Archive for the ‘IRS’ Category

Tax Relief for Hurricane Ida in New York and New Jersey

Wednesday, September 8th, 2021

Hurricane Ida created disaster conditions in Louisiana; the IRS previously granted relief for impacted taxpayers in various parishes in the state.  President Biden just declared a federal disaster area for many counties in New Jersey and New York (including New York City).  The IRS extended the same relief for those taxpayers.  Any tax deadline from September 1, 2021 onward through year-end is extended until January 3, 2022.

There are some caveats with this.  First, because 2020 tax payments were due on May 17th, that payment deadline has not been extended.  However, if you filed a valid extension and owe the late payment penalty, that penalty is suspended between September 1st and January 3, 2022.  Second, be aware that the IRS has a “down-time” for electronic filing of tax returns; this typically begins in mid to late November and lasts until late January.  During that time, all returns must be paper-filed.  It’s currently taking the IRS eight to twelve months to process paper-filed returns.  You may want to consider not waiting until January (especially if you are expecting a refund).

This relief does extend to third quarter estimated payments (due September 15th), partnership and S-Corporation returns on extension (also due on September 15th), trust/estate returns on extension (due September 30th), C-Corporation returns on extension (due October 15th), and nonprofit returns on extension (due November 15th).  Quarterly payroll and excise tax returns due on November 1st are also extended for impacted taxpayers.

New Jersey is conforming to this relief for impacted New Jersey taxpayers.  Note that if you paper-file in New Jersey, you need to write, “Presidential Disaster Relief Area, Hurricane Ida” on the top of the return or payment.  While I expect New York to conform, there has been not yet been an announcement from the New York Department of Taxation and Finance.

Can the IRS be Honest About the Delays in Processing?

Thursday, September 2nd, 2021

The IRS maintains a webpage showing operational status during the pandemic.  Additionally, the IRS periodically sends out “Hot Issue” summaries.  One of the items asked in the “Hot Issue” questions was on amended returns:

1040X not processed

Issue:  When will 1040X be processed?

Response: As a result of the backlog in the number of amended returns in inventory created by Coronavirus closures, the processing time has been extended to 20 weeks. We are sorry for any inconvenience.

That’s equivalent to about five months.  Unfortunately, that’s very optimistic.  I have seen an amended return processed that fast this year (back in March), but the return involved no change in dollar amounts (just changing the capital loss carryforward for a year).  The last three amended returns I prepared for clients took nine months, 15 months, and 12 months to be processed.

Now, I am not blaming the IRS here for the delays.  As long as most government employees aren’t working in their offices, these delays will continue.  However, I do blame the IRS for misstating what taxpayers should expect from the IRS.  Bluntly, taxpayers should expect that it will take on average one year from the date they file their amended return for it to be processed.  I’m not going to quote five months when that simply isn’t happening.

Tax Agencies Need to Modify Deadlines to Account for Post Office Delays

Friday, August 27th, 2021

In today’s mail I received some notices from a tax agency.  That’s not unusual: We have many Tax Information Authorizations and Powers of Attorney on file.  And it wasn’t out of the ordinary that all three notices were for the same client.  What was unusual is that these notices were not dated on the same date: These were sent (most likely) at intervals of three weeks, with the most recent notice (probably) being mailed this week, and the other notices being mailed three and six weeks ago.  How can clients timely respond to notices when the Post Office (an agency of the United States Government) does not timely deliver the mail?

Yet under the law a notice mailed regular mail is considered received in one week.  Many state tax agencies don’t have the requirement to send Notices of Deficiency (or the state equivalent) by certified mail.  Unless my client or I have a working crystal ball (and neither of us do) it’s impossible for us to timely respond to these notices.

And the delays aren’t getting better.  A different client of mine who resides overseas just received a notice mailed three months ago asking for a response two months ago!  Yes, Covid has played havoc with overseas mail (and it turns out the notice my client received is incorrect), but I have other examples.  Late last month I mailed a certified letter on behalf of a client to the IRS in Fresno.  Look at the tracking on this:

This was a request for a Collection Due Process Hearing.  It got to Fresno in two days from Las Vegas, but then sat around in Fresno for one week before being delivered to a PO Box…in Fresno.

