Archive for the ‘IRS’ Category

If You Used IRS Direct Pay on October 20th Check Your Bank Records

Saturday, October 29th, 2022

I love IRS Direct Pay.  It’s a simple method to make payments to the IRS for most (but not all) taxes individuals might have.  And it works…well, it works most of the time.

I saw on Twitter the following:

On October 20th, the IRS Direct Pay application had issues with processing payments. The issue was fixed but approximately 4,600 taxpayers were impacted and duplicate payments were made and processed.

The Treasury Financial Agent is reaching out to all financial institutions to return the duplicate payments. However, if a taxpayer calls the IRS about this issue, they should be advised to contact their financial institution and have them return the duplicate payment(s) using ACH return reason code R10 (Customer advises not authorized) or R11 (Check truncation entry return).

The issue was sent to all financial institutions via the Federal Reserve Bank Operations Bulletin.

To date, no one has contacted us about this, but we do have individuals who used Direct Pay after October 17th to pay taxes.  If you are an impacted taxpayer, follow the instructions noted above.  If you’re one of our clients who was impacted, feel free to call our office.

Hurricane Ian: IRS Extends Deadline for All Floridians to February 15

Thursday, September 29th, 2022

The IRS announced today that because the state of Florida has been declared a disaster zone that tax deadlines for Floridians have been extended until February 15, 2023.  This includes the individual and C-Corporation extended deadline of October 17th, the trust/estate (Form 1041) extension deadline of September 30th, payroll tax deadlines of October 31st and December 31st, and the January 17, 2023 Estimated Payment deadline.  Do note that tax payment deadlines that have already passed have not been extended.  However, interest and penalties do not accrue during disaster extensions, so there won’t be any additional interest and penalties.

I would expect the Florida Department of Revenue to extend the corporation tax deadline of October 17th to February 15, 2023 soon.

 

The Trouble With Identity Protection Verification Notices

Friday, September 16th, 2022

The IRS sends two types of Identity Protection Verification Letters: LTR 4883C and LTR 5071C.  If you receive a LTR 4883C, you must call the IRS’s Identity Protection unit so that your return is processed.  If you receive a LTR 5071C, you can generally respond online and have your return processed.

There are three main problems with the verification notices:

  1. Reaching a human at the IRS is extremely difficult;
  2. Tax professionals generally cannot call on your behalf if you receive one of these notices (we can be on the call with you, but the IRS wants the taxpayer to be on the line);
  3. The IRS is not following up with taxpayers who don’t respond to the notices.

Today, I’m going to look at the third issue: the lack of follow-up.  Here’s a real world example.

A client, call him John Smith, filed his 2021 tax return in May.  He owed the IRS $5,000 in tax and paid that and the appropriate amount of interest.  It was the first time Mr. Smith had ever filed a return after April 15th–and there was no extension.  The IRS assessed the late filing and late payment penalties.  Mr. Smith believed he qualified for First Time Abatement and signed an IRS Power of Attorney form allowing me to request the abatement.  I called the IRS to request the abatement (on my 10th try to reach the IRS today via the Practitioner Priority Service, I got through).  The helpful IRS agent asked me if Mr. Smith had filed his 2019 return.  I said he had (I had a copy of it).  She did some digging, and discovered that the IRS had sent an Identity Protection Letter that Mr. Smith never responded to, and his return was sitting in limbo.  Another copy of the letter is going out in the mail to Mr. Smith, so his 2019 return should soon be processed.  Once that happens, we’ll be able to request the abatement for 2021.

Mr. Smith told me he was stunned by what I wrote; he claims he never received the IRS letter.  Unfortunately, the mail isn’t perfect and it is quite possible that he didn’t receive it.  (Indeed, today a different client told me one of his past due returns had finally been processed and there’s a balance due.  I ran an Account Transcript; in theory, the IRS sent notices to him and me in March showing the balance due.  Neither of us received a notice.  But I digress….)

Let’s consider an alternative reality where three or four months after the initial Identity Protection Unit notice is sent a follow-up notice is sent (if the return remains unprocessed).  There’s a better likelihood of the taxpayer responding and getting the return processed–the goal of all involved.  And the cost of this programming change and sending the letter should be minimal.

Unfortunately, that isn’t the reality we live in today.  Instead, there’s no follow-up and it was only by accident that we discovered the issue.  If my client had timely filed his 2021 tax return, we still wouldn’t know about this issue.  IRS: It’s time to start following up on these notices.

Student Loan Forgiveness: Should You File or Wait?

Thursday, August 25th, 2022

With President Biden’s announcement of forgiving student loans, there are some obvious questions:

  1. Will this be taxed by the IRS?
  2. Will this be taxed by the states with income taxes?
  3. Will this be upheld by the courts?
  4. When will there be guidance on this?
  5. When should impacted taxpayers file?

