Archive for the ‘IRS’ Category

IRS to Open Tax Season on Monday, January 28th

Tuesday, January 8th, 2019

The IRS announced yesterday that the 2019 Tax Season will begin on Monday, January 28th:

Despite the government shutdown, the Internal Revenue Service today confirmed that it will process tax returns beginning January 28, 2019 and provide refunds to taxpayers as scheduled.

“We are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown. I appreciate the hard work of the employees and their commitment to the taxpayers during this period,” said IRS Commissioner Chuck Rettig.

Congress directed the payment of all tax refunds through a permanent, indefinite appropriation (31 U.S.C. 1324), and the IRS has consistently been of the view that it has authority to pay refunds despite a lapse in annual appropriations. Although in 2011 the Office of Management and Budget (OMB) directed the IRS not to pay refunds during a lapse, OMB has reviewed the relevant law at Treasury’s request and concluded that IRS may pay tax refunds during a lapse.

The IRS will be recalling a significant portion of its workforce, currently furloughed as part of the government shutdown, to work. Additional details for the IRS filing season will be included in an updated FY2019 Lapsed Appropriations Contingency Plan to be released publicly in the coming days.

January 28th will be the first date that 2018 tax year business and individual tax returns can be filed with the IRS.

Tax Refunds May Be Issued During Government Shutdown

Monday, January 7th, 2019

Vice President Pence announced today that the IRS would issue tax refunds during the government shutdown. The Wall Street Journal reported this earlier today, but it’s unclear what the legal justification would be. Speculation (by the Journal) is that the power to issue refunds is based on the permanent appropriations for the refunds themselves.

Meanwhile, other IRS services are closed. I cannot fax Powers of Attorney forms to the IRS; those fax numbers are down. I have an outstanding IRS audit where we’re waiting for information from the IRS auditor; he’s not working right now so the audit is on hold. I need to setup a payment plan for another client; I have no one to call at the IRS right now.

And we still have no idea when we will be able to file 2018 tax returns. Prior-year business returns can be filed beginning tomorrow; however, current-year (2018) returns cannot be filed at this point.

As to when the partial government shutdown will end, your guess is as good as mine.

It’s Time to Start Your 2019 Mileage Log

Friday, January 4th, 2019

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

Wednesday was 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 80,008). 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;

Here’s the other things you should do:

On the cover of your log, write “2019 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 90315-90350 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 $0.58/mile, the 35 miles in this hypothetical trip would be worth a deduction of $20. 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.

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.

The Freedom of Information Act Doesn’t Allow Access to President Trump’s Tax Returns

Wednesday, December 19th, 2018

Section 6103(a) of the Internal Revenue Code (IRC) mandates that tax returns shall be confidential. The Electronic Privacy Information Center (EPIC) wanted a peak at President Trump’s tax returns; might there be income from Russia? They submitted a Freedom of Information Act request to see his tax returns (from 2010 onwards). The IRS refused. EPIC filed a lawsuit in the District Court of the District of Columbia; that lawsuit was thrown out. EPIC filed an appeal to the Court of Appeals for the DC Circuit.

At first blush, the IRC stands in tension with the Freedom of Information Act (FOIA), which vests the public with a broad right to access government records. 5 U.S.C. § 552(a)(3)(A). One statute demands openness; the other privacy. But as we explain infra, the statutes work well together. Not all records are subject to FOIA requests. An agency need not disclose records “specifically exempted from disclosure by statute.” Id. § 552(b)(3). Because the IRC is such a statute, records that fall within its confidentiality mandate are exempt from FOIA.

Consider if I submitted a FOIA request to see Senator Chuck Schumer’s tax returns. Do I have any legitimate reason to see them? Well, I’m going to allege Senator Schumer is in the pocket of Ruritania, and the way to discover this is to have a little peak to see if he has any income from Ruritania on the return. Of course, if Senator Schumer were to sign a Tax Information Authorization or an IRS Power of Attorney, I’d be able to access his records. But just because I think something nefarious is going on doesn’t mean I can go fishing.

Indeed, as the Court noted:

The IRS declined to comply with the request for two reasons. First, the requested “documents, to the extent that any exist, [] consist of, or contain the tax returns or return information of a third party,” which “may not be disclosed unless specifically authorized by law.” Second, the IRS’s rules require that a request for a third party’s tax returns include his consent. See 26 C.F.R. § 601.702(c)(5)(iii)(C); see also I.R.C. § 6103(c). In fact, the IRS does not process a FOIA request that violates its rules. Id. § 601.702(c)(4). Because EPIC failed to obtain President Trump’s consent, the IRS did not process the request.

I left the citations in just to illustrate that the IRS had law on their side. But EPIC had another arrow in their quiver; they cited Section 6103(k)(3) of the Tax Code:

The Secretary may, but only following approval by the Joint Committee on Taxation, disclose such return information or any other information with respect to any specific taxpayer to the extent necessary for tax administration purposes to correct a misstatement of fact published or disclosed with respect to such taxpayer’s return or any transaction of the taxpayer with the Internal Revenue Service.

The Court analyzed this section at length. The Court noted that a “Significant Impact” on tax administration is necessary for a request to move forward. Additionally, the provision allows the IRS (not a requestor) to make information public, but only if the Joint Committee on Taxation allows for it. The Court agreed that EPIC couldn’t use this provision to force disclosure of a tax return.

The Court’s conclusion seems right to me:

This case presents the question whether a member of the public—here, a nonprofit organization—can use a FOIA request to obtain an unrelated individual’s tax records without his consent. With certain limited exceptions—all inapplicable here—the answer is no. No one can demand to inspect another’s tax records. And the IRC’s confidentiality protections extend to the ordinary taxpayer and the President alike. Accordingly, we affirm the dismissal of the Electronic Privacy Information Center (EPIC)’s lawsuit seeking President Donald J. Trump’s income tax records.

