Archive for the ‘IRS’ Category

IRS Clarifies Electronic Signature Requirements

Tuesday, November 18th, 2014

The IRS released a new version of Publication 1345 today (html version only is available for now). Included in it is the following:

Note: An electronic signature via remote transaction does not include handwritten signatures on Forms 8878 or 8879 sent to the ERO by hand delivery, U.S. mail, private delivery service, fax, email or an Internet website.

Thus, if a client signs a signature document in ink, hands it to me, mails it to me, faxes it to me, or uploads it to me via our web portal (or even if he emails it to me), it’s not an electronic signature and I don’t have to check id, etc. (So, mom, I don’t need to see your ID.)

Additionally, the IRS will accept Form 3115 as a pdf attachment to an electronically filed return. This is one less bad thing with the new property repair/capitalization regulations.

The Horrible, No Good, Very Bad Upcoming Tax Season

Sunday, November 16th, 2014

If you’re a tax professional here’s a warning: The 2015 Tax Season will be one you’re almost certain to remember for all the wrong reasons. If you’re a client of a tax professional be forewarned: Your tax professional will be even more grouchy than usual next year. Why? The upcoming tax season will likely be the worst in 30 years.

There are four reasons for this: tax extenders, budget issues the IRS faces, the Affordable Care Act (aka ObamaCare), and the new property capitalization/repair regulations. Let’s look at them seriatim.

1. Tax Extenders. Stop me if you’ve heard this before: Congress has essential tax legislation, but sits around and does nothing on it until after the November elections. Yes, that’s happened again. If Congress acts on extender legislation in the next couple of weeks, there likely won’t be much of a delay (if any) on the opening of the 2015 Tax Season. However, if Congress dallies or punts this to the new Congress in January, the 2015 Tax Season will be significantly delayed. This will also hurt the IRS’s resources when there’s a lot going on (see below). I’m hopeful that something will be passed by the first week of December but that’s just hope on my part. I have no idea if the extenders will be timely extended.

Odds that this impacts Tax Season: 95%
Odds of a significant impact: 50%

2. Budget Issues the IRS Faces. The IRS’s budget has been cut the last two years. The House of Representatives has done this because of anger over the IRS scandal; it’s clear to any objective observer that the IRS knows more about the scandal than they’ve revealed. The only thing that the GOP can do to impact the IRS is cut the budget.

Unfortunately, the budget cuts impact service that the public and tax professionals receive. Additionally, the cuts limit the IRS’s ability to adapt to new legislation. It’s not a recipe for good service. Given the major changes coming for the 2015 Tax Season, it’s a recipe for disaster.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 80%

3. The Affordable Care Act (aka ObamaCare) This is the first year that reporting on health insurance is required on tax returns. However, reporting isn’t required this year by insurance companies. Insureds who believe they qualify for an exemption must apply for that exemption; that exemption must be noted on the return.

For most individuals, the new law will not change their taxes. They have employer provided health insurance. However, for the other 20% the new law will change their returns. They’ll have their own insurance, or receive a subsidy, don’t have insurance, have an exemption, or any of the other ‘edge cases.’ There are two new forms that tax professionals will have to deal with, and the complications are an unknown.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 100%

4. The New IRS Property/Capitalization Regulations. The IRS announced final regulations for repair/property/capitalization regulations in 2013. These regulations impact anyone who owns property, leases property, or produces property. This means you’re impacted if:

- You’re a business entity that manufacturers anything (you produce property); or
- You’re a business entity or an individual with a business that has depreciation; or
- You’re an individual (or a business) that owns rental property.

It might be easier to list those taxpayers who aren’t impacted by this: The typical family who works, owns a home, and has a simple situation. Put another way, if you file a Schedule C, E, or F, or you file a business return, you will likely be impacted by this change.

So Russ, you ask, what’s changing with these new regulations? Since most of you aren’t tax professionals and don’t care about the minutiae, the IRS changed the rules on what must be capitalized (and depreciated over time) and what must be expensed. That didn’t seem like such a huge deal back in May when I first heard about this (at a continuing education course). However, how the IRS is implementing this change will impact you if you’re a taxpayer impacted by this.

At the continuing education course I took, we were told that every impacted taxpayer would need to sign a statement noting compliance with the new regulations. That didn’t seem too bad–get a draft statement, and make the necessary modifications depending on the type of business. Unfortunately, that’s not what’s going to happen.

Instead, the IRS wants every impacted taxpayer to include Form 3115 on their tax return. This form is anything but easy or straightforward. You must make several calculations based on the past. The IRS estimates that it will take a taxpayer, on average, 23 hours and 48 minutes to be able to complete and file just this form. This is nuts.

