PPS Gets Friendlier: Callbacks Available

December 15th, 2020

Twice a week, on average, I call the IRS’s Practitioner Priority Service. It’s the usual starting place for tax professionals to resolve issues with the IRS. This year, calling the IRS has been an adventure. This is not the IRS’s fault: Covid has played havoc with everyone. But getting through to the IRS for tax professionals has been an adventure: If I call after 9am PST I’m usually greeted by the message, “Due to extremely high call volumes we cannot complete your call at this time; please call back later. Goodbye.”

This morning, I called the IRS to resolve a client’s payment. He made a payment for 2019 taxes–and it shows on the IRS computer system. However, it has not made it to the client’s account; somehow the payment is stuck in limbo. When I called the IRS up I was greeted with something new and improved (really, this isn’t a joke):

We estimate your wait time to be between 15 and 30 minutes.

Rather than waiting on hold, we can call you back when it’s your turn. You will not lose your place in the queue. To receive a callback, press….

After entering my callback number (it does require a direct phone number), I was told I would receive a callback in 20 minutes…and I did! This is a marked improvement, and I’m surprised the IRS hasn’t publicized it.

Additionally, I’ve been told the ability to receive callbacks has been added to the IRS’s Identity Protection Unit. This year, the IRS has sent out 25% more letters requiring individuals to prove their identity while staff has been cut. Getting through to that number has been extremely difficult. Callbacks make the identity verification process a little easier.

All-in-all, kudos to the IRS for adding some technology that helps users.

Ignoring W-2Gs and $482,000 of Income Led to a Sub-Optimal Result

December 14th, 2020

Bluffing in poker can work quite well. However, if your opponent will always call, bluffing cannot work. One poker player learned that the IRS always call your bluffs (especially when they have evidence).

Guy Smith owns an interior construction business in Connecticut. He also enjoys playing poker, and had some success. With that success comes W-2Gs: They’re issued if you have a cash of $5,000 or more (net of the buy-in). Mr. Smith has had many, winning a poker tournament in Connecticut and finishing fifth in another in Florida.

Mr. Smith apparently didn’t tell his tax professional about those winnings. The IRS computer would, of course, send notices noting the discrepancies on the returns. Given the tournament winnings were more than $1 million, this is a big issue. Ignoring tax forms that are sent to the IRS has about a 0% chance of long-term success.

But like a bid informercial, that’s not all. Mr. Smith ignored $482,000 of income from his business (and didn’t tell his tax professional about that, either). Unfortunately for Mr. Smith, the IRS discovered this. With nearly $1.5 Million of unreported income and over $800,000 of unpaid federal income taxes, IRS criminal investigation was interested.

Mr. Smith pleaded guilty to one count of tax evasion last week; he is scheduled to be sentenced in March and faces up to five years at ClubFed. Given he has agreed to cooperate with the IRS and pay all outstanding taxes (and the penalties and interest), his actual sentence will likely be far less.


In just over two weeks I’ll be announcing this year’s winner of the “Tax Offender of the Year” award. To win this coveted award [1] it takes more than simply evading taxes. It has to be special; it really needs to be a Bozo-like action or actions. If you have any ‘deserving’ nominees, let me know.

[1] I’m not sure anyone really covets receiving this award, but given the actions of some of the previous winners it may be that some were actually trying to win the award.

Tax Professionals: IRS Considering Extending 2021 Tax Season

December 6th, 2020

Last week, a client of mine who filed in late March (by paper because her return could not be electronically filed) finally received her refund. The return was processed in mid-November (per the IRS transcript). The IRS is doing its best with Covid, but they remain ridiculously behind. It’s certain the IRS will not process all timely paper-filed 2019 returns by the end of this year. Indeed, I saw that a Revenue Agent told a fellow E.A. that the IRS has “at least 2.5 million unopened pieces of mail.”

