Archive for the ‘IRS’ Category

IRS E-Services Outage Postponed…Again

Wednesday, August 16th, 2017

Back in June the IRS was going to do a major update of their E-Services (what tax professionals, software developers, and return transmitters use to access IRS computer systems). That update was postponed. Last month the IRS announced that the update would happen beginning tomorrow (August 17th). This morning, the IRS postponed it again; no new date was announced. The notice is reproduced below.

The IRS today announced that a planned outage of all e-Services tools and applications has been postponed. The extended delay will allow for some additional improvements to take place in the final product.

When a new date is set, we will issue a follow up Quick Alert. Until further notice, all e-Services tools and applications are available to registered users, except for AIR users. The Affordable Care Act Information Return (AIR) participants will be unable to submit new or change existing Transmitter Control Code applications until this platform upgrade takes place.

The planned outage, when it occurs, will allow for the e-Services suite of tools to be transferred to a new digital platform. The new platform will conclude a years-long effort to upgrade the technology for e-Services tools.

Did I Prepare 5% of the Tax Returns with Bitcoin in 2015?

Sunday, August 13th, 2017

The IRS is attempting to force Coinbase to disgorge a list of its customers who have traded Bitcoins. Back in March, an IRS agent, as part of attempting to enforce its summons against Coinbase, stated that there were only 802 individuals who reported Bitcoin transactions on Form 8949. The IRS searched and that’s what they supposedly found after looking at over 120 million returns filed for 2015.

My records show that I filed 40 returns in 2015 with Bitcoin transactions. According to the IRS that means I prepared 5% of all returns with Bitcoin transactions on them for tax year 2015!

Let’s be honest: There were more than 802 individuals who had Bitcoin transactions in 2015. This is why I expect (in the long run) the IRS’s summons against Coinbase will be successful.

This also may say something about tax professionals (and not a good thing). Now, it is true that my clientele happens to be more likely to skew towards individuals owning cryptocurrencies such as Bitcoin. Still, am I one of the few tax professionals to ask clients about cryptocurrency transactions?

It’s actually far more likely that most tax professionals have a Sergeant Schultz moment with Bitcoins: Since there’s no paperwork, there’s nothing to report. That’s not how it works: Income is taxable (or not) regardless of whether or not you receive paperwork. For example, if you do consulting work for someone and get paid $800 but you don’t receive a Form 1099-MISC noting the income, you must report that $800. Individuals who self-prepare returns likely have the same issue: No paperwork, no reporting.

Cryptocurrency is fertile ground for the IRS, and sooner or later the IRS is going to get this information and conduct audits on it. If you are trading Bitcoins or other cryptocurrencies, you need to report them on your tax return. And if you’re a tax professional, you need to ask clients about this.

The IRS Gives Good Suggestions on Handling an IRS Notice

Saturday, July 15th, 2017

Earlier this week the IRS sent out “Tips on How to Handle an IRS Letter or Notice:”

Tips on How to Handle an IRS Letter or Notice

The IRS mails millions of letters every year to taxpayers for a variety of reasons. Keep the following suggestions in mind on how to best handle a letter or notice from the IRS:

1. Do not panic. Simply responding will take care of most IRS letters and notices.

2. Do not ignore the letter. Most IRS notices are about federal tax returns or tax accounts. Each notice deals with a specific issue and includes specific instructions on what to do. Read the letter carefully; some notices or letters require a response by a specific date.

3. Respond timely. A notice may likely be about changes to a taxpayer’s account, taxes owed or a payment request. Sometimes a notice may ask for more information about a specific issue or item on a tax return. A timely response could minimize additional interest and penalty charges.

4. If a notice indicates a changed or corrected tax return, review the information and compare it with your original return. If the taxpayer agrees, they should note the corrections on their copy of the tax return for their records. There is usually no need to reply to a notice unless specifically instructed to do so, or to make a payment.

5. Taxpayers must respond to a notice they do not agree with. They should mail a letter explaining why they disagree to the address on the contact stub at the bottom of the notice. Include information and documents for the IRS to consider and allow at least 30 days for a response.

6. There is no need to call the IRS or make an appointment at a taxpayer assistance center for most notices. If a call seems necessary, use the phone number in the upper right-hand corner of the notice. Be sure to have a copy of the related tax return and notice when calling.

7. Always keep copies of any notices received with tax records.

8. The IRS and its authorized private collection agency will send letters and notices by mail. The IRS will not demand payment a certain way, such as prepaid debit or credit card. Taxpayers have several payment options for taxes owed.

The IRS here gives good advice. Do not ignore IRS (or state) tax notices, and respond timely. One thing the IRS doesn’t mention is that if you need more time, you can ask for an extension in the deadline. And remember, the IRS will never demand you pay using any specific way.