No wonder Joe Kristan (via Tax Analysts) reported the following:

Participants in the tax methods and periods panel at the American Institute of Certified Public Accountants fall Tax Division meeting in Washington said that some taxpayers don’t want to pay the high costs associated with going through years’ worth of records to calculate a precise section 481(a) adjustment required under the final regulations (T.D. 9636). The cost of that level of compliance could be more than the entire cost of preparing their returns, practitioners said, adding that the taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero. [emphasis in original]

Joe calls this insane; I agree completely. Yet as of now I’m required to do this procedure. No wonder it was stated, “…taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero.” Consider a hypothetical client, Joe Lessor. Mr. Lessor has one rental property he’s leased out for the last four years. He has rent received, a mortgage, property tax, management fees, and every so often repairs. Do you think he’s going to pay me an additional $5,000 to get his return done to comply with this requirement? Or do you think he’ll tell me to make the numbers zero because the return was done right in the past and it will be done right in the future? (If you don’t like this scenario, choose your own.)

But there’s more. Form 3115 is (at least with my tax software) not a form that can be electronically filed. That means the IRS will have a lot more paper returns this year. Given the IRS’s staffing issues, that sure figures to work well.
UPDATE: Form 3115 can be attached as a pdf to electronically filed returns. That’s been clarified in Publication 1345. Thus, it can be (effectively) electronically filed.

I am hopeful that the IRS’s view on this will change. I know that the AICPA sent a request to the IRS for a de minimis exception to this. Maybe the IRS will see the light.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 100%


The 2015 Tax Season looked to be bad just given the first two issues. Adding ObamaCare and the new property/capitalization regulations to this just makes what was going to be a bad tax season into what will likely be a disastrous tax season. Nina Olson, the National Taxpayer Advocate, compared the upcoming tax season to 1985. In that tax season, the IRS Philadelphia Service Center “lost” about 20% of the paperwork they received. (This was back when returns were all paper-filed.) This will likely be a very bad tax season for tax professionals and taxpayers.

AICPA Lawsuit Against IRS Dismissed Over Standing

Tuesday, October 28th, 2014

Earlier this year the IRS announced its new “Annual Filing Season Program,” a voluntary program for tax preparers to register with the IRS. The American Institute of Certified Public Accountants (AICPA) filed a lawsuit asking for the program to be blocked. The IRS asked the court to dismiss the lawsuit, arguing that the AICPA had no standing to sue the IRS in this case. Judge James Boasberg agreed with the IRS, and today the lawsuit was dismissed. Judge Boasberg is the same jurist who decided Loving v. IRS.

I’m not an attorney, so I’m not going to give a treatise on standing. Luckily, there are attorneys who write tax blogs. Leslie Book in Procedurally Taxing gives all the background on standing you might possibly need. Judge Boasberg noted the real reason that the AICPA sued,

Beneath its amorphous rhetoric about confusion, the crux of Plaintiff’s concern is apparent: its membership feels threatened by the specter of increased competition from previously uncredentialed preparers who choose to complete the program.

The AICPA could appeal the decision. I could also envision them refiling the lawsuit, and adding individual CPAs to the lawsuit (and perhaps other types of preparers, such as Enrolled Agents and unenrolled preparers). In any case, it now appears quite likely that the Annual Filing Season Program will go forward.

That said, the long-term prospects for the Annual Filing Season Program aren’t good. As noted in Procedurally Taxing the class action lawsuit against the IRS’s PTIN fee continues. I can foresee other challenges to this program. And until Congress authorizes the IRS to regulate tax professionals the IRS is limited to purely voluntary programs.

SARs Leading to Forfeiture: The IRS Oversteps

Sunday, October 26th, 2014

There have been plenty of stories on civil forfeiture recently. Two poker players had their cash seized in Iowa while driving home from a poker tournament in Illinois. They had their funds returned, but have now filed a lawsuit against the Iowa police. The IRS has also been using forfeiture. The New York Times today spotlighted the IRS using forfeiture–one example is, coincidentally, from Iowa.

For those not aware, civil forfeiture occurs when an individual’s funds are seized but the individual is not necessarily charged with a crime. The police agency involved alleges that there’s a pattern of behavior that shows that the individual’s funds are being used illegally. In the IRS’s case, this all involves Suspicious Activity Reports (SARs).

When you deposit $10,000 or more of cash, a Currency Transaction Report (CTR) is completed. A copy is sent to the Financial Crimes Enforcement Network (FINCEN). FINCEN gets so many CTRs that few are investigated.

But let’s say you want to avoid a CTR so you deposit less than $10,000. If you do that often enough, a SAR will be generated. You’re not informed when a SAR is generated. Like a CTR, a SAR is also sent to FINCEN. Most SARs are also sent to IRS Criminal Investigation. There are far fewer SARs than CTRs, and most are investigated.