We have answers to some of these questions, but definitely not all.  First, this will not be taxed federally.  This is quite clear based on the American Rescue Plan Act.  Indeed, issuers are not supposed to send Form 1099-C’s to those with forgiven loans.  However, some states do not conform to the Internal Revenue Code of today.  Thus, on the state level this will be taxable income in some (but not all) states.  Jared Walczak of the Tax Foundation noted that this could be taxed in Arkansas, Connecticut, Hawaii, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Minnesota, Mississippi, New Jersey, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin.  (I haven’t done the research for every state, but it sure looks like a taxable event for Pennsylvania and New York.)

But the big question is one I cannot answer: Will this be upheld by the courts?  I’m not an attorney, but it’s a certainty this will be litigated.  I have my doubts as to this being upheld (the “major questions doctrine” from West Virginia v EPA is a–sorry for the pun–major issue here), and no one will know until the cases are resolved.  I absolutely could see one Court of Appeals ruling in favor of allowing it while another imposes a national injunction.  I expect the Supreme Court to be the arbiter of this, and probably not for several weeks.

As to when there will be guidance: soon.  I would expect it within ten days, but this is just an educated guess on my part.  I actually expect it sooner than ten days, but you never know about Washington.

Finally, the question.  “Russ, I have student loans.  I’m on extension.  Should I file?”  That’s an it depends question.  If your return is set, and there are no tax planning opportunities for the return (you’re single and/or you cannot contribute to retirement plans for 2021), the tax you owe and the income you have will not change; whether you qualify or not is set.  Thus, you can file–whether or not you’re above the income threshold.

The individuals who should wait for guidance are those who still have tax planning opportunities for 2021 (and who are impacted by this).  Generally, those are the self-employed (who can still contribute to retirement accounts such as SEP IRAs) and married couples (who can choose between filing separate and joint).  Of course, if your income is far above the threshold no matter how you file and/or contribute to retirement plans, filing now or after the guidance is released won’t change your eligibility for forgiveness.  It’s only those who might qualify by doing something that should wait.

 

UPDATE: I originally listed New Jersey as a state that I thought where forgiveness would be taxed; however, the Tax Foundation released a new list without New Jersey.  They’re spending a lot more time on the research on this than I am.  Do note that until official guidelines come out, all any of us are doing is speculating.  The official state pronouncements (and those are in the future) will govern.

If You Haven’t Filed Your 2019 and/or 2020 Tax Returns, You Have One Month to Do So and Avoid Late Filing Penalties

Wednesday, August 24th, 2022

Earlier today, the IRS announced extremely broad penalty relief for 2019 and 2020 late-filed tax returns.  Here’s the beginning of the IRS’s press release:

To help struggling taxpayers affected by the COVID-19 pandemic, the Internal Revenue Service today issued Notice 2022-36, which provides penalty relief to most people and businesses who file certain 2019 or 2020 returns late.

The IRS is also taking an additional step to help those who paid these penalties already. Nearly 1.6 million taxpayers will automatically receive more than $1.2 billion in refunds or credits. Many of these payments will be completed by the end of September.

Besides providing relief to both individuals and businesses impacted by the pandemic, this step is designed to allow the IRS to focus its resources on processing backlogged tax returns and taxpayer correspondence to help return to normal operations for the 2023 filing season.

“Throughout the pandemic, the IRS has worked hard to support the nation and provide relief to people in many different ways,” said IRS Commissioner Chuck Rettig. “The penalty relief issued today is yet another way the agency is supporting people during this unprecedented time. This penalty relief will be automatic for people or businesses who qualify; there’s no need to call.”

The relief applies to the failure to file penalty. The penalty is typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late. This relief applies to forms in both the Form 1040 and 1120 series, as well as others listed in Notice 2022-36, posted today on IRS.gov.

The returns impacted by this include:

  • Form 1040 (Individual Income Tax Returns)
  • Form 1041 (Trust/Estate Tax Returns)
  • Form 1120 (C-Corporation Tax Returns)
  • Form 1120-S (S-Corporation Tax Returns)
  • Form 1065 (Partnership Tax Returns)
  • Some foreign information returns, such as Forms 5471 and 3520

Let’s say you haven’t filed your 2020 tax return.  You’re being given a golden opportunity to avoid a 25% penalty.  You will still owe the late payment penalty (0.5% of the tax due per month late) and interest, but these pale in comparison to the late filing penalty.  If I were an impacted taxpayer, I would immediately contact a tax professional to get the return filed!  Most tax professionals are extremely busy (especially with the extension deadlines approaching), but things will only be worse in two weeks.

If you did file one of these returns and late and were assessed a penalty, you should receive your refund by the end of September.

IRS: Let’s Spend $5 (At Least) to Disallow $0.11

Sunday, August 21st, 2022

When you file an amended return, you’re actually making a claim for refund.  Tax professionals have been filing (for their clients) amended payroll tax returns (Form 941) to obtain the Economic Recovery Credit (ERC).  I’ve done two (so far), and have a few more to go.  Another tax professional filed one claiming a $19,746.61 refund.  The IRS partially disallowed it, so a five-page letter was sent.

The disallowance? 11ȼ.  No, you didn’t misread it: eleven cents.

Why, IRS, are you doing this? This is the literal example of penny-wise and pound-foolish.  I wish I could tell you why this is happening, but….

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.