Unfortunately, government agencies’ assumptions about mail deliveries need to be modified based on today’s realities.  Two years ago, it was reasonable to assume a letter from Las Vegas would be delivered to Fresno within three business days (and that was true pretty much anywhere in the United States).  Today, such an assumption is unwarranted.  Tax agencies need to add additional time for taxpayers to timely respond to notices.

There’s No Basis for that Argument

Wednesday, August 25th, 2021

Yesterday, TIGTA release a report, “Efforts to Address the Compliance Risk of Underreporting of S Corporation Officers’ Compensation Are Increasing, but More Action Can Be Taken.”  From the report:

TIGTA’s analysis of all S corporation returns received between Processing Years 2016 through 2018 identified 266,095 returns with profits greater than $100,000, a single shareholder, and no officer’s compensation claimed that were not selected for a field examination.

S-Corporation officers (and owners who own 2% or more of the entity) are required to be paid a “reasonable” compensation.  Clearly, $0 isn’t reasonable for a business profiting $100,000 per year.  (There could be an exception for a company using that profit to pay back a loan that it took during the time it was unprofitable.)  I’ve seen prospective S-Corporation clients with large profits who are taking salaries of $20,000 a year; again, this is clearly unreasonable compensation.  TIGTA urged the IRS to do more, but the IRS basically disagreed with the recommendations.  I learned by reading the report that the IRS is conducting another Compliance Initiative Project to look at officer’s compensation (this began last August).

Another S-Corporation issue is basis.  One of the rules about deducting losses is you must have basis in the entity.  You can get basis in an S-Corporation by contributing capital, previous net income, and/or loaning the company money.  But let’s say I have an S-Corporation, and I give you 10% of the stock as part of your employment package.  Further, let’s assume that the business loses $100,000 (so your share of the loss is $10,000).  What can you deduct on your personal tax return?  Generally, nothing–you have no basis in the entity.

A couple of years ago the IRS tried to improve compliance here: Basis statements are required to be attached to personal tax returns in this situation.  It appears that isn’t working well (probably a combination of individuals ignoring the rule and differing forms for a basis statement).  In July the IRS published a request for comments about a new Form 7203 in the Federal Register.  The IRS is requesting comments:

Comments are invited on: (a) Whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency’s estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

It appears the IRS wants to develop a standardized form (Form 7203) that S-Corporation owners must use to note their basis.  I did a search to see if there’s even a draft of Form 7203 anywhere, but there’s none.  It’s clear that the IRS at least here recognizes there’s an issue and is looking at means of resolving it.  If you wish to comment on the proposal, you have until September 17.

If you’re an S-Corporation owner and haven’t been taking ‘reasonable’ compensation, today’s a good day to start.  And if you’re an S-Corporation owner who hasn’t been tracking basis, you really need to do so.

Certified Mail, Return Receipt Requested, Is More Important than Ever

Wednesday, August 11th, 2021

It’s exactly 399 miles from my office to the Post Office in Fresno, California (93779).

On my way out of town on my vacation, I stopped at the Post Office to mail a response to an IRS notice.  This was a request for a Collection Due Process (CDP) Hearing, and it had a deadline of July 28th.  I mailed the response on July 26th (using certified mail, return receipt requested).  I haven’t received the return receipt yet, but the filing was delivered on August 4th (per USPS tracking).  Given all the delays in the IRS reading and responding to mail, am I concerned for my client?  Definitely not.  I have proof of the mailing, and the fact that something a six-hour drive took the Postal Service nine days doesn’t matter–most IRS filings are postmark deadlines.  (It is possible the IRS delays in reading their mail will cause issues, but those are resolvable if I can speak to an individual at the IRS.)

But consider what might have happened if I had just put $1.40 of postage on the envelope and dropped it in the mail.  What might have happened if the postmark got obliterated (or if the mail hadn’t been postmarked)?  My client would lose.  We spent the $3.60 for certified mail (and $2.85 for the return receipt), so my client will have a CDP hearing.

