Archive for the ‘IRS’ Category

IRS Prematurely Asking for Money

Tuesday, April 22nd, 2014

A few years ago, the IRS routinely sent notices to taxpayers who filed tax returns prior to April 15th but didn’t pay their taxes until April 15th. After complaints from taxpayers and tax professionals, the IRS supposedly stopped this practice. Unfortunately, they’ve started it up again.

Taxpayers have until April 15th to pay their taxes. That’s a postmark deadline, so the payment can be received days later. I had two clients who received CP14 notices. Both of these individuals paper-filed in March, but paid on April 15th (one using EFTPS and one mailing a check). Both individuals payments cleared (the individual who mailed his check also received his certified mail receipt), so both believed they didn’t owe anything. Telephone calls to the IRS confirmed this.

In the case of my client who paid by EFTPS, there was no reason for the notice at all. The payment was made for April 15th; there was no reason for a notice to be sent. My client who paid by check said his check cleared on April 17th. One would think that the IRS would wait beyond the 17th for generating this notice. When the IRS ended this practice, we were told the IRS would wait a couple of weeks after the deadline to make sure that almost all payments would be matched with returns.

Given that it takes the IRS about two weeks to generate and mail a notice, it’s clear these notices were generated prior to April 15th (even though both notices were dated April 28th). Perhaps the IRS is only issuing these notices for paper-filed returns, thinking that most taxpayers who paper-file include a check with the return. Still, payment of taxes is not due until April 15th; there really is no reason why the IRS can’t wait until the calendar has really turned to April 28th to send out their CP14 notices for 2013 tax returns.

While I Was Out…

Sunday, April 20th, 2014

I’ve recovered from Tax Day, my sleep is caught up, and it appears Las Vegas has moved smoothly towards summer (it reached 89 today). There has been a little bit of tax news during the past month:

Good News for Tax Professionals: The IRS announced that eServices has been updated and you can request a transcript for an individual where you have a Tax Information Authorization (Form 8821). I have not tested this new capability yet, but if this works we will no longer have to have a Power of Attorney in order to use eServices for transcripts.

That said, the IRS announcement (it came in late March) said that eServices was updated last fall. If it was, it wasn’t successfully updated; I tried to request a transcript for a client with an 8821 in December and couldn’t.

The IRS Scandal Continues to Percolate, with Bad News for Lois Lerner: Emails sent to and from the IRS and Lois Lerner have been made public, and these do not show Ms. Lerner in a good light. They show that Ms. Lerner was definitely involved in targeting conservative non-profits. They were obtained by Judicial Watch after filing a freedom of information act lawsuit against the IRS.

My favorite, though, is one where Cindy Thomas complains that Ms. Lerner and the White House through the Cincinnati “low-level” employees under the bus. I’ll let Ms. Thomas explain:

As you can imagine, employees and managers in EO Determinations are furious. I’ve been receiving comments about the use of your words from all parts of TEGE and from IRS employees outside of TEGE (as far away as Seattle, WA).

I wasn’t at the conference and obviously don’t know what was stated and what wasn’t. I realize that sometimes words are taken out of context. However, based on what is in print in the articles, it appears as though all the blame is being placed on Cincinnati. Joseph Grant and others who came to Cincinnati last year specially told the low-level workers in Cincinnati that no one would be “thrown under the bus.” Based on the articles, Cincinnati wasn’t publicly “thrown under the bus” instead was hit by a convoy of mack trucks.

Was it also communicated at that conference in Washington that the low-level workers in Cincinnati asked the Washington Office for assistance and the Washington Office took no action to provide guidance to the low-level workers?

One of the low-level workers in Cincinnati received a voice mail message this morning from the POA for one of his advocacy cases asking if the status would be changing per “Lois Lerner’s comments.” What would you like for us to tell the POA?

How am I supposed to keep the low-level workers motivated when the public believes they are nothing more than low-level and now will have no respect for how they are working cases? The attitude/morale of employees is the lowest it has ever been. We have employees leaving for the day and making comments to managers that “this low-level worker is leaving for the day.” Other employees are making sarcastic comments about not being thrown under the bus. And still other employees are upset about how their family and friends are going to react to these comments and how it portrays the quality of their work.

