Archive for the ‘IRS’ Category

Here We Go Again: Bias in the IRS’s Tax Exempt Group

Sunday, June 20th, 2021

Most of us remember the IRS scandal from 2013.  In that scandal we learned that the IRS and/or individuals working at the IRS deliberately targeted conservative tax exempt (nonprofit) organizations.  It was a huge scandal at the time, and it led directly to the IRS’s budget being cut.  It’s now eight years later, and one would assume the IRS had learned.

One would be wrong.

From various sources we learn that the IRS has denied 501(c)(3) status to a group titled Christians Engaged.  Why? Quoting from the actual letter denying 501(c)(3) status:

[Y]ou are serving the private interests of the D party [D means Republican] more than incidentally in contravention to Treas. Reg. Section 1.501(c)(3)-1(d)1(ii) as well as serving a substantial nonexempt private purpose. For example, you educate Christians on what the bible says in areas where they can be instrumental including the areas of sanctity of life, the definition of marriage, biblical justice, freedom of speech, defense, and borders and immigration, U.S. and Israel relations. The bible teachings are typically affiliated with the D party [Republican] and candidates. This disqualifies you from exemption under IRC Section 501(c)(3).

This is, bluntly, unbelievable.  President Biden, a Democrat, is a practicing Catholic who presumably believes in the Bible.  If we believe this letter, only Republicans believe in the sanctity of life, marriage, freedom of speech, defense, and US-Israel relations.   I guess if the IRS says its true we must now all vote Republican, because apparently God is a Republican.

A 501(c)(3) charity does need a charitable purpose.  According to the President of Christians Engaged, Bunni Pounds, they, “…[W]ant to encourage more people to vote and participate in the political process.  How can anyone be against that?”  It appears that for at least a few individuals at the IRS (the employee who wrote this letter and his supervisor), having more Christians engaged in the political process is a bad thing.

I do expect IRS Appeals to overrule the tax exempt group.  I also hope that there is some additional remedial training for that group because it sure looks like they haven’t learned a thing in eight years.

 

§1031 Exchanges for Cryptocurrency: The IRS Thinks Not

Saturday, June 19th, 2021

Back in September 2017 I wrote a piece titled, “Can You Use a §1031 Exchange to Defer Gain with Cryptocurrency?”  The conclusion I drew was, “[M]ost exchanges of one cryptocurrency for another do not qualify as §1031 exchanges and it’s more likely than not that the IRS will rule that two different cryptocurrencies are not eligible for like-kind treatment.”  Do note that after December 2017 you can only use a §1031 like-kind exchange for real property, so today the answer is clearly no.

It’s likely some taxpayer was audited on this issue by the IRS, and the auditor asked the Chief Counsel’s Office for whether a like-kind exchange (aka a §1031 exchange) was allowed for cryptocurrency.  The Chief Counsel’s Office issued a memorandum that for Ether (ETH) from Bitcoin (BTC), Bitcoin for Litecoin (LTC), and Ether for Litecoin, the answer is no.  The Chief Counsel’s office looked at the underlying character of the cryptocurrencies and found them to be different and, thus, not qualifying for a like-kind exchange.

While it’s nice to have my conclusion verified, this is now fairly irrelevant.  As I noted above, today you can only do a §1031 like-kind exchange for real property.  There are few taxpayers who will be impacted by this given that generally 2017 returns are beyond the statute date.

“I Haven’t Received My IRS Refund. Can You Help Me?”

Friday, June 18th, 2021

This past week I fielded a number of phone calls asking this question.  Unfortunately, the answer is no.  Neither I nor any other tax professional can speed up your IRS refund.

First, the good news: about 90% of IRS refunds are moving through the system normally (with the refund being issued between 10 and 21 days after filing).  However, the remaining 10% of returns with refunds are facing long delays; I estimate that these refunds will be delayed on average between three and five months.  Why?

There are two issues causing the delays.  First, the IRS is manually checking all refunds where an individual is claiming a refund for not receiving the Recovery Rebate Payment(s) (Form 1040, Line 30).  Due to staffing issues at IRS Service Centers, this takes quite some time.

