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Good, Bad, and Ugly With the IRS

Thursday, February 9th, 2023

This week I’ve had to call the IRS up for several different items.  There is good news, bad news, and some ugly news.

The good news: In calling the Practitioner Priority Service (PPS), I’ve gotten through every time!  Twice, there was no wait!  I was disconnected once after reaching an agent but I called back and was immediately connected to another agent.  For practitioners, this is great news and will make our lives easier in Tax Season.

The bad news: The IRS remains slow to respond to obvious issues.  For example, the California “Middle Class Tax Rebates” were announced last year.  California exempted them from state taxation (which is their right); how would they be treated for federal tax returns?  There were (and are) two schools of thought: these are taxable as an accession to wealth or these are not taxable based on the “General Welfare” theory.  A ruling from the IRS is due soon.  My suspicion is that the IRS will rule that these aren’t taxed–based on politics, not law.  (This isn’t just a California issue; several states enacted similar programs in 2022.)

The ugly news: Yesterday, I spoke with an IRS Appeals Officer on a case.  We didn’t agree completely on my client’s issues, but we did agree on where to go to move the case forward.  (Like almost everyone I have dealt with at the IRS, she was pleasant and helpful.)  So why am I putting this in “ugly news?”

The issue is her workload.  From everything I’ve seen, Appeals is buried (see below for another example of this).  She confirmed this, and noted that over the past three years the number of Appeals Officers has decreased to a point that she thinks it will take five years to rebuild the staffing.  (You can’t just hire effective Appeals Officers.)  I agree–it will be years before this and other Pandemic-related backlogs are resolved.

Speaking of backlogs, paper remains the IRS’s Achilles heal.  Here’s an example impacting a client of mine.  An individual self-represented for an audit.  That individual lost at the audit, hired me, and I requested an Appeals hearing by certified mail.  That request was received timely (we tracked the mailing), and we received a notification that the file was sent to an IRS office.  No matter, a Notice of Deficiency was issued so now my client must file a Tax Court petition because of an IRS error.  If this ever goes to Tax Court (which isn’t likely–filing the petition will cause the case to be assigned to Appeals), I doubt the court would look favorably at the IRS ignoring its own procedures.

Additionally, yesterday I needed a transcript for a client.  I went onto IRS E-Services to download it (I had an authorization sent to the IRS back in 2021) and it failed.  Why?  Who knows.  I show it was successfully faxed–but it went into the ether.

As I noted above, it’s going to take years for the IRS to work its way out of the backlog and staffing issues.  This isn’t just for Appeals, but for Exam (audit), collections, and all functions of the IRS.  If there’s a budget shutdown or anything else like that, this could delay things even more.

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Is It January 9th Yet?

Friday, January 20th, 2023

Last year, the IRS announced a new system for efiling 1099s (and other information returns) called IRIS.  This system would be available for both professionals and individuals (and businesses) to efile 1099s.  The system was supposed to be available on January 9th.  On January 9th the webpage noted, “…[Y]ou can log in to IRIS starting mid-January 2023.”  Well, today is January 20th and the system still isn’t available.

(I do need to note you must have an IRS IRIS Transmitter Control Code (TCC) to use IRIS.  You can apply for one via a link on the IRIS webpage.)

The deadline for mailing most information returns remains January 31st–and that’s 21 days away.  We are back using the IRS FIRE system (this system is not available to the general public) for one more year as it appears we have no options.  There are many services you can find that will file 1099s, but we have batches of 1099s for our clients that need filing.

Perhaps the original announcement of the IRIS system was correct: the IRS simply didn’t note which year the system would be up on.  After all, there’s a January 9th in 2024, too.

UPDATE: The IRS’s IRIS system went live earlier this week.

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Start Your 2023 Mileage Log

Tuesday, January 3rd, 2023

I’m going to start the new year with a couple reposts of essential information. Yes, you do need to keep a mileage log:

Tuesday will be the first business day of the new year for many. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log (or use a smart phone app–with periodic sending of the information to yourself to prove that the log is contemporaneous).

Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you need a paper log or must be able to prove your smart phone log is contemporaneous.

The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 123,808). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car. It’s also a good idea to take a picture of the odometer and email that picture to yourself. This will give you a time-stamp showing you accurately noted your beginning mileage.

Here’s the other things you should do:

On the cover of your log, write “2023 Mileage Log for [Your Name].”

Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:

1/4 123900-123935 Office-Acme Products (1234 Main St, Las Vegas)-Office, Discuss requirements for preparing tax return, year-end journal entries.

It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.655/mile, the 35 miles in this hypothetical trip would be worth a deduction of $23. That deduction does add up.

