against him. He’s had ten additional counts added to his indictment. At this point, though, these are just allegations; we’ll have to wait until 2015 to see if Mr. Waldo can truly be nominated.

Finally, Rashia Wilson received a nomination. Ms. Wilson received 21 years at ClubFed for tax fraud. Now, she was indicted in 2012 and convicted in 2013. For those who don’t remember her, there’s this from the Tampa Bay Times:

“I’m Rashia, the queen of IRS tax fraud,” Wilson said May 22 on her Facebook page, according to investigators. “I’m a millionaire for the record. So if you think that indicting me will be easy, it won’t. I promise you. I won’t do no time, dumb b——.”

Ms. Wilson also posted this wonderful picture:

Rashia Wilson (Image Credit: Tampa Police Department)

In any case, Ms. Wilson, who now resides at a federal prison in Aliceville, Alabama, was ordered to pay $25 each quarter toward the $3.1 million in restitution she owes the IRS. She has asked a US District Court to suspend the payments because she is only making $5.25 each month and must buy vitamins and hygiene items. Ms. Wilson is a reminder to all that bragging about illegal activities on Facebook isn’t a brilliant idea.

Back in 2012 I wrote a post titled, “A Modest Proposal on Tax-Related Identity Theft.” The IRS admits that this is a huge issue. Unfortunately, the IRS is still mostly reactive rather than proactive on this front.

This year, I’ve decided to spotlight an identity thief as the Tax Offender of the Year. I deliberately chose this kind of tax offense because, as the IRS states, “We know identity theft is a frustrating process for victims.” I don’t know of any tax professional with a large practice who hasn’t seen a case of identity theft. My business partner’s late stepfather was a victim of identity theft when his social security number was published on the Social Security Death Index.

Identity theft causes trauma in a victim’s life, and this trauma can last years. The problems can be psychological and actual, impacting the mundane (purchasing), filing a tax return, buying property, and a victim’s self-esteem.

I had literally hundreds of identity thieves to choose from. I naturally chose someone who committed a huge fraud, and whose actions were egregious. For the record, a Google search of the Justice Department’s website looking for “identity theft” for just December 2014 found about 140 entries.

From Smyrna, Georgia comes the story of Mauricio Warner. Mr. Warner told individuals that you could receive a “stimulus payment” or “Free Government Money.” Instead, the over 5,000 victims had a tax return filed in their names. The tax returns contained false income amounts and refundable tax credits to generate the erroneous refunds. Of course, the refunds were direct deposited into bank accounts that Mr. Warner controlled.

Mr. Warner was indicted in April, 2013. He was accused of 16 counts of wire fraud, 16 counts of aggravated identity theft, 16 counts of filing false claims, and two counts of money laundering. He was tried earlier this year, and found guilty of all the charges. He was sentenced to 20 years at ClubFed and was ordered to make restitution of $5,041,869. Partial restitution has already occurred; the court ordered forfeiture of seven bank accounts that contained $4,185,455.31. (While there have been abuses of forfeiture, this is a case where it appears to be amply justified.) For the record, Mr. Warner has filed an appeal.

While the IRS continues to spend money on its quixotic goal of regulating all tax professionals, the plague of identity theft continues. Yes, the IRS is making strides and has implemented some ideas that will stop some of this scourge. But priorities at the IRS seem a little off to me: All of the money being directed into the IRS’s Annual Filing Season Program could be redirected into fighting identity theft.

One year I’m hopeful that I’ll write, “I could not find a deserving candidate for the Tax Offender of the Year.” Unfortunately, I suspect that I’ll have plenty to choose from in 2015, too.

That’s a wrap on 2014. I wish everyone a happy, healthy, and safe New Year.

IRS Announces Tax Season to Start on January 20th

Monday, December 29th, 2014

The IRS announced today that they anticipate opening tax season normally — on Tuesday, January 20, 2015. (Monday, January 19th is Martin Luther King day and is a federal holiday.) Paper return processing will also begin on the same day.

It is probable that 2014 business tax returns will be accepted on or around the same date.

While I Was Out: 2015 Standard Mileage Rates Issued

Friday, December 26th, 2014

While I was on my vacation the IRS announced the 2015 standard mileage rates:

Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

  • 57.5 cents per mile for business miles driven, up from 56 cents in 2014
  • 23 cents per mile driven for medical or moving purposes, down half a cent from 2014
  • 14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates

Business Efiling Annual Shutdown on Friday

Tuesday, December 23rd, 2014

The IRS will begin its annual business electronic filing shutdown on Friday, December 26th. This shutdown enables the IRS to add the new year (2014) tax products for business electronic filing. I’d expect business efiling to resume in mid to late January (2015).

Tax Extenders Signed Into Law

Sunday, December 21st, 2014

President Obama signed legislation that extended for one year the “Tax Extenders.” Tax Extenders include items such as the deduction for sales tax, mortgage/cancellation of debt tax relief, “bonus” depreciation, and many others. As the legislation didn’t have much in the way of surprises and it was signed into law in December, it’s likely tax season will begin either on time or just a week or so late.

That said, it’s not going to be a pleasant tax season for tax professionals, the IRS, or the taxpaying public. The IRS is anticipating answering just 50% of the phone calls it receives. On the bright side, since many of the answers given on the IRS help line are wrong this might have a positive component.

Additionally, this year features the first year of ObamaCare tax forms and the new property/capitalization/repair regulations.

These are such pleasant thoughts to think about on the last day of my vacation….