The New York Times story notes the case of a restaurant owner in Iowa who had about $33,000 seized solely because she made regular cash deposits of less than $10,000. While SARs were not mentioned in the story, it’s clear that’s the cause of what happened. A SAR was generated, someone from IRS Criminal Investigation looked at the pattern and referred it to the Department of Justice; the DOJ then filed a suit to seize the money.

The only good news from the article is that the IRS is apparently going to limit the practice. In a statement made to the Times, Richard Weber, head of IRS Criminal Investigation, said the practice will be curtailed.

Unfortunately, the IRS has recently not always practiced what they preached. If you have to regularly deposit reasonable sums of cash–say, $6,000 regularly–you probably should every so often make sure one of your cash deposits is $10,000 or more so a CTR is filed. It’s better safe than sorry. And even if the IRS won’t institute civil forfeiture, there’s an alphabet soup of government agencies that still can.

One other comment I’ll make on this: Perhaps we can see some bipartisanship on an issue. I saw this issue highlighted by both the left and the right today. When Congress gets around to extenders, maybe they’ll throw something in to limit this practice.

You Filed That Extension, And Only Now Are Realizing the Deadline is Wednesday…

Sunday, October 12th, 2014

Yes, only three days are left until the extension deadline. If you file on October 16th, it’s as if you never filed that extension (you will owe a 22.5% late filing penalty). So what should you do if you’re just starting on your return now?

First, in most cases tax professionals say it’s better to extend than amend. But extending is now out [1], so it’s better to get a reasonable return in. It can’t be a frivolous return: If you file a frivolous return, it’s even worse than not filing–you can get hit with a penalty for filing a frivolous return.

1. Get your documents together. If you have them, wonderful. If not, on Tuesday [2] you can use the IRS’s “Get Transcript” application to hopefully download a Wage & Income Transcript.

2. Include all of your income: Interest, dividends, rental real estate, gambling wins, etc. Just because you don’t receive a 1099 doesn’t mean you get to exclude that income! If you’re using software, carefully enter it where it belongs. Software does a great job putting numbers where you tell it to, but it’s also garbage in, garbage out.

You can download forms off the IRS’s website.

3. After you complete your return, look it over to make sure it’s reasonable.

4. If you live in a state with a state income tax, you have to file that too. And if you have a municipal or school district income tax, that’s also due. Most jurisdictions do have forms online.

5. If you’re filing electronically, keep the proof of filing. If you’re mailing your return, go to the post office or an automated postal center and spend the $5 on certified mail, return receipt requested. If your tax return is postmarked on October 15th, it’s considered timely filed. Certified mail gives you that proof. The automated postal centers can issue certified mail, and the postmark is the local time–even if the mail is picked up the next day (a very useful thing if you’re preparing your return at 11pm on October 15th).

6. If you’re thinking about calling up a tax professional, you need some luck. Most of us are quite busy dealing with our current procrastinating clients; October 13th is just not the time for a new client meeting.

7. Finally, make a vow with yourself that you will get started far sooner next year. While the 2015 Tax Season will likely be very unpleasant [3] and will probably start late [4], you should be able to get your returns started before October 1.


NOTES:

1. A few individuals can file a request for a second extension. If you were outside of the US on April 15th and will be outside of the US on October 15th (and both are for business/employment/residency purposes), you can file a request for a second extension. Phil Hodgen wrote about this last year (the rules haven’t changed).

2. The IRS, in its unending wisdom, has an annual “outage” of all computer systems on Columbus Day Weekend. Yes, all IRS computers are turned off just days prior to the extension tax deadline. If you’re scratching your head about this, well, so am I.

3. Next year features the first year of ObamaCare reporting, extender legislation that will probably pass late (see #4 below), and the IRS’s budget continues to shrink.

4. Congress has done nothing on “Extenders” but almost certainly will following the November election. IRS Commissioner Koskinen warned of issues if legislation passes late. Well, it will pass (in some form) late. Will it pass on January 1, 2015? I hope not, but if the Republicans gain control of the Senate (which wouldn’t occur until 2015; the Democrats will still run the Senate in the “lame duck” session), the Senate might work well or might not work at all. If you’re getting the idea that the 2015 Tax Season won’t be fun, that’s my view.

It’s Not As If Anything Is Happening Right After This…

Tuesday, October 7th, 2014

Of course, after reporting good news from the IRS there must be bad news to balance it out. And there is. For reasons that only the bureaucrats at the IRS can fathom, every year over Columbus Day weekend the IRS shuts down their computer systems. This includes processing of returns and IRS e-services.

