The IRS announced on December 29th the standard mileage rates:
These rates do apply to electric and hybrid vehicles along with gasoline and diesel vehicles.
Two big announcements from the IRS today will have a major impact on 2022 tax returns (returns filed in 2023). First, the IRS announced a delay in implementing the $600 reporting for third-party payment platforms (Form 1099-K). Quoting from the announcement:
“The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan,” said Acting IRS Commissioner Doug O’Donnell. “To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements.”
I’ll change the verbiage to reality: The IRS is currently in no position to handle the flood of 1099-K’s that would come in, and this transition guidance gives them a year to (hopefully) get ready and smooth out a whole bunch of wrinkles. Do note that if you have a side business, income from that business is taxable (that’s been the law and nothing has changed).
Second, the IRS announced that brokers are not required to report additional information regarding disposals of digital assets (aka cryptocurrency) until final regulations are issued. This does not impact taxpayers’ responsibility to both report all dispositions nor answer the question regarding cryptocurrency that appears at the top of Form 1040. Announcement 2023-02 notes that the IRS plans to issue regulations with a notice of proposed rulemaking.
A notice of proposed rulemaking will be published that sets forth proposed regulatory text, explains the proposed rules, solicits public comments, and announces a public hearing. This process will allow the Treasury Department and the IRS to accept comments from affected taxpayers, industries, and other interested parties and enable the public to meaningfully participate in the regulatory process. After careful consideration of all public comments received and all testimony at the public hearing, final regulations will be published.
Depending on when the notice of proposed rulemaking is issued, this could delay the new rules until either the 2024 or 2025 Tax Seasons (2023 or 2024 tax returns).
Overall, this is good news for taxpayers, tax professionals, and the IRS. The IRS still has ~12 million returns to be processed, and computer systems that are older than I am. Had the IRS received the flood of 1099-K’s and issued notices when taxpayers properly don’t include erroneous items on their returns, the IRS wouldn’t have been able to handle the volume of correspondence. Putting this off a year makes it at least possible the IRS will be ready.
No, I’m not talking about my business: feel free to call or write us (but due to a water leak, our office is closed today, Thursday, December 8th–we’ll be in tomorrow). Rather, I’m talking about calling the IRS and writing the IRS.
Let’s start with calling the IRS. For tax professionals like me, we use the Practitioner Priority Service (PPS). When we reach agents from the IRS, they can usually resolve issues, or direct us to the personnel at the IRS who can resolve our issues. This is good for taxpayers and tax professionals. Unfortunately, there’s a but in this: “When we reach agents from the IRS….” The problem is reaching them.
On Tuesday, I had eight matters to resolve with the IRS (four business, four individual). At 7am I began calling PPS (the service is open from 7am – 7pm local time). I made 60 phone calls to PPS. On all of them I received the message, “We’re sorry, but due to high call volume in the topic you’ve chosen we cannot take your call at the present time. Good bye.” On some of the calls, I also had to do simple math (add six and eight) or repeat words (a theoretical way to stop automated dialing). All that did for me was make each call take more time to reach the “We’re sorry” message. (I alternated attempting to reach the business and individual queues, and was equally unable to reach either.)
I am not alone in being frustrated. The National Association of Enrolled Agents (NAEA) sent a letter to the IRS and Congress noting our frustration. One excerpt from the letter:
As you can see from the sentiments of enrolled agents across the country, accessing the PPS lines has become nearly impossible for tax professionals to gain the help they need from the IRS. We have received anecdotal evidence that less than one percent of callers can get through the PPS individual line. [emphasis added]
Once we get through, we’re usually on hold for at least 30 minutes. Sometimes the IRS will offer a callback option so I don’t have to listen to the IRS hold music for an hour. I can work on other matters while on hold so I don’t have to charge clients for that time. Still, the current phone system is untenable in allowing tax professionals to resolve issues.
I will be trying to call the IRS again tomorrow and we’ll see if there’s any improvement.
So, Russ, why not write the IRS letters to resolve matters? When we write the IRS, it goes into the black hole of correspondence. First, the average response time when we write the IRS is measured in months (three to six currently), so taxpayers have to wait longer for resolution. Second, some of the time when we respond by mail the IRS repeats what was said in the original notice, ignoring the response; in those cases, we now have to send another letter to the IRS. Third, the National Taxpayer Advocate correctly noted the IRS’s Achilles heal is correspondence. The volume is so large that the IRS does lose items. With a phone call, we have resolution (hopefully).
