Archive for the ‘IRS’ Category

When Acquire Doesn’t Mean Acquire

Thursday, March 4th, 2021

It’s time for today’s lessen in double-speak, or bureaucratese, courtesy of the IRS.  On the top of Form 1040, just below your address is a question:

At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?

It seems simple: If you bought any cryptocurrency, sold any, exchanged any, sent some, or received any, check the box marked “Yes.”  Except that’s wrong, per the IRS.  On March 2nd, the IRS updated their Frequently Asked Questions (FAQ) on cryptocurrency.  If all you did was acquire (purchase) cryptocurrency, you can answer no:

Q5. The 2020 Form 1040 asks whether at any time during 2020, I received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency.  During 2020, I purchased virtual currency with real currency and had no other virtual currency transactions during the year. Must I answer yes to the Form 1040 question? (3/2/21)

A5. No.  If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question. [emphasis added]

As the National Taxpayer Advocate pointed out, the IRS wants information on individuals who had reportable sales of cryptocurrency.  That would be sales, exchanges, and spending; it would also include individuals who received cryptocurrency for free (but not gifts).  The IRS wants to make sure individuals who have taxable events with cryptocurrency have reported them on their tax returns.

Is it a problem if you answered “yes” but all you did was acquire cryptocurrency?  Definitely not.  The question is poorly written, and you answered truthfully based on the question.  However, you might end up receiving an IRS notice if the IRS computer looks for taxable cryptocurrency activity on your return and doesn’t see any.  The solution, which likely will be adopted for 2021 returns, is to change the question to read, “At any time during [the tax year], did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency in a reportable transaction?

I give the IRS an “A” for knowing that many individuals are not reporting cryptocurrency activity on their tax returns, and a “D-” for writing questions.

More Erroneous IRS Notices

Wednesday, February 10th, 2021

In yesterday’s mail we received several IRS CP59 Notices for clients. What’s a CP59 Notice? Well, here’s the first two lines:

You didn’t file a Form 1040 tax return.

You haven’t filed your tax return for the tax year ending on December 31, 2019.

Of course, all the clients had filed their 2019 tax returns in October. However, these clients had to paper-file for various reasons and the IRS simply has not yet processed those returns. Based on a phone call with the IRS, it appears that the IRS is still processing paper returns from July! Yikes! Based on that timeline these returns may not be processed until May.

These notices were issued because these clients had income that showed they needed to file a tax return (1099s, etc.) and none had been noted. The notices, dated February 15, 2021, are automatically sent four months after the extension deadline.

The CP59 notice includes a Form 15103 that you’re supposed to complete and return along with a copy of your tax return. The helpful individual I spoke with at the Practitioner Priority Service noted that taxpayers who paper-filed after July and who receive the CP59 notice should simply ignore the notice and should not file Form 15103 and send another copy of their tax return.

The IRS is simply backlogged with paper, and while IRS Commissioner Rettig has stated the IRS is caught up, that’s simply not the case. The handy IRS Operations Status Page says that the IRS is opening mail within normal timeframes. Unfortunately, that same page states:

The IRS has also made significant progress in processing returns. As of January 29, 2021, we had 6.7 million individual tax returns in the processing pipeline

How long you may have to wait:  It depends on where you sent your tax return and where it is in the process. We are processing returns we received over the summer due to the extended July 15 tax filing due date and, in some cases, are processing tax returns dated as early as July 15, 2020. However, we are rerouting tax returns and taxpayer correspondence from locations that are behind to locations where more staff is available, and we are taking other actions to minimize any delays. Tax returns are opened in the order received. As the return is processed, it may be delayed because it has a mistake, is missing information, or there is suspected identity theft or fraud. If we can fix it without contacting you, we will. If we need more information or need you to verify that it was you who sent the tax return, we will write you a letter. The resolution of these issues depends on how quickly and accurately you respond, and the IRS staff trained and working under social distancing requirements to complete the processing of your return.

What you should do: Other than responding to any requests for information promptly, there’s no action you can take. We’re working hard to get through the backlog. Please don’t file a second tax return or contact the IRS about the status of your return. [emphasis added]

There’s no blame to the IRS–this is the reality of dealing with Covid. Unfortunately, with 2020 returns about to start flowing into the IRS I don’t see improvement coming on return processing anytime soon. What can you do? Basically, efile if at all possible. Electronically filed returns, for the most part, are processed smoothly. But if you have to paper-file for any reason, just expect your return to take time to be processed. I’d estimate nine months for a paper-filed return to be processed. (The IRS will be backdating the filing date to the postmark date.)

