Archive for the ‘IRS’ Category

IRS Appears to Add Requirement for Individuals to Include Statement on PPP Loan Forgiveness for 2021 Personal Returns

Monday, December 6th, 2021

On Friday, the IRS released draft instructions for Form 1040.  Buried on page 23 of the instructions (page 24 of the PDF) is the following:

Forgiveness of Paycheck Protection Program (PPP) Loans

The forgiveness of a PPP Loan creates tax-exempt income, so although you don’t need to report the income from the forgiveness of your PPP Loan on Form 1040 or 1040-SR, you do need to report certain information related to your PPP Loan.

Rev. Proc. 2021-48, 2021-49 I.R.B. 835, permits taxpayers to treat tax-exempt income resulting from the forgiveness of a PPP Loan as received or accrued: (1) as, and to the extent that, eligible expenses are paid or incurred; (2) when you apply for forgiveness of the PPP Loan; or (3) when forgiveness of the PPP Loan is granted. If you have tax-exempt income resulting from the forgiveness of a PPP Loan, attach a statement to your return reporting each taxable year for which you are applying Rev. Proc. 2021-48, and which section of Rev. Proc. 2021-48 you are applying—either section 3.01(1), (2), or (3). Any statement should include the following information for each PPP Loan:

1. Your name, address, and ITIN or SSN;
2.
A statement that you are applying or applied section 3.01(1), (2), or (3) of Rev. Proc. 2021-48, and for what taxable year (2020 or 2021) as applicable;
3.
The amount of tax-exempt income from forgiveness of the PPP Loan that you are treating as received or accrued and for what taxable year (2020 or 2021); and
4.
Whether forgiveness of the PPP Loan has been granted as of the date you file your return.

Write “RP2021-48” at the top of your attached statement.

As I read the instructions, this applies for any PPP loan for a sole proprietorship (Schedule C business) where there is PPP loan forgiveness in either 2020 or 2021.  So this includes people who had the loan forgiven last year!

As the IRS states, “The forgiveness of a PPP Loan creates tax-exempt income, so…you don’t need to report the income from the forgiveness of your PPP Loan on Form 1040 or 1040-SR….”  While Rev. Proc. 2021-48 states, “The IRS will publish form instructions for the 2021 filing season that will detail how taxpayers can report consistently with sections 3.01 through 3.03 of this revenue procedure,” wouldn’t the easiest and simplest method be that taxpayers must retain records of their forgiveness of their PPP loans and supply them to the IRS upon request?  Instead, we get more “make work” for tax professionals (and taxpayers) for 2021 tax returns.  It adds time to return preparation without giving IMHO the IRS any real benefit. 

The IRS Can’t Figure Out Where to Apply an Electronic Payment…Where the IRS Was Told Where to Apply It

Tuesday, November 30th, 2021

My client received a letter from the IRS dated November 22, 2021:

Taxpayer identification number: [redacted]
Tax Period(s): Dec. 31, 2018
Form: 1040

We received a payment of $2,002.00 on Oct. 08, 2020.

We don’t have enough information to apply this payment correctly.

Attach a clear copy of both sides of the canceled check or checks.

If the $2,002.00 you paid is for a bill you received, send a copy of the bill so we can identify the tax period. An incorrect identification could result in a bill for the period you intended to pay….

My client did indeed make this payment on October 8, 2020.  The $2,002 was for an amended 2018 return so the IRS has (already) applied it to the correct tax year.  This payment was made using IRS Direct Pay.  When you use IRS Direct Pay you must specify the tax year, the reason for the payment, and the tax form.  My client correctly noted the tax year (2018), the reason (Amended Return), and the tax form (1040X) when he paid, so the letter is nonsensical.  So why did the IRS send it when they had this information?