The other issue is “errors” when processing.  This doesn’t mean there’s an error on your return.  Rather, as part of normal processing a few returns “fall out of processing.”  In most years, the “errors” are fixed within one to four days, and the delay is hardly noticed.  But 2021 isn’t a normal year.  Because of Covid, IRS Service Centers are not fully staffed.  Returns that fall out of processing go in a giant (virtual) stack to await a human to review the error, fix it, and have the return complete being processed.  Instead of taking days, we’re talking months.

Your tax professional cannot fix this.  There is no one to call to have this resolved.  Indeed, the IRS asks that you do not call them as there really is nothing that can be done.  Please don’t call your tax professional either; he or she cannot make your refund come to you any faster this year.  You must just be patient.

The only good news is that we expect to see many IRS employees return to Service Centers in the coming weeks.  That should eventually help to resolve the problem.  Until then, you should just periodically check the IRS’s “Where’s My Refund” website.  And do realize that you will receive interest from the IRS on your delayed refund (though that interest is taxable).

The 2021 Tax Season (Part 1)

Monday, June 14th, 2021

I’ve had good Tax Seasons and bad Tax Seasons, but the first part of the 2021 Tax Season was unique.  And uniqueness doesn’t mean good nor does it mean bad.  Both points were present this year, and continue to be present.  Let’s look at the highlights and lowlights of the first part of the 2021 Tax Season.  (I state “first part” because we still have 50% of our clients’ returns to file–we always have a lot of clients on extension.)

The IRS’s Does Great!  Let’s heap some praise on the IRS.  The IRS generally did an excellent job in implementing the laws that Congress passed dealing with Covid relief.  These laws required many changes to the antiquated computers that the IRS uses to process tax returns and given the IRS’s systemic issues (low staffing, ancient computer systems, etc.) they did an excellent job.

The IRS Made Some Confounding Decisions.  Let’s take tomorrow’s tax deadline (June 15th) for residents of Texas, Louisiana, and Oklahoma as an example.  Residents of those states can timely file returns tomorrow, and timely file extensions tomorrow.  (Individuals residing outside the United States can also so file.)  But if a resident of Texas wants to file an extension, that extension must be mailed to the IRS.  Ask any tax professional about correspondence sent to the IRS and the theme song from the musical Annie comes to mind (tomorrow, tomorrow, it’s always a day away).  Yet the IRS wants to increase the mail backlog.  This makes no sense.

Speaking to the IRS Is Near Impossible.  The Taxpayer Advocate reported that 2% of individuals attempting to reach the IRS actually do so.  And when you do, you’re likely on hold for a long time.  I have eight matters that require that I speak with the Practitioner Priority Service (PPS).  I have either Power of Attorney forms or Tax Information Authorizations for each client.  Some of these I could handle using the IRS’s e-services system if the IRS would timely process the forms.  It’s currently taking the IRS three months to process forms.  So I (along with other tax professionals) must call the IRS up.

I’m currently on hold for the business side of PPS, with a hold time of more than one hour noted.  Now, I can work while I’m on hold but most individuals cannot–they can’t take phone calls, they must sit at home, etc.  Meanwhile, I’ve tried to reach the individual side of PPS four times a day for the last week and cannot get through.  If I cannot get through over this week I will have to mail letters on some of these matters, delaying resolutions for months–it’s taking the IRS on average ten months to read the mail.  (While Commissioner Rettig states the IRS is timely opening their mail, they are not timely reading their mail.)

I have a client who had to mail his 2019 tax return to the IRS (the return has a form that is not allowed by the IRS to be efiled).  It was mailed in late September (he was on extension, waiting for a K-1). The return was just processed.  But my client was selected for Identity Protection Verification–that requires my client to call the IRS.  He’s tried three times a day for the last week and cannot get through.  Now, my client’s refund is about $40, so it’s not a big deal but the IRS’s inability to handle phone calls right now is a disaster that retards effective tax administration.

This Was an Early Year.  Tax seasons are sometimes late (everyone wants extensions) or early (everyone wants to file yesterday).  This was an early year–many clients wanted their stimulus money and, thus, wanted to file early.  Unfortunately, there are so many hours in the day (my cloning machine still needs work) and…

Tax Paperwork Comes Later and Later Every Year.  This year was no exception.  Most of my clients who are in partnerships saw their K-1s come one week later than last year.  That doesn’t sound like much, but a day here, a day there, and then you’re talking about many days.  (My apologies to Senator Dirksen.)  Adding to this was…

Congress Changing the Tax Law in the Middle of Tax Season Delays Tax Filings.  Many clients received unemployment.  When Congress changed 2020 tax law in March 2021, that means that tax professionals had to wait for (1) the IRS to update their computers and make any rules about the new laws and (2) the tax software to be updated.  While the IRS and the software companies generally did a good job, this added to delays.

