Archive for the ‘IRS’ Category

Haste Makes Waste

Monday, October 22nd, 2018

Or so the cliche goes. And for the IRS, it certainly does.

A client filed his tax return on October 2nd. He had a balance due (he had made an extension payment, but he still owed some tax). He paid by having his bank account electronically debited with the filing of his tax return. In today’s mail he received a CP14 notice (dated today) alleging he hadn’t paid his balance due. Yikes!

My client was upset. “Russ, you forgot to have my bank account electronically debited.” No, I didn’t forget, and the return shows his payment being accepted for processing. I had a Tax Information Authorization for my client, so I ran an Account Transcript and it showed a $0 balance. My client was relieved, but there appears to be a systemic IRS issue.

The payment went through on October 2nd, but the IRS posted the tax due first (dated October 22nd) without posting his payment. Yet the payment was made, and my client should have never received this notice. It wasted both of our time for no good reason.

If this were the only such IRS notice I received this year I’d just ignore the issue, but there were two others I received in today’s mail (one I received as I had authorization for my client, and the other that the client forwarded to me). Both clients have $0 balances, so it appears there is a systemic issue of the IRS being a bit too fast in sending out CP14 notices.

Several years ago this was an issue for April filers; the IRS corrected the problem by allowing an additional ‘cycle’ before sending out CP14 notices. I hadn’t seen this issue before for extension filers, but it appears we have a case of deja vu all over again. I reported this to the IRS Systemic Advocacy Management System. If you’re a tax professional and run into this issue I urge to to report it, too.

A Letter on Redacted Transcripts

Thursday, October 18th, 2018

About a month ago I wrote Nina Olson, the IRS National Taxpayer Advocate, regarding the IRS’s new policy on redacting transcripts. I noted several issues:

1. While an unredacted transcript is available, it is only available to taxpayers, not tax professionals.
2. The redacted transcripts should have more characters available for the name.
3. Most issues will take longer to resolve under the new policy.
4. Tax professionals are being treated as second (or third) class citizens by the IRS.
5. Compliance issues for expatriates will be even harder to resolve in the future.
6. If the IRS extends the redactions to AUR notices, resolving such notices will be difficult.

You can read the entire letter here.

One Tiptoe Forward for Representation, With that Giant Step Backwards Still Coming

Wednesday, September 19th, 2018

The IRS released a Fact Sheet today on the new transcript redaction policy that begins on Monday. There’s one very slight piece of good news for tax professionals in the Fact Sheet:

If necessary for return preparation, a client may also order a complete (not redacted) wage and income transcript through the IRS. A client must first authenticate their identity with the IRS and a complete (not redacted) wage and income transcript will be mailed to the address of record within five to 10 days. If a practitioner cannot obtain Forms W-2 from the client, or if the client is unable to receive a complete (not redacted) transcript at the address of record, then the practitioner may have to file a paper return.

This is slightly better than it was, but is still unacceptable. First, if I have a Power of Attorney for my client for a particular tax year, I am authorized to act for the client (on the client’s behalf). That means that there’s no reason why the IRS shouldn’t send a tax professional with proper authorization an unredacted Wage & Income transcript. The IRS’s reasoning on this is flawed. Assume an individual hires a tax professional to come into compliance (or deal with an issue). Who do you think will be using the Wage & Income transcript: the client or the tax professional? All this will do is lengthen the process for no particularly good reason. Additionally, all the issues with mailed transcripts remain (security, expatriates, etc.)

Indeed, I strongly believe that tax professionals should be able to pull unredacted transcripts through IRS e-Services (with proper authorization, of course). The goal of obtaining transcripts is for some aspect of compliance; I’m unaware of any tax professionals who pull transcripts “just to have them.” The only thing I (and other tax professionals) have to sell is our time. We simply don’t have the time to waste to pull transcripts that are not needed. Overall, the IRS’s new policy remains poor (though there was that tiptoe forward).

IRS Extends Deadlines for Those Impacted by Hurricane Florence

Saturday, September 15th, 2018

Hurricane Florence is battering North and South Carolina. News reports indicate “biblical” amounts of rain will fall, with catastrophic flooding probable throughout the Carolinas. Today, the IRS announced that they are extending deadlines for those in the federal disaster zone to January 31, 2019.

Hurricane Florence victims in parts of North Carolina and elsewhere have until Jan. 31, 2019, to file certain individual and business tax returns and make certain tax payments, the Internal Revenue Service announced today.

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. Currently, this only includes parts of North Carolina, but taxpayers in localities added later to the disaster area, including those in other states, will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

While the list of impacted areas is a ‘work in progress’ right now (the IRS’s “Hurricane Florence” webpage doesn’t list them yet), FEMA has noted President Trump’s declaration of a disaster: Beaufort, Brunswick, Carteret, Craven, New Hanover, Onslow, Pamlico, and Pender Counties. As the rains continue to fall, I would expect this list to (unfortunately) lengthen.

