Archive for the ‘IRS’ Category

That 6 Million Return Backlog? Oops, We Mad a Math Error: It’s Really 24 Million

Saturday, February 12th, 2022

Everyone makes math mistakes.  When we last heard from IRS Commissioner Chuck Rettig, the backlog of unprocessed returns was down to about 6 million.  Per the Washington Post, that was slightly off–well, a bit more than slightly.  The true backlog is 23.8 Million,  a difference of about 18 million returns.  True, this does include unopened correspondence–but that correspondence also likely includes returns.

Of course, you can try calling the IRS up.  I generally do multiple times during a week.  I have about twelve items I need to get resolved and (in theory) I can over the phone, (a) if I get through, (b) I speak to an IRS employee who can resolve the issue, and (c) don’t get hung up on.  Here’s an example: A client paid his tax in October, the IRS cashed the check, but the payment isn’t posted on his account.  He just received a CP504 notice, gave me a Power of Attorney, and sent me a copy of the front and back of the check (and it absolutely cleared).

The first issue is calling the IRS.  I’m in the Pacific time zone, so when I call at 7am (the earliest time I can call), I’m competing against everyone else in the US.  On Monday I couldn’t get through to the Practitioner Priority Service (PPS).  I made ten attempts, and then stopped as I had a full day of appointments.  On Tuesday, I reached the IRS–and was not even on hold!  That’s akin to a one-outer in poker.  The helpful IRS employee (and do note that every IRS employee I’ve dealt with on PPS has been very helpful) could not help me; she did not have access to the computer system that allowed transferring of payments.  She transferred me…and I was on hold with a hold time given of “between 30 and 60 minutes.”  90 minutes later, the IRS system hung up on me (I think it may be programmed to do that when you’re on a call and it lasts two hours).  I couldn’t try to call again on Tuesday, because I had appointments.

On Wednesday, my fourth try to PPS resulted in a callback from the IRS 30 minutes later.  This employee found my client’s payment, and then started the work to move the payment–which apparently was a lot more complex than either he or I thought it would be.  Every five to seven minutes he’d get back on the line stating he was still working on this form to move the payment.  After 100 minutes, the system hung up on me.  On his last “I need another five to seven minutes” he said he was close to having this resolved.  But I don’t know for sure.

On Thursday I had an outside appointment, and by the time I got into the office I didn’t have an open two hours to call the IRS.  (I can work while I’m on the phone with the IRS, but I can’t have a scheduled call or appointment.)  On Friday, I didn’t get through to the IRS.  On Monday, my first scheduled call is at 11am, so I am hopeful I can confirm that this payment has been resolved, and then go on to issue number two (a 2016 return that still hasn’t been processed).

Last week, 30 Senate Republicans wrote a letter to Treasury Secretary Janet Yellen and Commissioner Rettig that the situation is untenable.  They’re correct.  So what can we do–given that it’s likely impossible to salvage the 2022 Tax Filing Season from being on the level of disastrous?  I have some ideas:

