Archive for the ‘IRS’ Category

Can I Disclose a Candidate’s Tax Returns?

Sunday, May 12th, 2019

Let’s say that back in 2010 I prepared the federal and California tax returns for John and Mary Smith of Irvine, California. Ten years later, Mr. Smith decides to run for statewide office. Let’s further assume I abhor Mr. Smith’s politics. Can I leak his tax returns to the Los Angeles Times? Can the Times publish the Smiths’ returns?

I, like all tax professionals, fall under the rules of Circular 230. Circular 230 basically states that I can only disclose a client’s returns with his or her permission, and that these rules protect current clients, future clients, and former clients. Federal law has more to state about this: Under 26 U.S.C. § 7213(a)(1) it is illegal for me to disclose to anyone any information about a tax return. Additionally, 26 U.S.C. § 7213(a)(3) states: “It shall be unlawful for any person to whom any return or return information (as defined in section 6103(b)) is disclosed in a manner unauthorized by this title thereafter willfully to print or publish in any manner not provided by law any such return or return information.”

So the answer to the first question I asked is easy: It is very illegal for me to disclose Mr. & Mrs. Smiths’ returns to anyone for any reason whatsoever without the permission of the Smiths.

The answer to the second question is far more difficult. While federal law makes it illegal for anyone receiving illegally disclosed tax return information to publish it, the First Amendment to the Constitution (“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.”) likely overrides federal law. I have to use “likely” instead of “certainly” because there hasn’t been a case about this issue that has reached the Supreme Court.

I wrote this brief piece because of the release of information regarding President Trump’s tax returns from 1984-1995. The New York Times published this information and stated they received the information from someone who had legal access to them. It is a certainty that particular individual violated federal law and could be prosecuted. If he’s a licensed CPA or Enrolled Agent, he could lose his license; if he’s a licensed attorney, he could be disbarred. If the Department of Justice discovers the individual responsible for the leak, he or she is very likely to be prosecuted (it’s a slam-dunk case). As for the Department of Justice going after the New York Times, I highly doubt that will happen. The case is anything but a certain winner. I strongly suspect the First Amendment overrides 26 U.S.C § 7213(a)(3).

Bozo Tax Tip #1: We Don’t Need No Stinkin’ Basis

Friday, April 12th, 2019

If there’s one issue in tax that tax professionals have trouble explaining to clients it’s basis. Your basis in an entity is, generally, the total of your investment in an entity plus income it generated less any distributions from it. If you’re an investor in a business, you can only take losses up to the amount of your basis. Sounds simple, right?

So let’s say you invest in an S-Corp, “Losing Money, Inc.” Unfortunately, it’s name matches what’s happened year after year. You invested $10,000 years ago, and each year your share of the loss has been $3,000. It’s year four of your ownership, and you get the K-1 showing the (as usual) $3,000 loss. Your tax professional tells you, “I’m sorry, but you’re only getting $1,000 of the $3,000 loss–you used up your basis.”

The IRS has been battling this issue for a number of years. Owners of businesses are supposed to keep basis statements. Most reputable tax professionals prepare basis statements for the partnerships and S-Corporations that they prepare returns for. It remains, though, the responsibility of the owner to keep track of the basis.

Anyway, the IRS has (in audits) seen many owners not have basis and still take losses. The IRS hasn’t had a good method to police this. This year, though, the IRS wised up. There’s an addition to the instructions for page 2 of Schedule E:

If you are claiming a deduction for your share of an aggregate loss, check the box on the appropriate line in Part II, column (e), and attach to your return a computation of the adjusted basis of your corporate stock and of any debt the corporation owes you. For details, see the Shareholder’s Instructions for Schedule K-1 (Form 1120S). [emphasis added]

Of course, some individuals may attach a phony basis statement to get around this issue, but that’s yet another bozo action (that’s committing a felony–lying on your tax return, which is signed under penalty of perjury). Still, it’s likely that the IRS has the right idea and this will lessen the problem. (I expect the IRS to expand basis reporting rules to partnerships in the near future.)

Of course, some individuals may simply ignore attaching the basis statement and play ‘audit roulette.’ That’s something else I can never advise. But if you want to enjoy the Bozo side of life, just keep ignoring your basis and take your loss year after year after year.


That’s the last of our Bozo Tax Tips for the 2019 tax filing season. We’ll be back with normal content, including a rather scathing review of this tax filing season, late next week.

Bozo Tax Tip #2: We Don’t Need No Stinkin’ Employees (Especially Because We’re Lawyers)

Thursday, April 11th, 2019

A few years ago, I first heard about the law firm that had no employees. Now, I can imagine a small firm of, say, three or four partners, with no clerical staff as a possibility. However, having dealt with enough attorneys there are always secretaries, paralegals, clerks, and junior lawyers because most clients don’t way to pay $400 an hour for typing.