The North Carolina Department of Revenue will almost certainly conform to the extensions. (The South Carolina Department of Revenue will, too, as impacted regions are declared a federal disaster area.)

The extension impacts all tax filings for those in the federal disaster zone:

The tax relief postpones various tax filing and payment deadlines that occurred starting on Sept. 7, 2018 in North Carolina. As a result, affected individuals and businesses will have until Jan. 31, 2019, to file returns and pay any taxes that were originally due during this period.

This includes quarterly estimated income tax payments due on Sept. 17, 2018, and the quarterly payroll and excise tax returns normally due on Sept. 30, 2018. Businesses with extensions also have the additional time including, among others, calendar-year partnerships whose 2017 extensions run out on Sept. 17, 2018. Taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018 will also have more time to file.

In addition, penalties on payroll and excise tax deposits due on or after Sept. 7, 2018, and before Sept. 24, 2018, will be abated as long as the deposits are made by Sept. 24, 2018.

We’re Not Gonna Take It

Thursday, August 23rd, 2018

The IRS issued proposed regulations today on charitable contributions as it relates to state and local tax credits. Here’s a hint to politicians in Connecticut, New Jersey, and New York. The IRS is telling you:

Here’s an excerpt from the IRS press release:

The proposed regulations issued today are designed to clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions. The proposed regulations are available in the Federal Register.

Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.

There’s a de minimis exception for tax credits of no more than 15% of the payment amount.

This proposed regulation isn’t a surprise. Indeed, it’s hard to see under the Tax Code how tax credits as charitable contributions would succeed. As for the current lawsuit against the IRS regarding the new tax law, that has even less of a chance of success in my view. But it sounds good, so the lawsuit happened. The idea of a state like New York changing their tax laws to lower their tax rates apparently hasn’t occurred to New York politicians.

One Giant Step Forward for Security (Maybe), One Huge Step Backward for Representation

Thursday, August 23rd, 2018

If you are a tax professional who does any representation work, do I have news for you…and it’s not good. Yesterday, the IRS made an announcement about redacting information on transcripts. Here’s an excerpt of the announcement:

Moving to better protect taxpayer data, the Internal Revenue Service today announced a new format for individual tax transcripts that will redact personally identifiable information from the Form 1040 series…The following information will be provided on the new transcript:
• Last 4 digits of any SSN listed on the transcript: XXX-XX-1234
• Last 4 digits of any EIN listed on the transcript: XX-XXX-1234
• Last 4 digits of any account or telephone number
• First 4 characters of the last name for any individual
• First 4 characters of a business name
• First 6 characters of the street address, including spaces
• All money amounts, including balance due, interest and penalties

But there’s more information—information not included in this announcement that’s very important if you do any tax representation work. If a tax professional with authorization (either an IRS Power of Attorney or Tax Information Authorization) calls the IRS up and requests a transcript, we can have it faxed to us (if we have a secure fax machine). Effective January 1, 2019, the IRS will no longer fax transcripts; they will only be mailed, and then, apparently only to the taxpayer’s address of record (not to tax professionals with the appropriate authorization). This is a huge problem.

Consider nonfilers–people not in the system. There is no address in the system to mail anything to. This will slow down work and hinder compliance with tax law.

Next, consider taxpayers who are overseas. Mail to locations outside the United States takes much longer and, in many countries, is of dubious security.

Now those of us with access to IRS E-Services will still be able to download transcripts once the CAF Unit processes the authorization (but see below on two additional issues). But when there’s an immediate issue, and the authorization hasn’t been processed, we will have to tell all involved, “We have to wait for the POA to be processed. Please add two weeks additional to your timeline.” I’m sure IRS Revenue Officers, Tax Compliance Officers, and Revenue Agents will appreciate this.

Unfortunately, there are two other major issues with this policy. First, the redaction of Employer Identification Numbers (EINs) will impact efiling and state tax issues. Let’s assume I request a Wage & Income Transcript for John Smith. Today, that transcript will show the full EIN for any issuers of tax documents. That allows tax professionals to prepare returns that can be electronically filed (EINs are required for efiling). In the future, the transcript will just show “xx-xxx9999″ as the EIN. If we happen to have a W-2 on file for that employer we’ll be able to use the EIN; otherwise, that tax return will have to be paper filed. This impacts state tax returns, too. Many states mandate efiling, and also mandate that we provide EINs on the tax return. We will be unable to comply with this in the future for impacted clients.

