Taxable Talk

Most people are aware of Form 1099; that’s the form you send individuals in the US to report various kinds of income. There’s a similar form used when you’re sending paperwork to non-Americans: It’s Form 1042-S. These forms must be mailed to the recipient and filed with the IRS by Monday, March 16th. If you file electronically with the FIRE system, no Form 1042-T (the cover page used with the 1042-S’s) is needed. Form 1042 is the annual report of withholding.

The deadline for filing these forms is Monday. Like the deadline for corporate tax returns, this is a postmark deadline. So if you need to mail these forms to the IRS, go to the Post Office and mail them certified mail, return receipt requested. It’s the only proof that’s accepted (other than efiling the forms).

The deadline for calendar year corporations (both C-corporations and S-corporations) to file their 2014 tax returns is Monday, March 16th. If you’re not ready to file, simply file an extension. This can be done electronically, or download Form 7004 and mail it–using certified mail, return receipt requested, of course–with a postmark no later than Monday.

The penalty for late filing an S-Corp return is $195 per month per shareholder. That’s a hefty price for not filing an extension.

Yesterday, I called the IRS on behalf of a client. The client’s 2013 tax return was not processed correctly, so we had to file an amended return. The client received a CP503 notice demanding payment; however, we believe that she will actually receive a refund. It’s been four months since the amended return was received. It will likely be another four months before the issue is resolved…and it might be longer. The IRS put a 15-week hold on collection activities, so my client’s issue was resolved (for the moment).

But for the taxpaying public it’s gloom and doom this year when dealing with the IRS. IRS Commissioner John Koskinen sent a memo to all employees on Tuesday:

There is no way around the severity of these budget cuts without taking some difficult steps. Congress approved a $10.9 billion budget for us, which means we must absorb a cut of $346 million during the remaining nine months of the fiscal year. But that really amounts to a total reduction of about $600 million when you count another $250 million in mandated costs and inflation. This is the lowest level of funding since 2008, and the lowest since 1998 when inflation is considered.

In the memo, Commissioner Koskinen noted that there will be delays to IT work, less enforcement, and cuts in overtime and temporary staffing. For the public, interfacing with the IRS will get worse:

o Delays in refunds for some taxpayers. People who file paper tax returns could wait an extra week—or possibly longer—to see their refund. Taxpayers with errors or questions on their returns that require additional manual review will also face delays.

o Increasing correspondence inventories. We realize there will be growing inventories in Accounts Management, and taxpayer correspondence will face lengthy delays.

o Taxpayer service diminished further over the phone and in person. We now anticipate an even lower level of telephone service than before, which raises the real possibility that fewer than half of taxpayers trying to call us will actually reach us. During Fiscal Year 2014, 64 percent were able to get through. Those who do reach us will face extended wait times that are unacceptable to all of us.

What this means for you and I is that we have deadlines, but there’s none on the IRS. If you’re going to call the IRS, expect very lengthy hold times; yesterday I was on hold for 101 minutes before speaking with an IRS representative. I expect the hold times to get far worse as we head into Tax Season. If you’re sending mail to the IRS, you will be waiting for a response for weeks to months. Given the volume of mail, this will lead to more individuals mail not being responded to in a timely manner; this will lead to more Tax Court petitions being filed.

Back in December 2013 I sent a letter to the IRS on behalf of a taxpayer who had an issue with an electronic payment. I received the response to that letter last week. Humorously, the IRS had first said they lost my letter. (It was sent certified mail, return receipt, so I knew it was received.) This kind of delay is going to become the norm.

What can the taxpaying public do? First, don’t take out your anger with IRS employees; it’s not their fault. Almost all IRS employees do try their best. As Commissioner Koskinen said, “But I know firsthand the commitment and dedication you and your colleagues have to the nation and to taxpayers, and I know you will continue to do your best even as we are forced to do less than all of us want.” Yes, the IRS partially brought this on themselves with their obfuscating responses to the IRS scandal, but that has nothing to do with the rank and file IRS employees.

Second, document everything. If you mail something to the IRS, send it certified mail, return receipt requested. If you call the IRS, document who you spoke to (especially if the call relates to an examination/audit). At the beginning of any call with an IRS employee, they will state their name and badge number. You may need this information later.

Third, if you work with a tax professional get your paperwork to him or her early this year. This return season would have been challenging without the IRS issues; it will likely be one for the record books (and not in a good way). I expect my firm’s deadlines for clients to be applied to all this year.

Finally, be very patient. The IRS will eventually get back to you. If you have an issue and have to call the IRS, try first thing in the morning (especially if you live on the East Coast) or at the end of the day (especially if you live on the West Coast); avoid calling on Mondays.

I wish I had good news here, but the reality is that dealing with the IRS over the next few months will be a very unpleasant experience.

The IRS will reopen business electronic filing this Friday, January 9th. This is just for prior-year business returns (2012 and 2013). Current year (2014) business return electronic filing opens on Tuesday, January 20th — the same day that the IRS will begin accepting 2014 individual returns. Prior-year individual returns (2012 and 2013) can also be electronically filed beginning on January 20th.

The IRS announced today that they anticipate opening tax season normally — on Tuesday, January 20, 2015. (Monday, January 19th is Martin Luther King day and is a federal holiday.) Paper return processing will also begin on the same day.

It is probable that 2014 business tax returns will be accepted on or around the same date.

If you’re a tax professional here’s a warning: The 2015 Tax Season will be one you’re almost certain to remember for all the wrong reasons. If you’re a client of a tax professional be forewarned: Your tax professional will be even more grouchy than usual next year. Why? The upcoming tax season will likely be the worst in 30 years.