Another email shows that the IRS planned to meet with the Department of Justice over whether to prosecute conservative groups. I’ll leave it to the reader to decide whether or not there’s anything to see here.

Second Runner-Up for 2013 Tax Offender of the Year Gets 20 Years at ClubFed. Phillip Monroe Ballard decided to channel the spirit of 2012 Tax Offender of the Year Stephen Martinez: He decided to murder the judge of his tax evasion trial. Luckily for all concerned, an informer let authorities know of the plan. Mr. Ballard not only has a tax conviction but now a 20-year sentence for attempted murder-for-hire. Given he’s 72, he’ll likely spend the rest of his life at ClubFed.

Bozo Tax Tip #1: The Eternal Hobby Loss

Monday, April 14th, 2014

The goal of must businesses is to make money. There aren’t many businesses that can lose on each sale and make it up in volume. In fact, I don’t know of any. But I digress….

So let’s take Sam and Edna, two successful individuals who love horses. They decide to start raising horses. They remember their accountant telling them that if they had a business that loses money they can take the loss and offset some of their income. That’s true. They don’t remember their accountant telling them that the business does need to be structured to make money eventually.

Hobby losses are not allowed. The IRS has a webpage that notes the major factors used in determining whether or not your business is a business or a hobby:

The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:

– Does the time and effort put into the activity indicate an intention to make a profit?
– Do you depend on income from the activity?
– If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
– Have you changed methods of operation to improve profitability?
– Do you have the knowledge needed to carry on the activity as a successful business?
– Have you made a profit in similar activities in the past?
– Does the activity make a profit in some years?
– Do you expect to make a profit in the future from the appreciation of assets used in the activity?

If your business loses money year-after-year, and you’re not making any efforts to change it, and you get a lot of personal enjoyment out of the business, beware! Your “business” might be a hobby. Yes, circumstances can cause any business to fail (and the IRS knows this). But when your business is losing money every year and you make no effort to change your business, at least on the surface you’re looking like a hobby. The eternal hobby loss is a good way to head to an IRS audit.

That’s it for our Bozo Tax Tips for the 2014 Tax Filing Season. I hope you’ve enjoyed them. We’ll be back with actual tax posts at the end of the week.

IRS: Bitcoins Are Property

Tuesday, March 25th, 2014

The IRS finally released guidance on Bitcoins and other virtual currency today. The IRS’s notice states that Bitcoins should be treated as property. What does this mean?

1. Bitcoins held as investments are generally treated under capital gain rules. If you buy a bitcoin today and sell it in less than a year and a day, it will be a short-term capital gain or loss. Hold it longer, and it’s a long-term gain or loss. (There are exceptions to the capital gain treatment for other situations of Bitcoin use, though.)

2. Every time you spend a Bitcoin (or any part thereof) you have a gain or loss of income based on the change in fair market value of the Bitcoin. If you use Bitcoins regularly, you have lots of paperwork (or spreadsheet work) in your future.

3. If you mine a Bitcoin (for those not familiar with this term, it’s basically the creation of a Bitcoin), you have increased your income. It’s reportable; Congress hasn’t exempted Bitcoin mining from income.

4. Similarly, if you pay people in Bitcoins, it’s reportable as salary (or nonemployee compensation or whatever else). You need to use a “reasonable consistent method” for determining the valuation as you will need to file a W-2 or 1099 based on US dollars. There isn’t any exception for Bitcoins in information reporting rules.

For those who are active in Bitcoins, I strongly suggest you read the IRS notice. It’s fairly straightforward (and there’s plenty more I haven’t covered). Do note this is not the last word on Bitcoin regulations, though. The IRS is looking for comments on the notice.

