Archive for the ‘IRS’ Category

Answering to a Higher Authority

Wednesday, August 10th, 2022

Robert Brockman, the 2020 Tax Offender of the Year, passed away last weekend.  Mr. Brockman was facing a 39-count indictment for tax fraud and related charges; his trial was set for this coming February.  Mr. Brockman’s attorneys argued that he was incompetent to stand trial due to dementia; however, the judge had ruled him competent.  The criminal case is now moot—Mr. Brockman is answering to a higher authority; the civil case will continue against his estate (the IRS attempting to obtain back taxes, penalties, and interest).

My condolences to his family.

Do IRS Employees Know the Postmark Rule?

Friday, July 22nd, 2022

So what’s the postmark rule?  The IRS notes this on their website:

Your return is considered filed on time if the envelope is properly addressed, has enough postage, is postmarked, and is deposited in the mail by the due date. If you file electronically, the date and time in your time zone when your return is transmitted controls whether your return is filed timely.

Of course, the IRS website doesn’t govern; the Tax Code and regulations promulgated under the Code do.  And here the IRS website exactly matches the law under IRC Section 7502 and 26 CFR § 301.7502-1.  So why aren’t IRS employees aware of this rule?  Let me first explain why I’m asking.

We normally file business return extensions electronically.  However, every year there are a few that must be paper-filed (mailed to the IRS).  On March 11th we mailed an extension for an S-Corporation (call it Acme).  The IRS had yet to process Acme’s S-Corporation election paperwork; when I attempted to e-file the extension, it failed.  So we mailed it certified mail, return receipt to the IRS on March 11th; it was received at the IRS in Ogden, Utah on March 17th.  This past week, Acme received a letter from the IRS stating we cannot accept your extension because it was filed after the deadline.

The owner of Acme was, of course, upset with me until he saw that I did file the extension timely; eventually the extension will end up being valid.  But (a) I had to waste time on a conversation with the owner of Acme, (b) the IRS wasted time and money in sending out the notice, and (c) will waste additional time removing the penalty and noting the extension was timely filed.

And I’m not alone in having clients impacted by this.  On Twitter, another tax professional noted he’s been receiving a “steady stream” of notices denying extensions for business returns.  Why has this happened?

I can only think of two reasons: either the IRS is separating envelopes from extensions (so that the IRS employee processing the mailed extension has no idea when it was mailed and only knows the receipt date) or the IRS employee processing the extensions aren’t aware of the rule.  Neither of these reasons is acceptable, but it appears that’s the reality today.

What does this mean for taxpayers?  First, you must use certified mail, return receipt requested in sending anything to the IRS (or any other tax agency) by mail.  Yes, my envelope mailed on March 11th from Las Vegas should have made it to Ogden by the 15th (it’s about a 6 1/2 hour drive from my office) but it didn’t.  Because I have proof of the postmark there won’t be any issues (in the long run).  Had I not mailed it certified mail, there would be no proof.  Given current IRS practices, this is essential.  Second, where possible e-file.  With electronic filing, there’s absolute proof of the date and time of filing.

Standard Mileage Rate Increases Beginning July 1st

Thursday, June 9th, 2022

The IRS announced today that the standard mileage rate for the second half of 2022 will be $0.625/mile, up from $0.585/mile.  As the IRS notes:

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. For travel from Jan. 1 through June 30, 2022, taxpayers should use the rates set forth in Notice 2022-03.

“The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices,” said IRS Commissioner Chuck Rettig. “We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses and others who use this rate.”

If you use the standard mileage rate, you will need to correctly report your business mileage for each half of the year.  I strongly suggest you take a picture of your odometer at the end of the day on June 30th (or the beginning of the day on July 1st) and email that to yourself so you can prove to the IRS your total mileage for each half of the year.

The official IRS Announcement is here.

Contributing to the IRS’s Paper Backlog

Friday, May 20th, 2022

A client of ours has filed Form 2553 three times to elect S-Corporation status.  The first time, his attorney sent the form to the IRS.  The second time, my client mailed the form (right before the pandemic began).  The third time, I faxed the form (now 13 months ago).  As of today, the IRS has not processed the request.  On Twitter, a fellow tax professional noted it took 22 months for his client’s Form 2553 to be processed.

Yesterday, I called the IRS up to see if the S-Corporation election had been processed (I have a Power of Attorney for the entity).  It has not been.  The IRS agent told me that the 2020 tax return for the client also had not been processed, and it should be resent along with another copy of the Form 2553.