There are four reasons for this: tax extenders, budget issues the IRS faces, the Affordable Care Act (aka ObamaCare), and the new property capitalization/repair regulations. Let’s look at them seriatim.

1. Tax Extenders. Stop me if you’ve heard this before: Congress has essential tax legislation, but sits around and does nothing on it until after the November elections. Yes, that’s happened again. If Congress acts on extender legislation in the next couple of weeks, there likely won’t be much of a delay (if any) on the opening of the 2015 Tax Season. However, if Congress dallies or punts this to the new Congress in January, the 2015 Tax Season will be significantly delayed. This will also hurt the IRS’s resources when there’s a lot going on (see below). I’m hopeful that something will be passed by the first week of December but that’s just hope on my part. I have no idea if the extenders will be timely extended.

Odds that this impacts Tax Season: 95%
Odds of a significant impact: 50%

2. Budget Issues the IRS Faces. The IRS’s budget has been cut the last two years. The House of Representatives has done this because of anger over the IRS scandal; it’s clear to any objective observer that the IRS knows more about the scandal than they’ve revealed. The only thing that the GOP can do to impact the IRS is cut the budget.

Unfortunately, the budget cuts impact service that the public and tax professionals receive. Additionally, the cuts limit the IRS’s ability to adapt to new legislation. It’s not a recipe for good service. Given the major changes coming for the 2015 Tax Season, it’s a recipe for disaster.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 80%

3. The Affordable Care Act (aka ObamaCare) This is the first year that reporting on health insurance is required on tax returns. However, reporting isn’t required this year by insurance companies. Insureds who believe they qualify for an exemption must apply for that exemption; that exemption must be noted on the return.

For most individuals, the new law will not change their taxes. They have employer provided health insurance. However, for the other 20% the new law will change their returns. They’ll have their own insurance, or receive a subsidy, don’t have insurance, have an exemption, or any of the other ‘edge cases.’ There are two new forms that tax professionals will have to deal with, and the complications are an unknown.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 100%

4. The New IRS Property/Capitalization Regulations. The IRS announced final regulations for repair/property/capitalization regulations in 2013. These regulations impact anyone who owns property, leases property, or produces property. This means you’re impacted if:

– You’re a business entity that manufacturers anything (you produce property); or
– You’re a business entity or an individual with a business that has depreciation; or
– You’re an individual (or a business) that owns rental property.

It might be easier to list those taxpayers who aren’t impacted by this: The typical family who works, owns a home, and has a simple situation. Put another way, if you file a Schedule C, E, or F, or you file a business return, you will likely be impacted by this change.

So Russ, you ask, what’s changing with these new regulations? Since most of you aren’t tax professionals and don’t care about the minutiae, the IRS changed the rules on what must be capitalized (and depreciated over time) and what must be expensed. That didn’t seem like such a huge deal back in May when I first heard about this (at a continuing education course). However, how the IRS is implementing this change will impact you if you’re a taxpayer impacted by this.

At the continuing education course I took, we were told that every impacted taxpayer would need to sign a statement noting compliance with the new regulations. That didn’t seem too bad–get a draft statement, and make the necessary modifications depending on the type of business. Unfortunately, that’s not what’s going to happen.

Instead, the IRS wants every impacted taxpayer to include Form 3115 on their tax return. This form is anything but easy or straightforward. You must make several calculations based on the past. The IRS estimates that it will take a taxpayer, on average, 23 hours and 48 minutes to be able to complete and file just this form. This is nuts.

No wonder Joe Kristan (via Tax Analysts) reported the following:

Participants in the tax methods and periods panel at the American Institute of Certified Public Accountants fall Tax Division meeting in Washington said that some taxpayers don’t want to pay the high costs associated with going through years’ worth of records to calculate a precise section 481(a) adjustment required under the final regulations (T.D. 9636). The cost of that level of compliance could be more than the entire cost of preparing their returns, practitioners said, adding that the taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero. [emphasis in original]

Joe calls this insane; I agree completely. Yet as of now I’m required to do this procedure. No wonder it was stated, “…taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero.” Consider a hypothetical client, Joe Lessor. Mr. Lessor has one rental property he’s leased out for the last four years. He has rent received, a mortgage, property tax, management fees, and every so often repairs. Do you think he’s going to pay me an additional $5,000 to get his return done to comply with this requirement? Or do you think he’ll tell me to make the numbers zero because the return was done right in the past and it will be done right in the future? (If you don’t like this scenario, choose your own.)

But there’s more. Form 3115 is (at least with my tax software) not a form that can be electronically filed. That means the IRS will have a lot more paper returns this year. Given the IRS’s staffing issues, that sure figures to work well.
UPDATE: Form 3115 can be attached as a pdf to electronically filed returns. That’s been clarified in Publication 1345. Thus, it can be (effectively) electronically filed.

I am hopeful that the IRS’s view on this will change. I know that the AICPA sent a request to the IRS for a de minimis exception to this. Maybe the IRS will see the light.

Odds that this impacts Tax Season: 100%
Odds of a significant impact: 100%

The 2015 Tax Season looked to be bad just given the first two issues. Adding ObamaCare and the new property/capitalization regulations to this just makes what was going to be a bad tax season into what will likely be a disastrous tax season. Nina Olson, the National Taxpayer Advocate, compared the upcoming tax season to 1985. In that tax season, the IRS Philadelphia Service Center “lost” about 20% of the paperwork they received. (This was back when returns were all paper-filed.) This will likely be a very bad tax season for tax professionals and taxpayers.