And if you do have to paper-file a return, make sure you use certified mail. It’s inevitable that some returns are going to get lost. If you have your certified mail receipt, your return should be treated as if it was filed on the date you mailed it to the IRS. This year, it’s absolutely worth the additional $5.

IRS Sending Erroneous Notices With Erroneous Content

Thursday, February 4th, 2021

Today is February 4, 2021. But the IRS computer has some other ideas about the date.

The IRS sent many CP21C notices telling individuals that their Economic Impact (Stimulus) payments were offset to your 2007 tax account. Yikes! From the National Taxpayer Advocate:

The IRS’s more than 109,000 CP21C letters informed the recipient, “We applied a credit to your 2007 [that is not a typographical error!] tax account due to new legislation. We used (offset) all or part of your economic stimulus payment to pay your federal tax as the law allows … As a result, you don’t owe us any money, nor are you due a refund.” Unsurprisingly, the letter directs the taxpayer to a general phone number to resolve this issue. Equally unsurprisingly, taxpayers will face more frustration because the official level of service so far in 2021 is 14 percent on the Accounts Management telephone lines, down from 61 percent for the same period last year, and employees have answered only nine percent of taxpayer calls. The CP21C letter may very well drive the more than 109,000 recipients to the phone lines on the cusp of filing season when taxpayers may already be struggling with filing and RRC questions. The letter and taxpayers’ phone experience may both escalate taxpayer frustration.

The only quibble I have with this is “The letter and taxpayers’ phone experience may both escalate taxpayer frustration.” Calling the IRS today is an exercise in futility for the most part. When I do get through–and I did three times yesterday!–I find the IRS telephone agents very professional and willing to assist me. But the 14% number mentioned above seems about right for the general lines (it’s probably 25% for the tax professional numbers–better, but not great), and that’s a huge issue.

Getting back to the notice, these notices were basically completely erroneous. What the IRS meant to write was:

Because we don’t show a filed 2019 tax return nor a 2018 return, we cannot issue you the Economic Impact (Stimulus) payment. You can still get the payment by taking a tax credit on your 2020 tax return.

The IRS did note this on their website but how many of these taxpayers will look on this website and get down to the bottom of the General Information questions and click on the link to read the information? My guess is less than 1% of the 109,000 who received the erroneous notice. Indeed, this should be at the top of the webpage so that those impacted by this will see it.

In any case, just another “fun” fact for the 2021 Tax Season.

Calling the IRS? Good Luck! (Because You Will Really, Really Need It)

Tuesday, February 2nd, 2021

I need to speak with the IRS regarding four clients. Unfortunately, I need to speak with three different departments within the IRS for these clients. I’ve been attempting to reach the IRS for over a week first thing in the morning (7am PST), late in the day (2-3pm PST), and in the middle of the day (sometime between 10am and 12n PST). In almost all cases I’ve heard this message:

We’re sorry, but due to extremely high call volumes in the topic you’ve chosen we cannot take your call at this time. Please try your call again later.

I did manage to get a human this afternoon. Exactly 3 minutes into my call he vanished, I heard a click, and the call ended. He did not call me back.

For two of my clients, I may be forced to write letters even though the issues are (theoretically) easily resolvable by a phone call. Instead, they’ll likely go in the 5+ million pieces of mail sitting in a trailer and the clients will have to wait (probably a year) for a response, and might have to send another letter.

And I’m calling numbers that are designed for tax professionals with theoretically less hold time. It’s basically impossible to get through on the regular numbers. I tried calling the international IRS contact number and received a busy signal; that’s the first time that’s ever happened to me. For individuals needing tax assistance regarding information from the IRS, the lyrics from Man of La Mancha’s “Impossible Dream” come to mind: “To dream the impossible dream….”

I realize the IRS (along with all of us) are dealing with Covid-related issues. However, this performance is simply unacceptable. I have clients who may be subject to levies who have filed appeals (thus, they are not supposed to be subject to levies) and I cannot speak to anyone at the IRS to have collection activities stopped on their accounts. The IRS can verify this easily during a phone call. But I can’t reach a human.