  1. Drop the Schedule K-2 and K-3 requirements for all but the largest partnership and S-Corporations (say, $25 million in gross income or more) for 2021 returns.  This will (a) eliminate even more paperwork for the IRS to process (currently, K-2s and K-3s must be attached as pdf’s to returns; this requires the IRS to do special processing), (b) help the tax professional community, and (c) help most taxpayers where these documents add just filing requirements with no tangible benefits to anyone.
  2. Get all IRS employees who are supposed to work in IRS Service Centers back in the Service Centers.  Yes, Covid still exists but it’s going to be with us (likely) forever.  This can be done by Presidential executive order–and Treasury Secretary Yellen and IRS Commissioner Rettig should be demanding this.  This will eliminate the issue with “error” returns (see below).  Additionally, it will increase IRS efficiency: employees will be in the locations they should be in.
  3. Start posting realistic time-frames for processing of paper returns.  I’m quoting 12 months for a paper-filed tax return and 18 months for a paper-filed amended return.  For electronically filed tax returns, I’m quoting two to four weeks if you’re in the lucky 90% that don’t get an error/reject and nine months if you’re in the unlucky 10% that does get an error/reject.  For electronically filed amended returns, I’m quoting one year for processing.  (All time-frames are averages.)  If my suggestion about getting employees back in the Service Centers is acted on, that will reduce the backlog of returns as error/reject returns won’t take the months that they currently take to be resolved (pre-Covid, they took three to four days).
  4. Listen to TIGTA (the Treasury Inspector General for Tax Administration) and spend what technology money you have wisely.  Yesterday, TIGTA released a report noting that the IRS cost the US $56 million in interest payments because of outdated mail processing equipment that would cost between $360,000 to $650,000 to replace.
  5. Work with Congressional leadership to get the budget increased for improved technology, not snooping on bank records.  Secretary Yellen and Commissioner Rettig can point out that improved technology would allow for far greater efficiency within the IRS.  Do you know that the main IRS computer system dates from 1959 and uses COBOL, and the last major improvements date from the 1980s?  Given the current situation, there should be bipartisan support for this.  Yes, this wouldn’t have benefits for a few years but we have to start somewhere.
  6. Work with Congressional leadership to increase starting wages for IRS employees.  The IRS is trying to hire more individuals (including in customer service), but has only hired 10% of the number they want to hire (and are budgeted to hire).

By the way, do you know how many IRS employees there are per phone call coming in to the IRS?  For every 16,000 calls, there’s one employee.  (Yes, employees take more than one call a day, but if you wonder why you and I can’t get through, that’s the answer.)

What does this mean for the 2022 Tax Season?  If your tax professional doesn’t have gray hair, he or she will by October 15th.  If you need to call the IRS, budget a day to get through (you will likely need it).  If you have to write the IRS (or submit a paper return) and need a quick response, consider a prayer: It can’t hurt and it just might help.  And hug your tax professional; he or she will appreciate it.

The K-2/K-3 Kerfuffle

Saturday, February 5th, 2022

The IRS announced a year ago that there would be two new forms for partnerships and S-Corporations with international income and/or partners: Schedules K-2 and K-3 (links are to the partnership versions of these forms).  Most tax professionals would have a return or two that had to deal with these new schedules; no one believed it would be a big deal.  Indeed, the original IRS instructions for these forms confirmed that.

And then the IRS changed the instructions.  Most of these changes are technical and of little concern to the public.  However, the IRS made a major change related to the interaction of these schedules and Form 1116 and Form 1118 (Foreign Tax Credit).  The change–which I’ll detail below–means that almost every partnership (and many S-Corporations) will need to complete at least a portion of these new schedules.

The IRS added an example in the new instructions of when a partnership does not need to complete Schedules K-2 and K-3:

Example. U.S. citizen A and U.S. citizen B own equal interests in domestic partnership. In Year 1, domestic partnership has no foreign source income and no assets that generate foreign source income. Domestic partnership does not pay or accrue foreign taxes. In Year 1, U.S. citizen A pays $100 of foreign income taxes on passive category income which was reported to U.S. citizen A on a qualified payee statement. U.S. citizen A does not pay or accrue any other foreign taxes and has no other foreign source income. U.S. citizen B does not pay or accrue foreign income taxes. In Year 1, because U.S. citizen B paid no foreign taxes for which it can claim a foreign tax credit and U.S. citizen A qualifies for the exemption from completing Form 1116 to claim a foreign tax credit and such information was provided to domestic partnership by both U.S. citizen A and U.S. citizen B, domestic partnership need not complete Schedules K-2 and K-3, Part I, box 1, box 2, box 3, box 4, box 5, and box 10, Parts II or III.

In English, this means that if a tax professional is certain that no partner is taking a foreign tax credit where Form 1116 or Form 1118 is completed, then Schedules K-2 and K-3 do not need to be completed.  The problem is that in almost all cases, tax professionals will not know this and will have no way of knowing this!