Given all the issues with the Post Office and the IRS, anything sent to the IRS by mail must be sent certified mail (and you have to maintain the proof that it was mailed and received).  I’m expecting quite a few cases where the IRS claims various filings were lost–the volume of paperwork is just too large for this not to happen.  Don’t be part of the problem–use certified mail.  The courts have little to no sympathy if you don’t.

(Yes, there’s an issue with an envelope taking nine days to get from Las Vegas to Fresno.  But that’s another story for another day.)

Tax Professionals: Use Systemic Advocacy Management System (SAMS)

Friday, July 23rd, 2021

With the pandemic, the IRS has faced a lot of issues.  One that has faced my clients is the IRS ignoring responses to Automated Underreporting Unit (AUR) notices.  These notices are sent when the IRS receives notification of items of income that the IRS thinks should be on the return but are not on the return.  These are not audits.  These typically arrive to taxpayers as CP2000 notices.  Taxpayers have 30 days to respond to the notice, either by mail or by fax.

Unfortunately, several of my clients received CP2000 notices and responded (or I responded on their behalf) and the IRS ignored the response and sent a statutory Notice of Deficiency.  You can respond to the IRS to a Notice of Deficiency; however, if the IRS doesn’t respond back to you within 90 days the tax will be assessed (unless you file a petition for Tax Court).  I had clients respond both by fax and by mail and their responses were ignored.

One such client isn’t a systemic issue (mistakes do happen), but when it is several it’s a systemic issue.  I reported this on the Systemic Advocacy Management System (SAMS).  The IRS was aware of mail issues, but had not been aware of the issues with faxes.  I could prove to the IRS that the faxes were sent (we had the receipts generated by my fax machine showing that all pages were sent and received).  The SAMS group–which works within the Taxpayer Advocate Office–agreed that it’s a systemic issue and is working to (hopefully) prevent this from recurring.

Figuring out what went wrong will help protect taxpayer rights and reduce the burden on both taxpayers and the IRS.  I’ve spoken to SAMS representatives a few times on this issue, and they are trying to resolve this.  It may not help my clients (unfortunately, the deadline on a Notice of Deficiency is a ‘set in stone’ date though the IRS is trying to resolve the problems faced by my clients), but it will help others.

I encourage any of you to use the SAMS system if you see an issue that faces multiple taxpayers and are “big picture” issues:

These systemic issues:

  • Always affect multiple taxpayers;
  • Don’t apply to just one taxpayer (but if you personally have an unresolved IRS problem, TAS may be able to help);
  • Involve IRS systems, policies, and procedures;
  • Involve protecting taxpayer rights, reducing burden, ensuring fair treatment, or providing essential taxpayer services.

You can report such issues on the SAMS system.  The Taxpayer Advocate does look at these, and resolving these issues helps everyone.

At Least I’m Not Classified as “Dead”

Friday, July 16th, 2021

I’ve been talking over the past months about the issues faced by taxpayers in dealing with the IRS.  Suffice to say, when you have a 3% chance of reaching a human things aren’t going well.  But we should always look at the good side of things: I’m still breathing (in reality and in view of the IRS).

One woman in New Jersey is classified as “deceased” according to this report in the New York Post.  It’s going on seven years of bureaucratic futility in rising like a Phoenix to life.  Of course, she is really breathing and this is something that should just have gotten fixed immediately.  And yes, she still must pay taxes even though she’s “deceased.”

Indeed, I was able to give a client good news this week.  He was erroneously assessed a late filing penalty on a foreign trust return (the return was timely filed with an extension, and we had proof of both the timely filing and the extension).  Late filed foreign trust returns (Form 3520) are assessed a $10,000 penalty.  When the client was assessed the penalty he wrote the IRS with proof.  When the IRS ignored him, he asked me to write the IRS.  I did so, but the IRS refused to reverse the ruling.  We appealed, and after eighteen months of waiting we received a letter reversing the penalty.  (We never had an Appeals hearing–it appears that the Appeals screener realized that my client did have an extension.)