I am extremely frustrated by this. And there’s no end in sight to this horrible customer service. There’s plenty for the IRS’s new “Chief Taxpayer Experience Officer,” Ken Corbin, to deal with.

The Looming AUR Disaster from Fraudulent Unemployment Insurance Claims

Thursday, January 21st, 2021

A story I saw from a Sacramento television station noted that California’s Employment Development Department (EDD) processed millions of fraudulent unemployment insurance claims; indeed, EDD has no idea how many fraudulent claims were filed. EDD is now mailing out Forms 1099-G to note the unemployment paid (unemployment is taxable on the federal level). The Sacramento television station notes that individual who receive a fraudulent 1099-G from EDD should file a fraud claim with EDD so that (hopefully) EDD will issue a corrected 1099-G showing $0 paid in unemployment. Given it’s next to impossible to call EDD and reach a human, I wish you the best of luck in that.

But the story misses the point: Few, if any, of the fraudulent 1099-G’s will be received by the true holder of the social security number. Most of these fraudulent unemployment claims were filed with phony addresses, so the erroneous 1099-G’s being mailed out will be returned to the EDD.

Instead, what’s going to happen is that about 15 months after John & Jane Doe file their tax return (correctly noting their income), the Does will receive an Automated Underreporting Unit (AUR) notice alleging that they didn’t include their unemployment benefits from the EDD on their tax return. The Does will have to write to the AUR unit noting that the information is false. Will the AUR unit realize the issue? The AUR unit does a good job when you point out that the income was reported on the return (and the computer simply missed it). In my experience, the AUR unit does a poor job when you’re trying to show a tax form is wrong: proving a negative is difficult.

I suspect that non-Californians will have an easier time dealing with this issue than Californians. The AUR unit is far more likely to believe that the Does, living in (say) Illinois didn’t receive unemployment from California.

And it’s not just California that was victimized by this fraud. There were news stories of it here in Nevada, and I assume that other states were impacted, too. The fraud will likely lead to a lot of AUR notices in late 2022 to 2023.

SBA Releases New Simplified Forgiveness Form for PPP Loans

Wednesday, January 20th, 2021

When Congress passed the budget reconciliation act that contained the second Covid-related stimulus, one piece of the legislation was a simplified form for Paycheck Protection Program (PPP) loan forgiveness. Late yesterday, the Small Business Administration released the newest version of Form 3508S, the form that borrowers will need to complete.

This form can only be used if the amount of the PPP loan was $150,000 or less. The form is far easier to complete than the Form 3508EZ and should make applying for forgiveness far easier. It will likely be a few days before lenders are ready to accept the new Form 3508S. (One SBA website states that the Form 3508S can only be used for loans of $50,000 or less; that is wrong. I expect that website to also be corrected in the next few days.)

2021 Tax Season to Begin on Friday, February 12th

Friday, January 15th, 2021

I have been asked by several clients when they can efile their 2020 tax returns. In most years, tax filing begins in late January. But not this year:

The Internal Revenue Service announced that the nation’s tax season will start on Friday, Feb. 12, 2021, when the tax agency will begin accepting and processing 2020 tax year returns.

The Feb. 12 start date for individual tax return filers allows the IRS time to do additional programming and testing of IRS systems following the Dec. 27 tax law changes that provided a second round of Economic Impact Payments and other benefits.

The IRS is delaying the start of tax filing because of changes to the Tax Code made with the December 27, 2020 tax law changes.

Today happens to be the date that IRS “Free File” begins. However, returns prepared using Free File will not be transmitted to the IRS until February 12th.

As of today, the deadline for filing individual tax returns remains Thursday, April 15th.

UPDATE: A friend reminds me that just because tax returns cannot be filed until February 12th does not mean you should wait on (a) sending return information to your tax professionals and (b) starting work on your 2020 tax returns. Do not wait!!! This is not going to be a fun Tax Season for tax professionals. Get your return paperwork to your tax professionals ASAP. Most tax professionals encourage you to send your tax documents (i.e. 1099s, W-2s, etc.) as you receive them–so do so!