Form 1116 is exempt on a personal return if you have $300 or less in foreign taxes paid ($600 if married filing jointly).  Consider Acme Partners–with Bill, Jane, and Ralph as partners.  It has no foreign activities at all, so you would think it would be exempt from Schedules K-2 and K-3.  Bill and Jane have no foreign income of any sort.  Ralph, though, invests in lots of partnerships that issue him K-1s.  Some years he’s had $1,000 of foreign tax paid; other years, it’s $10.  Ralph isn’t on good terms with Bill and Jane, but Ralph is still a partner.  Russ is the tax professional, and he deals with Bill in getting the return prepared.  Russ can ask Bill, “Will any of the partners file Form 1116?”  We have a number of issues:

  1. Whether Form 1116 is required might not be known until each partner receives all of his or her K-1s (and that can be in mid-September).  There’s an obvious circular issue here: Whether a partner needs to file Form 1116 depends on all the K-1s (and K-2/K-3s), but you’re preparing a K-1 (and K-2/K-3).
  2. What if a partner refuses to discuss this with the “Tax Matters Partner?”  Conflict of interest rules under Circular 230 (the regulations governing tax professionals) likely prohibit the tax professional from asking the recalcitrant partner.
  3. What if one or more partners honestly doesn’t know?
  4. Why should a partnership with only US activities complete Schedules K-2 and K-3 given that (a) there is no international activity; (b) there are no foreign partners; and (c) the IRS can accurately determine the income and expenses of the partnership (and accurately determine each partner’s share of income) from the return and the Schedule K-1.  Additionally, any partner who is filing Form 1116 can accurately complete it using Schedule K-1 for a US-only partnership.
  5. Completing Schedules K-2 and K-3 will add time and cost to any partnership return.
  6. As of today, the IRS estimates it will be ready to accept efiled Schedules K-2 and K-3 for partnerships on March 17th (partnership returns are due on March 15th).  It’s even worse for S-Corporations: the IRS is estimating it will be ready for those Schedules K-2 and K-3 in the May to June time-frame (S-Corporation returns are due on March 15th, too).
  7. The IRS is allowing “transition relief” for 2021 returns, but a “good faith” effort is supposed to be made to prepare the new schedules.

There are only three solutions that I can see.  The first–and best–is that the IRS simply state that a partnerships and S-Corporations with no foreign activity or partners need not file Schedules K-2 and K-3.  The reality is that the IRS does not need such partnerships (and S-Corporations) to complete the forms in order to determine whether a partner’s (or S-Corporation shareholder’s) Form 1116 (or Form 1118) was completed accurately.  The second possible solution is for the IRS to allow a statement to be attached to the return stating that the partnership has no foreign income (similar to the de minimis property regulation statement).  The third solution is just to postpone Schedules K-2 and K-3 until the 2022 tax year so that a workable solution can be found.

If the IRS continues down their current path, I do not see a way around preparing Schedules K-2 and K-3 for almost every partnership.  For perhaps 10% of the partnership returns we prepare, we also prepare all partners’ tax returns (most of those are husband-wife partnerships); for those, we can determine if we must prepare Schedules K-2 and K-3.  For the other 90%, I will have no choice but to prepare these schedules.  This will add at least 20 minutes of work for each return (possibly more), and that will add to every client’s bill.  Additionally, all of these partnerships will have to go on extension.  And by the time March 17th comes and I can efile the returns, we’ll be buried in personal returns.

The issue is less of one for S-Corporations.  Perhaps half of the S-Corporation returns we prepare are one-owner returns.  For those, we know whether they need to include Schedules K-2 and K-3.  Still, we will have many impacted returns; all of those returns will need to be extended (and the owners’ personal returns will all have to be extended).

This was already shaping up to be a miserable Tax Season. This change is only going to make miserable year turn nightmarish.  If anyone from the IRS reads this, please reconsider what you’ve done or postpone it a year.

“Amount Due by January 3, 2022….”

Friday, February 4th, 2022

We receive lots of IRS notices for clients.  In yesterday’s mail, we received two CP14 notices.  These state that a taxpayer filed a return with a balance due.  Many times this is an issue of the return being processed before the payment; sometimes, of course, the taxpayer truly owes the tax.

