Archive for the ‘IRS’ Category

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.

On Disclosure

Monday, October 10th, 2016

As you may have heard, there’s a Presidential campaign going on. I try hard to avoid politics in this blog, but one story that came out relates to Donald Trump taking a Net Operating Loss (NOL) on his tax return. Mr. Trump’s former accountant, Jack Mitnick, has talked to the media regarding the returns he prepared for Mr. Trump back in the 1990s. Is Mr. Mitnick supposed to talk about the returns he prepared?

Let’s start with the rules on returns I prepare. Suppose I get a phone call from the Las Vegas Review-Journal asking about a return I prepared for John Smith, a hypothetical client. Mr. Smith is running for office here in Nevada, and the Review-Journal has a copy of his 2008 tax return. I could neither tell the RJ I prepared the return nor could I tell them I didn’t prepare the return.

IRS Circular 230 governs the practice of tax professionals. Tax professionals are to keep client relationships confidential unless the client has authorized me to disclose the information. I’m also a member of the National Association of Enrolled Agents; NAEA rules also require that client relationships be confidential. That’s why when a mortgage company calls me and says that they want confirmation that I prepared the tax returns for Mr. Smith my response is, “Have Mr. Smith call me. If I prepared his returns, I will have him sign a ‘Consent to Disclosure’ notice that authorizes me to disclose information to you (should he wish me to do so).” An IRS regulation requires that the Consent to Disclosure be on my letterhead; thus, I can’t accept the ones that mortgage companies have clients sign. But I digress….

Mr. Mitnick is, of course, retired. He appears not to care about Circular 230 or confidentiality. Still, I think it’s wrong for him to say anything about clients (and former clients). When I retire–and for current clients, no worries, that’s many years down the road (I hope)–I don’t think it’s right for me to author a ‘tell-all’ book about my clients or talk to the media about them. The confidentiality rules should apply for as long as I’m around.

On 1099 Due Dates in 2017

Tuesday, October 4th, 2016

You may have heard that Form 1099-MISC’s must be filed earlier next year. That’s true, but it only impacts some of the 1099s. Let’s look at the IRS instructions:

New filing date. Public Law 114-113, Division Q, section 201, requires Form 1099-MISC to be filed on or before January 31, 2017, when you are reporting nonemployee compensation payments in box 7. Otherwise, file by February 28, 2017, if you file on paper, or by March 31, 2017, if you file electronically. The due dates for furnishing payee statements remain the same.

What this means is that only 1099-MISC’s for independent contractors (nonemployee compensation) must be filed by January 31st, whether you file by paper or electronically. All other information returns, including 1099-MISC’s reporting “Other Income,” will have the same deadlines as this past year: paper returns on or before February 28th, and electronic on or before March 31st.

I’m certain there will be confusion this coming year over the deadline. Of course, there’s no penalty for filing all your information returns by January 31st (whether required or not).

Prepare to Panic

Monday, October 3rd, 2016

No, I’m not talking about the two choices in this year’s presidential election. Rather, I’m talking about the situation if you have yet to send your tax paperwork to your tax professional. It’s just about time to panic.

Mind you, if your return is simple and straightforward, take care of it now: The deadline is in exactly two weeks. If your return has any sort of complexities, you must start working on it immediately. Your tax professional will need time to get your return done right. You need to turn in that paperwork post haste. Yes, if you’ve procrastinated you need to stop, sit down, and take the time to get things done.

If you file late, it’s as if you never filed your extension. So sit down, and get everything done now. Or you may be paying a significant monetary penalty if you don’t.

Another Incorrect IRS CP2000 Notice

Wednesday, September 28th, 2016

One of my clients received an IRS CP2000 notice today alleging he did not include $1000 of ordinary dividend income. And the IRS was correct: She forgot to provide me the 1099-DIV. Yet the IRS, in the same notice, states that the client included $1000 in qualified dividends on the same stock.

This may sound familiar, and it should; back in March a client had a similar experience.

I will repeat what I said then: It’s impossible to have qualified dividends without having ordinary dividends. The IRS notice my client received today is wrong. Given I’ve seen two such notices it appears there is a systemic issue; I’ve reported it to the Taxpayer Advocate’s systemic issue hotline. If any other practitioners see similar incorrect notices, I urge you to do the same.

If you’re a taxpayer and receive an IRS notice, do not blindly assume it is correct. Show the notice to your tax professional. Your tax professional can look at your return and see if it is correct or not. IRS statistics show that two-thirds of IRS notices are wrong in whole or in part. The IRS has publicly stated that they know they send out incorrect notices, but it’s a profit center so they’ll keep sending them out.

As for my client, the IRS alleged my client owed a bit over $300. In truth, my client owes a touch over $100. A reply to the IRS notice has been sent and in about ten weeks we’ll hear back that we’re correct. My client has already paid what we believe the balance to be.

Extension Deadline for Business Entities; 3rd Quarter Estimated Tax Payment Deadline

Wednesday, September 14th, 2016

Thursday, September 15th is the filing deadline for business returns on extension: C-Corporations (Form 1120), S-Corporations (Form 1120S), partnerships and LLCs that file as partnerships (Form 1065), and trusts (Form 1041). You can either electronically file or mail your returns (it’s a postmark deadline), but if you mail the return use certified mail, return receipt requested so you have proof of filing.

