Archive for the ‘IRS’ Category

Evergreen Post: IRS Sending Erroneous Balance Due Notices

Friday, November 5th, 2021

Many of our clients have authorized us to receive IRS notices for them.  Yesterday, we received three “balance due” (CP14) notices.  I was quite surprised, as all three individuals paid their tax by electronic debit with the filing of their tax returns.  I ran account transcripts, and all show $0 balances (they did indeed pay, and the IRS shows the payments).

As a reminder, I’ve noted this issue in years past.  The IRS has apparently decided this isn’t worth fixing.  So let’s look at the costs of this: The IRS wastes taxpayer funds by knowingly sending out erroneous notices.  They waste taxpayer’s time because these notices will cause either the taxpayer or their tax professional to investigate.  This will cause more taxpayer funds being spent, as IRS employees get needless phone calls.

The solution for the IRS is to wait one or two “cycles” to allow the payments to post.  (The IRS computer system is old.  It uses batch processing, so when a return is filed with electronic debit the return might be in cycle 17 while the payment will be in cycle 18 or 19.)  The IRS changed this for the regular due date (April 15th) but doesn’t think this is worthwhile to change for returns on extension.  The IRS is wrong, but I’m not going to win this fight.

This does bring up some standard rules about IRS notices:

  1. Do not assume the notice is correct.  Per IRS statistics, two-thirds of IRS notices are wrong in whole or in part.
  2. If you use a tax professional, let him or her know immediately about the notice.  IRS notices do not get better with age.
  3. If you do need to respond, make sure you respond timely and use certified mail, return receipt requested.  You want proof the IRS received the response.

So if you’ve paid your tax and receive a CP14 notice alleging you didn’t, check to see if your check (or electronic payment) cleared.  If it did, most likely this is a timing issue.

IRS Efficiency and Inefficiency

Thursday, October 7th, 2021

It was with fear and trepidation I logged onto IRS eServices this morning.  This is the portal that allows me to download transcripts for clients from the IRS (when I have an authorization).  On September 16th, I had electronically uploaded a Power of Attorney for a client.  It’s been taking the IRS months to process them.  However, this morning I was able to download transcripts for that client!  It’s not that a three-week processing time is great; rather, compared to what we’ve been dealing with the CAF unit does appear to be making progress on the backlog.

However, with every step forward there’s a step backwards.  A different client received a CP2000 automated underreporting unit (AUR) notice.  We disputed that, and sent a letter to the IRS explaining why the IRS is wrong.  A month ago we received the usual “We need another 90 days to get to your response”  from the IRS.  In yesterday’s mail that client received a Notice of Deficiency.   The IRS had not even gotten to the response we sent in!  If anyone is wondering why the Tax Court docket has ballooned, here is Exhibit A.  Indeed, if the IRS doesn’t reply to the response we sent in the next two months there will be yet another case in their docket (the AUR notice is clearly wrong).


Prepare to Panic!

Wednesday, September 29th, 2021

As I write this, it’s September 29th. Two weeks from Friday is October 15, 2021. That’s the deadline for individual taxpayers on extension to file their tax returns (except for those in disaster areas such as the hurricane that impacted New Jersey, New York, Pennsylvania, Louisiana, and Mississippi). If you have yet to send your paperwork to your tax professional it’s past the time to do so. Yes, it’s time to panic!

If your return is simple and straightforward, stop procrastinating and get it done and filed. If your return has any sort of complexities, you must start working on it now. Your tax professional needs time to get it done correctly. You need to turn in that paperwork post haste. If you’ve procrastinated, stop, sit down, and get it done–NOW.

It may already be too late for your return to be timely filed with many tax professionals. For example, our official deadline was September 15th. We’re not horribly behind, but I can state that if one of our clients procrastinates beyond this weekend there could be issues.  And I can guarantee if you drop off your paperwork with us on October 13th your return is almost certainly not going to be timely filed.

If you file late, it’s as if you never filed your extension. So sit down and get everything done now! Of course, if you like paying a 25% penalty, continue procrastinating.  After all, tax professionals are far less busy after October 15th.

