Posts Tagged ‘2022.Tax.Season’

IRS: “You Know That New K-2/K-3 Requirement: Well, We Had Second Thoughts.”

Wednesday, February 16th, 2022

UPDATE: Make sure you read the post of February 17, 2022 on this issue.

Every so often the IRS actually listens to the tax professional community.  Tax professionals were unanimous in stating that requiring a domestic partnership with no foreign partners and no foreign operations to complete the new Schedules K-2 and K-3 was stupid; it’s similarly stupid for an S-Corp with no foreign operations.  (I wrote about this requirement 11 days ago.)  The IRS added the following notice to a special page on the 2022 Tax Season:

Coming relief from certain Schedule K-2 and K-3 reporting: The IRS intends to provide certain additional transition relief for this year from the Schedule K-2 and K-3 reporting for certain domestic partnerships and S corporations with no foreign activities, foreign partners or shareholders, and without knowledge of partner or shareholder need for information on items of international relevance. For 2021, these qualifying domestic partnerships and S corporations will not have to file the new schedules. We are taking this step in response to feedback we received from the tax community and our stakeholders. The IRS will provide full details of this relief soon.

It;s great that the IRS realized the problems that these new schedules involve for tax professionals and taxpayers during what is sure to be a challenging Tax Season.  However, there’s still a long-term problem that needs to be resolved.

Consider Harry, a partner in a domestic partnership (call it Acme) with no foreign partners and no foreign operations.  He and his wife typically have about $400 of foreign tax paid through a different partnership he’s a partner in.  He tells the managing member of Acme that for 2022 (next year’s taxes filed in 2023) he doesn’t have a Form 1116 filing requirement.  Acme timely files its 2022 return and doesn’t include Schedules K-2 and K-3.  In September, Harry receives the other partnership’s K-1, K-2, and K-3 and discovers that this year there was $610 of foreign tax paid.  Does Acme now have to amend its 2022 returns?  Is Acme subject to draconian penalties even though the partner had no way of knowing about the Form 1116 requirement? 

There are three courses of action the IRS should choose among for the long-term resolution of the issue.  They could just use a de minimis threshold of somewhere between $1 million and $25 million of sales; entities with sales below that and no foreign partners and foreign operations would be exempt.  The IRS could base whether Schedules K-2 and K-3 need to be filed on the prior year’s requirements for filing Form 1116.  Or the IRS could just drop the requirement to file these forms for domestic entities with no foreign partners or operations.

Unfortunately, I suspect all that’s happened is the problem has been postponed one year.

That 6 Million Return Backlog? Oops, We Mad a Math Error: It’s Really 24 Million

Saturday, February 12th, 2022

Everyone makes math mistakes.  When we last heard from IRS Commissioner Chuck Rettig, the backlog of unprocessed returns was down to about 6 million.  Per the Washington Post, that was slightly off–well, a bit more than slightly.  The true backlog is 23.8 Million,  a difference of about 18 million returns.  True, this does include unopened correspondence–but that correspondence also likely includes returns.

Of course, you can try calling the IRS up.  I generally do multiple times during a week.  I have about twelve items I need to get resolved and (in theory) I can over the phone, (a) if I get through, (b) I speak to an IRS employee who can resolve the issue, and (c) don’t get hung up on.  Here’s an example: A client paid his tax in October, the IRS cashed the check, but the payment isn’t posted on his account.  He just received a CP504 notice, gave me a Power of Attorney, and sent me a copy of the front and back of the check (and it absolutely cleared).

The first issue is calling the IRS.  I’m in the Pacific time zone, so when I call at 7am (the earliest time I can call), I’m competing against everyone else in the US.  On Monday I couldn’t get through to the Practitioner Priority Service (PPS).  I made ten attempts, and then stopped as I had a full day of appointments.  On Tuesday, I reached the IRS–and was not even on hold!  That’s akin to a one-outer in poker.  The helpful IRS employee (and do note that every IRS employee I’ve dealt with on PPS has been very helpful) could not help me; she did not have access to the computer system that allowed transferring of payments.  She transferred me…and I was on hold with a hold time given of “between 30 and 60 minutes.”  90 minutes later, the IRS system hung up on me (I think it may be programmed to do that when you’re on a call and it lasts two hours).  I couldn’t try to call again on Tuesday, because I had appointments.