The Treasury Department and the IRS recognize that there may be other questions regarding the tax consequences of virtual currency not addressed in this notice that warrant consideration. Therefore, the Treasury Department and the IRS request comments from the public regarding other types or aspects of virtual currency transactions that should be addressed in future guidance. Comments should be addressed to:

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2014-21)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Alternatively, taxpayers may submit comment electronically via e-mail to the following address: Taxpayers should include “Notice 2014-21” in the subject line. All comments submitted by the public will be available for public inspection and copying in their entirety.

IRS Releases New Forms W-8BEN and W-8ECI

Wednesday, March 19th, 2014

The IRS released a new version of Form W-8BEN. The new version should be used by an individual responding to a withholding request from the US. It’s commonly used to note tax treaty benefits.

There is a disclaimer on the form: “For use by individuals. Entities must use Form W-8BEN-E.” There’s only one problem with that: Form W-8BEN-E has not been released yet; it’s still in draft form. I suspect that until the Form W-8BEN-E is released, an entity can use the Form W-8BEN.

The IRS also released a new version of Form W-8ECI. This is the form used by individuals and businesses who are foreigners with a business in the US; that is, income that is effectively connected with the US. Individuals and entities completing this form are required to complete a US tax return.

People receiving either of these forms should make sure they receive the new forms (dated by the IRS as February 2014). The old forms should no longer be accepted.

The Other March 17th Deadline: Form 1042s

Sunday, March 16th, 2014

There’s another tax deadline today: Form 1042s. The form 1042 series (1042, 1042-S, and 1042-T) is used to report annual withholding for US-source income of foreigners. Again, this is a postmark deadline (for paper-filed returns). There is no extra time for electronic filing of 1042-S’s; they are also due today.

Corporate Tax Deadline Is Here

Sunday, March 16th, 2014

March 15th is the deadline to file calendar year corporate tax returns (Forms 1120 and 1120S). Because that fell on a Saturday, Monday, March 17th is the deadline. If you’re not ready to file, file an extension. Download Form 7004 and mail it certified mail, return receipt requested. If you’re a C-Corporation and believe you owe tax, pay the amount you think you will owe.

Extensions can also be electronically filed.

Finally, don’t forget your state corporate returns (though not all states have the same deadline). Some states’ extensions are automatic while others are not.

The IRS Needs Volunteers for the Taxpayer Advocacy Panel

Wednesday, March 12th, 2014

The IRS is looking for a few good men and women. The IRS is looking for volunteers to serve on the Taxpayer Advocacy Panel (TAP), a federal advisory committee that listens to taxpayers, and help identify concerns and make recommendations for changes and improvements to IRS services.

“In trying to comply with an increasingly complex tax system, taxpayers may find they need different services than the IRS is currently providing,” said Nina E. Olson, National Taxpayer Advocate. “The TAP is vital because it provides the IRS with the taxpayers’ perspective as well as recommendations for improvement. This helps the IRS deliver the best possible service to assist taxpayers in meeting their tax obligations.”

There are some requirements: You must be a US citizen, current with your taxes, pass an FBI criminal background check, and be able to commit 200-300 hours each year. New TAP members will begin serving a three-year term this December. The TAP is looking for members in Alaska, Arizona, California, Delaware, Idaho, Indiana, Kansas, Kentucky, Massachusetts, Minnesota, Montana, Nevada, New Jersey, New York, Oregon, Pennsylvania, Utah, Vermont, Virginia and International; alternates are needed for the District of Columbia, Florida, Georgia, Illinois, Louisiana, Maryland, North Dakota, Puerto Rico, Rhode Island, South Carolina and West Virginia.

You can find applications here. Additional information about the TAP and/or the application process is available from 888-912-1227 (select prompt number five) or by email at

Your Check Might Not be in the Mail

Thursday, March 6th, 2014

I used to live in Orange County, California. Earlier this week a US Postal Service caught fire as it was heading toward an airport after leaving the Santa Ana mail sorting center. So if you mailed something on Monday, March 3rd from ZIP Codes starting with 926, 927, 928, 906, 917 and 918, it might have been burnt to a crisp. All the mail the truck was carrying was destroyed (an estimated 120,000 pieces). (No one was hurt in the accident.)