Joe Kristan (who formerly had the Roth CPA tax update blog) wrote about the Donald Cave Law Firm in Baton Rouge, Louisiana. A few years ago the firm found itself in Tax Court claiming that the three associates of the firm weren’t employees because the owner, Mr. Cave, alleged he didn’t have enough control over them. Now, do you really believe that a senior lawyer at any firm would allow junior attorneys to do their own thing? Of course not, and the Tax Court didn’t believe it either.

That wasn’t the end of the story, though. The firm appealed and their fate at the Fifth Circuit was, well, what you would expect.

Finally, with respect to the law clerk, Michael Matthews, the record shows that Donald Cave hired Matthews and exercised complete control over the assignment of Matthews’ work for the Firm. Although Matthews also worked for other lawyers and law firms, providing services to multiple employers does not necessitate treatment as an independent contractor…Matthews was paid a salary by the Cave Law Firm of approximately $1250 every two weeks, which amounts to $30,000 per year, regardless of the amount of work he performed during that time period. Contrary to the Firm’s suggestion, Matthews was not paid a minimal amount for essentially piecework. Instead, he entered into a verbal contract with Donald Cave and the Firm for a fixed sum to provide services at the direction of Cave, and there was no evidence that he could reject any work he did not wish to perform. Furthermore, Matthews could neither increase his profit through his own skill and initiative, nor would he suffer the risk of any losses. Matthews also made no investment in the facilities because the Firm provided him with the amenities needed to complete his work.

Can you really imagine that a clerk at a law firm isn’t an employee? I can’t, and neither could the judges at the Fifth Circuit.

The point of this is to be careful about who you claim are independent contractors. If you give John a research project, and don’t control his activities, and he’s working in another state on his own, that truly sounds like an independent contractor. However, if John’s working in your office, and your supervising his every move, etc., trying to claim he’s an independent contractor when he’s really an employee can lead to a big heartache.

Additionally, some states are far tougher on the independent contractor/employee decision than the IRS. Indeed, my old homestead of California is probably the most difficult state in the country to have independent contractors. California’s Employment Development Department (EDD) has an excellent publication on this issue (EDD Publication 38). There’s even a help line you can call.

So if you really have independent contractors, great. But if you’re a law firm and you really, really think that your secretary and the filing clerk are independent contractors you are committing a Bozo act.

Bozo Tax Tip #4: The $0.55 Solution

Tuesday, April 9th, 2019

With Tax Day fast approaching it’s time to examine yet another Bozo method of courting disaster. And it doesn’t, on the surface, seem to be a Bozo method. After all, this organization has the motto, Neither rain nor snow nor gloom of night can stay these messengers about their duty.

Well, that’s not really the Postal Service’s motto. It’s just the inscription on the General Post Office in New York (at 8th Avenue and 33rd Street).

So assume you have a lengthy, difficult return. You’ve paid a professional good money to get it done. You go to the Post Office, put proper postage on it, dump it in the slot (on or before April 15th), and you’ve just committed a Bozo act.

If you use the Postal Service to mail your tax returns, spend the extra money for certified mail. For $3.50 you can purchase certified mail. Yes, you will have to stand in a line (or you can use the automated machines in many post offices), but you now have a receipt that verifies that you have mailed your return.

About fourteen years ago one of my clients saved $2.42 (I think that was the cost of a certified mail piece then) and sent his return in with a $0.37 stamp. It never made it. He ended up paying nearly $1,000 in penalties and interest…but he did save $2.42.

Don’t be a Bozo. E-File (and you don’t have to worry at all about the Post Office), or spend the $3.50! And you can go all out and spend $2.80 and get a return receipt, too (though you can now track certified mail online). For another $1.60, you can get the postal service to e-mail the confirmation that the IRS got the return (for the OCD in the crowd). There’s a reason every client letter notes, “using certified mail, return receipt requested.”

Bozo Tax Tip #5: Procrastinate!

Monday, April 8th, 2019

Today is April 8th. The tax deadline is just seven days away.

What happens if you wake up and it’s April 15, 2015, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t (Pennsylvania is one of those), while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download and mail off a payment to your state, too. If you mail your extension, make sure you mail it certified mail, return receipt requested. (You can do that from most Automated Postal Centers, too.)

By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too.

But what do you do if you wait until April 16th? Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).

There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: the interest is taxable.

Bozo Tax Tip #10: Email Your Social Security Number

Monday, April 1st, 2019

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

This is a repeat for the sixth year in a row, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and the IRS’s response has been pitiful. (To be fair, it has improved somewhat over the last two years, but that didn’t take much.)

I have some clients who are incredibly smart. They make me look stupid (and I’m not). Yet a few of these otherwise intelligent individuals persist in Bozo behavior: They consistently send me their tax documents by email.

Seriously, use common sense! Would you post your social security number on a billboard? That’s what you’re doing when you email your social security number.

We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my mother, it might go in a straight line to her. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem—communicate in a secure fashion to your tax professional.