On Wednesday, my fourth try to PPS resulted in a callback from the IRS 30 minutes later.  This employee found my client’s payment, and then started the work to move the payment–which apparently was a lot more complex than either he or I thought it would be.  Every five to seven minutes he’d get back on the line stating he was still working on this form to move the payment.  After 100 minutes, the system hung up on me.  On his last “I need another five to seven minutes” he said he was close to having this resolved.  But I don’t know for sure.

On Thursday I had an outside appointment, and by the time I got into the office I didn’t have an open two hours to call the IRS.  (I can work while I’m on the phone with the IRS, but I can’t have a scheduled call or appointment.)  On Friday, I didn’t get through to the IRS.  On Monday, my first scheduled call is at 11am, so I am hopeful I can confirm that this payment has been resolved, and then go on to issue number two (a 2016 return that still hasn’t been processed).

Last week, 30 Senate Republicans wrote a letter to Treasury Secretary Janet Yellen and Commissioner Rettig that the situation is untenable.  They’re correct.  So what can we do–given that it’s likely impossible to salvage the 2022 Tax Filing Season from being on the level of disastrous?  I have some ideas:

  1. Drop the Schedule K-2 and K-3 requirements for all but the largest partnership and S-Corporations (say, $25 million in gross income or more) for 2021 returns.  This will (a) eliminate even more paperwork for the IRS to process (currently, K-2s and K-3s must be attached as pdf’s to returns; this requires the IRS to do special processing), (b) help the tax professional community, and (c) help most taxpayers where these documents add just filing requirements with no tangible benefits to anyone.
  2. Get all IRS employees who are supposed to work in IRS Service Centers back in the Service Centers.  Yes, Covid still exists but it’s going to be with us (likely) forever.  This can be done by Presidential executive order–and Treasury Secretary Yellen and IRS Commissioner Rettig should be demanding this.  This will eliminate the issue with “error” returns (see below).  Additionally, it will increase IRS efficiency: employees will be in the locations they should be in.
  3. Start posting realistic time-frames for processing of paper returns.  I’m quoting 12 months for a paper-filed tax return and 18 months for a paper-filed amended return.  For electronically filed tax returns, I’m quoting two to four weeks if you’re in the lucky 90% that don’t get an error/reject and nine months if you’re in the unlucky 10% that does get an error/reject.  For electronically filed amended returns, I’m quoting one year for processing.  (All time-frames are averages.)  If my suggestion about getting employees back in the Service Centers is acted on, that will reduce the backlog of returns as error/reject returns won’t take the months that they currently take to be resolved (pre-Covid, they took three to four days).
  4. Listen to TIGTA (the Treasury Inspector General for Tax Administration) and spend what technology money you have wisely.  Yesterday, TIGTA released a report noting that the IRS cost the US $56 million in interest payments because of outdated mail processing equipment that would cost between $360,000 to $650,000 to replace.
  5. Work with Congressional leadership to get the budget increased for improved technology, not snooping on bank records.  Secretary Yellen and Commissioner Rettig can point out that improved technology would allow for far greater efficiency within the IRS.  Do you know that the main IRS computer system dates from 1959 and uses COBOL, and the last major improvements date from the 1980s?  Given the current situation, there should be bipartisan support for this.  Yes, this wouldn’t have benefits for a few years but we have to start somewhere.
  6. Work with Congressional leadership to increase starting wages for IRS employees.  The IRS is trying to hire more individuals (including in customer service), but has only hired 10% of the number they want to hire (and are budgeted to hire).