Some gotchas and questions:
1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.

That said, if you backup (or transfer) your phone app on a regular basis, and can then print out those backups, that should work. The regular backups should have identical historical information; the information can then be printed and will function as a written mileage log. I do need to point out that the Tax Court has not specifically looked at mileage logs maintained on a phone. A written mileage log (pen and paper) will be accepted; a phone app with backups should be accepted.

2. I have a second car that I use just for my business. I don’t need a mileage log. Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.

3. Why do I need to record the starting miles for the year? There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.

4. Can I use actual expenses? Yes. You would need to record all of your expenses for your car: gas, oil, maintenance, repairs, insurance, registration, lease fees (or interest and depreciation), etc., and the deduction is figured by taking the sum of your expenses and multiplying by the percentage use of your car for business (business mileage to total mileage driven). Note that once you start using actual expenses for your car, you generally must continue with actual expenses for the life of the car. Be careful if you (or your family) have multiple vehicles. You will need to separate out your expenses by vehicle.

So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.

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2023 Standard Mileage Rates

Sunday, January 1st, 2023

The IRS announced on December 29th the standard mileage rates:

  • $0.665/mile for business use (up from $0.635/mile as of July 1, 2022);
  • $0.22/mile for medical/moving for active-duty members of the Armed Forces; and
  • $0.14/mile in service of charitable organizations.

These rates do apply to electric and hybrid vehicles along with gasoline and diesel vehicles.

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IRS Delays New $600 1099-K and Cryptocurrency Trading Reporting

Friday, December 23rd, 2022

Two big announcements from the IRS today will have a major impact on 2022 tax returns (returns filed in 2023).  First, the IRS announced a delay in implementing the $600 reporting for third-party payment platforms (Form 1099-K).  Quoting from the announcement:

“The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan,” said Acting IRS Commissioner Doug O’Donnell. “To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements.”

I’ll change the verbiage to reality: The IRS is currently in no position to handle the flood of 1099-K’s that would come in, and this transition guidance gives them a year to (hopefully) get ready and smooth out a whole bunch of wrinkles.  Do note that if you have a side business, income from that business is taxable (that’s been the law and nothing has changed).

Second, the IRS announced that brokers are not required to report additional information regarding disposals of digital assets (aka cryptocurrency) until final regulations are issued.  This does not impact taxpayers’ responsibility to both report all dispositions nor answer the question regarding cryptocurrency that appears at the top of Form 1040.  Announcement 2023-02 notes that the IRS plans to issue regulations with a notice of proposed rulemaking.

A notice of proposed rulemaking will be published that sets forth proposed regulatory text, explains the proposed rules, solicits public comments, and announces a public hearing. This process will allow the Treasury Department and the IRS to accept comments from affected taxpayers, industries, and other interested parties and enable the public to meaningfully participate in the regulatory process. After careful consideration of all public comments received and all testimony at the public hearing, final regulations will be published.

Depending on when the notice of proposed rulemaking is issued, this could delay the new rules until either the 2024 or 2025 Tax Seasons (2023 or 2024 tax returns).

Overall, this is good news for taxpayers, tax professionals, and the IRS.  The IRS still has ~12 million returns to be processed, and computer systems that are older than I am.  Had the IRS received the flood of 1099-K’s and issued notices when taxpayers properly don’t include erroneous items on their returns, the IRS wouldn’t have been able to handle the volume of correspondence.  Putting this off a year makes it at least possible the IRS will be ready.

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IRS: Don’t Call Us, Don’t Write Us

Thursday, December 8th, 2022

No, I’m not talking about my business: feel free to call or write us (but due to a water leak, our office is closed today, Thursday, December 8th–we’ll be in tomorrow).  Rather, I’m talking about calling the IRS and writing the IRS.

Let’s start with calling the IRS.  For tax professionals like me, we use the Practitioner Priority Service (PPS).  When we reach agents from the IRS, they can usually resolve issues, or direct us to the personnel at the IRS who can resolve our issues.  This is good for taxpayers and tax professionals.  Unfortunately, there’s a but in this: “When we reach agents from the IRS….”  The problem is reaching them.

On Tuesday, I had eight matters to resolve with the IRS (four business, four individual).  At 7am I began calling PPS (the service is open from 7am – 7pm local time).  I made 60 phone calls to PPS.  On all of them I received the message, “We’re sorry, but due to high call volume in the topic you’ve chosen we cannot take your call at the present time.  Good bye.”  On some of the calls, I also had to do simple math (add six and eight) or repeat words (a theoretical way to stop automated dialing).  All that did for me was make each call take more time to reach the “We’re sorry” message.  (I alternated attempting to reach the business and individual queues, and was equally unable to reach either.)

