Posts Tagged ‘2019.Tax.Season’

When 85% Equals 90%

Wednesday, January 16th, 2019

One of my favorite expressions from poker that translates into tax is, “Math is hard.” But how can 85% equal 90%? No, the two aren’t equivalent. However, this year they are equal in one aspect of taxes.

The IRS announced today that they will waive the Estimated Tax Penalty for taxpayers who have prepaid 85% of their tax rather than the usual 90%:

WASHINGTON — The Internal Revenue Service announced today that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.

The IRS is generally waiving the penalty for any taxpayer who paid at least 85 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90 percent to avoid a penalty.

The waiver computation announced today will be integrated into commercially-available tax software and reflected in the forthcoming revision of Form 2210 and instructions.

This relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), the far-reaching tax reform law enacted in December 2017.

It is unlikely that many (any) states will conform to today’s notice from the IRS.

It’s Time to Generate Those 2018 1099s

Tuesday, January 15th, 2019

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)
  • Where you would normally have to send a 1099 but you made payment by a credit or debit card

Otherwise, you need to send a Form 1099-MISC to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your accounting software (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing might be easier than electronic filing.

If you wish to file paper 1099s, you must order the forms from the IRS. The forms cannot be downloaded off the Internet. Make sure you also order Form 1096 from the IRS. This is a cover page used when submitting information returns (such as 1099s) to the IRS.

Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-MISC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement.

Remember, the deadline for submitting 1099-MISCs for “Nonemployee Compensation” (e.g. independent contractors) to the IRS is now at the end of January: Those 1099s must be filed by Thursday, January 31st.

Here are the deadlines for 2018 information returns:

  • Thursday, January 31st: Deadline for mailing most 1099s to recipients (postmark deadline);
  • Thursday, January 31st: Deadline for submitting 1099-MISCs for Nonemployee Compensation to IRS;
  • Thursday, February 28th: Deadline for filing other paper 1099s with the IRS (postmark deadline);
  • Friday, March 15th: Deadline for mailing and filing Form 1042-S; and
  • Monday, April 1st: Deadline for filing other 1099s electronically with the IRS.

Remember, if you are going to mail 1099s to the IRS send them certified mail, return receipt requested so that you have proof of the filing.

Also note that most 1099s must be mailed to recipients. Mail means the postal service, not email. The main exception to this is if the recipient has agreed in writing to receiving the 1099 electronically. I consider this the IRS’s means of trying to keep the Post Office in business.

IRS to Open Tax Season on Monday, January 28th

Tuesday, January 8th, 2019

The IRS announced yesterday that the 2019 Tax Season will begin on Monday, January 28th:

Despite the government shutdown, the Internal Revenue Service today confirmed that it will process tax returns beginning January 28, 2019 and provide refunds to taxpayers as scheduled.

“We are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown. I appreciate the hard work of the employees and their commitment to the taxpayers during this period,” said IRS Commissioner Chuck Rettig.

Congress directed the payment of all tax refunds through a permanent, indefinite appropriation (31 U.S.C. 1324), and the IRS has consistently been of the view that it has authority to pay refunds despite a lapse in annual appropriations. Although in 2011 the Office of Management and Budget (OMB) directed the IRS not to pay refunds during a lapse, OMB has reviewed the relevant law at Treasury’s request and concluded that IRS may pay tax refunds during a lapse.

The IRS will be recalling a significant portion of its workforce, currently furloughed as part of the government shutdown, to work. Additional details for the IRS filing season will be included in an updated FY2019 Lapsed Appropriations Contingency Plan to be released publicly in the coming days.

January 28th will be the first date that 2018 tax year business and individual tax returns can be filed with the IRS.

Tax Refunds May Be Issued During Government Shutdown

Monday, January 7th, 2019

Vice President Pence announced today that the IRS would issue tax refunds during the government shutdown. The Wall Street Journal reported this earlier today, but it’s unclear what the legal justification would be. Speculation (by the Journal) is that the power to issue refunds is based on the permanent appropriations for the refunds themselves.

Meanwhile, other IRS services are closed. I cannot fax Powers of Attorney forms to the IRS; those fax numbers are down. I have an outstanding IRS audit where we’re waiting for information from the IRS auditor; he’s not working right now so the audit is on hold. I need to setup a payment plan for another client; I have no one to call at the IRS right now.

And we still have no idea when we will be able to file 2018 tax returns. Prior-year business returns can be filed beginning tomorrow; however, current-year (2018) returns cannot be filed at this point.

As to when the partial government shutdown will end, your guess is as good as mine.

Hug Your Tax Professional, or The Upcoming Horrible, Miserable, Rotten, and Delayed Tax Season

Wednesday, December 12th, 2018

A question I’ve been asked many times this month: When will the 2019 Tax Season (for filing 2018 tax returns) open? The answer I’ve given is, “I don’t know.” Normally by now the IRS has released the date. As of today, the IRS’s only comment has been, “It might not be in January [2019].” At a recent continuing education event speakers from the IRS implied that the 2019 Tax Season could be delayed–possibly significantly. My tax software company has no idea; many forms state “Final on January 28th” but that’s just a best guess on their part. Why? Because the IRS still has not released all of the final 2018 forms. For example, the link to Form 1040 takes you to the 2017 form. (You can find the draft of the new 2018 form here.)

