Bozo Tax Tip #9: Let Your IRS Notice Age Like Fine Wine

Posted on July 2, 2020 by Russ

My brother is a wine connoisseur. As all my friends know, I’m anything but a wine aficionado. But I have learned one difference between fine wine and a notice from the IRS: Wine can age very well but IRS notices don’t.

Almost all IRS notices come with deadlines. You need to act to stop the IRS. If you ignore the notice, you usually will get a second notice. After that, you may receive a Notice of Deficiency. If that ages the tax is assessed.

Yet most IRS notices are wrong in whole or in part! The last study I saw showed that two-thirds of IRS notices are wrong. That’s a shockingly high percentage. An obvious question is why doesn’t the IRS change its procedures so that the bad notices aren’t issued? The answer is simple: People pay those notices. The IRS’s Automated Underreporting Unit is a huge profit center for the agency.

What does this mean for you? Put simply, if you get an IRS notice read it carefully. Let your tax professional know about it when you receive it, not on the day a response is due. It’s a lot easier (and cheaper) to act earlier in the process than later.

And be very careful this year: Many IRS notices have new deadlines. The IRS printed approximately 20 million notices before the shutdown and are now sending those out. The deadlines on these notices are wrong and the IRS included an insert with the correct deadlines. If in doubt, send all pages of the notice to your tax professional and ask him or her what the deadline is.

My brother tells me that some of the best wine he’s tasted have been old varietals. I can tell you that I’ve never seen a tax notice get better with age.

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Bozo Tax Tip #10: Email Your Social Security Number

Posted on July 1, 2020 by Russ

Earlier this year I stated I wouldn’t run my Bozo Tax Tips for the 2020 Tax Season. A friend persuaded me that I should, that the world needs some humor. So we’re going to run them now that the tax deadline appears set as July 15th. Without further ado:

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

This is a repeat for the seventh year in a row, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and the IRS’s response has gone from awful to mediocre.

I have some clients who are incredibly smart. They make me look stupid (and I’m not). Yet a few of these otherwise intelligent individuals persist in Bozo behavior: They consistently send me their tax documents by email.

Seriously, use common sense! Would you post your social security number on a billboard? That’s what you’re doing when you email your social security number.

We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my mother, it might go in a straight line to her. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem—communicate in a secure fashion to your tax professional.

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No, Please No

Posted on June 24, 2020 by Russ

A brief story in today’s Wall Street Journal (Pay$ Link) states that Secretary of the Treasury Mnuchin may consider extending the July 15th tax deadline (which was, of course, originally April 15th) again. Quoting the Journal,

Asked in an interview at a virtual Bloomberg event if he was considering another delay to Sept. 15, Mr. Mnuchin said it is possible.

“As of now we’re not intending on doing that, but it is something we may consider,” he said.

My reaction is what I titled this article: No, please No. I and every other tax professional would like this Tax Season to end.

The article also notes that another stimulus program is now being considered, but Republicans would want it to be very targeted. Given that Democrats want everything under the sun, it will be quite interesting to see what (if anything) comes out of Congress this Summer.

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If the Lawyers Had Followed the Rules…

Posted on June 18, 2020 by Russ

Two marijuana dispensaries were audited by the IRS. Because of Internal Revenue Code § 280E (which prohibits all deductions for carrying on a business of trafficking in a controlled substance, which marijuana is), the first dispensary was looking at a tax bill of $1,129,276 with penalties of $225,855; the second was “only” faced with additional taxes of $531,707 and penalties of $106,341. The dispensaries received Notices of Deficiency, and they petitioned the Tax Court. The attorneys sent the petitions by Federal Express First Overnight. But they made mistakes:

The petitions were received, but the IRS filed motions to have them dismissed for “Lack of Jurisdiction.” This happens when you file late–the Tax Court is a court of limited jurisdiction, and you must follow the rules in order to have a case heard there. The IRS prevailed at the Tax Court (the case was dismissed for lack of jurisdiction), and the dispensaries appealed to the Ninth Circuit Court of Appeals.