It’s Deja Vu All Over Again: IRS *Again* Mailing Erroneous CP259F Notices

Monday, September 20th, 2021

One would think that the IRS would learn from its mistakes.  One would be wrong (at least, in this case).  Back in November 2020 I wrote a post titled, “IRS Mailing Erroneous CP259F Notices.”  That post dealt with taxpayers who filed split-interest trust returns (Form 5227) timely and received notices stating they had not filed those returns.  And as Yogi Berra would say, it’s deja vu all over again.

Yes, the IRS sent those same notices out this year.  Yes, the returns have been filed and are sitting in bins somewhere in Ogden, Utah waiting to be processed.  Yes, you should not respond to those notices and send a second copy of your Form 5227 to the IRS.  (Normally, you should always respond to IRS notices but this is an exception.)  As the IRS said last year, (a) if you send a second return it could be processed before the first return (causing another set of issues), and (b) sooner or later the backlog will be cleared.  (Note: If you didn’t file your Form 5227, you should, of course, respond to this notice.)

As I said last year, this faux pas is another reason why using certified mail is essential when sending anything to a tax agency.  With the volume of paper waiting to be processed, it’s inevitable that something is going to be lost.  (Not to mention the report that the IRS “helpfully” destroyed 30 million documents in March 2021.)  If you have your certified mail receipt that will hold up as proof of filing.

I am going to add some parting remarks to the IRS.  As I just told a client, “This is incredibly stupid.  The IRS was made aware of this issue last year and obviously did nothing.  This will cause even more phone calls to the IRS (you currently have a 3% chance of reaching a human if you call the IRS), and more mail sitting in trailers.  The IRS should have turned off the automatic generating of these notices.”


Tax Relief for Hurricane Ida in New York and New Jersey

Wednesday, September 8th, 2021

Hurricane Ida created disaster conditions in Louisiana; the IRS previously granted relief for impacted taxpayers in various parishes in the state.  President Biden just declared a federal disaster area for many counties in New Jersey and New York (including New York City).  The IRS extended the same relief for those taxpayers.  Any tax deadline from September 1, 2021 onward through year-end is extended until January 3, 2022.

There are some caveats with this.  First, because 2020 tax payments were due on May 17th, that payment deadline has not been extended.  However, if you filed a valid extension and owe the late payment penalty, that penalty is suspended between September 1st and January 3, 2022.  Second, be aware that the IRS has a “down-time” for electronic filing of tax returns; this typically begins in mid to late November and lasts until late January.  During that time, all returns must be paper-filed.  It’s currently taking the IRS eight to twelve months to process paper-filed returns.  You may want to consider not waiting until January (especially if you are expecting a refund).

This relief does extend to third quarter estimated payments (due September 15th), partnership and S-Corporation returns on extension (also due on September 15th), trust/estate returns on extension (due September 30th), C-Corporation returns on extension (due October 15th), and nonprofit returns on extension (due November 15th).  Quarterly payroll and excise tax returns due on November 1st are also extended for impacted taxpayers.

New Jersey is conforming to this relief for impacted New Jersey taxpayers.  Note that if you paper-file in New Jersey, you need to write, “Presidential Disaster Relief Area, Hurricane Ida” on the top of the return or payment.  While I expect New York to conform, there has been not yet been an announcement from the New York Department of Taxation and Finance.

Can the IRS be Honest About the Delays in Processing?

Thursday, September 2nd, 2021

The IRS maintains a webpage showing operational status during the pandemic.  Additionally, the IRS periodically sends out “Hot Issue” summaries.  One of the items asked in the “Hot Issue” questions was on amended returns:

1040X not processed

Issue:  When will 1040X be processed?

Response: As a result of the backlog in the number of amended returns in inventory created by Coronavirus closures, the processing time has been extended to 20 weeks. We are sorry for any inconvenience.

That’s equivalent to about five months.  Unfortunately, that’s very optimistic.  I have seen an amended return processed that fast this year (back in March), but the return involved no change in dollar amounts (just changing the capital loss carryforward for a year).  The last three amended returns I prepared for clients took nine months, 15 months, and 12 months to be processed.