Additionally, business names will be redacted; only the first four characters will be shown. Imagine seeing “ACME xxxxxxxxxxxx xxxxxxxxxxxxx” as the business name. The business address will be redacted (just the first six characters will be shown); our address would be shown as “1919 S”; maybe with the first four characters of our name (CLAY) and those characters you could figure out who we are but I doubt it in a city one-tenth the size of Las Vegas. Basically, when I’m entering W-2s based off a transcript I’ll enter four characters and hope it matches correctly (good luck with that!). As to trying to call someone, how? Clients’ memories of prior years are, much of the time, hazy; the transcripts will be of little use. And many payors listed on information returns are parent companies rather than the payor itself; matching will be near impossible.

(This is also going to make responding to IRS Automated Underreporting Unit (AUR) notices quite interesting. Imagine your client receives such a notice, and all it says is “ACME” and the client says he never worked for ACME. How is a tax professional or the client going to find out the truth? There won’t be near enough information on the notice. You can expect a surge in Tax Court filings in about a year.)

“But Russ,” you ask, “Shouldn’t clients keep good records and all their W-2s (and other tax documents)?” Absolutely, but we have to deal with the world as it is, not how we want it to be. I’ve had two representation clients in the last month who have been victims of casualty losses: One lost all his records because of a fire; the other lost his records due to a flood. And many representation clients simply don’t have the records.

I understand why the IRS is doing this (the security issue) but this is going to make representation clients wait even longer to get their cases resolved, and will make overall compliance worse. It will cause paper filing to increase (not by a huge percentage, but it will still be noticeable) and will impact states, too. Overall, the unintended consequences were not thought out by the IRS.

Can You Spin Garbage Into Gold?

Saturday, August 18th, 2018

I guess I’ll spoil the post:

Rumpelstiltskin could spin straw into gold. Rumpelstiltskin, Inc. thought it could do the same for garbage, spinning it into tax credits. The Commissioner of the Internal Revenue Service disagreed. So did the Tax Court. So do we.

So begins the Appeals Court decision of Green Gas Delaware Statutory Trust v. Commissioner, a decision of the US Court of Appeals for the District of Columbia. The case involves tax credits for production of landfill gas (the since repealed Section 45K credits). Three entities, all related, with the parent company having the wonderful name Rumpelstiltskin, Inc. (and no, we didn’t make this up) took these tax credits worth $11.7 million while having $4.5 million in income. The IRS audited these returns, and allowed only $586,000 of tax credits. The IRS also turned the entities’ business expenses from gold into straw, disallowing most of them, and threw in a 20% accuracy penalty. The Tax Court upheld the IRS, and the entities appealed that decision.

So where did the tax credits come from?

The overwhelming majority of those claimed credits came from venting/flaring landfills, where RTC made no (and could make no) use of the gas. Green Gas, 147 T.C. at 30…[footnote:] It is, perhaps, no coincidence that some of the intermediary entities were named Bye Bye Gas GP, C U Later Gas GP, Arrivederci Gas GP, Buon Giorno Gas GP, Ciao Gas GP, and Adios Gas GP.

The first problem Rumpelstiltskin had is that the tax credits were designed for production of alternative energy, not venting (or burning) landfill gas. The second problem was that Rumpelstiltskin didn’t keep good records. Seriously, something we tell all clients is that if you keep good records an audit is an annoyance; if you don’t keep good records, an audit will be a very painful and expensive annoyance. And so it was here. Rumpelstiltskin tried to blame two deceased employees who kept 85% of the business logs; however, not only did the Tax Court find the logs (that were produced) unreliable the Court of Appeals asked the obvious question: “…the appellants could have introduced evidence from still-living employees who prepared the remaining 15% of the site logs, and yet chose not to do so.”

Rumpelstiltskin also tried to get the IRS’s rejection of business expenses reversed by the Court of Appeals. An excerpt from the Court of Appeals:

As to the appellants’ claimed deductions for consulting and legal fees, the Tax Court determined that the appellants “failed to provide a credible explanation” for why the consulting fees were “paid by other entities but deductions were claimed by” appellant Green Gas. And it held that the appellants could not claim legal-fee deductions because there was no evidence that any legal work benefited the appellants. Finally, it disallowed various miscellaneous expenses, except to the extent that the appellants could corroborate them with documentation. [citations omitted]

It does help if you are claiming an expense that you actually incur that expense….

There are two serious conclusions that can be drawn from this case. First, where there are tax credits there will be schemers trying to get money from them when it’s undeserved. “It’s free money,” they think. Second, document, document, and document some more. If you keep good records…but I said that above. In any case, as Chief Judge Merrick Garland wrote (who, like me, is a native of Lincolnwood, Illinois), the decision of the Tax Court is affirmed.

