Archive for the ‘IRS’ Category

IRS Increases De Minimis Expense Threshold to $2,500 from $500 for 2016 Onward

Tuesday, November 24th, 2015

The IRS today announced that the de minimis expense threshhold for small taxpayers (which is the vast majority of all taxpayers) to $2,500 from $500 for tax years 2016 onward. Note that this does not apply for 2015 returns filed in 2016. This move will allow taxpayers to expense many items that currently must be depreciated.

The IRS announcement notes that this will simplify taxes for small businesses.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.

“We received many thoughtful comments from taxpayers, their representatives and the professional tax community, said IRS Commissioner John Koskinen. “This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers.“

Do note that you do need to keep a receipt (or other proof) of the expense.

Yo No Hablo Ni Leo Español

Wednesday, November 18th, 2015

Yes, Spanish is not one of my languages. Luckily for me, computer translators exist. Unluckily for one of my clients, he received an IRS notice in Spanish…when he doesn’t read or speak Spanish.

This is more humorous than anything else (errors do occur), but somehow my client has been apparently tagged by the all-knowing and all-seeing IRS computer as Spanish speaking or reading. Neither of us could figure out why, but with the help of the IRS Practitioner Priority Service we figured out that the notice was innocuous. Hopefully, the IRS computer will change his language of choice back to English.

IRSAC Report Has Hits and Errors

Wednesday, November 18th, 2015

The Internal Revenue Service Advisory Council (IRSAC) issued its annual report today. I agree with some of the recommendations but strongly disagree with others.

IRSAC laments IRS funding. While I agree it would be nice to have the IRS fully funded, the problem was caused by the IRS (and especially Chairman Koskinen) and the IRS scandal. Until the IRS comes clean, Republicans in Congress rightly will not allow full funding. The IRS scandal is not noted in the report, but that’s the cause of the problem. Is IRSAC right? Yes, but their complaints will fall on deaf ears.

IRSAC commits an error when they advocate the IRS be granted statutory authority to regulate tax professionals (return preparers). IRSAC is absolutely correct that congressional action is needed for the IRS to have the authority to regulate tax professionals. IRSAC is, however, silent on the current tools available against unscrupulous preparers. The law of supply and demand applies to tax preparation (just like anything else); if tax preparation is regulated, the supply will decrease and prices will increase. It won’t hurt me (I’m already a licensed professional) but it will hurt numerous “mom and pop” preparers and their clients. It will disproportionately help the large tax chains.

IRSAC hits it out of the park on some of their recommendations. I agree with their comments on IRS online applications (which are generally excellent), authentication of 1040 forms, and improving penalty administration.

Even where I disagree with IRSAC I want to commend them for the report. It’s a thorough analysis of a host of issues (some of which are out of my purview), and their recommendations–even those I disagree with–should be analyzed.

Time Running Out on the Miccosukee Tribe’s Battle with the IRS

Wednesday, November 4th, 2015

I have sympathy when taxpayers battle the IRS over legitimate issues. Indeed, I’m all for fighting the IRS when they’re (imho) wrong. However, fighting quixotic battles when you are wrong isn’t a good idea. The Miccosukee Tribe in Florida is in that position.

The Miccosukees operate a successful casino near Miami. The tribe itself is exempt from taxation (it’s a sovereign nation). However, the members of the tribe are not exempt from taxation when they receive income related to the casino. And therein lies the issue.

Beginning in 2012 (or perhaps even earlier) the IRS was wondering why payments to tribe members weren’t being reported (on information reporting forms) and taxes withheld. The IRS sent requests to the tribe, and eventually summonsed material from the tribe and the tribe’s financial institutions. The tribe fought the summonses claiming sovereign immunity. The tribe lost the battles, most recently with this decision in June. (It’s unclear if the tribe has since provided this information to the IRS.)

Meanwhile, approximately 20 tribe members were sent Notices of Deficiency by the IRS pertaining to distributions from 2000-2005. The tribe members filed Tax Court petitions in 2013. As best as I can tell, no case related to this has yet been decided.

Separately, the IRS issued tax, penalties and interest on the non-withholding withholding (that is, the money that the IRS thinks should have been withheld by the Miccosukee tribe). The IRS issued a lien and levy notice. The Miccosukee Tribe had a Collection Due Process hearing. When asked to provided financial information the tribe refused. The tribe lost the Collection Due Process Hearing and then filed a Tax Court petition.