As noted on various IRS web pages:

IRS will conduct its annual Columbus Day Power Outage beginning Saturday, October 11, 2014 at 3:00 p.m. and ending on Tuesday, October 14, 2014 at 5:00 a.m. [times Eastern]

Yes, I know the IRS does this every year, but why not break with tradition and choose another weekend — say the weekend of October 18th. It’s not as if there’s a tax deadline right after Columbus Day weekend….

IRS Simplifies Reporting for RRSPs and RRIFs

Tuesday, October 7th, 2014

In a piece of good news, the IRS announced today that US taxpayers will automatically be treated as deferring income from Canadian Registered Retirement Savings Plans (RRSPs) and Canadian Registered Retirement Income Funds (RRIFs). In other words, the treatment will be exactly like 401(k)s are treated for Americans. Such individuals will no longer have to make annual filings of Form 8891 to note their holdings for RRSPs or RRIfs.

The noncompliance with this provision was legion, so the new Revenue Procedure 2014-55 is good news. Individuals who were not in compliance had to file a request for a Private Letter Ruling in order to “get out of jail free” (so to speak). The Revenue Procedure includes retroactive relief.

However, such individuals will still need to note these accounts on their FBARs (Report of Foreign Bank and Financial Accounts, Form 114). Note also that at least one state (California) does not recognize deferral or RRSP income, so holders of RRSPs who are required to file California tax returns must report their income on their state tax returns.

One Good Erasure Deserves Another

Wednesday, October 1st, 2014

I wonder if this sounds familiar to anyone: An organization is looking for key information stored on IRS computers. A lawsuit ensues, and the hard drives were allegedly wiped clean.

No, I’m not talking about the IRS Scandal, Lois Lerner, and the Freedom of Information Act lawsuits. Rather, I’m talking about a tax fight between NetJets and the IRS. NetJets sued the IRS for $643 million alleging, according to the Columbus Dispatch, that a ticket tax was misapplied. The IRS countersued for $366 million, alleging that NetJets hasn’t paid all their taxes. Both sides have petitioned for summary judgement.

I’ll let the first two paragraphs of the Dispatch story state what’s going on:

In the midst of a lawsuit with the federal government over tax payments, NetJets claims that the Internal Revenue Service destroyed documents important to the case.

The Columbus-based private-jet company, in a motion filed with U.S. District Judge Edmund A. Sargus Jr., said the IRS “wiped clean a number of computer hard drives containing emails and other electronic documents that the Government was required to produce.”

Most of the time, I wouldn’t believe that the IRS would do this. As of 18 months ago, I wouldn’t believe that the IRS would lie to Congress, would target conservative applicants for nonprofit status, and that the hard drive of any computer (or other electronic device) touched by Lois Lerner would be magically erased.

On a serious note, the fact that the IRS has done these things (even if it’s just a coincidence that the hard drive of any computer Ms. Lerner touched died) will make judges highly skeptical of the IRS. I have no idea who is right on the NetJets vs. IRS fight. I do know that the IRS’s position sure sounds fishy to me.

“I’ve tried to tell you the truth every time I’ve been here”

Sunday, September 21st, 2014

That quote is from IRS Commissioner John Koskinen during his testimony from earlier this week on Capitol Hill. I have a simple question for Commissioner Koskinen: Why doesn’t that quote read, “I’ve told you the truth every time I’ve been here”?

The obfuscation coming from the IRS hurts the entire US population. The IRS’s budget has been (rightfully) cut: Republicans are not willing to fund what appears to be a partisan office being used against the GOP.

Let’s Give Lois Lerner Credit Where Credit Is Due

Wednesday, September 10th, 2014

We don’t know with certainty what Lois Lerner’s role is in the IRS scandal. However, let’s give credit to Ms. Lerner in exposing something that definitely is wrong with the IRS.

It turns out that Ms. Lerner was upset with an unnamed IRS employee who was paid $138,136 a year and was doing “nothing.” The Washington Examiner reported on this in an article on a letter written by House Ways & Means Subcommittee on Oversight Chairman Charles Boustany (R-LA) to IRS Commissioner John Koskinen. Here’s an excerpt of the Examiner’s article:

In a 2011 email recently uncovered by the committee, Lerner wrote to colleagues that she “learned than [an] employee who is assigned to a special project has spent most of the last year doing nothing and reporting to her manager on on timesheets that she has been working on the project full time.” The worker was paid $106,263-$138,136.

Lerner said that “We can’t do anything” about the worker, though some argued for termination, explained Boustany’s letter. Instead, the unnamed worker was given a lower performance rating.

While this will do nothing to help the IRS’s reputation, kudos to Ms. Lerner for trying to stop such activities. As for Congressman Boustany’s letter to Commissioner Koskinen, I’m not holding my breath for any results.