Another fellow Enrolled Agent attended (virtually) the IRS Stakeholder Liaison IMRS meeting last week. That’s a meeting where the Stakeholder Liaisons–IRS employees tasked with assisting tax professionals–track and respondsto significant national and local issues and concerns on IRS policies and procedures. During that call the IRS discussed extending the 2021 tax season by extending the filing deadlines for various 2020 tax returns.

The IRS has various concerns:

  1. 1099s and W-2s may be delayed.
  2. The IRS may not be caught up by the beginning of the 2021 Tax Season.
  3. A 2-week quarantine by an employee would be difficult to overcome.
  4. Many tax professionals will be working from home.
  5. Clients will expect less contact with tax professionals which likely will increase the time needed to prepare returns.

The IRS is requesting that tax professionals contact their local stakeholder liaison express their opinion.

I will be pondering this over the next week as I have both pro and con opinions regarding extending the 2021 Tax Season. And I still have two timely returns to get completed for the 2020 Tax Season (two individuals residing outside the United States who took second extensions)!

Gambling With an Edge Podcast

November 30th, 2020

I was this week’s guest on the Gambling With an Edge podcast where we talk about taxes (with an emphasis on gambling). You can download the podcast here; it’s also available on iTunes and all the other usual podcast locations.

We spoke about changes in the tax law, self-employment tax for professional gamblers, self-dealing vis-a-vis IRAs, 529 plans, and offshore (foreign) corporations among other issues. I also gave a non-tax recommendation on my favorite Thai restaurant here in Las Vegas.

Wait

November 24th, 2020

I sometimes listen to music while working. I have a ~900 song playlist I cycle through, and today White Lion’s Wait came on. (White Lion was a hair band–if you watch the linked video, you will see why.) And it seemed an entirely apropos title to this post: a post where we’re dealing with PPP loan forgiveness.

Earlier this year many businesses applied for Paycheck Protection Plan (PPP) loans. These seemed like a great deal for struggling businesses: Use them for payroll or certain other expenses (rent, utilities, etc.) and the loan would be forgiven. It was money from the US government to help small businesses make their way through Covid.

Congress’s intent (at least according to Senators Grassley and Wyden) was that businesses would be able to receive the loan, have the loan forgiven (assuming the expenditures were used as noted above), and the loan would not be considered income. The IRS, though, had another idea. Sure, the loan isn’t income; however, the expenses would not be deductible: the IRS noting that per Section 265 of the Tax Code if you have nontaxable income, expenses used in production of that income are not deductible. Senators Grassley and Wyden complained earlier this summer when the IRS first announced this. The IRS double-downed on this, releasing Revenue Ruling 2020-27 and Revenue Procedure 2020-51 confirming the IRS’s initial position. Senators Grassley and Wyden complained again.

A few tax professionals have argued the IRS got this wrong. Unfortunately, a literal reading of the Tax Code verifies what’s in Section 265 of the Tax Code. That said, Congress can override this. They could, for example, write a new law stating that PPP loans that are forgiven do not cause the expenses used in production of that income to be taxable. Indeed, there is legislation pending in Congress to do just that. Whether such legislation passes is another question though. The legislation does have bipartisan support, so there is a good chance it passes either in the “lame duck” session or early next year.

So what should someone do who received a PPP loan? Generally, they should wait to request forgiveness. (An exception is a sole proprietorship who used the funds for replacement of the owner’s ‘pay’. Because such pay isn’t taxable, there are no expenses which would be non-deductible.) Generally, you have ten months from the end of the PPP covered period to request forgiveness. We’re likely to have clarity on this sooner rather than later (I’m hopeful we’ll know by February), so if you can wait do so.

Indeed, given the rules and procedures the IRS came up with in Revenue Ruling 2020-27 and Revenue Procedure 2020-51 it’s a good idea to know what the exact forgiveness is before filing your 2020 return…and that could be five months after applying for forgiveness. As always, it’s better to extend than amend. Yes, there are going to be quite a few extensions filed by PPP loan recipients in 2021.

When 5 ½ Months Seems Fast

November 23rd, 2020

Last week I complained about the IRS taking more than 5 ½ months to process an amended return. Well, I may have some clarity now on IRS processing time and it ain’t pretty.