The tribe disputed both the underlying liability and the collection activity (the latter, as an abuse of discretion). In May 2014 the Tax Court used an order for summary judgment against the Miccosukee tribe on the underlying liability. Because the tribe had an opportunity to dispute the underlying liability at Appeals, the Court ruled that the tribe could not dispute it in the Tax Court case.

The Tax Court held a trial in March, and ruled today that the levy was not an abuse of discretion.

It is clear from our review of the record that the SO [settlement officer] verified that the requirements of applicable law and administrative procedure were followed and that in sustaining the filing of the NFTLs and the proposed levy the SO properly balanced “the need for the efficient collection of taxes with the legitimate concern of * * * [petitioner] that any collection action be no more intrusive than necessary.” Petitioner did not raise any valid challenge to the appropriateness of the NFTL filings and the proposed levy. Furthermore, petitioner did not submit the financial information necessary for the SO to consider an installment agreement. There is no abuse of discretion when a settlement officer declines to consider collection alternatives under these circumstances…see also sec. 301.6330-1(e)(1), Proced. & Admin. Regs. (“Taxpayers will be expected to provide all relevant information requested by Appeals, including financial statements, for its consideration of the facts and issues involved in the hearing.”). Therefore, we hold that the SO’s determination to sustain the filing of the NFTLs and proceed with the proposed levy was not an abuse of discretion. [citations omitted]

While I expect the Miccouskee Tribe to file an appeal, and this will delay any IRS action for the time while an appeal is pending, it’s clear that time is running out for the Miccosukee Tribe on this matter. They may not want to provide their financial information to the IRS, but they have to. They also need to start complying with the law in regards to reporting and withholding casino income payments. Years ago, the US government ended up owning part of the Bicycle Casino. It wouldn’t surprise me that at some date in the near future that the Miccosukee’s casino is under new management.

Where I Agree (In Part) With IRS Commissioner John Koskinen

Tuesday, November 3rd, 2015

It’s rare for me to agree with IRS Commissioner John Koskinen. However, he spoke to some tax practitioners today and I do agree with some of what he said. From Accounting Today:

Once again, Congress has been working on legislation to extend a group of expired tax provisions, but it has not completed action yet. The uncertainty we face over the extenders legislation raises operational and compliance risks for the IRS in its administration of the tax law and delivery of the filing season. This uncertainty imposes stress, not only on the IRS, but also on the entire tax community, including everyone in this room.

If this uncertainty persists into December, we could be forced to postpone the opening of the 2016 filing season…This would delay the start of processing of tax refunds for millions of taxpayers. It’s also important for lawmakers to understand what the effect would be if they made any substantive changes to tax provisions that are extended, or decided to approve any new tax provisions. We would need to reprogram our systems and make processing changes that would result in delays. So I will continue to urge members of Congress not to let this uncertainty drag on. We believe it is critical for Congress to make a decision one way or another on the extenders legislation no later than the end of November in order to ensure there are no disruptions to the upcoming filing season.

Commissioner Koskinen is correct. Congress should get off its duff and pass the extender legislation. That said, the calendar hasn’t hit December so I don’t expect anything to happen for four weeks.

Meanwhile, Commissioner Koskinen complained about the funding cuts to the IRS. Yes, they’ve hurt service (on that, he’s correct). However, the biggest villain isn’t Congress; it’s the IRS. The 501(c)(4) scandal and the wishy-washy testimony from almost everyone at the IRS (including Commissioner Koskinen) has led directly to the cuts in funding. Republicans aren’t going to fully fund an agency being used against them. Until this is resolved, Commissioner Koskinen can complain all he wants but the funding levels aren’t going to increase.

Interestingly, IRS Taxpayer Advocate Nina Olson also appeared and spoke at the same meeting. She noted that the funding issues are hurting morale (I’m sure they are) and that there is resistance to the Taxpayer Advocate from the IRS.

