Posts Tagged ‘2017.Tax.Season’

IRS E-Filing for Individuals Closes on November 18th

Tuesday, October 31st, 2017

The IRS announced today that e-filing for 2016 tax returns will close on Saturday, November 18th. After that date individuals who need to file 2016 tax returns will need to paper-file those returns until e-filing reopens (most likely in late January 2018). Individuals impacted by the hurricanes and wildfires currently on ‘disaster extension’ are those most likely to be impacted by this.

The Five “Strangest” Things Clients Told Us This Tax Season

Wednesday, October 18th, 2017

As I write this from an undisclosed location on my vacation, it’s now two days past the closing (for most of us) of the 2017 Tax Season (filing 2016 tax returns). Our clients told us some, shall we say, interesting things this year. Here are five lowlights:

5. “I sold things on the Internet, so I don’t owe state tax on it.” This client, call him Mr. Smith, sells products over the Internet. He’s a resident of a state with an income tax. “But Russ,” he said, “My customers use the Internet to purchase the products. This business isn’t located in my home.” Indeed, the products ship from Nevada, rather than his home state. Unfortunately, there are two arguments that outweigh his idea. First, he resides in a state with a state income tax; all of his worldwide income is subject to that tax. Second, he is conducting the business from his home: He directs it, manages it, and profits from it. His business may be conducted over the Internet, but it’s conducted by him in his home (in his home state). He eventually came around to paying state income tax. I did offer him a solution: Move to Nevada or some other state that doesn’t have a state income tax. His wife didn’t like that idea.

4. “I don’t want to file the New York tax return, even though I’m getting a full tax credit on my California return.” Mrs. Jones didn’t like it when her employer withheld New York income tax for a four week stint she did working in the Big Apple. “I’m a California resident; how dare New York tax me!” I asked her if she did spend that time in New York. She did. I explained she would get a full tax credit on her California tax return for the New York tax. She didn’t care. I then explained that if she didn’t pay the tax (after withholding, there was a small balance due to New York) she’d get a bill for penalties and interest in a couple of years, and she would pay a lot more than if she simply filed the return. She would also then have to amend her California return to get the tax credit; that would incur additional fees from me. That last point caused her to change her mind.

(The issue of nonresident taxation is a big one, though. Congress has been looking at making the rules for such taxation uniform, and that would be a godsend to both taxpayers and tax professionals.)

3. “I only had the foreign bank account for one week. I don’t want to file the FBAR.” A client inherited money in Spain; the money was moved into a Spanish bank account for exactly one week before being wired to her US account. Since the funds weren’t taxable (gifts aren’t taxable to the recipient) nor was it reportable (gifts from foreign individuals can be subject to reporting but this gift wasn’t large enough to trigger that) she felt it was none of the government’s business that she inherited funds. I explained that Congress felt otherwise. She didn’t care. I then told her there’s a minimum $100,000 penalty for willingly failing to file the FBAR. She then asked me how it was filed.

2. “The side income was only $30,000. Doesn’t that qualify for the de minimis exception to reporting income?” My response was simple: There is no de minimis exception to reporting income. (And even if there were, $30,000 is likely not de minimis.)

1. Twice I heard, “The 1099 never showed up. I don’t have to report the income, right?” Wrong: All income is taxable, no matter if you receive paperwork or not.

We have a bonus lowlight, too. An individual who I effectively turned down as a client apparently read up on Irwin Schiff. The late Mr. Schiff argued that the income tax was unconstitutional, and various other incorrect arguments about how one can legally stop paying the income tax. He was correct in that anyone can stop paying income tax; he was incorrect in saying that one can do that legally. Mr. Schiff died at ClubFed.

In any case, this unnamed individual called me and asked me if I believe in following the law on taxes. I do, of course. He then said that he was looking for a tax professional who believed in the law. So far, so good. He then said that since he had read that the income tax was voluntary he was only going to pay tax on a fraction of what he made; and he wanted me to prepare such a return. I told him that as long as the fraction was equal to 100% of his income, I’d be happy to do so. Strange, I never heard back from him.

I’ll likely have some serious thoughts about the Tax Season that was next week when I get back from my all-too-brief vacation.

Prepare to Panic!

Monday, September 25th, 2017

Today is Monday, September 25, 2017. Exactly three weeks from today is Monday, October 16, 2017. That’s the deadline for individual taxpayers on extension to file their tax returns (save for those in hurricane disaster zones in Florida, Georgia, Texas, Puerto Rico, and the Virgin Islands). 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.

It may already be too late for your return to be timely filed with many tax professionals. For example, our official deadline was last Wednesday. Luckily, we’re not behind so our procrastinating clients are still in good shape. However, that might not be the case with all tax professionals. And I can guarantee if you drop off your paperwork with us on October 13th 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, simply procrastinate for another three weeks.