In this case, there’s a deeper issue.  Both notices were dated December 13, 2021 with payments due on January 3, 2022—more than a month ago.  This is clearly an IRS issue (not a Post Office issue, as we received two such notices sent from two different IRS Service Centers).  There was no insert giving the taxpayer more time to pay.  It appears the IRS again has a backlog of notices to be mailed, and is sending out notices late.

One of the two taxpayers received a CP503 notice in January (noting the balance due, but with no explanation of the amount); for the other taxpayer, this is the first communication from the IRS that has been received.  The taxpayer who received the CP503 notice has paid his tax (and the account has a $0 balance), but assume for the moment you received such a notice.  Wouldn’t you call the IRS up and ask them did you get my payment?

The IRS sending notices late will only add to the phone volume, making it even harder to reach the IRS for callers who truly have issues.  I’m not sure why these notices were sent seven weeks after the date on the notices, but this is just adding to a miserable Tax Season.

Hug Your Tax Professional: The IRS Is At It Again

Thursday, January 20th, 2022

I was hoping that the 2022 Tax Season (which begins for individuals on Monday) would be more pleasant than the last two.  Yes, the IRS didn’t cause Covid; however, as the National Taxpayer Advocate noted in her recent report the IRS’s response has been (to put it charitably) ‘lacking.’  It doesn’t look like things are improving based on three items in the mail.

The first is the most serious.  The IRS is sending out letters (Letter 6419) noting how much taxpayers received in the Advance Child Tax Credit (ACTC).  Yesterday, a client received hers.  The letter noted that she had received $1,000.  She went through her records and found that was wrong (she received a little over $800).  The letter gives a phone number to call if there’s a discrepancy–which she did.  The helpful IRS agent told her that the letter is wrong, and that the information my client had (which she got from her bank records) was accurate.  “The IRS is aware of the issue.”

Are corrected letters going to be sent?  Is this a widespread issue or is it just (say) less than 1% of all letters?  What will happen when I file the client’s return noting the correct amount of ACTC?  Will the IRS use the letter’s $1,000 or the correct amount in verifying the return?  Will a whole bunch of returns have very slow processing because of this?  (Undoubtedly, yes.)

I just saw on Twitter other tax professionals seeing the same issue, so it’s clear there’s a problem.  Hopefully, it’s just a few individuals…but I have my doubts.

The second issue relates to an IRS notice that come on Tuesday, January 18th.  The notice is dated December 6, 2021 and asks for payment by December 27, 2021.  Given how bad the mail has been it’s possible this is a Post Office issue rather than IRS, but I strongly suspect the IRS is again sending out notices well after their dates.  There was no insert telling me that the client has longer to pay.  Again, is this a one-off or the start of a trend?

The third issue involves a correspondence examination.  A client was selected for a correspondence exam.  We needed additional time to get the paperwork together; the IRS gave us an additional month (to January 5th).  We sent our response to the IRS on January 3rd.  In yesterday’s mail, the IRS has now assessed the tax with an audit report dated December 27, 2021.  Yes, the IRS ignored the extension it gave.  Yes, I will have to call the IRS to see what’s going on and why the IRS’s left and right hands have no idea what they’re doing.  Yes, this adds to the call volume at the IRS–and it shouldn’t have happened.

This is not a good start to the 2022 Tax Season.

Frozen Returns: If You Made an Extension Payment on May 17th And Haven’t Received Your Refund….

Tuesday, January 11th, 2022

Yesterday, a client of mine called asking about her 2020 tax refund.  I assumed she was one of the unlucky individuals whose return fell out of IRS processing and is stuck waiting to be reviewed.  However, she told me that her return didn’t even show in the IRS’s “Where’s My Refund.”   I confirmed that–and that didn’t make any sense; her return was filed on September 30th and accepted that day.

I called the IRS and discovered another reason some haven’t received their refunds.  If you made an extension payment on exactly May 17, 2021 (the last day to file a 2020 extension) and are receiving a refund, your return may have been “frozen” by the IRS computer system.  (I had my second such case today.)  I don’t know how extensive this issue is, but the representative I spoke to yesterday told me that he had dealt with “many” such cases.