I checked with my client; he timely mailed the 2020 tax return and has proof of receipt (he sent it certified mail, return receipt requested).  We decided not to resend the tax return because it’s currently taking the IRS months to open their mail.  The IRS Agent told me, “If it had been sent in September it would show up in our system by now.”  Based on the testimony of IRS Taxpayer Advocate Erin Collins, that’s simply not the case.  Until the return has been processed, it doesn’t show in the IRS computer system at all.  I decided not to argue with the IRS Agent I spoke to, but he might want to read his own website:

The IRS is opening mail within normal timeframes and all paper and electronic individual refund returns received prior to April 2021 have been processed if the return had no errors or did not require further review.

As of May 6, 2022, we had 9.8 million unprocessed individual returns which include returns received before 2022, and new tax year 2021 returns. Of these, 2.6 million returns require error correction or other special handling, and 7.2 million are paper returns waiting to be reviewed and processed.  [emphasis added]

This is straight from the IRS’s “Operations Page During Covid-19,” and it was updated on May 17, 2022.  It is extremely likely (if not certain) that my client’s 2020 S-Corporation return is simply sitting in a bin in Ogden, Utah waiting for its turn in the queue.  Sending a second return would only cause other problems.  Given current IRS processing times for paper returns–about one year–if the return hasn’t been processed by late October we’ll check with the IRS and perhaps then send another copy of the return.

In any case, my client will be heading to the Post Office this morning to mail Form 2553 to the IRS.  I’m not holding my breath on it being processed quickly, but miracles do occur.

Depressing

Thursday, May 5th, 2022

TIGTA (the Treasury Inspector General for Tax Administration) came out this morning with its interim report on the 2022 Tax Filing Season.  I would love to report statistics that make me feel warm and fuzzy; instead, we’re left with more of the same: lots and lots of items sitting around in bins (both virtual and real).

One of the major issues the IRS has faced is hiring.  TIGTA allows us to give numbers to the IRS issues.  On the good side, the IRS has “onboarded” (aka hired) 3,827 Accounts Management employees out of a goal of 5,000 (76.5% of the goal).  However, the IRS hired just 521 Submission Processing employees out of its goal of 5,473 (9.5%).

The backlogs of returns remain.  Here is Figure 3 from the TIGTA report (click on the figure for a larger version):

Work Remaining to be Processed

This is depressing, and I am not changing my estimates of how long paper will take to be processed by the IRS.  If you submit a paper-filed tax return, expect it to take one year to be processed.  If you submit a paper-filed amended return, expect it to take 18 months (1.5 years) to be processed.  If your electronically filed return is unlucky enough to go through Error Resolution, Rejects, or Unpostables (which does not mean you did anything wrong), you’re looking at an average delay of four months.

The report briefly touches on the delays with IRS Account Management functions.  I’m telling clients that when a response is sent to an IRS notice, expect it to take six months to receive the response back from the IRS.  My oldest case is going on three years–it involves a C-Corporation return incorrectly processed as an S-Corporation.  The client owes tax but cannot pay it because it will be sent back to the corporation until the IRS fixes the problem!  (Yes, that has already happened.)  The file has been sent back and forth two times between the IRS offices in Ogden and Cincinnati, and I have no idea when this will be resolved.  We think this case is getting closer–the last two “we need more time” notices have noted the corporation is a C-Corporation (but I’m not holding my breath).  But I digress….

The IRS’s ability to answer telephone calls also remains poor.  The IRS says they answered 19.5% of net calls with a 24 minute average wait.  Recently, the Taxpayer Advocate said that it was about 5% of calls that were answered.  No matter, neither statistic is good, and improvement is desperately needed.

There was one bright spot: The IRS is finding more Identity Theft returns (confirmed fraudulent returns); so far in 2022, they have found 9,626 versus 2,499 found in 2021.  The IRS stopped $807.9 million of fraudulent returns this year versus $12.6 million in 2021.

The conclusions of this report are obvious.  If at all possible, efile your return.  If you do have to mail something to the IRS, bring patience (a whole lot of patience).  And if you’re Commissioner Rettig and you’re stating “everything will be cleared up by year-end,” let’s just say I hope you’re right but I really, really doubt it.

2022 Tax Season: The Tax Season From Hell (Part 2)

Wednesday, May 4th, 2022

In Part 1 of this series we looked at what went wrong with the IRS.  (That post might have been shorter if I had written what went right.)  Today, let’s look at what should be done by Congress and the IRS to fix this mess.