The real reason is that my client’s amended return (which was mailed to the IRS on October 8, 2020 and was received one week later) is sitting in a bin in the Austin Service Center waiting to be reviewed.  Yes, the IRS is more than one year behind in processing paper-filed amended returns (I recently had a client who filed eighteen months ago have his amended return processed).  I spoke to the Practitioner Priority Service yesterday (PPS) seeing if I could resolve this over the phone.  The PPS representative told me that the client’s amended return does not even show up in the IRS computer system. This is typical (unfortunately) for paper-filed amended returns.  I was told (a) don’t send another copy of the amended return, (b) respond to the letter (but without sending another copy of the amended return), and (c) you may be asked to resend the amended return if the IRS can’t find it.

Why didn’t we electronically file this amended return? You cannot electronically file pre-2019 federal amended returns; they must be paper-filed.  My client did pay electronically, and he did mail the amended return using certified mail so we are certain the return was received.

This is another IRS issue caused by the IRS’s response to the pandemic.  Yes, the IRS was not at fault for the pandemic, but the ongoing response (did you know that IRS employees are still not completely back at IRS Service Centers?) is a cause of this issue (and many others).  This is costing taxpayers time and money.  It’s also costing the IRS time and money (which means taxpayers) because (a) someone must read the response I sent and (b) my client can–and will be able to–get some penalties and interest abated once this amended return is processed (given that the IRS is at fault for the slow processing time).  This episode also makes the IRS look stupid.  My client told the IRS exactly where the payment should be applied…and the IRS still couldn’t figure it out.

IRS: Per Diem Is Food Provided by Restaurants

Tuesday, November 16th, 2021

For tax years 2021 and 2022 taxpayers are allowed to deduct 100% of business meals provided by restaurants (per § 274(n)(2)(D) of the Internal Revenue Code).  One question that I had was how the per diem would be treated.

Taxpayers have a choice for deducting meal expenses.  They can take actual expenses or they can use the per diem meal allowance.  These rates are published by the General Services Administration (GSA) for the continental United States.  While actual expenses tend to give a higher deduction, the per diem is a good tool for individuals who keep poor records (but can prove their business travel).  Do note that you must use one method for the entire year (actual or per diem); you cannot use actuals where you have records and the per diem where you don’t.

For most tax years, meals are at 50% of actual expenses.  Say you spend $1,000 on business meals; you’re tax deduction is $500.  But as noted above for tax years 2021 and 2022 you can deduct 100% of meals provided by a restaurant.  Today, the IRS released Notice 2021-63.  It states:

Solely for purposes of § 274(n)(2)(D), a taxpayer that properly applies the rules of Rev. Proc. 2019-48 may treat the meal portion of a per diem rate or allowance paid or incurred after December 31, 2020, and before January 1, 2023, as being attributable to food or beverages provided by a restaurant.

This is excellent news for individuals using the per diem rate.  You, too, get the benefit of the 100% meals deduction for 2021 and 2022.

IRS’s “ID.me”: Not Ready for Prime Time

Monday, November 15th, 2021

This afternoon, I needed to upload an IRS Power of Attorney form to the IRS’s CAF Unit.  The IRS advised me (on the login screen) that I should obtain an account on ID.me.

The IRS rightly wants to make sure that tax professionals are who they say they are.  So the IRS has partnered with ID.me to verify identity for tax professionals.  In theory, the process will be mandatory sometime during the Summer of 2022.  If you’re a tax professional tempted to start now with ID.me, I strongly advise waiting.

The ID.me process is both biometric and checking your credit record (to make sure you’re you).  You upload a picture of your driver’s license (or similar ID), a video capture, and enter your social security number.  In theory, it’s straightforward.  I recently used the Clear application to do a similar check for Covid vaccination without any issues.

Unfortunately, ID.me isn’t Clear.  I couldn’t use my phone’s camera for my driver’s license (but a scan worked just fine).  I couldn’t use my computer’s webcam for a video (but my phone worked fine for that).  And each time it failed, I had to shutdown the browser window and start over.

Once I had my ID.me setup, the program says it will take you back to the IRS.  Instead, I saw the following:

Yes, this is a new product and bugs are always going to happen.  But I think the IRS needs to do some additional extensive testing before this goes fully live.  As I noted, that date is sometime next summer so there’s plenty of time.  Until then, tax professionals should use the option to login using their IRS ID and skip ID.me.

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.