2022 Tax Season: The Tax Season From Hell (Part 4)

November 4th, 2022

To recap, in Part 1 of this series I dealt with IRS failures in the 2022 Tax Season; in Part 2, I covered what the IRS should do to fix the mess.  In Part 3, I wrote about what our firm got wrong.  It’s now time to look at the opportunities (or change-points) to resolve our issues.

1. We’re upgrading our hardware and software.  Our computer server is being replaced in a little over one week (which should allow us to access files faster).  We’re switching to a unified back-end software before year-end; this should eliminate (I hope) or greatly reduce our internal systemic issues and increase our work-flow efficiency and speed.

2. We’re moving to a new office in December.  We’re moving across the courtyard to a larger office that’s far better suited for our needs.  We’ll have room for expansion.  While I’ll miss having the only 17-sided office in the country (yes, it’s a heptadecagon!), the new office will work better for our staff.

3. We’re moving up our submission deadlines.  We need to be able to better deal with the workload, and we simply couldn’t get everything done correctly and provide the proper level of service with our old deadlines.  This does mean many of our clients may need to file extensions; however, while inflation is adding costs for all of us, the 24-hour day remains just 24 hours long.  (The details will be in the Engagement Letters we send to our clients in December.)

4. We’re changing our work hours for the health and efficiency of our staff.  We’re decreasing the hours we’re working during Tax Season.  Everyone needs time to recharge, and working seven days a week isn’t healthy.  We will be starting our increased Tax Season hours earlier, but our staff deserves time off every week–and they will be getting it this year.

5. We’re raising our rates for the 2023 Tax Season.  There are two major components of this.  First, as I’ve detailed in the past, inflation is impacting every input.  From the paper we use to the software we rely on, everything has gone up between 10% to 488% from last year.  Like every business, we must pass that on to our clients.  Second, we believe we’ve been charging too little and we need to adjust our rates (while providing a far better level of service than we did in the 2022 Tax Season).  (The details will be sent when we distribute our Engagement Letters.)

6. We’re not planning on net growth of clients for the 2023 Tax Season.  When Price goes up, Demand goes down; that’s one of the outputs of the Law of Supply and Demand.  We do expect to lose some clients because of our price increase, and we accept that.  Additionally, we’re going to cap the number of clients based on the number of returns we can realistically complete with the level of service we want to provide.  It’s quite likely that we will not be accepting new clients sometime early in 2023, so if you’re interested in using us, now is the time to let us know.

7. We’re attempting to hire another tax professional (or trainee).  Even though the economy is in a recession, the job market remains extremely tough.  We’d like to hire another tax professional, and we’re looking to do so.  Our trainee from 2022 will be on board as a tax professional for the 2023 Tax Season, so that should help.  Still, demand remains strong (and likely will continue to be strong as long as the Tax Code remains as convoluted as it is today).

Will these fix our issues from the 2022 Tax Season?  At minimum, they should greatly reduce the issues we faced.  However, no one can predict the future.  I can promise that we’re not going to have a repeat of the issues we had during 2022, and we are building more resiliency into our systems.

If You Used IRS Direct Pay on October 20th Check Your Bank Records

October 29th, 2022

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.

2022 Tax Season: The Tax Season From Hell (Part 3)

October 27th, 2022

This is, perhaps, the most painful post I’ve ever written for this blog.  Why?  I’m going to go over everything our firm got wrong with this past Tax Season.  As the saying goes (Murphy’s Law), what can go wrong will go wrong and, boy, was that the case this year!

When the 2021 Tax Season ended (2020 tax returns prepared in 2021), we added an additional tax professional.  We believed that would give us additional capacity for the expected growth for the 2022 Tax Season.  Otherwise, we expected 2022 to be a repeat of 2021.  However, that simply wasn’t the case.

1. We didn’t budget for returns taking 10% more time than last year (on average).  For whatever reason, we found that the amount of time we had to spend working an average return increased by that 10%.  Let’s say you spend 60 minutes (one hour) on a return; that would mean an extra six minutes.  That’s not much…but multiply that by 1,000 returns and you have 6,000 minutes or an additional 100 hours.  We didn’t budget for that (and didn’t see this coming).  This won’t be the first time I mention that while inflation is surely impacting our pocketbooks, there’s been no inflation in the length of a day.

2. Mr. Murphy struck on the illness front. When I wrote Part 1 in April, only one of our employees had gotten Covid.  By October, every employee had gotten Covid.  (Interestingly, no one caught it in the office.  Our office was built in the 1980’s and doesn’t have the best ventilation; one would think Covid would spread easily from employee to employee but that didn’t happen.)  That took each employee out of the office for at least one week (in my case, two weeks).  Additionally, last year’s flu shot was abysmal in preventing the flu (a reported 16% efficacy).  All but one of us got the flu, too (amazingly, no one caught it from anyone at the office–maybe the office’s ventilation is better than I thought).