1. Simplify the Tax Code.  Our Tax Code is a mess.  It is far, far too complex.  Most tax professionals now prepare returns for the proverbial husband, wife, 2.2 children living a relatively simple, straightforward life because they cannot do their own taxes due to the complexity!  Congress should (a) pass simplification, not complexity and (b) stop making the IRS a benefits agency (which it isn’t).  Unfortunately, there is no chance of anything like this coming from this Administration.

2. IRS Needs to Stop Stupid Make-Work.  As I noted in Part 1, the Schedule K-2/K-3 regulations on purely domestic partnerships with no foreign operations are a perfect example of this.  There’s no reason for this.  Unfortunately, I have seen no signs of the IRS understanding tax professionals’ needs over the past few years and I have significant doubts of anything like this happening in the near future.

3. Get IRS Employees Back in the Office. One of the things that has led to the massive amounts of paperwork sitting in bins is that IRS employees are still not fully back at their offices.  The IRS announced that all employees will be back in their offices by June 30th.  Here, it’s time for me to give kudos to the IRS for resolving one of the factors that has led to issues.

4. Hire More IRS Employees.  To the IRS’s credit, they are trying to hire more employees but the current environment and the federal government’s pay scale makes this difficult.  I do expect this to resolve over time.

5. Congress Needs to Increase the IRS’s Budget to Allow Multi-Year IT Projects.  Congress did increase the IRS’s budget for the current year, but IRS management has (rightly) complained about the budgetary process.  The main IRS computer system is older than I am (it dates to 1959).  Do you, in your office, use 63-year old computers?  To be fair to Congress, one of the reasons the IRS’s budget got cut was the Lois Lerner/IRS nonprofit scandal from a few years ago: The only tool Republicans had to protest was cutting the IRS’s budget.  While I see the IRS’s budget being increased, I think Congress will do it incrementally rather than significantly because Republicans still don’t trust the IRS.  A factor that impacts this is the ProPublica release of taxpayer information–which the current Administration appears to be ignoring.

6. Change the Tax Filing Deadline to May or June 15th.  I hated writing this, but the reality is that Tax Season is far too compressed and tax returns have gotten more complicated with more busy work.  It’s just impossible for most tax professionals to set a mid-March deadline and get all the returns filed.  (Indeed, as I’ll mention in Part 4 we plan on changing our deadline for receiving paperwork.)  Many of our clients didn’t receive their brokerage 1099s until late March.  Many of our clients still haven’t received their K-1s.

7. Go to the California System Where Extensions Are Automatic (But You Need to Pay the Tax).  I’m not a fan of how California taxes residents, but the California system where extensions are automatic as long as you pay 90% of the tax due is an excellent one.  Filing extensions is more make-work.  This would also cause more individuals to make estimated payments–an added benefit to our tax system.  Unfortunately, this change likely requires legislation, and getting this through Congress is unlikely.

I would love to be an optimist and see these seven solutions implemented.  The reality is that other than seeing IRS employees in their offices, only small incremental change at the IRS is likely.  Who suffers from this?  All of us: taxpayers, tax professionals, and the IRS.  But I promised to be realistic in this series, and we have to deal with the world as it is, not as we want it to be.

In Part 3 of this series (next week) we’ll look at the failures of my business.

2022 Tax Season: The Tax Season From Hell (Part 1)

Tuesday, April 26th, 2022

Mr. Murphy says, what can go wrong will go wrong.  This was definitely the case for the 2022 Tax Season.  In this four-part series, we’re going to cover IRS and government (Congress and the President) failures, our failures, and what we can do to get this right–or at least better–in the future.  As for the prognosis, well, it’s not pretty.

For this series:

Part 1 covers IRS and government issues.  In Part 2, we’ll look at government solutions and the possibility that any of them will occur.  In Part 3, I’ll take a look at taxpayer and tax professional issues this year (including the failures of my company).  In Part 4, we’ll look at solutions for taxpayers and tax professionals, and an overall conclusion.  So onward into the Tax Season From Hell!


This year began with the promise of a “normal” Tax Season.  The pandemic was going to be in the rear-view mirror, we would have the IRS and state tax agencies back to normal, and we could play “Oh What a Beautiful Morning” every day.  Let’s see what went wrong with that picture–starting with the failures of the IRS.

1. The Internal Revenue Service misplaced the word “service.”  In actuality, this could be points 1 to 5.  The failures of the IRS this year were legion.  First, there is some large number of tax returns sitting in bins at IRS Service Centers.  As the National Taxpayer Advocate has said, paper is the IRS’s Achilles heal.  Well, there are (we think) 20-30 million tax returns and an unknown amount of correspondence that are taking forever (or something akin to that) to be processed.  Tax refund processing is 90% of the time excellent.  Unfortunately, if you are in the 10% that has to be manually processed it makes the DMV look good.  And if you want to make that 10% look good, pity those of you who get an IRS Identity Protection verification notice.  It’s close to impossible for you to reach that group.  When you make the DMV look good….