We are finding instances where the IRS is refusing to let me or my staff have access to the administrative files of the taxpayers unless I sign a document agreeing in writing not to share any information that I find or see in that file with the taxpayer him or herself. I find that deeply offensive. I am subject to the same laws as any other IRS employee about disclosure of tax information. I am also by law entitled to any tax return or any tax return information that I need to conduct my tax administration duties. My tax administration duties are in the code and number one is help taxpayers resolve their problems with the IRS, and I need to be able to see the administrative files in order to determine how they go about doing that. My position is that the IRS in those instances has violated the law by not providing me access to those files, and I do not say that lightly.

Well, if the IRS will violate the law in regards to 501(c)(4) organizations, they can violate the law with regards to the Taxpayer Advocate Service. Until Congress or the courts stop it, that’s the environment that we work in.

AICPA Has Standing Per DC Court of Appeals; IRS’s Annual Filing Season Program In Jeopardy

Friday, October 30th, 2015

The American Institute for Certified Public Accountants (AICPA) filed a lawsuit in July 2014 challenging the IRS’s Annual Filing Season Program (AFSP). Almost exactly one year ago, a District Court for the District of Columbia ruled that the AICPA did not have standing to sue. The AICPA appealed that ruling, and in a decision announced today the Court of Appeals for the District of Columbia ruled that the lower court was wrong: The AICPA did have standing and the lawsuit will move forward.

To have standing, a plaintiff in a lawsuit needs three elements:

(1) plaintiffs must have suffered an injury in fact that is “concrete and particularized” and “actual or imminent, not conjectural or hypothetical”; (2) the injury must be “fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court”; and (3) “it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.” [citation omitted]

For an association to be able to have standing,

“(1) at least one of their members has standing to sue in her or his own right, (2) the interests the association seeks to protect are germane to its purpose, and (3) neither the claim asserted nor the relief requested requires the participation of an individual member in the lawsuit.” [citation omitted]

The IRS challenged only the first of these issues. The AICPA gave three reasons in their lawsuit why they had standing. One of these, competitor standing, was the focal point of this decision.

Here, the Institute’s members, like the researchers in Sherley and the congressmen in Shays, will face intensified competition as a result of the challenged government action. Specifically, participating unenrolled preparers will gain a credential and a listing in the government directory. The Institute alleges—and we must accept as true for purposes of assessing its standing—that this will “dilute[] the value of a CPA’s credential in the market for tax-return-preparer services” and permit unenrolled preparers to more effectively compete with and take business away from presumably higher-priced CPAs.

The Court found that the AFSP harms the AICPA’s members even if it doesn’t cause confusion.

The Institute alleges that unenrolled preparers are part of the same tax return preparation market as its members. Indeed, the IRS itself reports that sixty percent of tax return preparers are unenrolled preparers. We see nothing at all speculative or attenuated about the Institute’s contention that “[u]nenrolled preparers with government-backed credentials will be better able to compete against other credentialed preparers, and especially against uncredentialed employees of [Institute] members.” Nor do we see anything speculative or attenuated about the allegation that CPAs and their firms are more likely to lose business to an unenrolled preparer with a Record of Completion and a listing in the government directory than to an unenrolled preparer with no credentials at all. [citations omitted]

The IRS then says because AFSP participants can’t use the words “certified,” “enrolled,” or “licensed” that there’s no problem with increased competition. The Court disagreed with that argument.

Without violating any of these restrictions, however, participating preparers remain free to tell potential clients that they have a Record of Completion demonstrating that they satisfied the Program’s educational requirements and passed the test. Indeed, that is the very purpose of the Program. Moreover, participating preparers’ names will appear in the Directory of Federal Tax Return Preparers alongside the names of CPAs and other credentialed preparers. As the Institute helpfully sums up, “because the Rule distorts the competitive marketplace and dilutes [Institute] members’ credentials by introducing a government-backed credential and government-sponsored public listing, it harms those members regardless of whether it also confuses consumers.”

The Court of Appeals reversed the lower court ruling, so the AICPA’s lawsuit will move forward.

So the AFSP is back on very thin ice. The original lawsuit claims by the AICPA look very accurate to me. And there’s a new one: Unenrolled preparers who do not participate in the AFSP will be denied the ability to represent taxpayers’ whose returns they prepared in examinations (as of January 2016). This makes the program look a lot more mandatory than voluntary. My suspicion is that the one and only tax season for the AFSP was the past filing season.