Hopefully, someone at the IRS is going through frozen returns to manually unfreeze the returns without taxpayers having to call the IRS.  But if you made an extension payment on May 17, 2021 and have filed your return and have not received your refund, check IRS’s “Where’s My Refund.”  If no status at all is shown (the return does not show as still being processed), you or your representative needs to call the IRS and have the return “unfrozen.”

Tax Season (For Individuals) to Begin on January 24th

Monday, January 10th, 2022

The IRS announced today that Tax Season will begin on Monday, January 24th.  That’s the first date that electronically filed returns (and extensions) for the 2021 tax year will be accepted for individuals.  (Businesses can already file their 2021 returns.)

Do note that almost every tax professional uses software, and that some forms may not be ready until after that date.  Additionally, some state forms and state returns will not be able to be processed until after January 24th.

You should not file your return until you have all your tax paperwork.  The deadline for brokerage firms to send their 1099s is February 15th (and it is routinely extended).  If you are a partner in a partnership, a shareholder in an S-Corporation, or a beneficiary of a trust, you must wait until you receive your K-1’s.  Remember, it’s better to extend than amend.

Finally, we do not expect the deadline for individual returns to be extended from April 18th.  That means you will need to file (or file an extension) by then.

As for how this year’s Tax Season will go, expect a repeat of last year.  The IRS still has not processed all 2020 returns (but they’re through April!).  Until IRS staff is fully back at their Service Centers, there’s no reason to expect anything to change.  This is not a scenario to make any IRS stakeholder–be it a tax professional, taxpayer, or Congressman–happy.  I can state for the record that I absolutely expect the same issues with delayed processing of refunds this year.  (I have a client whose 2019 return is still stuck in limbo!)

It’s Time to Generate 2021 1099s

Tuesday, January 4th, 2022

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.

Form 1099-NECs have a filing deadline of January 31, 2022 (for reporting 2021 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 reportable 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.

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: Those 1099s must be filed by Monday, January 31st.

Here are the deadlines for 2021 information returns:

  • Monday, January 31st: Deadline for mailing most 1099s to recipients (postmark deadline);
  • Monday, January 31st: Deadline for submitting 1099-NECs for Nonemployee Compensation to IRS;
  • Monday, February 28th: Deadline for filing other paper 1099s with the IRS (postmark deadline);
  • Tuesday, March 15th: Deadline for mailing and filing Form 1042-S; and
  • Thursday, March 31st: 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.

It’s Time to Start Your 2022 Mileage Log

Monday, January 3rd, 2022

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

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

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

The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 117,392). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car. It’s also a good idea to take a picture of the odometer and email that picture to yourself. This will give you a time-stamp showing you accurately noted your beginning mileage.

Here’s the other things you should do:

On the cover of your log, write “2022 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 117400-117435 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 $0.56/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. Be careful if you (or your family) have multiple vehicles. You will need to separate out your expenses by vehicle.

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

The 2021 Tax Offender of the Year

Friday, December 31st, 2021

It’s time once more for that (not really) most prestigious of prestigious awards, the Tax Offender of the Year.  One year I’ll find that I don’t have many deserving winners (probably the year after I retire); however, there were plenty of individuals, businesses, and organizations that strove to take down the top prize.

We’ll start with the runners-up.  Dinesh Sah of Coppell, Texas saw the Paycheck Protection Plan loans as a wonderful thing.  Let’s not take out one; let’s do 15.  And let’s make up phony employees, payroll expenses, and tax returns to get $24.8 million in loans.  He pleaded guilty in March and was sentenced in July to more than 11 years at ClubFed.

Mustafa Shalash of Hilliard, Ohio didn’t commit huge fraud.  Rather, it’s the scope and what he did that is at issue.  Mr. Shalash won a Powerball jackpot in 2015 for $1 million.  He felt that the $290,000 withheld for taxes should come back to him, so he invented $1 million of gambling losses for his 2015 tax return.  Additionally, he had foreign bank accounts, and transferred $440,000 of his winnings to one in Jordan.  Yes, he ignored the FBAR (Report of Foreign Bank and Financial Accounts).  If you are lucky enough to win a prize in the lottery, your luck will likely become public information.  It would have been a lot easier for Mr. Shalash to simply have paid the additional tax.  Instead, he’ll be paying restitution of over $250,000 and could find himself at ClubFed for up to three years.