There are two major issues and one minor issue delaying the release of the forms. First, the Tax Cuts and Jobs Act (TCJA) changed much of the Tax Code; this required the IRS to redo many of the forms to adapt to the new Code. The second major issue is that the IRS is no longer exempt from having rules and forms reviewed by the Office of Management and Budget (OMB). That review likely adds 30 days to the release date of anything out of the IRS. The minor issue is that the IRS decided to make the new Form 1040 a giant, double-sided postcard size with six subsidiary schedules, meaning there are seven new forms to be reviewed by OMB.

Some of the 2018 forms have been released. For example, you can find Schedule A, Schedule C, and Schedule D. But without a Form 1040, no one is filing.

Adding to the delay is that the IRS is slow in releasing the “Schema” for 2018 returns. This is the coding that tax software companies use to transmit returns to the IRS, so that what’s noted on (say) line 10 of Schedule C goes onto line 10 of Schedule C in the IRS’s records when a return is transmitted. In most years, there’s a 60-day period from the date of announcement of the schema to the date Tax Season opens; this allows the software companies and the IRS to test everything to make sure it all works. This means we could be looking at Tax Season opening on February 10th…if the schema were given to the software companies today. Of course, the IRS could shorten the testing period but it’s looking like the 2019 Tax Season will be compressed (perhaps significantly).

In our Engagement Letters for 2018 returns we’re adding the following:

The Tax Cuts and Jobs Act (the Tax Act) passed late in 2017 contains sweeping changes to the Tax Code. Given the magnitude of changes in the Tax Act, as well as some new concepts introduced in the law, additional stated guidance from the IRS, and possibly from Congress in the form of technical corrections, may be forthcoming. We will use our professional judgment and expertise to assist you based on the Tax Act guidance as currently promulgated. Subsequent developments issued by the applicable tax authorities may affect the information we have previously provided, and these effects may be material.

In particular, the Tax Act added a new deduction for Qualified Business Income (the Section 199A deduction). This deduction is generally available for taxpayers who have income generated from business activity, including Sole Proprietors (Schedule C). The calculation for this deduction is based on numerous factors. We may need to conduct an extensive interview with you, receive additional information from you, and/or spend extensive time in calculating this deduction. This may result in an increase in the cost of our services to you.

Beginning with the 2018 tax year, the IRS now requires S-Corporation shareholders who either reported a loss on their K-1, received a distribution (not including a salary or expense reimbursement), disposed of any shares of stock (or the equivalent), or received a loan repayment from the corporation to include a complete basis calculation with their return. We will need this basis calculation for your return (if applicable). If you do not already have this basis calculation, we can prepare it for you at an additional cost. To do this, we would need copies of all K-1s issued to you by the S-Corporation and details of your investments to and distributions from the S-Corporation.

These are just three issues. First, the law may change while we’re in the middle of preparing your return. Second, the new deduction for Qualified Business Income is very complex; this will add cost to many taxpayers’ returns. And third, the new rule on reporting S-Corporation basis will be a surprise for many taxpayers (and tax professionals). We’ve prepared basis schedules for the S-Corporation returns we prepare; however, many tax professionals omit these. These three items are guaranteed to add time and stress to return preparation.

So consider what tax professionals are dealing with:
– A delayed start to Tax Season;
– New tax law with many complexities;
– New tax forms; and
– Many more IRS/state non-conformity issues.

This is a recipe for a very high-stress Tax Season. That’s why I suggest you hug your tax professional; he or she will appreciate it.

The Amazing, Incredible, Expanding Postcard!

Friday, June 29th, 2018

When I was a child, people used postcards to save on postage. Postage for postcards ran a nickel. That was less than a phone call. Today, with the emergence of cellphones, the only postcards I receive are advertisements. But the IRS has a better idea! Let’s put Form 1040 on a postcard! [Insert groans from the tax professional community] “It’s so simple that a child can do it!” [Let’s add some groans from all the parents out there.]

Indeed page 1 of the draft Form 1040 is simple and straightforward. You enter your name, address, filing status, and you sign the return on page 1. Page 2 looks simple: You note your wages, other items of income, write in your tax, note some credits, and you’re done. But then you see some interesting words, like Line 6:

6. Additional income and adjustments to income. Attach Schedule 1.

That’s one way to make things fit on a postcard: Add more postcards! And it’s not as if most people will be skipping Schedule 1; it includes business income (Schedule C), capital gains (Schedule D), rental income and partnerships (Schedule E), and IRA deductions and all adjustments to income. And there’s not one of these schedules, but six of them. Here’s a link to the draft Form 1040 and all six of the proposed schedules.

It’s time to be honest: Nothing has gotten simpler. Indeed, I would argue everything about the 2018 tax return has gotten far, far more complex. Take line 9 of the draft Form 1040 (on page 2 of the form):

9. Qualified business income deduction (see instructions).

I pity those people trying to do that deduction themselves. I guarantee that most who try to do that line themselves will be joining me with gray hair next year. (The best explanation I’ve seen of that deduction runs 32 accountant-friendly pages. That is not a joke. Another tax professional used the line “Rube Goldbergesque” to describe the deduction.) It’s near a certainty that do-it-yourselfers are going to have issues with these forms. They’re not straightforward.

As I’ve told all of my friends I have lifetime employment. I think the IRS just gave me a second lifetime worth of employment!