In today’s ruling of the Ninth Circuit in Organic Cannabis Foundation, LLC v. Commissioner, the Court begins:

This unhappy case presents a cautionary tale about the need for lawyers to ensure that they have done exactly what is statutorily required to invoke a court’s jurisdiction. The unusual Internal Revenue Code (“I.R.C.”) provision at issue here allows taxpayers to benefit from a “mailbox” rule—i.e., that a document will be deemed filed when dispatched—only if the taxpayer uses one of the particular delivery services that the Internal Revenue Service (“IRS”) has specifically designated for that purpose in a published notice.

Read the rules! It’s not hard; the IRS maintains a list of such services. The attorneys used a faster service than what was then on the list. The problem is the plain language of the statute, as the Court notes:

Unlike Federal Rule of Appellate Procedure 25(a)(2)(ii), which applies a mailbox rule to the timely delivery of a brief to “a third-party commercial carrier,” § 7502 does not allow taxpayers to use the services of any bona fide commercial courier. Instead, the statute specifies that a particular “delivery service provided by a trade or business” will count as a “designated delivery service” only “if such service is designated by the Secretary for purposes of this section.” I.R.C. § 7502(f)(2). The term “Secretary” means “the Secretary of the Treasury or his delegate,” id. § 7701(a)(11)(B), and here that delegate is the Commissioner (or his further delegate). In addition to requiring a formal designation, the statute states that the IRS may designate a delivery service “only if [it] determines that such service” meets four enumerated statutory criteria designed to ensure that the delivery service is at least as adequate as the U.S. mail…

Congress did not merely require that a private delivery service meet certain functional criteria concerning the operation of that delivery service; it also pointedly insisted that the service must be “designated by the Secretary for purposes of this section.” I.R.C. § 7502(f)(2) (emphasis added). Given the wide range of documents that are eligible for § 7502(f)’s mailbox rule and the need for clear-cut rules on questions of timeliness, Congress understandably elected to establish a quality-control regime in which the IRS would vet each such service in advance and then issue bright-line designations as to which services are subject to the mailbox rule and which are not. The statutory language also makes clear that there must be separate designations for each “service” offered by a private courier—and not merely a designation of the courier itself—because § 7502(f) expressly distinguishes between the “trade or business” that engages in delivery of packages (e.g., FedEx) and the various “delivery service[s]” by which it does so (e.g., FedEx Priority Overnight).

So what can Organic Cannabis Foundation do? They can appeal this decision, though their chance of success is near zero. (They can try for either an en banc ruling of the Ninth Circuit or petition the Supreme Court.) They can pay the tax, file a claim for refund, and then after six months file a lawsuit in District Court. And given that every court that has looked at § 280E has come to the same conclusion (that Congress must act to change the law and that the IRS is correctly interpreting current law), their chance of success isn’t good. But that’s what they’re left with.

Sometimes faster isn’t better. Had the petitions been mailed certified mail at the post office, they would have been considered timely filed even if it took a month to reach the Tax Court. Had the petitions been sent with a slightly slower service (FedEx Priority Overnight), they would have been considered timely filed. Had they been sent three days earlier, they would have been received by the deadline and been timely filed. This is a Tax Court case where $1,993,179 is in dispute and the rules weren’t followed. Needless to say, it pays to follow the rules.

Hat Tip: How Appealing

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2020 Best States for Business: Bring Me (mostly) the Usual Suspects

Posted on June 18, 2020 by Russ

Chief Executive magazine does a survey every year of the best and worst states for business. This isn’t just a list about taxes, but includes other factors; still, it’s a good survey of what business executives look at. The top ten includes my home:

  1. Texas
  2. Florida
  3. Nevada
  4. Tennessee
  5. Indiana
  6. North Carolina
  7. Arizona
  8. South Carolina
  9. Ohio
  10. Utah

The bottom ten has a couple of surprises (for me):

41. Alaska

42. Hawaii

43. Oregon

44. Washington

45. Massachusetts

46. Connecticut

47. New Jersey

48. Illinois

49. New York

50. California

That Texas is at the top isn’t a surprise. “Employers continue to be attracted by the state’s lack of an individual income tax, low business taxes, friendly regulators, a reasonable cost of living, and diverse and growing labor force.” [emphasis added]. Contrast that with California: ” Business owners—especially companies that make things— continue to abandon the state as fast as they can.”

