Archive for the ‘IRS’ Category

Form 8300 and Poker

Wednesday, June 17th, 2015

I’ve posted before on staking, but someone asked me the following question:

I’m a professional [poker player] and am going to be staked for the High Roller One Drop Tournament [a $111,111 buy-in tournament]. I’m going to be handed the cash to enter the tournament. What do I need to do?

Besides the normal staking issues (see these articles), there’s another issue: cash reporting. If you’re a business and you receive a payment of $10,000 or more in cash or like funds (this would include casino chips but would not include a cashier’s check), you have a reporting requirement: You must file Form 8300 with the IRS.

A professional poker player is operating a business and is required to comply with the laws impacting businesses. This includes cash reporting requirements. You have 15 days from the date of the cash transaction to report it. This is done by either mailing Form 8300 to the IRS or by filing it electronically through the BSA efile website. Note that if you use the BSA efile system you will have to register (required for Form 8300 efiling).

Like most penalties related to the Bank Secrecy Act, the penalties are on the ridiculous side. While the Failure to File penalty is just $100, the Intentional Failure to File penalty is the greater of $25,000 or the amount of the cash transaction (to a maximum of $100,000).

The IRS does take questions regarding Form 8300. You can call the IRS at 866-270-0733 or email questions to 8300questions@irs.gov

The BEA Responds, or Making IRS Customer Service Look Normal (Bad)

Tuesday, June 2nd, 2015

On Sunday I penned the post, “Making IRS Customer Service Look Good.” I now need to take that back. Why? I was greeted at 7am this morning by a phone call from an analyst from the Bureau of Economic Affairs.

He apologized for the issues that I had last week and confirmed:

1. The survey is required for all owners of 10% (or more) of foreign entities and US-owned foreign entities. This report is done every five years and is mandatory.

2. The BEA was stunned with the volume on inquiries last week on this survey. (I don’t think the BEA should have been surprised, but that’s another thing.) There phone system literally couldn’t handle the volume so in the best traditions of technology, it hung up on a lot of people. The extension, which normally must be sent in (similar to an extension for federal tax filing, Form 4868, where it’s automatic as long as you send in the paper/electronically file it) was made automatic because the BEA realized that they couldn’t handle the volume of extension requests.

3. Thus, most filers of the BEA-10 (“Survey of US Direct Investment Abroad”) have until June 30th to file.

Kudos to the BEA in reaching out and answering my questions. I do give the BEA a demerit for not appropriately publicizing this requirement. I would imagine there are numerous owners of foreign entities that are required to file the BEA-10 who still have no idea of the requirement. That said, I’m not sure how the BEA should publicize this; perhaps a notice sent to the American Bar Association?

Contrast the BEA being proactive with my call to the IRS Practitioner Priority Service yesterday. One of my clients closed his corporation in 2013 (filing a final return, closing it with the Corporation Commission in his state, etc.) and has moved so we needed to change the address with the IRS. (Yes, it’s a good idea to change the address for contact purposes as the IRS could audit the corporation’s returns.) I have a Power of Attorney for this corporation through the 2013 tax year, and the woman I spoke with questioned my ability to give a change-of-address for 2015 stating I would need a POA covering 2015. I noted to the IRS representative that there is no 2015 (or 2014) for this corporation; it would be the same thing as obtaining a POA for a deceased individual for the year after he died–impossible. In the end, I gave the representative the new address even after she told me she couldn’t confirm the IRS would do anything with it because I don’t have a POA covering 2015. Sigh….

IRS “Get Transcript” Application Hacked; 104,000 Tax Returns Illegally Accessed

Tuesday, May 26th, 2015

This afternoon IRS Commissioner John Koskinen announced that criminals were able to use the IRS “Get Transcript” application to access approximately 104,000 tax returns. (An additional 100,000 or so attempts were unsuccessful.) From the Wall Street Journal:

Thieves used the information from prior years’ returns to help them file for fraudulent refunds, the IRS said.

The IRS said the matter is under review by the Treasury Inspector General for Tax Administration as well as the IRS’s Criminal Investigation unit. In addition, the agency said its “Get Transcript” application—which the identity thieves successfully penetrated—has been shut down temporarily.

The IRS said it would provide free credit monitoring services for the approximately 100,000 taxpayers whose accounts were accessed. The IRS said it identified 200,000 attempts to access data and will notify all of these taxpayers about the incident.

The Hill has the number of returns accessed at 104,000.

That the Get Transcript application is insecure isn’t a surprise. Over one year ago I wrote:

Meanwhile, the Get a Transcript has its own problems. My partner attempted to use the service, but it could not verify either him or his wife as living where he’s lived for years. Second, the verification information relies on publicly available information for many. (It did for my partner, myself, and one other individual.) This is anything but a secure system. (I have sent a request to TIGTA noting the weakness of the system and requesting that they audit it. If TIGTA audits this, it’s unlikely we will hear anything for many months–probably not until 2015.) [emphasis in original]

Last year TIGTA responded to my request and stated that there were no issues with “Get Transcript.” I suspect they’ve changed their mind on that.