Aaron Aqueron of Clermont, Florida is a very good promoter.  He convinced numerous individuals that just by having a mortgage (or other debt) you’re entitled to a tax refund!  Sounds great.  But what he did was state that the financial institutions withheld tax when they hadn’t.  His clients filed tax returns claiming $14.6 million in refunds, and the IRS issued $7.6 million before catching on.  Yes, mortgage interest is an itemized deduction and, yes, if you have tax withheld you get to claim that on a tax return.  But the tax must actually be withheld—a minor step that was missed.  And Mr. Aqueron only charged between $10,000 and $15,000 to his soon-to-be-audited clients.  (If it sounds too good to be true, it probably is.)  Mr. Aqueron pleaded guilty earlier this month and will likely be residing at ClubFed in the near future.  Mr. Aqueron’s alleged co-conspirators will be tried in January.

Our last runners-up are a rap duo out of Detroit.  Sameerah Marrel and Noelle Brown were the “Deuces Wild” rap group.  Their rap career apparently didn’t take off, so they needed a different source of income.  They allegedly turned to tax fraud, inventing a number of trusts and purportedly noting that there was tax withheld on the trusts’ returns.  This allowed the duo to ask for $13.6 million in refunds (they received $5,539.049.28) when the actual amount of withholding was $0.  They’re facing years at ClubFed if convicted.

Coming in third place this year is Gary Hunsche of Troy, Illinois.  Mr. Hunsche owned and operated two employee leasing companies called Unique Personal Consultants and Unique Risk Management.  Mr. Hunsche faced a dilemma: How would he pay for his indoor basketball court on his new home (and other improvements to his home)?  He came up with the decidedly illegal answer: he would withhold payroll taxes but not remit $9.4 million.  It’s a wonderful scheme while it’s working, but it’s the one kind of tax fraud that will always be caught.  Sooner or later one of the employees’ returns gets looked at by the IRS, and the IRS wonders where the payroll taxes are.  He was sentenced to four years at ClubFed.

I really, really wanted to put the IRS as this year’s winner but they’re in second place.  The issues with the IRS this year are legion.  Good luck calling the IRS for assistance (you have a less than 10% chance of getting through).  Or you could be like my call earlier this week: You get in the queue, and after two hours waiting on the Practitioner line you hear, “We’re having technical difficulties.  You will be transferred back to the main number….We’re sorry, but due to extremely high call volume in the topic you’ve chosen, we cannot take your call at the present time.  Goodbye.”

Each year many returns filed with the IRS ‘fall out of processing.’  Normally, that means a one to four day delay in processing.  This year, it means at least four months.  The IRS Operations Status Page shows that as of December 18th there were 6.3 million unprocessed individual returns.  Clients are complaining, and there’s nothing I (or any other tax professional) can do.

If you filed an amended return, maybe your return will be processed within twelve months, but I wouldn’t bet on that.  The IRS Operations Page was changed to note, “The current timeframe can be more than 20 weeks instead of up to 16.”  I’m quoting 18 months (average) to my clients who have to paper-file amended returns, and I think that’s realistic.  If you can electronically file your amended return, you will shave off a few months (you’re likely looking at one year).

And then there are the IRS notices.  I had two clients receive notices stating their 2018 returns hadn’t been filed (both were electronically filed and accepted).  I called the IRS and found out that for one, it was a processing issue and my client should have received a new notice this past week (it didn’t come, so another call to the IRS is needed).  The other client never received a notice that he had to call the Identity Theft Unit.  He hasn’t been able to get through yet.

Many of my clients received notices and timely responded.  Unfortunately, while there are deadlines on taxpayers, there are no deadlines on the IRS.  I had one matter that took three years for the IRS to actually respond to our communication.  (The understaffed Taxpayer Advocate Service agreed to take the case, but the next day we received a letter from the IRS resolving the issue.)  I have another matter that has now exceeded three years (the IRS keeps sending it back and forth between their Cincinnati and Ogden offices).