If you use a tax professional, send him or her a coy of the notice (all pages of the notice). Do not wait until the deadline to send a copy of the notice to the tax professional. He or she can evaluate what you need to do (if anything) with the notice).

IRS Not Moving e-Services to a New Platform this Week

Monday, June 12th, 2017

The IRS had planned on moving e-Services to a new platform on Thursday, June 15th. However, today I received an email stating it has been postponed until later this summer:

The planned move of IRS e-Services to a different platform has been pushed to later this summer. This delay changes previous announcements to e-Services users.

1. The planned e-Services outage for June 15-19 has been cancelled.
2. State users will be able to submit new or update existing state e-file coordinator applications and TDS applications until the upgrade begins later this summer.

IRS will communicate the schedule for the e-Services platform upgrade and provide updates on user impact well in advance of any changes.

IRS Interest Rates Unchanged for Third Quarter 2017

Friday, June 9th, 2017

The IRS announced today that third quarter interest rates will remain unchanged:

The Internal Revenue Service today announced that interest rates will remain the same for the calendar quarter beginning July 1, 2017. The rates will be:
• four (4) percent for overpayments (three (3) percent in the case of a corporation);
• 1 and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000;
• four (4) percent for underpayments; and
• six (6) percent for large corporate underpayments.

Court Rules IRS Cannot Charge for PTINs

Friday, June 2nd, 2017

Back in 2010 to 2011 the IRS ordered all tax professionals to obtain a PTIN–a Preparer Tax Identification Number. The IRS stated this was necessary to track tax professionals, and would help in regulating the tax professional community. There is a fee to obtain a PTIN (now $50 initially, with a renewal costing the same $50). A group of tax professionals challenged the PTIN regulation and the fee in a class action suit. Can the IRS force tax professionals to obtain a PTIN? And can the IRS charge for PTINs?

The PTIN regulations came about at the same time as the IRS’s ill-fated efforts to regulate tax professionals. The IRS was challenged on the ability to regulate tax preparation professionals (see Loving v. IRS); the IRS lost the ability to regulate tax preparers. These regulations happen to also contain the IRS’s justification for charging a user fee to obtain a PTIN: As the Court yesterday noted,

As authority for requiring these fees, the IRS relied on the Independent Offices Appropriations Act of 1952 (“IOAA”). The IOAA provides that agencies “may prescribe regulations establishing the charge for a service or thing of value provided by the agency.” The IRS stated that a PTIN is a “service or thing of value” because without a PTIN “a tax return preparer could not receive compensation for preparing all or substantially all of a federal tax return or claim for refund,” and “[b]ecause only attorneys, certified public accountants, enrolled agents, and registered tax return preparers are eligible to obtain a PTIN, only a subset of the general public is entitled to a PTIN and the special benefit of receiving compensation for the preparation of a return that it confers.” [citations omitted]

The first part of the case was whether the IRS can mandate tax preparers use a PTIN. The Court ruled that the IRS can do so.

[P]laintiffs’ arguments fail step one of Chevron. Chevron states that “if Congress has directly spoken to the precise question at issue … that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” The statute specifically says that the Secretary has the authority to specify the required identifying number to be used on prepared tax returns. (“The social security account number issued to an individual for purposes of section 205(c)(2)(A) of the Social Security Act shall, except as shall otherwise be specified under regulations of the Secretary, be used as the identifying number for such individual for purposes of this title.” (emphasis added)). The Court must give effect to the unambiguous intent of Congress that the Secretary may require the use of such a number. [citations omitted]

The second part of the case is whether the IRS has justification for charging a fee for obtaining PTINs. The plaintiffs had two arguments: That because of the decision in Loving the IRS no longer had a rationale for charging PTIN fees, and thus charging such fees was arbitrary and capricious. Second, because Congress did not grant the IRS licensing authority (confirmed by Loving), tax return preparers don’t receive a benefit in exchange for the fees; thus, they are unlawful under the IOAA. The government disagreed:

The government argues that the PTIN and user fee regulations are separate from the regulations imposing eligibility requirements on registered tax return preparers. It argues that the PTIN requirements are not arbitrary and capricious because they make it easier to identify tax return preparers and the returns they prepare, which is a critical step in tax administration, and because PTINs protect social security numbers from disclosure. In support of its position that it may charge fees for PTINs, the IRS states that PTINs are a service or thing of value because the ability to prepare tax returns for compensation is a special benefit provided only to those people who obtain PTINs, who are distinct from the general public. Individuals without PTINs cannot prepare tax returns for compensation. In addition, the IRS argues that PTINs protect the confidentiality of tax return preparers’ social security numbers, and that protection itself is a service or thing of value.

The court found that PTINs are not a “service or thing of value.”