Meanwhile, I continue to have issues with IRS notices. Today I spoke with the Practitioner Priority Service (after being on hold for 1.5 hours) regarding a client where I have both a Tax Information Authorization (Form 8821) and a Power of Attorney (Form 2848), either of which should have had me copied on the notices. PPS confirmed that the POA and Tax Information Authorization were on file for the year in question. They could not explain to me why I didn’t receive any of the notices sent to my client.

One solution to the identity theft fiasco is the modest proposal on identity theft I made back in 2012. Instead, identity theft continues to balloon, while the IRS limits the tools available to tax professionals. Is it any wonder the IRS is so loved?

UPDATE: The IRS released a statement on the breach. Here are excerpts:

The IRS announced today that criminals used taxpayer-specific data acquired from non-IRS sources to gain unauthorized access to information on approximately 100,000 tax accounts through IRS’ “Get Transcript” application. This data included Social Security information, date of birth and street address.

These third parties gained sufficient information from an outside source before trying to access the IRS site, which allowed them to clear a multi-step authentication process, including several personal verification questions that typically are only known by the taxpayer. The matter is under review by the Treasury Inspector General for Tax Administration as well as the IRS’ Criminal Investigation unit, and the “Get Transcript” application has been shut down temporarily. The IRS will provide free credit monitoring services for the approximately 100,000 taxpayers whose accounts were accessed. In total, the IRS has identified 200,000 total attempts to access data and will be notifying all of these taxpayers about the incident…

The IRS determined late last week that unusual activity had taken place on the application, which indicates that unauthorized third parties had access to some accounts on the transcript application. Following an initial review, it appears that access was gained to more than 100,000 accounts through the Get Transcript application.

In this sophisticated effort, third parties succeeded in clearing a multi-step authentication process that required prior personal knowledge about the taxpayer, including Social Security information, date of birth, tax filing status and street address before accessing IRS systems. The multi-layer process also requires an additional step, where applicants must correctly answer several personal identity verification questions that typically are only known by the taxpayer.

I question that the answers to these questions are only known by the taxpayer. The questions I was asked could be discovered through a search of public records. It would be time consuming but entirely possible for a stranger who had my social security number and date of birth to answer all the other verification questions.

730

Sunday, May 10th, 2015

It’s a topic that, frankly, bores the media. It’s a topic that the current Administration would love to go away. It’s a topic that should never have arisen. It’s a topic that underlies the current crisis that impacts the IRS. It’s the IRS scandal.

It’s not something that you will see often in the newspapers. Surprisingly, today’s Las Vegas Review-Journal carried an op-ed from Victor Davis Hanson (that first appeared in the National Review) titled “America’s Politicized Tax Enforcement Is a Harbinger of Decline.” Mr. Hanson argues that when the law becomes negotiable civilization collapses. The IRS scandal is yet one way that we are not a nation of laws–and that appears to be the direct result of the current Administration.

Earlier this week the Wall Street Journal had an editorial titled, “The IRS Goes to Court.” You usually can’t tell how an appellate court will rule from oral arguments; that wasn’t the case here. As noted by the Journal,

Poor Ms. McLaughlin was sent to argue the indefensible so the IRS can delay discovery until the waning days of the Obama Administration. “If I were you, I would go back and ask your superiors whether they want us to represent that the government’s position in this case is that the government is free to unconstitutionally discriminate against its citizens for 270 days,” said Judge Garland.

Ms. McLaughlin replied, “Well, I will take that back.” The Beltway media may be bored, but the IRS scandal is a long way from over.

Have you tried to call the IRS lately? I have to as part of my job. I even get through–sometimes. I have to call tomorrow and maybe I’ll get lucky. Coincidentally, Karen Hawkins, Director of the IRS’s Office of Professional Responsibility, recently submitted her resignation. In her letter to the tax professional community, she said (in part):

I have had the pleasure to meet and talk with literally thousands of you at this juncture. I know you are solid ethical and professional people making every effort to serve your clients and tax administration in appropriate ways. It is important as you continue in your profession that you remain mindful of the overriding broad ethical principles contained in Circular 230 and resist the temptations to “get away with” the behavior less scrupulous individuals use to lure and keep clients. The recent litigation setbacks associated with tax return preparer regulation have been discouraging for all of us. Unfortunately, I have no crystal ball on the topic. I do know, however, that it is crucial for those of you who believe an ethical, fair, transparent and credible tax administration system is absolutely essential to this country to continue to practice your trade at the highest level and to press others for the same.

I agree with Ms. Hawkins that an ethical, fair, transparent and credible tax administration is essential. That said, I believe the IRS’s priorities should change to help implement that:

– Why is the IRS engaging in a “Washington Monument” strategy with their declining budget? (A “Washington Monument” strategy is to cut the most visible areas or most appreciated areas first.)
– Why is the IRS having employees while on the clock doing work for the employees’ union?
– Why is the IRS deliberately engaging in actions that are not fair, transparent, and credible such as the Z Street litigation?
– Why have many actions of the IRS impinged on tax professionals ability to service clients? Not only does this increase the workload for tax professionals, it increases the workload for the IRS.