On February 4th clients of mine mailed their 2018 tax return to the IRS. This particular return could not be electronically filed. They mailed it certified mail. It took nearly a full month to get from Las Vegas to Ogden, Utah. On March 1st it was received.

And then nothing…until today.

The IRS shows the return was processed today, November 23rd. That’s more than 8 ½ months from the date it was received (and more than 9 months after it was sent). Yes, we’re dealing with Covid but this is really unacceptable. These clients have been waiting to set up a payment plan (installment agreement) but couldn’t because the return was “in limbo.”

Per IRS Commissioner Rettig, there are 1 million unprocessed tax returns, 6.8 million returns “in process,” and 3 million pieces of unopened mail. Or a child could be conceived and born faster than whatever it is you’re sending to the IRS is responded to.

So, what’s the solution? I honestly don’t see much improvement until next summer (when I think we’ll be able to put Covid in the rear-view mirror). Until that happens, it’s just going to be a slog.

Long-term, the IRS really needs to have its funding increased. The main IRS computer is older than I am (to give a hint of my age, I watched “The Play” in-person as a college student 38 years ago). The IRS is (as far as I know) the only place where money spent at the federal level brings back more money (Commissioner Rettig said that for every dollar spent, the IRS brings in $7). Let’s spend some money and move the IRS into the 21st Century!

When It Takes the IRS 5+ Months to Process an Amended Return…

November 18th, 2020

Back in May, clients of mine discovered they left something out of their 2018 tax return. We prepared an amended return, the clients included a check for the additional tax, and it was mailed off to Kansas City. The check was cashed in July, so the amended return was received.

Fast forward to today. The amended return still has not been processed (and no one knows when it will be; it’s almost certainly sitting in a bin with thousands of other amended returns), but the IRS Automated Underreporting Unit discovered the error and sent the clients a notice. They found the same error. So now my clients have to respond to this notice, telling the IRS there’s an amended return somewhere in Kansas City.

Normally, when a taxpayer submits an amended return for a year the IRS computer system notes the return exists so that no AUR notices are sent until the IRS processes the return. Because of Covid the IRS is behind. Way, way behind. At last report the IRS still has 8+ million pieces of mail to go through. So what my clients are going through is going to be repeated by many others, just adding to the IRS’s backlog.

Unfortunately, I don’t see a solution to these issues. Covid isn’t going away until likely next summer (based on the vaccine news, I expect most Americans to be vaccinated by then), meaning the IRS issues we face today will continue for months. (Even when the IRS fully reopens we’re looking at months to clear the backlog.) And it’s not just amended returns. I have a payment issue for a client (the IRS misapplied a payment) where I sent a response in September 2019; that response has still not been assigned to anyone. An Appeals request sent in February has just been assigned to somebody, but the helpful staff at the Practitioner Priority Service (and they did help me this morning) have no idea when the case will actually be worked. We all do need to be patient, but many taxpayers aren’t which is adding to the issues.

Do Canadian Professional Poker Players Owe Income Tax?

November 5th, 2020

In the United States, the tax law can be boiled down to two sentences: Everything is taxable unless Congress exempts it. Nothing is deductible unless Congress allows it. Gambling winnings are taxed–they are an accession to income. An American professional gambler clearly owes income tax.

However, in many countries like Australia only professional gamblers (those conducting a business) are taxed on their gambling winnings. This came up when Australian Joseph Hachem won the World Series of Poker. He successfully argued that at the time he won he was an amateur gambler and did not have to pay income tax on his winnings.

The law in Canada is not settled in this area. There is a court case from British Columbia that says that professional poker players do not have to pay tax on their winnings. But clarity is likely coming, as the Tax Court of Canada will hear the case of Jonathan Duhamel in March.