Now, I am not blaming the IRS here for the delays.  As long as most government employees aren’t working in their offices, these delays will continue.  However, I do blame the IRS for misstating what taxpayers should expect from the IRS.  Bluntly, taxpayers should expect that it will take on average one year from the date they file their amended return for it to be processed.  I’m not going to quote five months when that simply isn’t happening.

Tax Agencies Need to Modify Deadlines to Account for Post Office Delays

Friday, August 27th, 2021

In today’s mail I received some notices from a tax agency.  That’s not unusual: We have many Tax Information Authorizations and Powers of Attorney on file.  And it wasn’t out of the ordinary that all three notices were for the same client.  What was unusual is that these notices were not dated on the same date: These were sent (most likely) at intervals of three weeks, with the most recent notice (probably) being mailed this week, and the other notices being mailed three and six weeks ago.  How can clients timely respond to notices when the Post Office (an agency of the United States Government) does not timely deliver the mail?

Yet under the law a notice mailed regular mail is considered received in one week.  Many state tax agencies don’t have the requirement to send Notices of Deficiency (or the state equivalent) by certified mail.  Unless my client or I have a working crystal ball (and neither of us do) it’s impossible for us to timely respond to these notices.

And the delays aren’t getting better.  A different client of mine who resides overseas just received a notice mailed three months ago asking for a response two months ago!  Yes, Covid has played havoc with overseas mail (and it turns out the notice my client received is incorrect), but I have other examples.  Late last month I mailed a certified letter on behalf of a client to the IRS in Fresno.  Look at the tracking on this:

This was a request for a Collection Due Process Hearing.  It got to Fresno in two days from Las Vegas, but then sat around in Fresno for one week before being delivered to a PO Box…in Fresno.

Unfortunately, government agencies’ assumptions about mail deliveries need to be modified based on today’s realities.  Two years ago, it was reasonable to assume a letter from Las Vegas would be delivered to Fresno within three business days (and that was true pretty much anywhere in the United States).  Today, such an assumption is unwarranted.  Tax agencies need to add additional time for taxpayers to timely respond to notices.

There’s No Basis for that Argument

Wednesday, August 25th, 2021

Yesterday, TIGTA release a report, “Efforts to Address the Compliance Risk of Underreporting of S Corporation Officers’ Compensation Are Increasing, but More Action Can Be Taken.”  From the report:

TIGTA’s analysis of all S corporation returns received between Processing Years 2016 through 2018 identified 266,095 returns with profits greater than $100,000, a single shareholder, and no officer’s compensation claimed that were not selected for a field examination.

S-Corporation officers (and owners who own 2% or more of the entity) are required to be paid a “reasonable” compensation.  Clearly, $0 isn’t reasonable for a business profiting $100,000 per year.  (There could be an exception for a company using that profit to pay back a loan that it took during the time it was unprofitable.)  I’ve seen prospective S-Corporation clients with large profits who are taking salaries of $20,000 a year; again, this is clearly unreasonable compensation.  TIGTA urged the IRS to do more, but the IRS basically disagreed with the recommendations.  I learned by reading the report that the IRS is conducting another Compliance Initiative Project to look at officer’s compensation (this began last August).

Another S-Corporation issue is basis.  One of the rules about deducting losses is you must have basis in the entity.  You can get basis in an S-Corporation by contributing capital, previous net income, and/or loaning the company money.  But let’s say I have an S-Corporation, and I give you 10% of the stock as part of your employment package.  Further, let’s assume that the business loses $100,000 (so your share of the loss is $10,000).  What can you deduct on your personal tax return?  Generally, nothing–you have no basis in the entity.

A couple of years ago the IRS tried to improve compliance here: Basis statements are required to be attached to personal tax returns in this situation.  It appears that isn’t working well (probably a combination of individuals ignoring the rule and differing forms for a basis statement).  In July the IRS published a request for comments about a new Form 7203 in the Federal Register.  The IRS is requesting comments:

Comments are invited on: (a) Whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency’s estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

It appears the IRS wants to develop a standardized form (Form 7203) that S-Corporation owners must use to note their basis.  I did a search to see if there’s even a draft of Form 7203 anywhere, but there’s none.  It’s clear that the IRS at least here recognizes there’s an issue and is looking at means of resolving it.  If you wish to comment on the proposal, you have until September 17.