Most of Our Clients Understood This.  We appreciate your patience this year.  For those who did not understand, please note that we did inform you of our deadlines when we sent our Engagement Letters (and all returns whose paperwork was received prior to the deadline were filed).

There Are Black Clouds on the Horizon for Tax Administration.  Congress and the IRS keep putting more and more work on tax professionals, and this is going to add to the cost of tax filings.  Consider the new Schedule K-2s and K-3s.  These are going to be forms used to report international transactions on partnerships and S-Corporations.  Lots more work.  Congress tends to pass laws mandating things like phone interviews for the Child Tax Credit.  This doesn’t sound like much, but take three minutes here and three minutes there–well, I’ve used my Dirksen quote already but you get the idea.

However, that’s nothing compared to the Pro Publica leak.  For those who haven’t heard, Pro Publica, a liberal special interest group, was provided tax documents showing how much various millionaires and billionaires paid in taxes.  (I will have a lot more on this later this week.)  Tax documents are never supposed to be released.  Indeed, felonies have been committed.

Democrats want to increase reporting to the IRS (as a way to pay for increases in taxes.)  Does anyone think that Republicans in Congress will go along with this given that the IRS can’t safeguard what they currently have?  When the previous tax scandal occurred (the Lois Lerner/targeting GOP-leaning non-profits), Republicans cut the IRS’s budget (it was the only thing they could do to show their displeasure).  Unless the felon is found in the next few weeks, expect the GOP to do the same thing as it’s their only means of showing displeasure.

Many Tax Professionals Are Unhappy.  Jason Dinesen, an Enrolled Agent in Iowa, penned a piece titled “The Tax Field is Broken.”  I don’t completely agree with the article, but much of what he writes is true.  Tax professionals do have lives outside of their businesses, and many have not had a break in over a year.  I have seen many posts about tax professionals retiring.  That said,…

I’m Still Standing.  Our business is doing fine (indeed, if you’re a tax professional and are interested in joining our firm, let us know), and I have no plans on retiring.  This was, though, the first year I was generally miserable for more than a month.

Expect Tax Preparation to Impact Inflation.  Everything I see shows that the supply of tax professionals is decreasing, the amount of work necessary to prepare a return is increasing, and the demand is increasing.  The Law of Supply and Demand says that if supply decreases and demand is constant, prices go up.  Here, we have a decrease in supply and an increase in demand and the amount of time needed to prepare the average return increasing.  Prices are going to increase, possibly significantly.

That’s my rundown on the May deadline.  We’ll see what the second half of the Tax Season brings us.

IRS Reminds Taxpayers of April FBAR Deadline. So What!

Friday, April 9th, 2021

The IRS sent out a press release this morning noting the FBAR deadline remains April 15th.  The FBAR is the Report of Foreign Bank and Financial Accounts (FinCEN Form 114), and must be filed if you have $10,000 aggregate in one or more foreign financial accounts at any time during the year.  My reaction is “Who cares.” And this is a deadline you can ignore (for now).

The penalties for willfully not filing the FBAR are very significant.  They start at $100,000 or half the balance in each account, whichever is greater.  I absolutely am not encouraging individuals to get in trouble with the FBAR.

But the IRS press release left out a significant issue vis-a-vis the April 15th deadline for the FBAR: There is an automatic extension until October 15th.  There are no penalties and no issues at all with filing the FBAR between April 16th and October 15th.  Indeed, the FinCEN automatic extension is how I (and most tax professionals) would like to see IRS deadlines work: automatic extensions for filing (but you have to pay the tax, if any, on the due date).  But I digress.

So if you have an FBAR filing requirement and you are not ready to file, relax.  You have six more months to get the FBAR filed—a fact the IRS left out of its press release.

If You Used Poloniex and Did Not Report Your Crypto…

Friday, April 2nd, 2021

…now is a very good time to amend your tax returns to include those cryptocurrency gains and losses.  The Department of Justice announced that a federal court in Massachusetts ordered Circle Internet, the former parent company of Poloniex, and Poloniex to provide a list of all U.S. taxpayers who conducted at least $20,000 of transactions from 2016 through 2020.  This is a “John Doe” summons, and is the same tactic the IRS used to get this information from Coinbase.