Case: Green Gas Delaware Statutory Trust v. Commissioner

Return to Sender

Tuesday, July 24th, 2018

A client was selected for a correspondence audit; the IRS asked the client to submit all the documentation regarding a tax credit taken on a recent return. The client had all the documentation, made his photocopies, and mailed off the notice using certified mail, return receipt requested. Imagine his surprise when three weeks later–two weeks after the deadline to respond–he receives his package back. Did he forget to attach postage? No, he mailed it at a post office. Did he put the incorrect address on the envelope? No, the address matched exactly. Did the post office make a mistake? No, the IRS did.

The client’s response was directed to go to the Andover (Massachusetts) Service Center. Apparently the Andover IRS office no longer gets mail at the address on the notice (a PO Box in Andover). Instead, the mail is redirected to the Service Center’s street address. Surely one agency of the government (the IRS) can communicate to another (the Postal Service), right?

Well, no. The IRS submitted a forwarding order to the Post Office. That order expired. So what happens when a forwarding order expires? The mail is returned to the sender.

Now, my client did nothing wrong–he responded timely. When he received the package back he called the IRS to alert them to the issue (hopefully in time to stop a Notice of Deficiency from being issued). If this matter were to get to the Tax Court, I’m pretty sure the Court wouldn’t be as amused as I was with the IRS’s overall actions. Shouldn’t the IRS be aware of where mail should be sent to?

If this were the only recent example of this I’d take it as a one-off. However, we received a notice from the Memphis Service Center for our own business (asking for a copy of a payroll filing). We duly made the photocopy and my Office Manager went to the Post Office to mail the response (using certified mail, return receipt requested). The Post Office told my Office Manager that they couldn’t take the mail as the address on the notice didn’t exist! I am not making this up. (I called the IRS up and was directed to send this to the Ogden Service Center.)

But consider taxpayers who aren’t represented by professionals or who aren’t as familiar with the IRS. They correctly respond to IRS notices but their responses don’t make it. If I had just put a stamp on the response to Memphis I might not have discovered the response didn’t make it for several weeks (returned mail takes quite a bit of time to get back to the sender). My client may still have to go to Tax Court because of the IRS’s error. These are issues that shouldn’t be happening.

The Amazing, Incredible, Expanding Postcard!

Friday, June 29th, 2018

When I was a child, people used postcards to save on postage. Postage for postcards ran a nickel. That was less than a phone call. Today, with the emergence of cellphones, the only postcards I receive are advertisements. But the IRS has a better idea! Let’s put Form 1040 on a postcard! [Insert groans from the tax professional community] “It’s so simple that a child can do it!” [Let’s add some groans from all the parents out there.]

Indeed page 1 of the draft Form 1040 is simple and straightforward. You enter your name, address, filing status, and you sign the return on page 1. Page 2 looks simple: You note your wages, other items of income, write in your tax, note some credits, and you’re done. But then you see some interesting words, like Line 6:

6. Additional income and adjustments to income. Attach Schedule 1.

That’s one way to make things fit on a postcard: Add more postcards! And it’s not as if most people will be skipping Schedule 1; it includes business income (Schedule C), capital gains (Schedule D), rental income and partnerships (Schedule E), and IRA deductions and all adjustments to income. And there’s not one of these schedules, but six of them. Here’s a link to the draft Form 1040 and all six of the proposed schedules.

It’s time to be honest: Nothing has gotten simpler. Indeed, I would argue everything about the 2018 tax return has gotten far, far more complex. Take line 9 of the draft Form 1040 (on page 2 of the form):

9. Qualified business income deduction (see instructions).

I pity those people trying to do that deduction themselves. I guarantee that most who try to do that line themselves will be joining me with gray hair next year. (The best explanation I’ve seen of that deduction runs 32 accountant-friendly pages. That is not a joke. Another tax professional used the line “Rube Goldbergesque” to describe the deduction.) It’s near a certainty that do-it-yourselfers are going to have issues with these forms. They’re not straightforward.

As I’ve told all of my friends I have lifetime employment. I think the IRS just gave me a second lifetime worth of employment!

IRS Interest Rates Unchanged for the Third Quarter of 2018

Saturday, June 9th, 2018

The IRS announced yesterday that IRS interest rates will be unchanged for the third quarter of 2018:

The rates will be:

– 5 percent for overpayments, 4 percent in the case of a corporation;
– 2.5 percent for the portion of a corporate overpayment exceeding $10,000;
– 5 percent for underpayments; and
– 7 percent for large corporate underpayments.

As I tell clients interest works both ways: If you file after the April tax deadline, you owe interest to the IRS; if you file after the April tax deadline and receive a refund, you are paid interest. That interest is, of course, taxable.