I have had at least ten clients file Tax Court petitions with the IRS in 2021.  (These are the clients I know about–there could be others.)  Two of the cases involve genuine disputes related to Automated Underreporting Unit (AUR) notices and were destined to get to Tax Court.  Filing the petitions is the means to get these disputes to IRS Appeals.  The other eight are matters where the IRS never read my clients’ timely filed responses.  The IRS simply issued Notices of Deficiency, so the only method available for the taxpayers to dispute the matters was filing Tax Court Petitions.  In all of these cases, had someone read the response it is likely that the matter could have been resolved.

This is just a sampling of the disastrous status of “service” within the IRS today.  I do want to point out that I am not complaining about any of the employees I have dealt with this year.  In almost every case, the IRS employees I speak with are professional, courteous, and honestly want to resolve the matters.  The problems relate to (a) IRS top management refusing to admit to all of the problems, (b) the IRS drowning in paper (partially caused by the pandemic), (c) the Biden Administration refusing to order staff back to work at IRS Service Centers, and (d) Congress not properly funding the IRS.  Unfortunately, it will take several years for the IRS to work its way out of its current hole.  It’s time for the IRS to give accurate time-frames, extend response times to taxpayers, and for Congress to fund the IRS appropriately.

Oleg Tinkov is a Russian entrepreneur.  Like me, he is a graduate of the University of California, Berkeley.  By any standard he’s successful.  He founded Tinkoff Credit Systems in 2006  It’s now the second largest provider of credit cards in Russia.  In 2013, the bank went through an Initial Public Offering (IPO) on the London Stock Exchange; the IPO raised $1.1 billion (coincidentally, his net worth became $1.1 billion at that time).  TCS Group, the holder of Tinkoff Bank, is officially based in Limassol, Cyprus.  Mr. Tinkov earlier formed a wholesale electronics business he later sold, a food company, a brewery, and a cycling team.  His net worth is estimated by Bloomberg at $6.9 billion and by Forbes at $7 billion.

In 1996 Mr. Tinkov became a naturalized US citizen.  In 2013, three days after the IPO Mr. Tinkov relinquished his US citizenship at the US embassy in Moscow.  When you relinquish your citizenship, you must have filed all your tax returns and complete IRS Form 8854 (Initial and Annual Expatriation Statement).  If you renounce your citizenship and your net worth is more than $2 million, you owe the expatriation tax.  The fair market value is based on you hypothetically selling all your assets the day prior to your expatriation.

Mr. Tinkov was asked about his net worth by his US-based accountant, and he told him it was less than $2 million.  Rather than admitting the truth, he used $300,000 instead of the true net worth of $1.1 billion.  There is no extradition treaty between the US and Russia, so he likely felt safe.

Two things I’ve repeatedly said over the years are, “It’s always easier to simply pay what you owe,” and, “If you’re a celebrity or someone else who is a public figure, you want to make sure your tax returns are squeaky clean.”  While Mr. Tinkov isn’t a household name, Forbes annually publishes a list of billionaires and his name has been on it.  It wouldn’t take long for someone at the IRS to wonder why only 0.027% of his net worth was noted on his Form 8854.

Unbeknownst to him, an investigation was begun.  In September 2019 he was indicted.  In February 2020 he went to London; the United Kingdom does have an extradition treaty with the US.  Mr. Tinkov was arrested.  The US sought extradition; Mr. Tinkov contested on medical grounds (he was undergoing treatment for leukemia).

On October 1, 2021, Mr. Tinkov pleaded guilty to one count of filing a false tax return.  He paid the $248,525,339 of tax he would have had to pay back in 2013.  He also paid a $100 million fraud penalty, interest, and other penalties; the total penalties and interest added $260,415,845 to his total tax bill of $508,936,184.  Yes, he didn’t have to pay his taxes for eight years but it would have been far less costly to simply have prepared the tax returns correctly in the first place.  And half a billion in tax evasion gives Mr. Tinkov the 2021 award as Tax Offender of the Year.