3. Personal and legal obligations kept me away from the business for several weeks.  I had a family issue arise in January that kept me away from the office for almost the entire month.  While Scott (my business partner) and everyone else pitched in during my absence, it put me behind.  That’s a bad way to start a tax season.  I was then unlucky enough to have to deal with a legal issue which kept me out of the office for a couple more weeks.

4. We dealt with two day-long power failures and two air conditioning failures.  In Las Vegas, you simply cannot work in an office in the summer if there’s no air conditioning.  Twice, the power was out for several hours and we closed.  Twice, the air conditioning failed. (We do have a service contract that specifies same-day repairs, and the company we used was very efficient in fixing the issues).  Still, that’s another week lost from preparing returns.

5. The first four items highlight that we didn’t have enough resiliency built into our planning.  Consider an office of 100 tax professionals where one individual is ill.  The other 99 can pick up the slack fairly easily.  Now consider an office with five individuals with one out for an extended period; it’s far more difficult for the other four to effectively handle the increased workload.

6. We upgraded our internal paperless system and it didn’t work. We’ve used the same paperless system for more than a decade, and at the end of 2020 we “upgraded” to the new, improved version.  Unfortunately, new and improved wasn’t the reality.  It was slower and simply didn’t work.  We downgraded back to the old, unimproved version (which we’re still on).  The new version looked better but we’re far more concerned with quick retrieval of .pdf files, not the fact that the new system uses the cloud.

7. We discovered our systems were not robust enough to handle our growth.  We discovered multiple failure points during the 2022 Tax Season relating to our internal systems and how returns flowed in our office.  Most of these issues related to computer systems we use and were caused by using three different systems (excluding our tax software) for running the back-end of our office.

In many ways it was for us a perfect storm of issues.  It resulted in poor communication to our clients (which is unacceptable to us) and poor performance by us (mainly in timely preparing returns).

So what are we going to do about this?  That’s in Part 4 of this series coming next week.  For now, I’ll quote Lewis Mumford who stated, “The Chinese symbol for crisis is composed of two elements: one signifies danger and the other opportunity.” [1]  We’re looking at this as an opportunity for the 2023 Tax Season.

[1] I don’t speak or read Chinese, but I heard from a friend of mine that the Chinese symbol for crisis is actually not composed of an element meaning “opportunity;” instead, the second element means “change point.”  Whether it’s a change point or an opportunity isn’t relevant: for us, it’s going to be both.

The Tax Foundation’s 2023 State Business Tax Climate Index: Bring Me the Usual Suspects (Again)!

October 25th, 2022

It seems like it was only yesterday when I wrote about the 2022 State Business Tax Climate Index, but it’s been a year!  This morning, the 2023 Index was released and it’s more of the same.  Let’s look at the top ten states:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Montana
6. New Hampshire
7. Nevada
8. Utah
9. Indiana
10. North Carolina

As the Tax Foundation notes,

The absence of a major tax is a common factor among many of the top 10 states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Nevada, South Dakota, and Wyoming have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax.

Of course, there’s a bottom ten, too.  And there are few surprises for tax professionals:

41. Alabama
42. Rhode Island
43. Hawaii
44. Vermont
45. Minnesota
46. Maryland
47. Connecticut
48. California
49. New York
50. New Jersey

Again, let me quote the Tax Foundation:

The states in the bottom 10 tend to have a number of afflictions in common: complex, nonneutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, has the highest-rate corporate income taxes in the county, and has one of the highest-rate individual income taxes. Additionally, the state has a particularly aggressive treatment of international income, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.

While California bureaucrats would argue that the high and complex tax and regulatory system in the Golden State doesn’t matter, reality is what it is: It truly does matter.  Businesses are relocating out of California, seeking better business environments.  Yes, California has a large population and there will always be business there.

I interacted with numerous small business owners when I lived in Irvine, California (I moved to Las Vegas in December 2011).  None of these business owners plan on retiring in California.  All of them would move their businesses to another state if they could.  That’s a tremendous indictment of the business climate in California.  Sure, it’s a small sample size (around 70), but it ought to scare politicians in California.  Instead, there are propositions on the November ballot that would increase taxes!  Well, I guess some in California want to try for the top spot!

In any case, for those thinking about opening a business I recommend reviewing this important study from the Tax Foundation.  Taxes matter, and they absolutely impact where you conduct business.

Is Anyone Happy In Tax Professional Land?

October 19th, 2022

Except for our four international clients on second extension and our ten clients impacted by Hurricane Ian, the 2020-2022 Tax Season is over.  I expect that within one month, we will be off filing returns until February 2023 (well, there is our one September fiscal-year-end corporate client….)  We had quite a few issues this year, and I’ll expound on them at length in the next week or two.  For now, let me ask a question:

Among tax professionals, is anyone happy?

I saw lots of tax professionals leaving the profession over the past two to three years, and it didn’t make sense to me.  This is a good profession where we help our clients.  I enjoy the work (yes, someone has to).  But this past Tax Season was the first year I felt, at times, that I didn’t like what I was doing; I now understand why tax professionals are retiring.