That Was the Tax Season that Was

Sunday, April 23rd, 2017

April 15th, err, make that April 18th, has come and gone. Every Tax Season is different, and this one had its ups and downs. So let’s take a look at eight observations I have of the first part of the 2017 Tax Season:

1. The IRS did a good job with telephone service for tax professionals. My average wait time on hold with the Practitioner Priority Service was three minutes. That’s superb. I was told by several agents that the IRS added personnel to help tax professionals. That made my life easier, but…

2. The IRS didn’t do as good a job with taxpayers. I had a couple of clients who called the IRS note the hour-plus hold times.

3. The new law mandating interviews with taxpayers claiming the Earned Income Credit, the Child Tax Credit, and the American Opportunity Credit is annoying for tax professionals and will only stop the lowest of low hanging fruit of tax cheats. Most tax professionals know their clients, and simply aren’t committing tax fraud. My clients were more bemused than anything else with some of the questions I had to ask about their children.

4. More of my clients filed without extensions than in the past. This result appears to differ from the national average (the latest report I saw was that there were five million fewer returns filed year-to-date than last), and differs from the long-term trend that I’ve seen the last few years (that more returns were going on extension).

5. The new FBAR deadline will make my life far easier. Officially, the deadline coincides with the tax filing deadline, but there’s an automatic six-month extension. This will allow FBARs to generally be filed coincidentally with tax returns.

6. It would be impossible to run our tax practice without using tax software; however, tax software isn’t a panacea for thinking about the returns themselves. I’ve seen some self-prepared returns this Tax Season that were, to be kind, amusing. Tax software is great in automating the mundane but not so great in thinking for you.

7. We need tax reform, and soon. The Tax Code is far, far too complex. I’m now preparing returns that are close to “basic.” And I practice in a state where there’s no income tax. (Yes, I prepare returns for many states, but my local clients generally don’t have to deal with state income tax.) Yet these clients find the Code so complex that they can’t do their own returns.

8. Deadlines matter. Almost every tax professional I know sets deadlines for receiving paperwork from clients; ours was set at March 15th. We did get to many returns that came after that date, but for the client who wondered why I stifled a laugh when he dropped his paperwork off on April 17th and said he’d be in tomorrow to pick up his completed return. He’s on extension, of course. If you’re using a tax professional to prepare your returns, he almost certainly has also set a deadline for receiving paperwork prior to the October 16th extension deadline. You should pay attention to that, and get your paperwork in to your professional timely.

I’m hopeful my thoughts in October will be just as kind about the second half of the Tax Season; only time will tell.

Your Tax Professional, A Cop

Thursday, December 1st, 2016

Las Vegas Police Department Logo

When I flew to visit my mother for Thanksgiving, I had to show my driver’s license to get through TSA security at the Las Vegas Airport. That’s not a surprise. When I prepare my mother’s tax return for 2016, I am required to note my mother’s drivers license number, the date it was issued, the date it expires, and the state it was issued by. No, I am not making this up.

I have become a cop. And I’m not happy about it.

The IRS (with the tacit support of tax software companies) has pushed this requirement on to tax professionals. Sure, it only takes two minutes to enter this information (four minutes if married filing jointly), so for a return it’s not that big of a deal. Multiply that by 500 returns, and you have 1,000 minutes. That’s nearly seventeen hours of work (likely more, as most of my clients are married).

Yes, this will aid in preventing some identity theft. Yes, some states have already required this information. (I know that Alabama did for 2015 tax returns.) Yes, I won’t need to reenter this for 2017 tax returns (unless the driver’s license information changes). But this is another 17 hours I don’t have during tax season.

Unfortunately, there’s more. When Congress passed the PATH Act, Congress increased due diligence requirements on tax professionals when preparing returns where taxpayers claim the Earned Income Credit, the Child Tax Credit, the Additional Child Tax Credit, and/or the American Opportunity Tax Credit. The instructions note that tax professionals must,

Meet the knowledge requirement by interviewing the taxpayer, asking adequate questions, contemporaneously documenting the questions and the taxpayer’s responses in your notes, reviewing adequate information to determine if the taxpayer is eligible to claim the credit(s) and in what amount(s)….[emphasis added]

We don’t have many clients that take the Earned Income Credit. However, we have plenty of clients that take the Child Tax Credit (and/or the Additional Child Tax Credit) and the American Opportunity Credit. Tax professionals must now conduct an interview. Once again, there goes ten to fifteen minutes of time (that’s our estimate of the interview length). If we have 100 clients who take these credits, that’s another 21 hours of work.