Some items must be responded to by mail. For example, I have two clients who received erroneous “Math Error” notices. The only way to challenge these notices is to write the IRS a letter. (In one case, the IRS notice would be correct except for two amended returns that have not been processed. In the other case, the IRS made the math error and miscalculated the client’s tax owed due to a tax treaty allowing for a favorable tax rate.) Based on experience, it will be mid-2023 before these clients have resolution on these matters.
The IRS is supposedly based on providing quality service for taxpayers and tax professionals. I do need to point out that when I reach IRS employees they almost always do provide a high level of service. Unfortunately, reaching those employees is near impossible today.
I love IRS Direct Pay. It’s a simple method to make payments to the IRS for most (but not all) taxes individuals might have. And it works…well, it works most of the time.
I saw on Twitter the following:
On October 20th, the IRS Direct Pay application had issues with processing payments. The issue was fixed but approximately 4,600 taxpayers were impacted and duplicate payments were made and processed.
The Treasury Financial Agent is reaching out to all financial institutions to return the duplicate payments. However, if a taxpayer calls the IRS about this issue, they should be advised to contact their financial institution and have them return the duplicate payment(s) using ACH return reason code R10 (Customer advises not authorized) or R11 (Check truncation entry return).
The issue was sent to all financial institutions via the Federal Reserve Bank Operations Bulletin.
To date, no one has contacted us about this, but we do have individuals who used Direct Pay after October 17th to pay taxes. If you are an impacted taxpayer, follow the instructions noted above. If you’re one of our clients who was impacted, feel free to call our office.
The IRS announced today that because the state of Florida has been declared a disaster zone that tax deadlines for Floridians have been extended until February 15, 2023. This includes the individual and C-Corporation extended deadline of October 17th, the trust/estate (Form 1041) extension deadline of September 30th, payroll tax deadlines of October 31st and December 31st, and the January 17, 2023 Estimated Payment deadline. Do note that tax payment deadlines that have already passed have not been extended. However, interest and penalties do not accrue during disaster extensions, so there won’t be any additional interest and penalties.
I would expect the Florida Department of Revenue to extend the corporation tax deadline of October 17th to February 15, 2023 soon.
The IRS sends two types of Identity Protection Verification Letters: LTR 4883C and LTR 5071C. If you receive a LTR 4883C, you must call the IRS’s Identity Protection unit so that your return is processed. If you receive a LTR 5071C, you can generally respond online and have your return processed.
There are three main problems with the verification notices:
Today, I’m going to look at the third issue: the lack of follow-up. Here’s a real world example.
A client, call him John Smith, filed his 2021 tax return in May. He owed the IRS $5,000 in tax and paid that and the appropriate amount of interest. It was the first time Mr. Smith had ever filed a return after April 15th–and there was no extension. The IRS assessed the late filing and late payment penalties. Mr. Smith believed he qualified for First Time Abatement and signed an IRS Power of Attorney form allowing me to request the abatement. I called the IRS to request the abatement (on my 10th try to reach the IRS today via the Practitioner Priority Service, I got through). The helpful IRS agent asked me if Mr. Smith had filed his 2019 return. I said he had (I had a copy of it). She did some digging, and discovered that the IRS had sent an Identity Protection Letter that Mr. Smith never responded to, and his return was sitting in limbo. Another copy of the letter is going out in the mail to Mr. Smith, so his 2019 return should soon be processed. Once that happens, we’ll be able to request the abatement for 2021.
Mr. Smith told me he was stunned by what I wrote; he claims he never received the IRS letter. Unfortunately, the mail isn’t perfect and it is quite possible that he didn’t receive it. (Indeed, today a different client told me one of his past due returns had finally been processed and there’s a balance due. I ran an Account Transcript; in theory, the IRS sent notices to him and me in March showing the balance due. Neither of us received a notice. But I digress….)
Let’s consider an alternative reality where three or four months after the initial Identity Protection Unit notice is sent a follow-up notice is sent (if the return remains unprocessed). There’s a better likelihood of the taxpayer responding and getting the return processed–the goal of all involved. And the cost of this programming change and sending the letter should be minimal.
Unfortunately, that isn’t the reality we live in today. Instead, there’s no follow-up and it was only by accident that we discovered the issue. If my client had timely filed his 2021 tax return, we still wouldn’t know about this issue. IRS: It’s time to start following up on these notices.
With President Biden’s announcement of forgiving student loans, there are some obvious questions:
We have answers to some of these questions, but definitely not all. First, this will not be taxed federally. This is quite clear based on the American Rescue Plan Act. Indeed, issuers are not supposed to send Form 1099-C’s to those with forgiven loans. However, some states do not conform to the Internal Revenue Code of today. Thus, on the state level this will be taxable income in some (but not all) states. Jared Walczak of the Tax Foundation noted that this could be taxed in Arkansas, Connecticut, Hawaii, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Minnesota, Mississippi, New Jersey, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin. (I haven’t done the research for every state, but it sure looks like a taxable event for Pennsylvania and New York.)