I am not alone in being frustrated.  The National Association of Enrolled Agents (NAEA) sent a letter to the IRS and Congress noting our frustration. One excerpt from the letter:

As you can see from the sentiments of enrolled agents across the country, accessing the PPS lines has become nearly impossible for tax professionals to gain the help they need from the IRS. We have received anecdotal evidence that less than one percent of callers can get through the PPS individual line.  [emphasis added]

Once we get through, we’re usually on hold for at least 30 minutes.  Sometimes the IRS will offer a callback option so I don’t have to listen to the IRS hold music for an hour.  I can work on other matters while on hold so I don’t have to charge clients for that time.  Still, the current phone system is untenable in allowing tax professionals to resolve issues.

I will be trying to call the IRS again tomorrow and we’ll see if there’s any improvement.

So, Russ, why not write the IRS letters to resolve matters?  When we write the IRS, it goes into the black hole of correspondence.  First, the average response time when we write the IRS is measured in months (three to six currently), so taxpayers have to wait longer for resolution.  Second, some of the time when we respond by mail the IRS repeats what was said in the original notice, ignoring the response; in those cases, we now have to send another letter to the IRS.  Third, the National Taxpayer Advocate correctly noted the IRS’s Achilles heal is correspondence.  The volume is so large that the IRS does lose items.  With a phone call, we have resolution (hopefully).

Some items must be responded to by mail.  For example, I have two clients who received erroneous “Math Error” notices.  The only way to challenge these notices is to write the IRS a letter.  (In one case, the IRS notice would be correct except for two amended returns that have not been processed.  In the other case, the IRS made the math error and miscalculated the client’s tax owed due to a tax treaty allowing for a favorable tax rate.)  Based on experience, it will be mid-2023 before these clients have resolution on these matters.

The IRS is supposedly based on providing quality service for taxpayers and tax professionals.  I do need to point out that when I reach IRS employees they almost always do provide a high level of service.  Unfortunately, reaching those employees is near impossible today.

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If You Used IRS Direct Pay on October 20th Check Your Bank Records

Saturday, October 29th, 2022

I love IRS Direct Pay.  It’s a simple method to make payments to the IRS for most (but not all) taxes individuals might have.  And it works…well, it works most of the time.

I saw on Twitter the following:

On October 20th, the IRS Direct Pay application had issues with processing payments. The issue was fixed but approximately 4,600 taxpayers were impacted and duplicate payments were made and processed.

The Treasury Financial Agent is reaching out to all financial institutions to return the duplicate payments. However, if a taxpayer calls the IRS about this issue, they should be advised to contact their financial institution and have them return the duplicate payment(s) using ACH return reason code R10 (Customer advises not authorized) or R11 (Check truncation entry return).

The issue was sent to all financial institutions via the Federal Reserve Bank Operations Bulletin.

To date, no one has contacted us about this, but we do have individuals who used Direct Pay after October 17th to pay taxes.  If you are an impacted taxpayer, follow the instructions noted above.  If you’re one of our clients who was impacted, feel free to call our office.

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Hurricane Ian: IRS Extends Deadline for All Floridians to February 15

Thursday, September 29th, 2022

The IRS announced today that because the state of Florida has been declared a disaster zone that tax deadlines for Floridians have been extended until February 15, 2023.  This includes the individual and C-Corporation extended deadline of October 17th, the trust/estate (Form 1041) extension deadline of September 30th, payroll tax deadlines of October 31st and December 31st, and the January 17, 2023 Estimated Payment deadline.  Do note that tax payment deadlines that have already passed have not been extended.  However, interest and penalties do not accrue during disaster extensions, so there won’t be any additional interest and penalties.

I would expect the Florida Department of Revenue to extend the corporation tax deadline of October 17th to February 15, 2023 soon.

 

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The Trouble With Identity Protection Verification Notices

Friday, September 16th, 2022

The IRS sends two types of Identity Protection Verification Letters: LTR 4883C and LTR 5071C.  If you receive a LTR 4883C, you must call the IRS’s Identity Protection unit so that your return is processed.  If you receive a LTR 5071C, you can generally respond online and have your return processed.

There are three main problems with the verification notices:

  1. Reaching a human at the IRS is extremely difficult;
  2. Tax professionals generally cannot call on your behalf if you receive one of these notices (we can be on the call with you, but the IRS wants the taxpayer to be on the line);
  3. The IRS is not following up with taxpayers who don’t respond to the notices.

Today, I’m going to look at the third issue: the lack of follow-up.  Here’s a real world example.