2. The IRS issued nonsensical regulations impacting Tax Season, further condensing Tax Season.  A perfect example are the new K-2/K-3 regulations.  The IRS believed (almost certainly correctly) that they weren’t getting enough information to accurately assess partnerships with foreign operations.  So they issued the new Schedule K-2 and K-3 regulations last summer.  I looked at them when the rules were issued, but believed (wrongly) that they had little impact on my practice.

Au, contraire!  In January (2022), the IRS issued new instructions that (a) causes a circular problem and (b) forced K-2/K-3s onto purely domestic partnerships with no foreign operations and no foreign partners.  The instructions state if a partnership has an owner who must file Form 1116 (foreign tax credit), the partnership must issue these Schedules.  Assume Acme Manufacturers LLC makes widgets here in Las Vegas.  Russ and Scott are the active owners, but there’s a third owner: Martin.  Martin is a passive investor, and invests in all sorts of businesses.  He and his wife file Form 1116 every year.  Thus, under the new instructions Acme must file Schedules K-2 and K-3.

As an experiment, I prepared K-2s and K-3s for my own business.  It added about 20 minutes of work, but for a completely domestic entity wasn’t difficult.  However, there is no reason that this needs to be done.  If Martin is audited, the IRS from the already prepared Schedule K-1 has all the information needed to accurately assess Martin’s liability for his investment in Acme.  The IRS doesn’t need the K-2/K-3–it’s useless make-work.

But that’s not all.  Let’s assume Martin doesn’t have a Form 1116 filing requirement each year, but occasionally does.  What should Debbie, who prepares Acme’s returns do?  Include the useless K-2/K-3s which most of the time aren’t needed or wait until September when she might know for certain?  Neither answer helps in tax preparation for obvious reasons.

But there are other “make-work” items thrust on tax professionals.  We must record IRS Submission ID Numbers (the number assigned by the IRS to each submission of a tax return) on either the signature document or in some other method.  It doesn’t take long–but the minute spent on this (and our tax software automatically notes this for posterity) is a waste of time.  Consider a tax practice with 500 clients.  That’s 500 minutes wasted, or about a day’s worth of work that I must pay someone for.  (Yes, that cost is passed on to you, the tax professional’s customer.)  There are needless interviews we are required to do with clients regarding various tax credits or I can be fined.  And these are just two of many examples.

3. Like all businesses, tax professionals must deal with an array of regulations–many of which are at cross-purposes.  And you, the tax professional’s clients, pay for them all.  We, like most tax professionals, have an Engagement Letter we require all clients to sign. When I started it was one page.  It’s now just over four pages.  Why has it grown?  Regulations and our litigious society.

The IRS requires I engage in best practices (it’s part of Circular 230, how I’m regulated).  I think it’s a good idea to use best practices as much as realistically possible.  But we’re not just regulated by the IRS.  Other regulatory agencies that have jurisdiction over me include:

  • City of Las Vegas Business Licensing
  • Clark County (Nevada) Health Department
  • State of Nevada Health & Safety
  • OSHA
  • Federal Trade Commission (FTC)

The above is not an exhaustive list.  When I started my office here in Las Vegas the regulatory notices fit on a single poster.  They now take two.  You, the tax professional’s customer, pay for this.  I, the regulated, also pay for this in having to do many things that are not useful but are required by law and regulation.

Please don’t misunderstand me: I do not believe in violating the law.  Most regulations and laws are in place for good reasons.  However, it’s like mandatory ethics training for two hours every year (and yes, I am required to take that).  I listen, and every so often learn something (usually something I must now implement to cover myself, not something that helps taxpayers).  I have in the past taught ethics to tax professionals.  But consider if I were an unethical tax professional.  Couldn’t I just goof off during those two hours since just being in the audience gets me the required continuing education hours?  I leave that for you, the reader, to decide.

4. Government regulations cause the tax professional community to shrink.  There’s an excellent quote: “Whatever you tax you get less of.”  Regulations have the same impact.  My professional society, the National Association of Enrolled Agents (NAEA), strongly believes that the IRS should regulate all tax professionals because it would weed out bad preparers.  I disagree.  If someone wants to be a bad professional, it’s easy and no amount of regulation will stop it.  It’s “whack-a-mole.”  But regulations also make it harder for me to operate, with costs passed on to you (the taxpayer).