But the big question is one I cannot answer: Will this be upheld by the courts? I’m not an attorney, but it’s a certainty this will be litigated. I have my doubts as to this being upheld (the “major questions doctrine” from West Virginia v EPA is a–sorry for the pun–major issue here), and no one will know until the cases are resolved. I absolutely could see one Court of Appeals ruling in favor of allowing it while another imposes a national injunction. I expect the Supreme Court to be the arbiter of this, and probably not for several weeks.
As to when there will be guidance: soon. I would expect it within ten days, but this is just an educated guess on my part. I actually expect it sooner than ten days, but you never know about Washington.
Finally, the question. “Russ, I have student loans. I’m on extension. Should I file?” That’s an it depends question. If your return is set, and there are no tax planning opportunities for the return (you’re single and/or you cannot contribute to retirement plans for 2021), the tax you owe and the income you have will not change; whether you qualify or not is set. Thus, you can file–whether or not you’re above the income threshold.
The individuals who should wait for guidance are those who still have tax planning opportunities for 2021 (and who are impacted by this). Generally, those are the self-employed (who can still contribute to retirement accounts such as SEP IRAs) and married couples (who can choose between filing separate and joint). Of course, if your income is far above the threshold no matter how you file and/or contribute to retirement plans, filing now or after the guidance is released won’t change your eligibility for forgiveness. It’s only those who might qualify by doing something that should wait.
UPDATE: I originally listed New Jersey as a state that I thought where forgiveness would be taxed; however, the Tax Foundation released a new list without New Jersey. They’re spending a lot more time on the research on this than I am. Do note that until official guidelines come out, all any of us are doing is speculating. The official state pronouncements (and those are in the future) will govern.
Earlier today, the IRS announced extremely broad penalty relief for 2019 and 2020 late-filed tax returns. Here’s the beginning of the IRS’s press release:
To help struggling taxpayers affected by the COVID-19 pandemic, the Internal Revenue Service today issued Notice 2022-36, which provides penalty relief to most people and businesses who file certain 2019 or 2020 returns late.
The IRS is also taking an additional step to help those who paid these penalties already. Nearly 1.6 million taxpayers will automatically receive more than $1.2 billion in refunds or credits. Many of these payments will be completed by the end of September.
Besides providing relief to both individuals and businesses impacted by the pandemic, this step is designed to allow the IRS to focus its resources on processing backlogged tax returns and taxpayer correspondence to help return to normal operations for the 2023 filing season.
“Throughout the pandemic, the IRS has worked hard to support the nation and provide relief to people in many different ways,” said IRS Commissioner Chuck Rettig. “The penalty relief issued today is yet another way the agency is supporting people during this unprecedented time. This penalty relief will be automatic for people or businesses who qualify; there’s no need to call.”
The relief applies to the failure to file penalty. The penalty is typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late. This relief applies to forms in both the Form 1040 and 1120 series, as well as others listed in Notice 2022-36, posted today on IRS.gov.
The returns impacted by this include:
Let’s say you haven’t filed your 2020 tax return. You’re being given a golden opportunity to avoid a 25% penalty. You will still owe the late payment penalty (0.5% of the tax due per month late) and interest, but these pale in comparison to the late filing penalty. If I were an impacted taxpayer, I would immediately contact a tax professional to get the return filed! Most tax professionals are extremely busy (especially with the extension deadlines approaching), but things will only be worse in two weeks.
If you did file one of these returns and late and were assessed a penalty, you should receive your refund by the end of September.
When you file an amended return, you’re actually making a claim for refund. Tax professionals have been filing (for their clients) amended payroll tax returns (Form 941) to obtain the Economic Recovery Credit (ERC). I’ve done two (so far), and have a few more to go. Another tax professional filed one claiming a $19,746.61 refund. The IRS partially disallowed it, so a five-page letter was sent.
The disallowance? 11ȼ. No, you didn’t misread it: eleven cents.
Why, IRS, are you doing this? This is the literal example of penny-wise and pound-foolish. I wish I could tell you why this is happening, but….
Robert Brockman, the 2020 Tax Offender of the Year, passed away last weekend. Mr. Brockman was facing a 39-count indictment for tax fraud and related charges; his trial was set for this coming February. Mr. Brockman’s attorneys argued that he was incompetent to stand trial due to dementia; however, the judge had ruled him competent. The criminal case is now moot—Mr. Brockman is answering to a higher authority; the civil case will continue against his estate (the IRS attempting to obtain back taxes, penalties, and interest).
My condolences to his family.