Mr. Duhamel won the 2010 World Series of Poker main event earning $8,944,310. Canada’s tax agency, Canada Revenue Agency (CRA), argues that Mr. Duhamel was operating a business; thus, he owes income tax on his net income. CRA argues that Mr. Duhamel hasn’t paid $1,219,114 (Canadian Dollars) in tax from 2010-2012. That’s $934,695 (USD), well worth fighting over.

The case will probably come down to whether or not the business aspect of Mr. Duhamel’s career outweighs the luck that caused him to win specific events. Per an article in The Canadian, CRA believes that because he considers himself a professional poker player, he behaves like a “serious businessman” while playing poker, he has no other primary source of income, and he performs his occupation for 40 to 50 hours per week, he is in business and owes income tax. Mr. Duhamel argues it’s just luck that causes him to win.

The good news for Canadian poker players is that clarity on income taxes is coming (probably next summer). The bad news is that to this observer it appears that CRA is starting with pocket Queens versus Mr. Duhamel’s eight-seven suited.

IRS Mailing Erroneous CP259F Notices

November 4th, 2020

We prepare a few split-interest charitable trust returns (IRS Form 5227) every year. Coincidentally, I serve as trustee of a split-interest trust. Imagine my surprise when I received a CP259F Notice from the IRS for the trust that I am trustee of stating, “You didn’t file a Form 5227.” The only problem is that I did file it (mailing it certified mail, return receipt requested) and it shows as delivered on March 4th. (Form 5227 cannot be electronically filed.) Meanwhile, multiple clients received the same letter; all filed their returns on or about the same date (and have proof of filing).

I called the IRS this morning and confirmed that these returns are most likely sitting in a trailer in Ogden, Utah waiting to be processed. Because of Covid, the Ogden, Utah mailroom did not reopen until mid-June. It could be tomorrow or three months from tomorrow before the Form 5227s are processed. The IRS asked that we ignore these notices and not send a second return because a second return (a) could be processed before the first return (causing another set of issues, including erroneous late filing penalties), and (b) sooner or later the backlog will be cleared (the returns will be considered filed on the date received, not the date the IRS eventually processes the returns). The IRS representative I spoke with stated these notices should not have gone out.

I do want to point out that this issue shows why using certified mail is essential when sending anything to a tax agency. While I’m hopeful that the trust return is sitting in the trailer and will eventually be filed, it’s inevitable that something is going to get lost. (There were over 23 million pieces of mail waiting to be processed at one point; the backlog is still more than 5 million.) Should the IRS lose the Form 5227, I have proof of filing that should hold up and prevent the imposition of late filing penalties.

This also is definitely the year to have patience with the IRS.

2021 State Business Tax Climate Index: Bring Me the Usual Suspects!

November 3rd, 2020

Every year the Tax Foundation publishes its State Business Tax Climate Index. As they state, they look at how each state taxes, not on the how much. Per usual, the names at the top and the bottom haven’t changed much.

The top ten states are:

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

The bottom ten states:

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

This is what the Tax Foundation states about the bottom ten:

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 second highest-rate corporate and individual income taxes in the country and a particularly aggressive treatment of international income, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.

I deliberately waited until election day to make this post. Why? Because some states have ballot measures today that will impact their rankings. For example, Californians will vote on whether to have a “split-roll” property tax, where business properties would be assessed annually based on current value rather than only when a property is sold. California today ranks 14th in property tax; if this measure passes, the ranking will fall dramatically. Illinois votes today on changing their personal income tax from a flat-rate tax to a progressive system.

Nevada, my state, ranks seventh. It’s not that every tax is great in Nevada (we have a poor sales tax system and unemployment insurance taxes); however, we lack income taxes. (We do have a gross receipts tax, called the Commerce Tax, that large businesses must pay.)

Some states, like Utah and Indiana, have most taxes but they administer them neutrally, simply, and with relatively low rates. Contrast that with California, which has an awful income tax system, high rates, and ridiculous regulations.

Below is a map (from the Tax Foundation) of the United States with the rankings of each state. If you’re considering locating a business, it makes sense to look at taxes (and other factors, too); the Tax Foundation’s annual guide is a tremendous resource.