Chaffetz Introduces Impeachment Resolution of IRS Commissioner Koskinen

Tuesday, October 27th, 2015

This past Friday the US Department of Justice announced that there would be no criminal prosecution of Lois Lerner related to the IRS scandal. I certainly wasn’t surprised. If you don’t remember, the Department of Justice won my Tax Offender of the Year award back in 2013 because the DOJ didn’t really investigate the scandal. I still don’t think that’s occurred. While it is theoretically possible that the IRS scandal is all due to an extraordinary amount of coincidences, it’s far more likely that one individual ordered it.

That brings us to today’s news. Congressman Jason Chaffetz (R-Utah) today filed an impeachment resolution against IRS Commissioner John Koskinen. Mr. Chaffetz is the chair of the House Oversight and Government Reform Committee. He accuses Commissioner Koskinen of violating the public trust.

He failed to comply with a congressionally issued subpoena, documents were destroyed on his watch, and the public was consistently misled. Impeachment is the appropriate tool to restore public confidence in the IRS and to protect the institutional interests of Congress. This action will demonstrate to the American people that the IRS is under repair, and signal that Executive Branch officials who violate the public trust will be held accountable.

Commissioner Koskinen is accused of:

  • Failed to comply with a subpoena resulting in destruction of key evidenceCommissioner Koskinen failed to locate and preserve IRS records in accordance with a congressional subpoena and an internal preservation order.  The IRS erased 422 backup tapes containing as many as 24,000 of Lois Lerner’s emails – key pieces of evidence that were destroyed on Koskinen’s watch. 
  • Failed to testify truthfully and provided false and misleading information.  Commissioner Koskinen testified the IRS turned over all emails relevant to the congressional investigation, including all of Ms. Lerner’s emails.  When the agency determined Ms. Lerner’s emails were missing, Commissioner Koskinen testified the emails were unrecoverable.  These statements were false.
  • Failed to notify Congress that key evidence was missing.  The IRS knew Lois Lerner’s emails were missing in February 2014.  In fact, they were not missing; the IRS destroyed the emails on March 4, 2014.  The IRS did not notify Congress the emails were missing until June 2014 – four months later, and well after the White House and the Treasury Department were notified.   

The IRS, of course, disputes the allegations in the resolution and believes they have fully cooperated with all of the investigations.

The reality is that Commissioner Koskinen may be impeached by the House of Representatives, but it is very unlikely he’ll be convicted by the US Senate. It is highly doubtful that Democrats will vote to impeach Mr. Koskinen.

My view of this is simple: Mr. Koskinen has become a mouthpiece of the Administration rather than an independent head of the IRS. New leadership and a resolution of the IRS scandal is needed before the people regain full confidence in the IRS. Mr. Koskinen has failed in that task. The IRS’s budget does need to be increased, but that’s not happening until Mr. Koskinen leaves the agency (and the scandal is resolved). The Wall Street Journal’s conclusion on the impeachment mirrors my thoughts:

Yet the exercise will have the salutary effect of reminding executive-branch officials that they are not a government unto themselves. The U.S. Attorney has refused to honor Congress’s contempt charge against Ms. Lerner for refusing to testify, the Justice Department has closed its investigations into IRS targeting without prosecutions, and the press corps winks at abuses of power when conservatives are the targets. With an executive who refuses to honor the normal separation of powers, Congress is obliged to use its authority to hold government accountable.

Monsters Under the Bed

Sunday, October 25th, 2015

Two Florida tax preparers (I hesitate to use the word “professionals” based on what they’re accused of) are facing a lawsuit from the Department of Justice seeking a civil injunction to prevent them from owning a tax preparation firm and preparing returns for others. This lawsuit is derived from other lawsuits against individuals related to LBS Tax Services.

It seems that Christopher Lawrence and Kenneth Aikens, proprietors of “Tax Mon$Ter” and “Tax Pros,” are accused of doing many of the practices that bad preparers use to get bad refunds: false earned income tax credit, incorrect filing status, phony businesses, fake unreimbursed business expenses, and one that we don’t see that often: unconscionable fees. From the DOJ press release:

According to the complaint, Lawrence and Aikens target primarily low-income customers with deceptive and misleading advertisements, prepare and file fraudulent tax returns to fraudulently increase their customers’ refunds and profit through unconscionable, exorbitant and often undisclosed fees—all at the expense of their customers and the U.S. Treasury.