The IRS’s budget isn’t going to be increased until the root cause of the IRS scandal is known. That’s a fact. It’s now been over 730 days (Monday will be day 732) that the scandal has been ongoing. If a Republican wins the White House in 2016, we’ll likely know what happened by day 1460. Otherwise, who knows.

Not All Private Delivery Services Are Equal

Wednesday, May 6th, 2015

Back when I was getting my MBA I did a team project about a California company that offers private delivery services in just Southern California. They were competing against FedEx, and they built a regional network. Recently I received an inquiry from a client who wanted to use them to send something to the IRS in Fresno; I told my client not to. He needed to use FedEx or UPS (and then, specific services offered by FedEx and UPS) or the postal service.

The reason for this is simple: The IRS only accepts certain of these services as equivalent to the postal service.

Today the IRS came out with their annual notice of which services you can use:

Effective May 6, 2015, the list of designated PDSs is as follows:

FedEx:
1. FedEx First Overnight
2. FedEx Priority Overnight
3. FedEx Standard Overnight
4. FedEx 2 Day
5. FedEx International Next Flight Out
6. FedEx International Priority
7. FedEx International First
8. FedEx International Economy

UPS:
1. UPS Next Day Air Early AM
2. UPS Next Day Air
3. UPS Next Day Air Saver
4. UPS 2nd Day Air
5. UPS 2nd Day Air A.M.
6. UPS Worldwide Express Plus
7. UPS Worldwide Express.

Only the specific delivery services enumerated in this list are designated delivery services for purposes of section 7502(f). FedEx and UPS are not designated with respect to any type of delivery service not enumerated in this list. Taxpayers are cautioned that merely because a delivery service is provided by FedEx or UPS, it does not mean that the service is designated for purposes of the timely mailing treated as timely filing/paying rule of section 7502. [emphasis added]

So if you’re going to use one of these private delivery services to send something to the IRS, use the correct service. If you don’t, the money you spent could be wasted.

Don’t Call Us Continues

Wednesday, April 22nd, 2015

Back in the 1970s Saturday Night Live had this sketch of Lily Tomlin reprising her role as Ernestine the phone company operator (from Laugh-In):

That’s how I feel about calling the IRS. I have three matters I need to get resolved with the IRS. Today, the response I received when calling the IRS’s Practitioner Priority Service was, “Due to extremely high call volumes that option is not available now. Please try your call again later.” Well, I tried again later. And later. And later still. “We’re sorry, but due to extremely high call volumes that option is not available now. Please try your call again later.”

Meanwhile, we find out today that the IRS has deliberately cut customer service.

During the 2015 tax-filing season, the IRS provided what its own Commissioner described as “abysmal” customer service, blaming skyrocketing wait times for telephone and in-person assistance on agency budget cuts. The IRS even called budget cuts “a tax cut for tax cheats.” But a close review of the agency’s spending shows the IRS deliberately cut $134 million in funding for customer service to pay for other activities. Spending decisions entirely under the IRS’s control led to 16 million fewer taxpayers receiving IRS assistance this filling season. Other spending choices, including prioritizing employee bonuses and union activity on the taxpayer’s dime, used up resources that otherwise could have been used to assist another 10 million taxpayers.

The above quote is from the House Ways and Means Committee majority staff titled “Doing Less with Less: IRS’s Spending Decisions Harm Taxpayers.” There’s not much to add. If I can’t get through I’ll have to write follow-up letters; on one topic it will be my third letter without a response. On another, it’s been over one year without a response.

If anyone thinks the IRS’s budget will be increased for next year, they’re dreaming.

Bozo Tax Tip #1: Let Your IRS Notice Age Like Fine Wine!

Sunday, April 12th, 2015

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.


I hope you’ve enjoyed this series of Bozo Tax Tips for the 2015 Tax Season. I’ll be back next week with normal blog content.

Bozo Tax Tip #2: The Eternal Hobby Loss

Thursday, April 9th, 2015

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.

Bozo Tax Tip #3: Just Don’t File

Wednesday, April 8th, 2015

We’re running some repeats, but there is some new Bozo material coming. It’s just that people keep trying the same things over and over again.

It’s tough to avoid the tax system. There are currency transaction reports (cash transactions of $10,000 or more) and suspicious activity reports (theoretically can be done on any transaction, but usually starts at $3,000 or more) done with cash. Businesses must send out 1099s on payments of $600 or more to individuals. Barter organizations must send out 1099s.

But that doesn’t stop the Bozo contingent. “They’ll never catch me,” they believe. Until the IRS or the Franchise Tax Board (substitute your state tax agency if you’re not in California) knocks on their door. There’s no statute of limitations if you don’t file.

Paying taxes isn’t fun. Avoiding the system and living on the edge may give you a thrill, but if you get caught you’ll be given a bill…and possibly a trip to ClubFed.

Bozo Tax Tip #4: Procrastinate!

Wednesday, April 8th, 2015

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.