If you’re an S-Corporation owner and haven’t been taking ‘reasonable’ compensation, today’s a good day to start.  And if you’re an S-Corporation owner who hasn’t been tracking basis, you really need to do so.

Certified Mail, Return Receipt Requested, Is More Important than Ever

Wednesday, August 11th, 2021

It’s exactly 399 miles from my office to the Post Office in Fresno, California (93779).

On my way out of town on my vacation, I stopped at the Post Office to mail a response to an IRS notice.  This was a request for a Collection Due Process (CDP) Hearing, and it had a deadline of July 28th.  I mailed the response on July 26th (using certified mail, return receipt requested).  I haven’t received the return receipt yet, but the filing was delivered on August 4th (per USPS tracking).  Given all the delays in the IRS reading and responding to mail, am I concerned for my client?  Definitely not.  I have proof of the mailing, and the fact that something a six-hour drive took the Postal Service nine days doesn’t matter–most IRS filings are postmark deadlines.  (It is possible the IRS delays in reading their mail will cause issues, but those are resolvable if I can speak to an individual at the IRS.)

But consider what might have happened if I had just put $1.40 of postage on the envelope and dropped it in the mail.  What might have happened if the postmark got obliterated (or if the mail hadn’t been postmarked)?  My client would lose.  We spent the $3.60 for certified mail (and $2.85 for the return receipt), so my client will have a CDP hearing.

Given all the issues with the Post Office and the IRS, anything sent to the IRS by mail must be sent certified mail (and you have to maintain the proof that it was mailed and received).  I’m expecting quite a few cases where the IRS claims various filings were lost–the volume of paperwork is just too large for this not to happen.  Don’t be part of the problem–use certified mail.  The courts have little to no sympathy if you don’t.

(Yes, there’s an issue with an envelope taking nine days to get from Las Vegas to Fresno.  But that’s another story for another day.)

Tax Professionals: Use Systemic Advocacy Management System (SAMS)

Friday, July 23rd, 2021

With the pandemic, the IRS has faced a lot of issues.  One that has faced my clients is the IRS ignoring responses to Automated Underreporting Unit (AUR) notices.  These notices are sent when the IRS receives notification of items of income that the IRS thinks should be on the return but are not on the return.  These are not audits.  These typically arrive to taxpayers as CP2000 notices.  Taxpayers have 30 days to respond to the notice, either by mail or by fax.

Unfortunately, several of my clients received CP2000 notices and responded (or I responded on their behalf) and the IRS ignored the response and sent a statutory Notice of Deficiency.  You can respond to the IRS to a Notice of Deficiency; however, if the IRS doesn’t respond back to you within 90 days the tax will be assessed (unless you file a petition for Tax Court).  I had clients respond both by fax and by mail and their responses were ignored.

One such client isn’t a systemic issue (mistakes do happen), but when it is several it’s a systemic issue.  I reported this on the Systemic Advocacy Management System (SAMS).  The IRS was aware of mail issues, but had not been aware of the issues with faxes.  I could prove to the IRS that the faxes were sent (we had the receipts generated by my fax machine showing that all pages were sent and received).  The SAMS group–which works within the Taxpayer Advocate Office–agreed that it’s a systemic issue and is working to (hopefully) prevent this from recurring.

Figuring out what went wrong will help protect taxpayer rights and reduce the burden on both taxpayers and the IRS.  I’ve spoken to SAMS representatives a few times on this issue, and they are trying to resolve this.  It may not help my clients (unfortunately, the deadline on a Notice of Deficiency is a ‘set in stone’ date though the IRS is trying to resolve the problems faced by my clients), but it will help others.

I encourage any of you to use the SAMS system if you see an issue that faces multiple taxpayers and are “big picture” issues:

These systemic issues:

  • Always affect multiple taxpayers;
  • Don’t apply to just one taxpayer (but if you personally have an unresolved IRS problem, TAS may be able to help);
  • Involve IRS systems, policies, and procedures;
  • Involve protecting taxpayer rights, reducing burden, ensuring fair treatment, or providing essential taxpayer services.

You can report such issues on the SAMS system.  The Taxpayer Advocate does look at these, and resolving these issues helps everyone.