By the way, do you know how many IRS employees there are per phone call coming in to the IRS?  For every 16,000 calls, there’s one employee.  (Yes, employees take more than one call a day, but if you wonder why you and I can’t get through, that’s the answer.)

What does this mean for the 2022 Tax Season?  If your tax professional doesn’t have gray hair, he or she will by October 15th.  If you need to call the IRS, budget a day to get through (you will likely need it).  If you have to write the IRS (or submit a paper return) and need a quick response, consider a prayer: It can’t hurt and it just might help.  And hug your tax professional; he or she will appreciate it.

“Amount Due by January 3, 2022….”

Friday, February 4th, 2022

We receive lots of IRS notices for clients.  In yesterday’s mail, we received two CP14 notices.  These state that a taxpayer filed a return with a balance due.  Many times this is an issue of the return being processed before the payment; sometimes, of course, the taxpayer truly owes the tax.

In this case, there’s a deeper issue.  Both notices were dated December 13, 2021 with payments due on January 3, 2022—more than a month ago.  This is clearly an IRS issue (not a Post Office issue, as we received two such notices sent from two different IRS Service Centers).  There was no insert giving the taxpayer more time to pay.  It appears the IRS again has a backlog of notices to be mailed, and is sending out notices late.

One of the two taxpayers received a CP503 notice in January (noting the balance due, but with no explanation of the amount); for the other taxpayer, this is the first communication from the IRS that has been received.  The taxpayer who received the CP503 notice has paid his tax (and the account has a $0 balance), but assume for the moment you received such a notice.  Wouldn’t you call the IRS up and ask them did you get my payment?

The IRS sending notices late will only add to the phone volume, making it even harder to reach the IRS for callers who truly have issues.  I’m not sure why these notices were sent seven weeks after the date on the notices, but this is just adding to a miserable Tax Season.

Hug Your Tax Professional: The IRS Is At It Again

Thursday, January 20th, 2022

I was hoping that the 2022 Tax Season (which begins for individuals on Monday) would be more pleasant than the last two.  Yes, the IRS didn’t cause Covid; however, as the National Taxpayer Advocate noted in her recent report the IRS’s response has been (to put it charitably) ‘lacking.’  It doesn’t look like things are improving based on three items in the mail.

The first is the most serious.  The IRS is sending out letters (Letter 6419) noting how much taxpayers received in the Advance Child Tax Credit (ACTC).  Yesterday, a client received hers.  The letter noted that she had received $1,000.  She went through her records and found that was wrong (she received a little over $800).  The letter gives a phone number to call if there’s a discrepancy–which she did.  The helpful IRS agent told her that the letter is wrong, and that the information my client had (which she got from her bank records) was accurate.  “The IRS is aware of the issue.”

Are corrected letters going to be sent?  Is this a widespread issue or is it just (say) less than 1% of all letters?  What will happen when I file the client’s return noting the correct amount of ACTC?  Will the IRS use the letter’s $1,000 or the correct amount in verifying the return?  Will a whole bunch of returns have very slow processing because of this?  (Undoubtedly, yes.)

I just saw on Twitter other tax professionals seeing the same issue, so it’s clear there’s a problem.  Hopefully, it’s just a few individuals…but I have my doubts.

The second issue relates to an IRS notice that come on Tuesday, January 18th.  The notice is dated December 6, 2021 and asks for payment by December 27, 2021.  Given how bad the mail has been it’s possible this is a Post Office issue rather than IRS, but I strongly suspect the IRS is again sending out notices well after their dates.  There was no insert telling me that the client has longer to pay.  Again, is this a one-off or the start of a trend?

The third issue involves a correspondence examination.  A client was selected for a correspondence exam.  We needed additional time to get the paperwork together; the IRS gave us an additional month (to January 5th).  We sent our response to the IRS on January 3rd.  In yesterday’s mail, the IRS has now assessed the tax with an audit report dated December 27, 2021.  Yes, the IRS ignored the extension it gave.  Yes, I will have to call the IRS to see what’s going on and why the IRS’s left and right hands have no idea what they’re doing.  Yes, this adds to the call volume at the IRS–and it shouldn’t have happened.