A client, call him John Smith, filed his 2021 tax return in May.  He owed the IRS $5,000 in tax and paid that and the appropriate amount of interest.  It was the first time Mr. Smith had ever filed a return after April 15th–and there was no extension.  The IRS assessed the late filing and late payment penalties.  Mr. Smith believed he qualified for First Time Abatement and signed an IRS Power of Attorney form allowing me to request the abatement.  I called the IRS to request the abatement (on my 10th try to reach the IRS today via the Practitioner Priority Service, I got through).  The helpful IRS agent asked me if Mr. Smith had filed his 2019 return.  I said he had (I had a copy of it).  She did some digging, and discovered that the IRS had sent an Identity Protection Letter that Mr. Smith never responded to, and his return was sitting in limbo.  Another copy of the letter is going out in the mail to Mr. Smith, so his 2019 return should soon be processed.  Once that happens, we’ll be able to request the abatement for 2021.

Mr. Smith told me he was stunned by what I wrote; he claims he never received the IRS letter.  Unfortunately, the mail isn’t perfect and it is quite possible that he didn’t receive it.  (Indeed, today a different client told me one of his past due returns had finally been processed and there’s a balance due.  I ran an Account Transcript; in theory, the IRS sent notices to him and me in March showing the balance due.  Neither of us received a notice.  But I digress….)

Let’s consider an alternative reality where three or four months after the initial Identity Protection Unit notice is sent a follow-up notice is sent (if the return remains unprocessed).  There’s a better likelihood of the taxpayer responding and getting the return processed–the goal of all involved.  And the cost of this programming change and sending the letter should be minimal.

Unfortunately, that isn’t the reality we live in today.  Instead, there’s no follow-up and it was only by accident that we discovered the issue.  If my client had timely filed his 2021 tax return, we still wouldn’t know about this issue.  IRS: It’s time to start following up on these notices.

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Student Loan Forgiveness: Should You File or Wait?

Thursday, August 25th, 2022

With President Biden’s announcement of forgiving student loans, there are some obvious questions:

  1. Will this be taxed by the IRS?
  2. Will this be taxed by the states with income taxes?
  3. Will this be upheld by the courts?
  4. When will there be guidance on this?
  5. When should impacted taxpayers file?

We have answers to some of these questions, but definitely not all.  First, this will not be taxed federally.  This is quite clear based on the American Rescue Plan Act.  Indeed, issuers are not supposed to send Form 1099-C’s to those with forgiven loans.  However, some states do not conform to the Internal Revenue Code of today.  Thus, on the state level this will be taxable income in some (but not all) states.  Jared Walczak of the Tax Foundation noted that this could be taxed in Arkansas, Connecticut, Hawaii, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Minnesota, Mississippi, New Jersey, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin.  (I haven’t done the research for every state, but it sure looks like a taxable event for Pennsylvania and New York.)

But the big question is one I cannot answer: Will this be upheld by the courts?  I’m not an attorney, but it’s a certainty this will be litigated.  I have my doubts as to this being upheld (the “major questions doctrine” from West Virginia v EPA is a–sorry for the pun–major issue here), and no one will know until the cases are resolved.  I absolutely could see one Court of Appeals ruling in favor of allowing it while another imposes a national injunction.  I expect the Supreme Court to be the arbiter of this, and probably not for several weeks.

As to when there will be guidance: soon.  I would expect it within ten days, but this is just an educated guess on my part.  I actually expect it sooner than ten days, but you never know about Washington.

Finally, the question.  “Russ, I have student loans.  I’m on extension.  Should I file?”  That’s an it depends question.  If your return is set, and there are no tax planning opportunities for the return (you’re single and/or you cannot contribute to retirement plans for 2021), the tax you owe and the income you have will not change; whether you qualify or not is set.  Thus, you can file–whether or not you’re above the income threshold.

The individuals who should wait for guidance are those who still have tax planning opportunities for 2021 (and who are impacted by this).  Generally, those are the self-employed (who can still contribute to retirement accounts such as SEP IRAs) and married couples (who can choose between filing separate and joint).  Of course, if your income is far above the threshold no matter how you file and/or contribute to retirement plans, filing now or after the guidance is released won’t change your eligibility for forgiveness.  It’s only those who might qualify by doing something that should wait.

 

UPDATE: I originally listed New Jersey as a state that I thought where forgiveness would be taxed; however, the Tax Foundation released a new list without New Jersey.  They’re spending a lot more time on the research on this than I am.  Do note that until official guidelines come out, all any of us are doing is speculating.  The official state pronouncements (and those are in the future) will govern.

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