I was surprised by Alaska and Washington. Neither state has a state income tax. Alaska, of course, is hard to get to, and the cost of living is a big issue. In Washington state, it appears that the cost of living and regulations lower the ranking.

I wanted to emphasize the impact of regulations. Regulations are hidden costs for businesses. It’s not that all regulations are bad (that’s absolutely not the case); rather, over-regulations cost business money. Consider a widget manufacturer in Los Angeles. He’ll face California’s burdensome regulations at the state, county, city, and regional level (the air quality district regulates). Here in Nevada, there are state and local regulations, but they’re integrated without the quadruple level of regulations. I read years ago it took Carl’s Jr. (a fast food chain) over a year to get regulatory approval to build a new location in California; it took less than two months in Texas.

In good times, California has prospered because of the entertainment industry and Silicon Valley. We’re not in good times right now, and the budget hit to the Golden State is severe (they’re projecting a $54 billion deficit). Sure, Covid isn’t the fault of California (or any other state). But the reaction of the legislature demonstrates that they’re not learning anything: Increase taxes and hope for a federal bailout (one that I doubt is coming).

For those who think that state policies don’t matter, this survey tells you otherwise. The states at the top (run by Democrats or Republicans get this). The states at the bottom mostly don’t.

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Not Only Incoming Mail is Backlogged at the IRS

Posted on June 11, 2020 by Russ

This morning, our IRS Stakeholder Liaison held a conference call on the current IRS situation. One unfortunate piece of information that was noted is that not only does the IRS have a backlog of incoming mail (estimated at well over 10 million pieces), there is a very large backlog of outgoing mail. As of early this week, the IRS has a backlog of 23.5 million notices.

With the IRS gradually reopening, this is a backlog that’s going to take months to resolve. The IRS has the capability of mailing 1.5 million notices per week. That means there’s nearly a four month backlog. This week, I received an IRS notice for a client for the first time in months, so the IRS is starting on this. Per today’s call, the IRS is concentrating on notices that are time sensitive (such as Notices of Deficiency).

There are also going to be issues with the notices. These notices are computer generated, so the deadlines in the notices will be wrong. The IRS is including a flyer explaining this along with the new deadlines, but how many taxpayers actually read an insert?

The 23.5 million notices does not include notices that will be generated based on returns as they are processed, and the backlog of correspondence that must be processed. I’m telling clients that have responded to IRS notices to think that it will likely be several months before they hear anything.

Unfortunately, there’s nothing the IRS can do at this point but to start on the process and let practitioners know of the issues. This is a year to be patient with the IRS.

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IRS Reopening More Offices in June

Posted on June 5, 2020 by Russ

On June 1st the IRS opened offices in Kentucky, Texas, and Utah. That’s important for those of us in the tax professional community as two of the major IRS Service Centers for processing returns are in those states (Austin and Ogden). Austin also includes the unit that processes ITIN applications (a news report said there’s a backlog 250,000 applications). Ogden has one of the three CAF units (the unit that processes power of attorney and tax information authorization forms); that was backlogged even before the shutdown.

The IRS is opening more offices later this month:

  • Georgia and Tennessee: June 15th
  • Missouri and Michigan: June 15th
  • Indiana and Ohio: June 29th
  • California, Oregon, and Puerto Rico: June 29th

This includes the Atlanta and Memphis Service Centers on June 15th and the Fresno Service Center on June 29th. Atlanta and Memphis are not used for processing returns but are used for numerous other IRS operations including correspondence audits, offers in compromise, and automated underreporting unit notices. Fresno is a major processing center for returns.

This is good news for everyone (taxpayers, tax professionals, and IRS employees). Unfortunately, it is going to take many months for the paper backlog to be resolved.

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IRS Interest Rates Decrease for the Third Quarter of 2020

Posted on June 4, 2020 by Russ

The IRS announced today that IRS interest rates will decrease for the third quarter of 2020 to 3% for most from 5%:

  • three (3) percent for overpayments [two (2) percent in the case of a corporation];
  • one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000;
  • three (3) percent for underpayments; and
  • five (5) percent for large corporate underpayments.

The IRS press release is here; the official Revenue Ruling is here.