I would expect it will be at least 30 days before the information releases the Department of Justice, and then several more weeks (to months) before the IRS starts comparing the lists of individuals with Poloniex transactions to filed tax returns.  If you forgot to include Poloniex sales on your tax returns (or if your actions were more deliberate), you have a window to act.  It is almost always better to come clean to the IRS before they send you a notice.

25 Million (and Counting)

Thursday, April 1st, 2021

Today is April Fool’s Day.  I wish this post were a joke–and I guess in one way it is.  Unfortunately, what I’m reporting is true.

Yesterday, National Taxpayer Advocate Erin Collins told a webinar that 25 million tax returns need a human to process.  Some returns must be filed on paper (for example, split-interest trust returns, Form 5227), other returns fall out of processing due to errors in processing, and some taxpayers choose to file paper returns.  The IRS Covid operations page says there are 9.2 million returns as of March 15th needing to be processed–some received as far back as July 2020.  Most likely, Ms. Collins’s remarks mean another 16 million returns fell out of processing and are awaiting a human to push them through the system.

What does this mean?  If you have to paper-file something with the IRS, or if you file an amended return with the IRS (all amended returns are reviewed by a human), you should expect it to take many months–maybe a year–to be processed.  If you file your return electronically, there’s about a 90% chance it will be processed just fine.  However, if your return is one of the 10% or so that falls out of processing, your return could sit in a virtual stack for months.  What’s worse is there is nothing you can do about this. 

The reality is that until IRS operations fully resume at their Service Centers (I expect that to happen late this summer), the backlogs will only grow.  Commissioner Rettig’s remarks that (paraphrasing) things are fine are disingenuous at best and outright lies at worst.  The IRS remains broken, and we’re all suffering as a result.

 

More IRS Correspondence Follies

Thursday, March 25th, 2021

Two more examples came in yesterday’s mail regarding the IRS’s troubles with correspondence.  First, clients received an Automated Underreporting Unit (AUR) notice in late December (2020) regarding income allegedly not included on their return.  It was included, and we faxed a reply a few days later to the IRS.  In yesterday’s mail the IRS reissued the same notice.  All of the content is identical.  The only changes are the date of the notice and the “AUR Control Number.”  Here’s how I began my response:

First, this notice appears to be identical to the CP2000 for Tax Year 2018 dated December 21, 2020 that I responded to on December 30, 2020.  Because everything on this notice is identical, my response is also identical.

Besides wasting my time, this just adds to the backlog of correspondence the IRS must weed through.

Second, an ongoing major issue is that the IRS has been issuing Notices of Deficiency before they read responses to AUR notices.  Taxpayers are forced to file Tax Court petitions to preserve their rights, adding more backlog into the system.  Clients of mine are impacted by this (they received an AUR notice in November, timely replied (and we have proof the IRS received the reply), and then received a Notice of Deficiency.  We replied to that with the hope (almost certainly forlorn) that the IRS might respond to the reply prior to the last date to petition Tax Court.  In yesterday’s mail there was a letter from the IRS acknowledging they received that most recent reply, but that they need more time to respond.  Given what we’re seeing, I strongly suspect my clients will be filing a Tax Court petition in a few weeks.

IRS correspondence remains broken.

Miccouskees Reach End of the Road

Monday, March 22nd, 2021

The Miccouskee Tribe runs a very successful casino outside of Miami.  The tribe itself is a sovereign nation and is exempt from federal taxation.  However, its members are US citizens and owe tax on all their income.  The tribe offered some unique (if bad) advice to its members: Don’t report the income–which is taxable–to the IRS, and don’t list distributions from the tribe on anything.  The then chairman of the tribe noted that if the IRS ever found about the income, trouble would ensue.  And that (as you might expect) happened.

The IRS found out and issued notices of deficiency.  Two members of the tribe fought the notices in Tax Court and had a partial victory (they lost on the tax and most of the penalties, but did have the accuracy-related penalty removed).  They appealed to the 11th Circuit.  Last week, the Court handed down its opinion upholding the Tax Court.