March 15th Tax Deadlines

Thursday, March 14th, 2019

Tomorrow, March 15th, is the first big tax deadline day. There are three tax deadlines on Friday:

First, partnership and S-Corporation returns are due. If your return isn’t completed, file an extension (Form 7004). If you file by mail, use certified mail, return receipt requested. You always want proof of your extension.

Second, Form 3520-A is due. This is one of the two forms for foreign trusts. Again, if your return isn’t completed there’s a simple solution: file Form 7004. You will almost certainly have to mail the extension for a Form 3520-A; you can find where to mail it in the instructions to Form 7004.

Finally, the Form 1042 series (Form 1042, Form 1042-S) are due. These are the information return series regarding payments to non-Americans. You can file Form 1042-S via the FIRE system (if you’re registered); Form 1042 generally has to be mailed to the IRS.

The deadline is a postmark deadline. If you mail your form via certified mail today or tomorrow and it takes a month to get to the IRS, it’s still considered timely (as long as it’s postmarked on or before March 15th). That’s why you want to use certified mail: You get proof (which is a good thing in dealing with the IRS).

When 35 Equals 365

Tuesday, January 29th, 2019

Yet another entry in the “Math Is Hard” file, again from our friends at the Internal Revenue Service. From the Washington Post comes the news that it will take the IRS between 12 and 18 months to catch-up on the backlog from the 35-day shutdown. The Post was quoting information from two House staffers who heard this from the National Taxpayer Advocate.

On January 16th, the IRS had a backlog of 2.5 million unanswered pieces of mail. That’s up to 5 million now. Two of those unanswered pieces of mail are from me on behalf of clients (both disputing CP2000 notices). They had to be mailed to the IRS because the IRS turned off their fax machines during the shutdown. I told my clients that they’ll get a response…eventually. My hope is that the IRS has turned off the automatic issuance of Notices of Deficiency. Once you have one of those, the only way to stop the process is to file a Tax Court petition. (I think that has happened, as neither client has received a follow-up notice or a Notice of Deficiency.)

So let’s see what we have. Millions of pieces of unanswered mail. New tax forms that most IRS employees haven’t been trained on. Computers that are, in some cases, older than I am. Add in new tax law and you have the recipe for…well, let’s not call it a masterpiece. Perhaps goulash or a stew, or one of those horrific casseroles that I remember from the dorms at Cal. Suffice to say this is going to be a trying Tax Season.

Oh, I shouldn’t forget: If Congress and President Trump don’t come to an agreement in about two weeks (and President Trump put the odds at less than 50-50) the whole shutdown may repeat.

When 85% Equals 90%

Wednesday, January 16th, 2019

One of my favorite expressions from poker that translates into tax is, “Math is hard.” But how can 85% equal 90%? No, the two aren’t equivalent. However, this year they are equal in one aspect of taxes.

The IRS announced today that they will waive the Estimated Tax Penalty for taxpayers who have prepaid 85% of their tax rather than the usual 90%:

WASHINGTON — The Internal Revenue Service announced today that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.

The IRS is generally waiving the penalty for any taxpayer who paid at least 85 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90 percent to avoid a penalty.

The waiver computation announced today will be integrated into commercially-available tax software and reflected in the forthcoming revision of Form 2210 and instructions.

This relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), the far-reaching tax reform law enacted in December 2017.

It is unlikely that many (any) states will conform to today’s notice from the IRS.

It’s Time to Generate Those 2018 1099s

Tuesday, January 15th, 2019

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)
  • Where you would normally have to send a 1099 but you made payment by a credit or debit card

Otherwise, you need to send a Form 1099-MISC to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your accounting software (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing might be easier than electronic filing.

If you wish to file paper 1099s, you must order the forms from the IRS. The forms cannot be downloaded off the Internet. Make sure you also order Form 1096 from the IRS. This is a cover page used when submitting information returns (such as 1099s) to the IRS.

Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-MISC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement.

Remember, the deadline for submitting 1099-MISCs for “Nonemployee Compensation” (e.g. independent contractors) to the IRS is now at the end of January: Those 1099s must be filed by Thursday, January 31st.

Here are the deadlines for 2018 information returns:

  • Thursday, January 31st: Deadline for mailing most 1099s to recipients (postmark deadline);
  • Thursday, January 31st: Deadline for submitting 1099-MISCs for Nonemployee Compensation to IRS;
  • Thursday, February 28th: Deadline for filing other paper 1099s with the IRS (postmark deadline);
  • Friday, March 15th: Deadline for mailing and filing Form 1042-S; and
  • Monday, April 1st: Deadline for filing other 1099s electronically with the IRS.

Remember, if you are going to mail 1099s to the IRS send them certified mail, return receipt requested so that you have proof of the filing.

Also note that most 1099s must be mailed to recipients. Mail means the postal service, not email. The main exception to this is if the recipient has agreed in writing to receiving the 1099 electronically. I consider this the IRS’s means of trying to keep the Post Office in business.