Together, that’s nearly a 40-hour week. Yes, 2016 tax returns will cost more to prepare.

But that’s not all. Consider John and Jane Doe. They have a very simple return: W-2 income, a few deductions, and the usual 2.2 children. They drop off their paperwork in late March, and are surprised to discover they will go on extension. “Why?” they ask. That’s because their tax professional doesn’t have any interview spots available until after the April tax deadline.

The actions of the IRS and Congress have laudable goals. Reduction of identity theft and eliminating people incorrectly claiming tax credits are good ideas. However, because of the additional work, most taxpayers are going to discover that tax professional’s deadlines are very strict for 2016 returns. I know ours will be.

If you are a tax professional it’s probably worth revising your Engagement Letters to note these new requirements. And if you happen to have a spare cloning machine, please call me.

That Was the Tax Season That Was

Wednesday, October 19th, 2016

Well, my sixteenth Tax Season is in the books. Let’s see what was good, bad, and ugly–and I’ll include a warning for next year.

The Good: First, the IRS did a much better job with the Practitioner Priority Service (PPS). PPS is how tax professionals primarily interface with the IRS. During 2015, hold times were one hour or more…and that was on the good days. What a difference a year makes: In 2016, there were times the hold time was zero. For all the problems the IRS has, kudos on this issue.

And let’s give a thumbs up to Congress–yes, Congress. We had tax legislation for “extenders” that covers not only 2015 but 2016. I know what taxes are for the current calendar year…and it’s not December!

The Bad: Late, late, and later arriving paperwork for clients. Very few K-1s (what partnerships, S-Corporations, and trusts/estates issue) arrived timely. Congress changed the due dates for partnerships to March 15th for next year with the hope that recipients of K-1s would receive their K-1s earlier. Most tax professionals believe (and I agree with them) that all the moving of the due date will do is cause more partnerships to file extensions. Indeed, I expect K-1 paperwork to be even later next year; more, not less, individuals will be forced to file extensions.

The Ugly: I had more and more procrastinating clients. Some of it wasn’t the fault of the clients (again, lots of late arriving paperwork), but some of it was. I’m not happy with the “twin peaked” curve of work that I have. Further, the trends aren’t good for it getting any better next year.

And that’s where the warning for the 2017 Tax Season comes in. Next year there are expanded “due diligence” requirements on tax professionals. This has impacted the Earned Income Credit, but it (a) expands to include the American Opportunity Credit (an education credit) and (b) the Child Tax Credit. Congress, in the PATH Act, mandated this:

The PATH Act also extended due diligence requirements to returns claiming the Child Tax Credit (CTC) and the American Opportunity Tax Credit (AOTC). Last year due diligence only applied to EITC. See “Paid Preparer Due Diligence Penalties” below for information on how IRS can assess penalties.

The draft Form 8867 and draft instructions are available. Something new for next year is that tax professionals not only need to get answers to various questions, we apparently must conduct an interview with the client. That means talking to the client. Consider Joe Taxpayer who submits his paperwork on October 10, 2017. You get to his return on the 14th and discover you need to talk to the client because he’s receiving the Child Tax Credit. There’s an obvious issue with that. Also consider that a typical interview is, say, ten to fifteen minutes. Assume you have 50 clients who need to be interviewed during the year; that’s an additional 500 minutes or eight hours of work. If you have 100 clients who qualify, that’s an additional sixteen hours of work. And there’s scheduling time. And yes, it appears the interview is mandatory.

That’s the warning for 2017: Taxpayers who procrastinate too long may run into an issue with their returns. Tax professionals have even more work coming up. Will tax professionals add an up-charge for this interview and compliance requirements? I’m certainly considering it.

On 1099 Due Dates in 2017

Tuesday, October 4th, 2016

You may have heard that Form 1099-MISC’s must be filed earlier next year. That’s true, but it only impacts some of the 1099s. Let’s look at the IRS instructions:

New filing date. Public Law 114-113, Division Q, section 201, requires Form 1099-MISC to be filed on or before January 31, 2017, when you are reporting nonemployee compensation payments in box 7. Otherwise, file by February 28, 2017, if you file on paper, or by March 31, 2017, if you file electronically. The due dates for furnishing payee statements remain the same.

What this means is that only 1099-MISC’s for independent contractors (nonemployee compensation) must be filed by January 31st, whether you file by paper or electronically. All other information returns, including 1099-MISC’s reporting “Other Income,” will have the same deadlines as this past year: paper returns on or before February 28th, and electronic on or before March 31st.

I’m certain there will be confusion this coming year over the deadline. Of course, there’s no penalty for filing all your information returns by January 31st (whether required or not).