5. Covid regulations. One of my employees got Covid in March.  He was ill for one day, and he felt fine and ready to come back to work a couple of days later.  Well, one week later he was back in the office.  He was out three to five extra days because of regulations.  (No one else in our office got Covid, but you will see in Part 3 we weren’t very lucky on the illness side this year.)

For those who think I have just become a killer, well, I disagree.  We’ve always had the policy that if you’re ill you go home.  That’s common sense.  It’s also common sense that (a) Covid is now ubiquitous (if you haven’t had it, unfortunately you will), (b) that anyone who wants to can get vaccinated (now, up to four times), and (c) for almost everyone, Covid today is akin to the flu in the death rate (and the death rate for children without serious pre-existing conditions is 0% per the Wall Street Journal).

Overall, the biggest problems came from the IRS.  In Part 2, I look at how we can fix these issues and give you the odds of any of my solutions happening.

The Worst Written IRS Notice Ever?

Thursday, April 21st, 2022

A client, living in a foreign country but who receives his mail in New Jersey (because mail to New Jersey is far more reliable than where he resides) received an IRS notice on his 2021 tax return:

Your refund has been reduced
We’ve reduced your penalty for failing to pay estimated taxes

We reviewed your Form 1040 for the tax period ending 2021 and found that you miscalculated your estimated tax penalty.

If you were in a disaster area, you may have been granted additional time to file returns and pay taxes. We considered any such time when we computed your penalty. Our correction reduces the penalty to $2,000.00.  You are due a refund of $4,500.00.

The taxpayer, when we filed his return, made an EFTPS payment of $200,000 which included a $6,500 estimated tax penalty. He owed tax–substantial tax, as noted.  He paid it in full.  It wasn’t a refund being reduced; rather his estimated tax penalty was reduced causing him to receive a refund.

Additionally, he doesn’t deserve this refund.  He does not reside in North America and the last time I checked the President cannot declare a disaster area in Europe.

In any case, my client was baffled by the wording and I think we have a “winner” (or, at minimum, an early leader) in the worst written IRS notice of the year.

Bozo Tax Tip #1: No Tax Form, No Income!

Friday, April 15th, 2022

A new client was on the phone with me last week:

“Russ, I just found out that I don’t get a tax form for the income I earn.  That means I don’t have to report it, right?”

This individual is filing his first tax returns.  He just graduated college, and is self-employed.  He (thankfully) did keep good books and records, but no one sent him a 1099-NEC (several businesses should have) so his uncle told him he didn’t have to report anything.

Yes, the US has a ‘voluntary’ tax reporting system, but here voluntary doesn’t mean you can skip income without paperwork.  A better word than voluntary is “self-reporting.”  We self-report our income, and the fact that tax paperwork isn’t sent for everything is one of the causes of the tax gap.  As I explained to my client, all income is taxable unless Congress exempts it.  Congress didn’t exempt his self-employment income (indeed, it’s over $100,000).  I asked him if he might want to buy a home in the next two years (which I already knew he did want to do).  I asked him how he was going to qualify for a mortgage without tax returns filed showing income.

I explained to him that his uncle was correct in that many individuals do receive income ‘under the table’ and don’t report it.  I also explained to him that not filing a tax return when you have income is a crime, and you can go to ClubFed for it.  It’s a lot easier to file and pay your taxes and sleep peacefully at night then to do the opposite.  My client agreed, and his return was filed.

Of course, for those who want to live on the edge you can: Ignore income that doesn’t come with tax paperwork.  You may want to remember that if you’re ever audited the IRS might just do a bank account analysis and wonder where those deposits are coming from.


That’s it for this year’s Bozo Tax Tips. We’ll be back with some interesting (I hope) thoughts about Part I of the 2022 Tax Season in a couple of weeks.

Bozo Tax Tip #5: Procrastinate!

Monday, April 11th, 2022

Today is April 11th. The tax deadline is just seven days away.

What happens if you wake up and it’s April 18, 2022, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t (Pennsylvania is one of those), while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download and mail off a payment to your state, too. If you mail your extension, make sure you mail it certified mail, return receipt requested. (You can do that from most Automated Postal Centers, too.)

By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too.  If you make an extension payment on IRS Direct Pay (using “Extension” as  the reason for the payment), the IRS will file an extension for you.

But what do you do if you wait until April 19th? Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).

There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: the interest is taxable.

(Note: If you reside in Massachusetts or Maine, your tax filing deadline for 2021 returns is Tuesday, April 19th.  Thanks to Patriot’s Day you get an extra day this year to file your tax returns and/or extensions.)