The overall theme when dealing with the IRS remains the same: patience.  You need it when dealing with the IRS.  I do expect things to slowly improve once the IRS moves employees back to the Service Centers (probably this Fall), but given the humongous backlog it will takes years for the IRS to be back to normal.

IRS Wakes Up, Still Smells Like Crown Imperials

Wednesday, July 7th, 2021

Normally when we talk about smelling flowers we’ll use a line like, “Waking up and smelling like roses.”  But that is decidedly not the case with this story, so we chose a different plant: Crown Imperial (Fritillaria imperialis).  You’ll see why shortly.

Back on June 20th we reported on the IRS denying 501(c)(3) status to Christians Engaged.  The reason given hearkened back to the IRS Scandal on non-profits:

[Y]ou are serving the private interests of the D party [D means Republican] more than incidentally in contravention to Treas. Reg. Section 1.501(c)(3)-1(d)1(ii) as well as serving a substantial nonexempt private purpose. For example, you educate Christians on what the bible says in areas where they can be instrumental including the areas of sanctity of life, the definition of marriage, biblical justice, freedom of speech, defense, and borders and immigration, U.S. and Israel relations. The bible teachings are typically affiliated with the D party [Republican] and candidates. This disqualifies you from exemption under IRC Section 501(c)(3).

Well, it appears the IRS got the message.  Christians Engaged received a new IRS Letter dated today that states: “We’re pleased to tell you we determined you’re exempt from federal income tax under Internal Revenue Code (IRC) Section 501(c)(3).”  There was no explanation given why the denial was reversed, but a cynic–and I am definitely one on this issue–believes the IRS figured out that only bad things would happen if the denial were to stand.  Indeed, under President Biden’s proposed budget the IRS is looking at an $80 billion increase in funding.  I strongly suspect IRS management realized that funding was in grave danger if the IRS continued to publicly discriminate against conservative (and religious based) nonprofits.

So does the IRS come up smelling like roses?  Hardly.  The IRS didn’t explain why Christians Engaged didn’t receive 501(c)(3) status to begin with.  Had I formed a new charity (and complied with all the minutiae regarding 501(c)(3) organizations) titled, “Ultra Liberals Engaged,” does anyone think that I wouldn’t have quickly received approval?

So the IRS comes up smelling like the Crown Imperial plant.  You haven’t heard of this plant?  It’s “a dazzling and unique member of the Lily family…In addition to adding visual interest, these flowers…have a potent, musky scent almost like a skunk….”

Hat Tip: Tyler O’Neil

Is the IRS Telling Tax Professionals the Truth?

Wednesday, July 7th, 2021

Yesterday, a fellow tax professional posted on Twitter:

Ogden currently has 70 tractor trailers of unopened mail. – per IRS agent trying to explain why a POA from 2019 still hasn’t cleared yet.

Yet if you read the IRS Operations page on the current status of IRS operations you get a different picture:

[On Individual Tax Returns] The IRS is opening mail within normal timeframes and all returns received prior to 2021 have been processed if the return had no errors or did not require further review. As of June 25, 2021, we had 16.7 million unprocessed individual returns in the pipeline…

Status of Processing Form 941, Employer’s Quarterly Federal Tax Return: The IRS is now opening mail within normal timeframes. The IRS has also made significant progress in processing Forms 941. As of July 2, 2021, we had about 5,000 Forms 941 received prior to 2021 in the processing pipeline. Including current year returns, as of July 2, 2021, we had 1.6 million unprocessed 941s in the pipeline.

An individual tractor trailer has a volume of 3,489 cubic feet; 70 of these would have a volume of 244,230 cubic feet.  You could fit 1,826,967 gallons of fluid in 70 tractor trailers.  That’s a lot of mail.  Sure, Ogden does now receive all paper-filed individual returns for the western United States, but what the IRS is saying doesn’t make sense if the IRS is telling us the truth.

Ogden is where almost all specialty returns are filed (Forms 3520, 3520-A, 8804/8805/8813, etc.), and those are not mentioned in the IRS pronouncement.  Yes, that will add to the unprocessed paper (these returns must all be paper-filed), but in volume it’s not large.  Paper-filed business returns (corporations, S-Corporations, and partnerships) also mainly go to Ogden; however, most such returns are electronically filed so in volume this is likely not a big factor.