If you happen to have mailed a tax payment or tax form hopefully you used certified mail. When your payment doesn’t show up–and you should check to see if the check cleared–tax agencies will normally consider the certified mail receipt as proof of filing. The USPS is offering documentation of the fire (if the news stories aren’t enough).

This is the third incident like this in recent years that I can remember. Back in 2005 a truck carrying payments leaving the San Francisco Post Office Box where IRS payments go made a right turn on the Hayward Bridge (across the San Francisco Bay). There’s a reason why there’s a bridge and you don’t make right turns while on a bridge. Those payments went to the fishes. In 2012, a truck carrying mail to New Jersey government offices went up in flames.

Most likely, this incident will have minimal impact on taxes as it is early in Tax Season. Still, this is a good reminder why if you do mail a tax form or tax payment that you use certified mail, return receipt requested. That way should there be a problem it’s an inconvenience rather than one leading to costly penalties.

Deadlines for Us, but Not for Them

Tuesday, March 4th, 2014

I was on the phone today with the IRS about a client. Back in October he received an IRS notice regarding his 2012 return. We believed the IRS notice was incorrect. With this particular notice the only option was to write the IRS. I did so (I had a Power of Attorney for the client), sent it via certified mail, return receipt requested, and noted that it was received three days later.

We heard nothing until last week.

The client has now received the first of a series of collection notices (a CP501). This is the first of four steps in IRS nastygrams about balance dues (CP501, CP502, CP503, and CP504). I called the IRS noting that we had sent in a letter disputing the original notice. The helpful IRS person noted that they had received the letter but it has yet to be assigned to someone. It has been over four months since I sent in the response. The woman I spoke to thought that the nine-week delay they put on sending out additional notices should be enough time for someone to read my letter.

If it takes all nine weeks, that would mean it took over six and a half months from the time I submitted the response until my client got a response. Many times the IRS will ask for additional information, and that might mean if it takes another six months that this will have gone over one year. Actually, that’s not as bad as something else that happened today.

I had a second client I was inquiring about. I had sent a letter disputing another IRS notice; this letter was sent in mid-December and received five days later (and yes, I have the certified mail tracking to prove it). The IRS has no record of receiving it, and the unhelpful individual I spoke to refused to put a stop on notices. I resent my previous response today (again, certified mail; this is another notice where I cannot fax a response). I will call the IRS three weeks after it was received to make sure that they have it noted in the system.

There are some takeaways for both practitioners and taxpayers. For practitioners, the current state of the IRS is such that you can expect a lot of delays in responding to notices. Think months instead of weeks. Expect to have to call the IRS to verify that your response was received, and make sure clients are aware that the IRS is moving like molasses rolling uphill. Make sure anything you send is documented: certified mail with proof of receipt if by mail; if faxing, make sure you have the proof of receipt. Given the lengthy delays our clients are going to be in fear for far longer.

The current customer service delays will lead to more clients being sent to ACS. A client rightly isn’t going to pay a notice he doesn’t owe. While the IRS can stop the sending of notices, sooner or later an account gets moved into ACS. I have one of these right now, and I have to call ACS every 30 days until the underlying matter gets resolved.

This will also lead to more Collection Due Process Appeals. If things get delayed long enough, ACS will refuse to stop collection activities. The next tool a practitioner can use is a Collection Due Process Appeal. If you’ve never been able to dispute the underlying notice, this should be fair game. And a CDP appeal does put a stop to collection activities. (This could also have the indirect effect of slowing other appeals.)

For taxpayers, you need to be aware that expediency is not part of today’s IRS. You have to be expedient in responding to notices but don’t expect the IRS to be expedient in getting back to you. Do not worry if it takes a long, long time to resolve something with the IRS. That’s just par for the course today.

Nina Olson, the National Taxpayer Advocate, noted that IRS budget cuts have hurt customer service. Unfortunately, the apparent political activities by some within the IRS have forced these cuts. Until then, everyone suffers.

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