First, the argument that the registered tax return preparer regulations regarding testing and eligibility requirements and the PTIN regulations are completely separate and distinct is a stretch at best. While it is true that they were issued separately and at different times, they are clearly interrelated. The RTRP regulations specifically mention the PTIN requirements and state that PTINs are part of the eligibility requirements for becoming a registered tax return preparer…Furthermore, the overarching objectives named in the PTIN regulations indicate a connection to the RTRP regulations. They were 1) “to provide some assurance to taxpayers that a tax return was prepared by an individual who has passed a minimum competency examination to practice before the IRS as a tax return preparer, has undergone certain suitability checks, and is subject to enforceable rules of practice;” and 2) “to further the interests of tax administration by improving the accuracy of tax returns and claims for refund and by increasing overall tax compliance.” The first objective clearly relates to the RTRP regulations regarding eligibility requirements for tax return preparers. The second objective is less explicit, but it does not stretch common sense to conclude that the accuracy of tax returns would be improved by requiring tax return preparers to meet certain education requirements. [citation omitted]

This results in a problem: What’s justifying the user fee?

The Loving court concluded that the IRS does not have the authority to regulate tax return preparers. It cannot impose a licensing regime with eligibility requirements on such people as it tried to do in the regulations at issue. Although the IRS may require the use of PTINs, it may not charge fees for PTINs because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority. Granting the ability to prepare tax return for others for compensation—the IRS’s proposed special benefit—is functionally equivalent to ranting the ability to practice before the IRS. The D.C. Circuit has already held, however, that the IRS does not have the authority to regulate the practice of tax return preparers. In coming to its conclusion, the Circuit considered the statutory language that the Secretary may “regulate the practice of representatives of persons before the Department of the Treasury.” The court found that the IRS improperly expanded the definition of “practice . . . before the Department of Treasury” to include “preparing and signing tax returns” because to “practice before” an agency “ordinarily refers to practice during an investigation, adversarial hearing, or other adjudicative proceeding.” The Loving court concluded that “[t]hat is quite different from the process of filing a tax return” in which “the tax-return preparer is not invited to present any arguments or advocacy in support of the taxpayer’s position . . . [and] the IRS conducts its own ex parte, non-adversarial assessment of the taxpayer’s liability.” The ability to prepare tax returns is the “practice” identified by the IRS in Loving, but the court found that such an activity does not qualify as practicing before the IRS. Therefore, it appears to this Court that the IRS is attempting to grant a benefit that it is not allowed to grant, and charge fees for granting such a benefit.

This ruling disagrees with another case (Brannen v United States), but that was pre-Loving (as the Court notes). The Court also noted that if the IRS were allowed to regulate tax professionals, the ruling might be quite different. Additionally,

The Court is unaware of similar cases in which an agency has been allowed to charge fees under the IOAA for issuing some sort of identifier when that agency is not allowed to regulate those to whom the identifier is issued, and the government has not pointed to any.

Thus, the Court ruled that the IRS can require PTINs but cannot charge for them. I do expect the ruling to be appealed, so it’s likely nothing will change for several months.

Case: Steele v United States

UPDATE: The court also ordered that the IRS refund all PTIN fees to all class members.

Again, I expect this ruling to be appealed, so any refunds are many months in the future.

Exchanging One Cryptocurrency for Another Is a Taxable Event

Saturday, May 27th, 2017

Let’s assume I own some Bitcoins and you own some Ethereum; these are two cryptocurrencies. We think they’re each worth $5,000 and we agree to swap them. Do we have a taxable event?

The IRS consideres cryptocurrencies to be akin to stocks and bonds. That means any time I sell or otherwise dispose of cryptocurrency I have a realized capital gain or loss. A client was told by a cryptocurrency trader that exchanging one cryptocurrency for another is not a taxable event. That individual is mistaken.

Let’s look at an analogous situation: You and I each own $5,000 worth of a stock (say General Motors and Ford). We swap stocks. I no longer own Ford, so I have a gain (or loss) on my Ford stock; you have a gain or loss on your General Motors stock. No one can successfully argue that this swap doesn’t result in a taxable event for each of us.

As I said swapping one cryptocurrency for another is analogous. Is a Bitcoin identical to an Ethereum? No; they’re each different cryptocurrencies. If you sell or dispose of a cryptocurrency, you have a taxable event. It’s very clear that such swaps absolutely must be reported on Schedule D.

Bozo Tax Tip #1: Declare More Income than You Earned!

Thursday, April 13th, 2017

Why in the world would anyone of sound mind and body declare more income than they actually earned? He or she would owe more tax, so there’s no reason to do this, right?