My suspicion is that a large amount of the 70 trailers are filled with returns waiting to be sent to federal warehouses.  Because of Covid, most federal employees are working from home.  Paper-filed returns are generally stored for years in federal warehouses.  The IRS cannot send those returns from Ogden to various warehouses because the warehouses are closed.  Thus, they fill tractor trailers waiting for them to reopen.  These do not represent unprocessed paperwork; they are filled with processed paperwork that must be stored.  My guess is that the telephone representative the tax professional spoke with saw the trailers, knew that some are filled with unprocessed mail, and assumed the rest were too.  I’m reaching out to my IRS Stakeholder Liaison on this issue.

Still, if you’re dealing with the IRS patience is a necessity.  We’re telling clients the following timelines (these are averages) when dealing with the IRS:

  • Refunds Where You Claim the Recovery Rebate Payment (as a tax credit): 4 months
  • Processing Time for Paper-Filed Return: 10 months
  • Processing Time for Paper-Filed Amended Return: 12 months
  • Processing Time for Electronically Filed Amended Return: 11 months
  • Response Time on Correspondence to AUR Group (CP2000s, etc.): 6 months
  • Response Time on Other Correspondence to the IRS: 12 months

Those timelines are, bluntly, ridiculous.  But that’s what’s going on today.  Though I expect the IRS to return to full staffing at Service Centers this Fall, it will likely take the IRS years to get out from under the backlog.

35,300,000

Wednesday, June 30th, 2021

This morning, The National Taxpayer Advocate issued her semi-annual report to Congress.  In the report is the true state of tax returns at the IRS.  Fair warning, it’s not a pretty picture.

As of the close of the filing season (late May), there were 35.3 million tax returns that were unprocessed.  This includes:

  • 1.1 million paper returns received in 2020 (100,000 for individuals and 1 million for businesses);
  • 15.7 million paper returns received in 2021 (6 million for individuals, 4.6 million for businesses, and 5.1 million “unspecified”);
  • 10.3 million returns awaiting “Error Resolution” (9.8 million for individuals, 500,000 for businesses);
  • 1.4 million returns that are “Processing Rejects” (1.2 million for individuals, 200,000 for businesses);
  • 2 million returns that are “Unpostable” (1.1 million for individuals, 900,000 for businesses); and
  • 2.1 million ID Theft returns (all individuals).

And if you called the IRS general phone line for individuals, you had a 3% chance of getting through!  (This is actually better than the Taxpayer Advocate’s initial estimate of 2%, not that there’s a significant difference here).  Tax professionals have special phone numbers to call.  I found that I had about a 5% chance of getting through–or a 95% chance of not getting through.  And I pity those who had to go through Identity Verification.  The IRS increased the number of returns subject to this while phone staffing on these lines decreased.  The Taxpayer Advocate called it a “Historically low level of IRS telephone service.” I won’t argue.

While I expect things to improve, it’s likely going to take years for the IRS to work through the backlog.  I currently quote to my clients the following timelines:

  • Processing time for a paper return: 10 months
  • Processing time for an amended return: 12 months
  • Processing time for your refund if you do not get it in the first month after e-filing: 5 months

The above numbers are averages.  I had a client (who I helped come into compliance) file back returns last year.  One return took 16 months to be processed.   That return was incorrectly processed by the IRS, so a letter must be sent (so the client is likely looking at another few months before it’s correctly processed).

The IRS is doing better on correspondence (the average response time is 6 months), but it’s nothing to write home about.  An issue not mentioned in the report is the IRS issuing Notices of Deficiency prior to reading correspondence addressing underlying issues (thus, the notices should not have been issued).  I know that the Taxpayer Advocate is working on this systemic issue, but a resolution is, unfortunately, unlikely in the near future.

I do expect the IRS Service Centers to be restaffed this Fall, and this will then start to help on reducing the backlog.  Unfortunately, a backlog that was built over 18 months will take at least that long to be undone.