First, as I’ve said in the past everything is income unless Congress exempts it.  And there’s nothing in the Code exempting class II gaming: “[T]he very statute that allows tribes to run class II gaming activities—the Gaming Act—also says that any “per capita payments” made from those activities must be “subject to Federal taxation.””  The members argue that the Miccosukee Settlement Act or “land lease” payments exempt them from tax.

Unfortunately for the members, the Miccosukee Settlement Act is about a highway, and does exempt income from that highway building from federal taxation.  The casino (and income from the casino) has nothing to do with that, so the members lose.  Then they argue that the payments are exempt because they are from a lease of the tribe’s lands.  There’s a problem: you need a lease if you’re going to argue that a lease exempts the income from taxation.

The tax court found that there was no lease agreement, and that finding was not clearly erroneous. Indeed, [the members] have not pointed to anything in the record even resembling a lease agreement. And a closer look reveals why: no lease ever existed. [Citations omitted]

Oops.

But there’s more–to have exemption, there must be clear statutory exemption.  The Court found there was none.  And the payments from the casino do not derive from the land, so the lease is irrelevant anyway.

So the Miccosukee members are out of luck.  They could appeal (either asking for en banc review by the entire circuit or to the Supreme Court), but neither is likely to be granted.  It appears to be the end of the line for the battle, and the members of the tribe need to start writing their checks to the IRS.

Case: Clay v. Commissioner

Commissioner Rettig, Come Clean and Stop the B.S.

Thursday, March 18th, 2021

Last week I wrote a post titled 18 Months and CountingAs promised, here’s the follow-up and it can be summed up with a simple line, “The IRS is lying to everyone about correspondence.”

Commissioner Rettig today said he is “hopeful to get through the backlog by summer,” and that there’s a 24 million return backlog of business and individuals per TIGTA.  And he said that the IRS always has a backlog.  But I and other tax professionals are seeing paper-filed returns take one year to be processed (and I’ve seen reports of longer).  That’s not normal.

I am not stating that Commissioner Rettig is lying in his testimony.  Indeed, I strongly suspect everything he said is the truth…but not the whole truth.  He sidestepped the question about the backlog stating there’s always inventory of returns.  No Congressmen followed up on that issue, but had they asked the question, “Is it normal to have a one year backlog for returns?” then we might have gotten more answers.  Additionally, no one asked about the delay in correspondence.

I didn’t see anything in the testimony (and I will admit I did not watch all of it) regarding the backlog in correspondence.  It’s ridiculous and is causing anyone who is corresponding with the IRS plenty of pain.

Today, the National Taxpayer Advocate asked for a multi-year budget for the IRS and guaranteed funding.  The IRS is the only (or one of the only) government agencies where more money spent generally leads to more revenue for the government.  Her point is well-taken: It is impossible to plan long-term when the budget falls off a cliff annually.  That’s on Congress to fix and is not up to Commissioner Rettig.

For Commissioner Rettig, though, here are three simple questions that I’d like answers to:

  1. What is the delay in correspondence?  You said in January you’re actually opening mail timely.  How timely is the IRS in reading mail?  And what’s a realistic time-frame to get this delay down to three months?
  2. You stated that an “inventory” of returns is normal.  Is it normal for paper-filed returns to take a year to be processed?  Given that we’re in the midst of another Tax Season, and given many returns cannot be e-filed (either due to complexities within the returns or limitations within the IRS), what’s a realistic time-frame for the IRS to catch up?  (Hint: Summer is not realistic.)
  3. The IRS has issued a series of erroneous notices.  The most recent involved CP59 notices.  Is the IRS doing any forward planning regarding automated notices, turning these off so that this issue doesn’t recur?

(My guess on the answers:  It will take 1-2 years for the correspondence backlog to get reduced to the point the IRS routinely responds within three months…and that’s 1-2 years once the IRS fully reopens the IRS campuses.  Likewise, I suspect it will take at least another year before the IRS backlog in tax returns is down to something manageable.  And I highly doubt the IRS has done any forward planning on notices.)

You likely can think of other good questions for Commissioner Rettig.  I’d love to see our Congressmen and Senators ask these questions, and get some realistic answers.  It would be enlightening to all.

UPDATE: My thanks to the commentator who pointed out that I had originally typed, “…many returns cannot be paper-filed….”  You can tell it’s been a long Tax Season (already).