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IRS to Allow E-Filing of Amended Tax Returns But…

Posted on May 28, 2020 by Russ

This morning I received an announcement (below) that the IRS will, sometime this summer, allow electronic filing of amended personal tax returns (Form 1040X). Unfortunately, there’s a major “but” included:

When the electronic filing option becomes available, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically. In general, taxpayers will still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form. Additional enhancements are planned for the future. [Emphasis Added]

This will definitely help for the future; however, most amended returns are not the current-year tax returns. For example, I prepared three 2018 amended returns today.

This isn’t to say this is a bad thing. On the contrary, over time this is a very, very good thing. In the best of times it takes the IRS four months to process an amended return filed by paper. (I suspect the amended returns I prepared today will take at least six months to be processed given the IRS’s current backlog.) Being able to have an amended return quickly sent, without risk of it being lost, is a wonderful improvement over what must be done today and will undoubtedly lead to faster processing of amended returns.

Here is the IRS announcement in full:

WASHINGTON — The Internal Revenue Service announced today that later this summer taxpayers will for the first time be able to file their Form 1040-X, Amended U.S Individual Income Tax Return, electronically using available tax software products.

Making the 1040-X an electronically filed form has been a goal of the IRS for a number of years. It’s also been an ongoing request from the nation’s tax professional community and has been a continuing recommendation from the Internal Revenue Service Advisory Council (IRSAC) and Electronic Tax Administration Advisory Committee (ETAAC).

Currently, taxpayers must mail a completed Form 1040-X to the IRS for processing. The new electronic option allows the IRS to receive amended returns faster while minimizing errors normally associated with manually completing the form.

“This new process is a major milestone for the IRS, and it follows hard work by people across the agency,” said IRS Commissioner Chuck Rettig. “E-filing has been one of the great success stories of the IRS, and more than 90 percent of taxpayers use it routinely. But the big hurdle that’s been remaining for years is to convert amended returns into this electronic process. Our teams have worked diligently to overcome the unique challenges related to the 1040-X, and we look forward to offering this new service this summer.”

About 3 million Forms 1040-X are filed by taxpayers each year.

The new electronic filing option will provide the IRS with more complete and accurate data in an easily readable format to enable customer service representatives to answer taxpayers’ questions. Taxpayers can still use the “Where’s My Amended Return?” online tool to check the status of their electronically-filed 1040-X.

When the electronic filing option becomes available, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically. In general, taxpayers will still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form. Additional enhancements are planned for the future.

“Adding amended returns to the electronic family also complements our partnership with the tax software industry, which continues to work with us to provide better ways to help taxpayers,” said Ken Corbin, Commissioner of the IRS Wage and Investment division.

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Patiently

Posted on May 20, 2020 by Russ

Two clients asked me about their tax refunds this week. Both had filed several weeks ago, and each had received their state refunds. Neither had received their federal refunds. With the IRS phone lines for practitioners now working (albeit with a reduced staff), I called the IRS for both clients.

The first client’s return was filed at the end of March. The helpful IRS phone agent told me there was a ‘processing error’ with her return, and the problem is normally resolved within one to four days by the “Error Resolution Department.” Unfortunately, that departments isn’t working right now, so her return (and likely hundreds or thousands of others) is waiting for the IRS Service Centers that process returns to reopen.

The second client filed just one week later; their return simply hasn’t been processed. Yes, it was electronically filed, but for some unknown reason it’s sitting in a queue (virtually, I suppose) waiting for some IRS employee to hit “Run.” Again, with no IRS employees working in the Service Centers right now that return could be processed today or a month from today or months from today.

My suspicion is that IRS Service Centers will reopen in June, and that the unprocessed returns and returns waiting for error resolution will be resolved then. On the other hand, if you have to mail a tax return that return will be processed sometime. I have a couple of 2016 returns that had to be mailed, and I told my clients I expect they’ll be processed by year-end.

I’m not optimistic about correspondence sent to the IRS. I have two correspondence audits and several other open issues with the IRS. In good times the IRS can takes many weeks to answer the mail; I’ll be thrilled if I receive responses by October.

Everyone needs to have some patience. This isn’t the choice of the IRS, and they want to resolve all the issues, too.

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