No, there are actually two reasons people do this. They’re both part of the Bozo contingent, and I strongly advise you not to follow their lead, but here goes:

The first (less common) reason is to qualify for a loan (typically a mortgage). Let’s say you found your dream home, but you need to show income of $100,000 a year…but you only earned $90,000. Simple solution: Declare an additional $10,000 of income! Now you qualify, and next year you plan on cheating on your taxes by that $10,000. Of course, the fact that you committed a felony by lying on your loan application doesn’t concern you. And the IRS is unlikely to come after you for the extra income; after all, if you do get audited in some future year you will simply admit the error. Some who practice this simply file an amended return a year or so later. You own the home, you’re making mortgage payments, so no one’s the wiser, right? (We’ll continue to ignore that felony you committed.)

The more common reason is the Earned Income Credit. This welfare program is part of the Tax Code. Let’s say you earn nothing; you’re not eligible for it. But if you have some income (but not huge income), you’re eligible for “free money.” (And we’ll throw in a phony child or two or nineteen so you can get the Child Tax Credit and, voila, you have even more “free money.”) Of course it’s not free—it comes out of our tax dollars. And you’re committing a crime (lying on your tax return). However, given how the Tax Code works and the monetary reasons for individuals to seek the Earned Income Credit, the Bozo contingent looks at it as “free money.”

(That’s the reason Congress requires tax professionals to conduct a mandatory interview for people who are claiming this credit. There are penalties on tax professionals who evade this requirement. Of course, if you’re running an Earned Income Credit fraud program, you’re probably more than willing to lie on the tax professional’s mandatory questionnaire.)

A tax return is supposed to show the exact amount of income you made: no more, no less. If you get caught adding income that didn’t exist to your return for one of the two reasons I’ve highlighted you’ve committed at least one crime. I’d like Congress to end Tax Code welfare (end the Earned Income Credit) but that’s not going to happen. But if you get caught adding phony income (especially if you’re a tax professional running an EIC fraud mill) you can be sent to a very real prison.


That’s the last of our Bozo Tax Tips for the 2017 Tax Season. I’ll be back in about one week with normal blog content.

Bozo Tax Tip #2: Cash Isn’t Taxable

Wednesday, April 12th, 2017

I haven’t run this Bozo Tax Tip in a few years, but it reared its head again just a couple of weeks ago (as you read this). A new client came into my office for the preparation of his tax return. Everything went smoothly, and an hour or so later his returns were complete and electronically filed, he had his copies of the returns, and the Bozo festivities (unknowingly to me) were about to begin.

He asked me if I’d take cash. “Sure,” I replied.

The client then handed me an amount exactly 10% less than the amount of the invoice. “This way you don’t have to report it—after all, it’s cash so there won’t be any record.”

“Cash income is just as taxable as any other source,” I replied. “I’m ethical, and I report all my income.”

“Oh, come on,” he replied. “When I was self-employed everyone did that.” Thankfully, my client is currently not self-employed.

“Well, that’s a good way to get in trouble. That’s called tax evasion. I don’t need to get myself involved in that, and neither does anyone else today.” I pointed out to my client the number of business owners who have done what he thought was ‘normal’ who are now residing in ClubFed. It’s amazing how many owners of Gentlemen’s Clubs (which are definitely cash businesses) get in trouble, thinking that they only have to report some of the income.

My client, after some prodding, came up with the other ten percent of the fees, and he ended up (hopefully) a little wiser. You needn’t worry about this: Just report all of your income on your tax return. But if you want to live on the Bozo side of life, skip reporting the cash…until one day you find out that really was a Bozo move.

Bozo Tax Tip #3: Let Your IRS Notice Age Like Fine Wine!

Tuesday, April 11th, 2017

Here’s another repeat from last year, but it’s something that bears repeating.

My brother is a wine connoisseur. As all my friends know, I’m anything but a wine aficionado. But I have learned one difference between fine wine and a notice from the IRS: Wine can age very well but IRS notices don’t.

Almost all IRS notices come with deadlines. You need to act to stop the IRS. If you ignore the notice, you usually will get a second notice. After that, you may receive a Notice of Deficiency. If that ages the tax is assessed.

Yet most IRS notices are wrong in whole or in part! The last study I saw showed that two-thirds of IRS notices are wrong. That’s a shockingly high percentage. An obvious question is why doesn’t the IRS change its procedures so that the bad notices aren’t issued? The answer is simple: People pay those notices. The IRS’s Automated Underreporting Unit is a huge profit center for the agency.

What does this mean for you? Put simply, if you get an IRS notice read it carefully. Let your tax professional know about it when you receive it, not on the day a response is due. It’s a lot easier (and cheaper) to act earlier in the process than later.

My brother tells me that some of the best wine he’s tasted have been old varietals. I can tell you that I’ve never seen a tax notice get better with age.