EPIC can send a request to President Trump, but unless he agrees to release his tax records they won’t be public.

Case: Electronic Privacy Information Center v Internal Revenue Service

Hug Your Tax Professional, or The Upcoming Horrible, Miserable, Rotten, and Delayed Tax Season

Wednesday, December 12th, 2018

A question I’ve been asked many times this month: When will the 2019 Tax Season (for filing 2018 tax returns) open? The answer I’ve given is, “I don’t know.” Normally by now the IRS has released the date. As of today, the IRS’s only comment has been, “It might not be in January [2019].” At a recent continuing education event speakers from the IRS implied that the 2019 Tax Season could be delayed–possibly significantly. My tax software company has no idea; many forms state “Final on January 28th” but that’s just a best guess on their part. Why? Because the IRS still has not released all of the final 2018 forms. For example, the link to Form 1040 takes you to the 2017 form. (You can find the draft of the new 2018 form here.)

There are two major issues and one minor issue delaying the release of the forms. First, the Tax Cuts and Jobs Act (TCJA) changed much of the Tax Code; this required the IRS to redo many of the forms to adapt to the new Code. The second major issue is that the IRS is no longer exempt from having rules and forms reviewed by the Office of Management and Budget (OMB). That review likely adds 30 days to the release date of anything out of the IRS. The minor issue is that the IRS decided to make the new Form 1040 a giant, double-sided postcard size with six subsidiary schedules, meaning there are seven new forms to be reviewed by OMB.

Some of the 2018 forms have been released. For example, you can find Schedule A, Schedule C, and Schedule D. But without a Form 1040, no one is filing.

Adding to the delay is that the IRS is slow in releasing the “Schema” for 2018 returns. This is the coding that tax software companies use to transmit returns to the IRS, so that what’s noted on (say) line 10 of Schedule C goes onto line 10 of Schedule C in the IRS’s records when a return is transmitted. In most years, there’s a 60-day period from the date of announcement of the schema to the date Tax Season opens; this allows the software companies and the IRS to test everything to make sure it all works. This means we could be looking at Tax Season opening on February 10th…if the schema were given to the software companies today. Of course, the IRS could shorten the testing period but it’s looking like the 2019 Tax Season will be compressed (perhaps significantly).

In our Engagement Letters for 2018 returns we’re adding the following:

The Tax Cuts and Jobs Act (the Tax Act) passed late in 2017 contains sweeping changes to the Tax Code. Given the magnitude of changes in the Tax Act, as well as some new concepts introduced in the law, additional stated guidance from the IRS, and possibly from Congress in the form of technical corrections, may be forthcoming. We will use our professional judgment and expertise to assist you based on the Tax Act guidance as currently promulgated. Subsequent developments issued by the applicable tax authorities may affect the information we have previously provided, and these effects may be material.

In particular, the Tax Act added a new deduction for Qualified Business Income (the Section 199A deduction). This deduction is generally available for taxpayers who have income generated from business activity, including Sole Proprietors (Schedule C). The calculation for this deduction is based on numerous factors. We may need to conduct an extensive interview with you, receive additional information from you, and/or spend extensive time in calculating this deduction. This may result in an increase in the cost of our services to you.

Beginning with the 2018 tax year, the IRS now requires S-Corporation shareholders who either reported a loss on their K-1, received a distribution (not including a salary or expense reimbursement), disposed of any shares of stock (or the equivalent), or received a loan repayment from the corporation to include a complete basis calculation with their return. We will need this basis calculation for your return (if applicable). If you do not already have this basis calculation, we can prepare it for you at an additional cost. To do this, we would need copies of all K-1s issued to you by the S-Corporation and details of your investments to and distributions from the S-Corporation.

These are just three issues. First, the law may change while we’re in the middle of preparing your return. Second, the new deduction for Qualified Business Income is very complex; this will add cost to many taxpayers’ returns. And third, the new rule on reporting S-Corporation basis will be a surprise for many taxpayers (and tax professionals). We’ve prepared basis schedules for the S-Corporation returns we prepare; however, many tax professionals omit these. These three items are guaranteed to add time and stress to return preparation.

So consider what tax professionals are dealing with:
– A delayed start to Tax Season;
– New tax law with many complexities;
– New tax forms; and
– Many more IRS/state non-conformity issues.

This is a recipe for a very high-stress Tax Season. That’s why I suggest you hug your tax professional; he or she will appreciate it.

IRS (and All Federal Agencies) Closed Tomorrow, December 5th

Tuesday, December 4th, 2018

The Internal Revenue Service and all federal agencies will be closed tomorrow, Wednesday, December 5th, for the national day of mourning for President George H.W. Bush. The IRS also announced today that they have granted taxpayers an extra day, until Thursday, December 6th, to file any return or pay any tax originally due on Wednesday, December 5th:

The Internal Revenue Service today granted taxpayers an extra day, until Thursday, Dec. 6, 2018 to file any return or pay any tax originally due on Wednesday, Dec. 5.

The IRS granted the extra time, following the Dec. 1 Executive Order closing all federal agencies on Dec. 5, as a mark of respect for George Herbert Walker Bush, the forty-first President of the United States.

The one-day extension applies to any return, required to be filed with the IRS, on Wednesday, Dec. 5, 2018. It also applies to any required federal tax payment, originally due on that day. In addition, it also applies to any federal income, payroll or excise tax deposit due on Dec. 5, including those required to be made through the Treasury Department’s Electronic Federal Tax Payment System (EFTPS).

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.