This has major impacts to our clients.  The Law of Supply and Demand holds throughout the world (no matter what politicians say).  If Supply decreases, Price increases.  Even if inflation were 0% (and it’s not), prices would be increasing significantly.  Add in the huge inflation we’re seeing (example: paper prices at Costco have increased from $28.99/case to $35.99 $36.99/case since November 2021), and most tax professionals will be increasing prices dramatically for the 2023 Tax Season.

Did I mention Demand?  That’s increasing, too.  During the month of October (and today is October 19th, so there’s still another nine business days) we’ve received twenty inquiries for next year!  So that, too, will cause price increases.  Additionally, if you are seeking a tax professional to assist you with your 2022 tax returns now is the time to find him or her because January will likely be too late!

I’m going to have a lot more to say about this as I review our failings (and, unfortunately, there were plenty) and successes during the 2022 Tax Season.  I’ve written two parts of the series (Part 1 and Part 2 were posted earlier this year); Part 3 should be up by the end of next week with Part 4 following soon thereafter.

Let me go back to the question I asked and ask it of myself: Was I happy doing what I do this year?  Far less so than in the past.  This means changes are coming–perhaps dramatic changes.  I am going to be happy doing what I do or I won’t do it anymore: life is too short to do otherwise.

UPDATE: I just returned from Costco to buy paper (and a few other items), and the price has increased $1/case (to $36.99 from $35.99) from September.

FINCEN Gives FBAR Filing Relief for Individuals Impacted by Hurricane Ian

October 6th, 2022

FINCEN announced today that they are following the IRS and giving relief to taxpayers impacted by Hurricane Ian:

FinCEN announced today that victims of Hurricane Fiona in Puerto Rico; Hurricane Ian in Florida, North Carolina, and South Carolina; and storms and floods in parts of Alaska have until Februrary 15, 2023 to file Report of Foreign Bank and Financial Accounts (FBARs) for the 2021 calendar year.

This is good news for taxpayers who have far more important things on their mind than completing government paperwork.

Hurricane Ian: IRS Extends Deadline for All Floridians to February 15

September 29th, 2022

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.


It’s Time to Panic!

September 20th, 2022

Today is September 20th. Three weeks from Monday is October 17, 2022. That’s the deadline for individual taxpayers on extension to file their tax returns (unless you’re in a federal disaster area). 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.

Every tax professional I’ve spoken to this year is buried.  Indeed, 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 will be issues.  And I can guarantee if you drop off your paperwork with us on October 10th 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 the October deadline.

The Trouble With Identity Protection Verification Notices

September 16th, 2022

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:

  1. Reaching a human at the IRS is extremely difficult;
  2. Tax professionals generally cannot call on your behalf if you receive one of these notices (we can be on the call with you, but the IRS wants the taxpayer to be on the line);
  3. The IRS is not following up with taxpayers who don’t respond to the 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.

Are NFTs Subject to Sales and Other State and Local Taxes?

August 31st, 2022

Let’s say you’re Ralph, and you create a series of Non-Fungible Tokens (NFTs).  You begin selling these NFTs, and each sells for the equivalent of $100,000.  Of course, that income is subject to income tax (it’s an accession to wealth, and clearly income to Ralph).  Is it subject to sales tax?

Some states’ sales taxes cover digital (electronic) items; other states’ sales taxes do not.  There are even some states, such as Oregon, that do not have sales tax and other states, such as Florida, that exempt sales of digital items from sales tax.  But let’s say Ralph resides in Pennsylvania and he sells an NFT to Linda; she also resides in Pennsylvania.  Let’s further assume that Ralph is in the business of selling NFTs.  Does he (a) need to register with Pennsylvania as a retailer for sales tax purposes, and (b) does he need to collect sales tax?

The answer is yes, he does.  The Pennsylvania Department of Revenue released a new sales tax booklet that addressed this issue.  Under Pennsylvania law, “…[S]ales and use tax applies to any transfer of a digital product where the purchaser pays a consideration, unless that transfer is otherwise exempt.”  NFTs are specifically noted as taxable.  That means that Ralph must register as a retailer and collect and remit sales tax.  This income is, because Ralph is in business, also subject to local Earned Income Tax.

Let’s change the facts slightly.  Ralph resides in Oregon, a state without sales tax, and sells an NFT to Linda, a Pennsylvania resident.  Believe it or not, Ralph may still have to register for sales tax in Pennsylvania.  Under the Wayfair Supreme Court decision, out-of-state sellers are, in some circumstances, required to register for sales tax in other states (if they meet minimum threshold requirements).  Let’s further assume that Ralph doesn’t meet that threshold.  In that case, Linda owes use tax (the equivalent of sales tax when sales tax isn’t charged) to Pennsylvania and must include it on her individual tax return.

Pennsylvania isn’t alone in releasing guidance.  Washington state released interim guidance noting that NFTs would be subject to both sales tax and the state’s Business & Occupations Tax.  I strongly suspect NFTs are subject to sales tax in other states, too.

If you’re selling or purchasing NFTs, or you are a company facilitating the sales of NFTs, you should speak with your tax professional regarding handling sales and use tax issues.