Final 2020 Estimated Tax Payment Due on Friday

Tuesday, January 12th, 2021

The fourth quarter estimated tax payment for individuals and trusts/estates is due this Friday, January 15th. If you make estimated payments (Form 1040-ES and the state equivalents) you should either mail your payment (using certified mail, return receipt requested) on or before January 15th or pay electronically using EFTPS (requires pre-enrollment) or IRS Direct Pay. Don’t forget your state and local estimated payments (if required); most states have webpay systems that you can use.

IRS Issuing Erroneous CP14 Notices

Monday, January 11th, 2021

One of our clients received a CP14 Notice alleging she owed the late payment penalty (“Failure to Pay under Internal Revenue Code Section 6651). The notice noted he had an unpaid balance of $583 as of July 15, 2020 on 2019 tax of $8,855. The late payment penalty is assessed on the unpaid balance as of the tax filing deadline. If you have paid 90% of the tax due by the tax filing deadline, there is no late payment penalty.

If you do the math you will see that my client paid $8,272 of the $8,855 she owed, or 93.4%. That’s more than 90%, so the late payment penalty should not have been charged. I spoke with an individual at the Practitioner Priority Service (PPS), and this is the second such case he’s seen. However, it’s not happening with all such individuals as another client with a similar balance due did not receive a CP14 notice.

As we tell all of our clients, do not assume a notice from the IRS is correct. Indeed, the last study on IRS notices shows that about two-thirds of IRS notices are wrong in part or in whole. If you have any doubts, ask your tax professional.

In this case, the helpful individual at PPS reversed the penalty, so my client doesn’t need to pay anything. Still, it would be better if the IRS didn’t issue erroneous notices but given everything that happened during 2020 some hiccups are to be expected.

It’s Time to Generate 2020 1099s

Wednesday, January 6th, 2021

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)
  • Where you would normally have to send a 1099 but you made payment by a credit or debit card

Otherwise, you need to send a Form 1099 to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your accounting software (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

This year will be the first year we’ll be using the new Form 1099-NEC to report nonemployee compensation instead of reporting this on Form 1099-MISC. Form 1099-NECs have a filing deadline of February 1, 2021 (for reporting 2020 nonemployee compensation). Form 1099-MISCs are used for all other 1099 reporting except interest, dividends, capital gains, etc. Payments of rent, royalties, advertising, crop insurance proceeds, substitute payments in lieu of dividends, attorney proceeds, other income (including gambling winnings not reporteable on a Form W-2G), and nonqualified deferred compensation are just some of the items reported on a Form 1099-MISC.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file Form 1099-MISC with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing might be easier than electronic filing.

IMPORTANT: The IRS is not sending Form 1099-NECs to state tax agencies. Thus, if you have a state filing requirement for your Forms 1099-NEC, you must separately file this with your state tax agency.

If you wish to file paper 1099s, you must order the forms from the IRS. The forms cannot be downloaded off the Internet. Make sure you also order Form 1096 from the IRS. This is a cover page used when submitting information returns (such as 1099s) to the IRS. WARNING: It is taking the IRS months to fill these orders. We ordered our paper 1099s in October; we have yet to receive them. It is likely too late to order them from the IRS and meet the February 1st deadline. Most tax professionals have software that can file 1099s directly with the IRS and state tax agencies; there are also services you can find that will do this for you.

Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-NEC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement (issuing form 1099-MISC).

Remember, the deadline for submitting 1099-NECs for “Nonemployee Compensation” (e.g. independent contractors) to the IRS is now at the end of January (though we get an extra day this year, because the 31st falls on a weekend): Those 1099s must be filed by Monday, February 1st.

Here are the deadlines for 2020 information returns:

  • Monday, February 1st: Deadline for mailing most 1099s to recipients (postmark deadline);
  • Monday, February 1st: Deadline for submitting 1099-NECs for Nonemployee Compensation to IRS;
  • Monday, March 1st: Deadline for filing other paper 1099s with the IRS (postmark deadline);
  • Monday, March 15th: Deadline for mailing and filing Form 1042-S; and
  • Thursday, April 1st: Deadline for filing other 1099s electronically with the IRS.

Remember, if you are going to mail 1099s to the IRS send them certified mail, return receipt requested so that you have proof of the filing.

Also note that most 1099s must be mailed to recipients. Mail means the postal service, not email. The main exception to this is if the recipient has agreed in writing to receiving the 1099 electronically. I consider this the IRS’s means of trying to keep the Post Office in business.