There are two main points to realize from this story. First, if it sounds too good to be true it probably is. If your tax “professional” is promising you a huge refund but something doesn’t sound right, there likely is something wrong. Second, the IRS has methods today to go after bad tax professionals. Suppose I start inventing deductions and credits, adding phony dependents, and otherwise abuse the system, the IRS can come after me. Even unlicensed tax professionals can be gone after–and it appears that’s the case here.

Up In Smoke, Again

Thursday, October 22nd, 2015

A California non-profit corporation tried to find a way around Section 280E of the Tax Code at Tax Court. Would they be successful or would yet another marijuana business fall victim to the difference between federal and state law?

In 1996 California approved medical marijuana. However, federal law make marijuana a Schedule I controlled substance under Section 280E of the Tax Code. The petitioner in the case is a non-profit corporation (technically, a California mutual benefit corporation that is not for profit). The IRS had disallowed business expenses because of Section 280E of the Tax Code. The petitioner timely filed a Tax Court petition.

The problem that the petitioner faces is basically that federal law trumps state law. The Federal Drug Enforcement Administration lists marijuana as a Schedule I controlled substance. In Olive v. Commissioner, the Ninth Circuit Court of Appeals stated,

[T]he only question Congress allows us to ask is whether marijuana is a controlled substance ‘prohibited by Federal law.’ * * * If Congress now thinks that the policy embodied in § 280E is unwise as applied to medical marijuana sold in conformance with state law, it can change the statute. We may not.

The petitioner tried to argue that he was in multiple lines of businesses, so that some portion of the business expenses would be deductible. The Tax Court was having none of that:

Because of the parties’ stipulation, we find that the sale of medical marijuana was petitioner’s primary source of income and that the sale of any other item was an activity incident to its business of distributing medical marijuana. We find that petitioner was engaged in one business–the business of selling medical marijuana.

With Section 280E prohibiting deductions for business expenses, the IRS’s deficiencies were upheld. Medical marijuana might be legal under California law, and expenses are deductible on California tax returns. However, until Congress changes the law business expenses for marijuana dispensaries cannot be taken on federal tax returns.

Case: Canna Care, Inc. v. Commissioner, T.C. Memo 2015-206

That Was the Year that Was

Sunday, October 18th, 2015

Last November I wrote about “The Horrible, No Good, Very Bad Upcoming Tax Season.” This definitely wasn’t the best tax season but it also wasn’t the worst (but it was close to the bottom). The four issues that I identified as problems were tax extenders, the IRS budget, the Affordable Care Act (aka ObamaCare), and the IRS Property/Capitalization regulations.

Tax extenders were passed late, but there weren’t any surprises. Thus, the impact to the 2015 Tax Season was minimal.

The same can’t be true for the IRS budget cuts. This probably impacted me more than any of the other issues I faced. Calling the IRS was almost a joke. The “Practitioner Priority Service” hold times were so bad that I’d hate to think of what they were for regular numbers. Unfortunately, I see no improvement possible with the IRS budget until the IRS scandal is resolved. That’s not going to happen until we have a new President, so we have probably two more years of misery in dealing with the IRS.

(The Obama Administration promised to be the most transparent in history. Its record is one of obfuscation and deceit, not of being open and honest.)

For the most part ObamaCare did not impact many of my clients. Of course, for 2014 tax returns a client could self-certify they had health insurance. Coming for 2015 returns will be IRS Forms 1095-B and 1095-C. Almost everyone will need to provide tax professionals with a health insurance form.

The property regulations almost had a huge impact. A literal reading of the regulations was that everyone impacted needed to file a Form 3115. The IRS realized that they didn’t have the personnel to handle the incoming tsunami of paperwork and, at the last moment, issued procedures that basically mitigated the impact of the new regulations.

While I’ll post about the upcoming season in another month, it looks like deja vu all over again. Once more, tax extenders haven’t passed, we have another year of impacts of ObamaCare, and the IRS budget constraints will continue. Unfortunately, this year I’m not taking a vacation to New Zealand and Australia in December. In any case, tax professional will likely be grouchy next tax season, too.