Tomorrow’s also the deadline for making your third quarter estimated tax payments. You can pay electronically (though if you use EFTPS the deadline was Wednesday for the payment to timely post), or you can mail your payment. If you mail the payment, it’s a postmark deadline.

We’re now just 32 days away from the filing deadline for individuals on extension. As I said before, the time for procrastination is over….

Five Sentenced for Tax Fraud; Justice Department Gets ITINs Wrong

Sunday, August 14th, 2016

A Justice Department press release caught my eye. Five individuals, all Mexican nationals residing in the US, were sentenced to ClubFed for terms between 33 months and 121 months. The five individuals had pleaded guilty to conspiracy to commit mail fraud, and they had indeed done so:

Beginning in 2014 and under the direction of Natividad Medina, the defendants conspired to steal money from the U.S. Treasury and U.S. taxpayers by exploiting the ITIN system. The Medina sisters began by collecting Mexican identification documents from unknown people in Mexico and used those to fraudulently obtain ITINs. The Medina sisters then used those ITINs to submit false and fraudulent income tax returns to the Internal Revenue Service Center in Austin. They requested that the IRS mail refund checks to residences or to one of more than 200 post office boxes in and around the Houston area which Lopez had rented and maintained on behalf of the Medina sisters.

Kudos to the DOJ and IRS Criminal Investigation for stopping these individuals.

Unfortunately, either the Department of Justice or the US Attorney’s Office for the Western District of Texas needs to learn more about Individual Taxpayer Identification Numbers (ITINs). Here’s what they say about ITINs:

According to court records, in 1996, the Internal Revenue Service began issuing Individual Taxpayer Identification Numbers, or “ITINs”. By obtaining an ITIN, an individual who is already disregarding federal law by living in the United States illegally is given the opportunity to comply with federal law by filing taxes. If the applicant can furnish sufficient proof (i.e. foreign birth certificate, national identification card, passport, etc.) that he or she is living in the United States illegally, the IRS will issue that person an ITIN.

While that’s true, there are other purposes ITINs are used for. If a US citizen is married to a non-American, an ITIN can be issued for the spouse. An ITIN can also be issued for a dependent of a US citizen. A non-citizen who has a US tax filing responsibility (and who is not in the US illegally) will also be issued an ITIN. One would think that the DOJ or US Attorney’s Office might look at an IRS web page (like this one) to see the legitimate reasons why one would obtain an ITIN.

While I was on vacation came the news that ITINs will now expire, with ITINs with middle digits of “78” and “79” expiring this year. While a renewal application (Form W-7) will be available by October 1st, and you won’t need to file a tax return to renew the ITIN, I’ve had lots of problems with the ITIN office (lost applications, lost paperwork, problems even when the Taxpayer Advocate Office handed the paperwork in) that I’m glad it appears none of my clients are in the first group of renewals. If you get the idea that I’m expecting problems, you’re right. But I digress….

In any case, I do say well done to the DOJ for putting these scofflaws behind bars. However, next time read up on why some people who are either visiting the US quite legally or are related to a US citizen really need an ITIN in order for them (or a US citizen) to comply with their US tax filing responsibilities.

Exempt Organization Extension Filing Deadline Is Monday

Thursday, August 11th, 2016

The extension deadline for filing Form 990 series returns for tax-exempt organizations is Monday, August 15th. This deadline is for the 501(c) series of organizations that filed extensions back in May, including charitable organizations, welfare organizations, social clubs, and other nonprofits. Most of these entities will not owe any tax unless they have either unrelated taxable business income or are a private foundation with investment income. If filing a paper return I strongly recommend using certified mail, return receipt requested so you have proof of filing. Better yet, just file electronically and you have complete proof of filing.

IRS Transcript Delivery System Down this Weekend

Thursday, June 30th, 2016

The IRS’s Transcript Delivery System (TDS) will be down tomorrow beginning at 12:01am, and will not come back up until Tuesday morning. The IRS announcement indicates they will be performing maintenance during this period. TDS is supposed to be back up by 6:00am EDT on Tuesday, July 5th.

The Self-Employment Tax While Employed???

Tuesday, June 28th, 2016

One of my clients was quite upset this morning. She had received an IRS Automated Underreporting Unit (AUR) notice alleging that she owed about $4,000 in additional tax. She sent me a copy of the notice and I looked at the change: The IRS added self-employment tax to her return.

My client (and her husband) were both employees in the year in question. There was no self-employment tax on the original return because you have to be self-employed to owe self-employment tax. As I told my client, this ranks with the most ridiculous of IRS notices I’ve seen.

Still, my clients had to respond to the notice; if they didn’t tax would be assessed. My client completed the response form, included a short letter noting why they didn’t owe self-employment tax, and they mailed it off (certified mail, of course).

I don’t know why my client got “lucky” and got this notice. The only conclusion I can draw is the computer goofed. When I spoke to my client, I let her know that two-thirds of IRS notices are wrong in whole or in part. Yet the IRS keeps sending them out for a simple reason: People pay them blindly. “If it comes from the IRS it must be right,” they think. The reality is sadly different.

Most of the AUR notices I see (even those that are wrong) have at least a kernel of truth in them. Clients do forget to include 1099s, or they misclassify items on returns. This notice was one of the rarer ones where nothing on it made sense. Well, they did spell my clients’ names correctly….