That’s a wrap on 2021.  May all of you have a Happy and Healthy New Year.

Dear IRS: What Part of Deceased Didn’t You Understand?

Thursday, December 16th, 2021

Last year, one of our clients (call him John Smith) passed away.  I had both a Power of Attorney and Tax Information Authorizations on file with the IRS for this taxpayer.  One of the rules about representation is that when a taxpayer dies, the representation also ends.  It is up to the estate/Executor/Administrator to obtain representation after death.  When this is done, the IRS requires a new authorization sent along with IRS Form 56 and a copy of the death certificate.

Mr. Smith was estranged from his spouse (call her Jane Smith), but apparently never changed his will.  When he passed, my representation passed and I was informed by his spouse that she would be using a different tax professional.  I thanked her for notifying me, informed her of the requirements to get the representation through to the IRS, and closed our file on Mr. Smith.  I never had any IRS authorizations from Mrs. Smith.  (The Smiths were Nevada residents, so there were no state tax issues.)

A week or two later we received some IRS notices for Mr. & Mrs. Smith.  I let Mrs. Smith know, and I wrote back to the IRS noting that Mr. Smith passed away (enclosing a newspaper story of his death), and that I did not represent the estate or the heirs.  I also copied the Centralized Authorization File (CAF) unit of the IRS; they are responsible within the IRS for maintaining taxpayer authorizations. I assumed that after a couple of months I wouldn’t receive any additional notices for the Smiths.

I was wrong.

Three months later I received a notice addressed to “John Deceased Smith.”  So the IRS realized Mr. Smith had passed away (presumably by this time the Social Security Administration notified the IRS, along with my letter to the CAF unit), but my representation had still not been cancelled.  I wrote yet another letter to the IRS, and really expected that to be the end of it.

I was wrong.

Yesterday I received another notice for the Smiths; this was addressed to Jane & John Smith (the actual return for the year in question has Mr. Smith as the primary taxpayer).  Yes, the IRS knows that Mr. Smith is deceased (that has to be the reason they switched Mrs. Smith to the primary taxpayer), but continues to believe that I represent the Smiths.  I wrote yet another letter to the IRS letting them know that I do not represent Mr. Smith; that he is deceased; and that I now have no means of contacting Mrs. Smith (the email address, phone number, and mailing address for her are no longer valid).  I returned the notice to the IRS as an enclosure in my letter.

Yes, this is almost certainly a dumb error at the CAF unit.  But it illustrates the current fiasco of how the IRS handles paper: Put simply, they are not handling paper well at all.  Yet many tax returns must be filed on paper.  I’m quoting to my clients eight months for processing a timely filed original paper return and twelve to sixteen months for a paper-filed amended return.  (The IRS is currently quoting 40 weeks for processing an amended return.  That does appear to be reasonable for an electronically filed amended return but not for a paper-filed return.)  In another case I’m dealing with, the IRS lost my client’s paper-filed amended return.  (He has the return receipt that it was signed for at the IRS.)  That client will be resubmitting his amended return by paper (it is not eligible for electronic filing), and if he’s lucky it will be processed before his timely filed 2022 return in 2023.  Unfortunately, that last line is not sarcasm.

What can be done about this?  First, the IRS’s budget does need to be increased.  However, instead of the IRS prioritizing auditors looking at the middle class the priority should be fixing and upgrading the technology.  To the IRS’s credit, these issues are priorities with the agency but the IRS’s budget simply hasn’t allowed much to be done in this area.  Second, the IRS needs to start telling the truth about processing times.  Lying makes the agency look foolish (which they are right now).  Third, the IRS needs to lengthen response times.  In yesterday’s mail there were two other IRS notices, one dated November 15th and one dated November 22nd.  The deadline for responding to the November 15th notice passed before I received it!  There was no insert giving more time to respond.  Will my client get a Notice of Deficiency?  Who knows, but this is ridiculous.  Finally, it appears that the CAF unit needs remedial training in the rules for a deceased taxpayer.  That (in reality) is the least important of the issues–except that it is an illustration of what taxpayers are dealing with in today’s IRS.