This is not a good start to the 2022 Tax Season.

Tax Season (For Individuals) to Begin on January 24th

Monday, January 10th, 2022

The IRS announced today that Tax Season will begin on Monday, January 24th.  That’s the first date that electronically filed returns (and extensions) for the 2021 tax year will be accepted for individuals.  (Businesses can already file their 2021 returns.)

Do note that almost every tax professional uses software, and that some forms may not be ready until after that date.  Additionally, some state forms and state returns will not be able to be processed until after January 24th.

You should not file your return until you have all your tax paperwork.  The deadline for brokerage firms to send their 1099s is February 15th (and it is routinely extended).  If you are a partner in a partnership, a shareholder in an S-Corporation, or a beneficiary of a trust, you must wait until you receive your K-1’s.  Remember, it’s better to extend than amend.

Finally, we do not expect the deadline for individual returns to be extended from April 18th.  That means you will need to file (or file an extension) by then.

As for how this year’s Tax Season will go, expect a repeat of last year.  The IRS still has not processed all 2020 returns (but they’re through April!).  Until IRS staff is fully back at their Service Centers, there’s no reason to expect anything to change.  This is not a scenario to make any IRS stakeholder–be it a tax professional, taxpayer, or Congressman–happy.  I can state for the record that I absolutely expect the same issues with delayed processing of refunds this year.  (I have a client whose 2019 return is still stuck in limbo!)

IRS Appears to Add Requirement for Individuals to Include Statement on PPP Loan Forgiveness for 2021 Personal Returns

Monday, December 6th, 2021

On Friday, the IRS released draft instructions for Form 1040.  Buried on page 23 of the instructions (page 24 of the PDF) is the following:

Forgiveness of Paycheck Protection Program (PPP) Loans

The forgiveness of a PPP Loan creates tax-exempt income, so although you don’t need to report the income from the forgiveness of your PPP Loan on Form 1040 or 1040-SR, you do need to report certain information related to your PPP Loan.

Rev. Proc. 2021-48, 2021-49 I.R.B. 835, permits taxpayers to treat tax-exempt income resulting from the forgiveness of a PPP Loan as received or accrued: (1) as, and to the extent that, eligible expenses are paid or incurred; (2) when you apply for forgiveness of the PPP Loan; or (3) when forgiveness of the PPP Loan is granted. If you have tax-exempt income resulting from the forgiveness of a PPP Loan, attach a statement to your return reporting each taxable year for which you are applying Rev. Proc. 2021-48, and which section of Rev. Proc. 2021-48 you are applying—either section 3.01(1), (2), or (3). Any statement should include the following information for each PPP Loan:

1. Your name, address, and ITIN or SSN;
A statement that you are applying or applied section 3.01(1), (2), or (3) of Rev. Proc. 2021-48, and for what taxable year (2020 or 2021) as applicable;
The amount of tax-exempt income from forgiveness of the PPP Loan that you are treating as received or accrued and for what taxable year (2020 or 2021); and
Whether forgiveness of the PPP Loan has been granted as of the date you file your return.

Write “RP2021-48” at the top of your attached statement.

As I read the instructions, this applies for any PPP loan for a sole proprietorship (Schedule C business) where there is PPP loan forgiveness in either 2020 or 2021.  So this includes people who had the loan forgiven last year!

As the IRS states, “The forgiveness of a PPP Loan creates tax-exempt income, so…you don’t need to report the income from the forgiveness of your PPP Loan on Form 1040 or 1040-SR….”  While Rev. Proc. 2021-48 states, “The IRS will publish form instructions for the 2021 filing season that will detail how taxpayers can report consistently with sections 3.01 through 3.03 of this revenue procedure,” wouldn’t the easiest and simplest method be that taxpayers must retain records of their forgiveness of their PPP loans and supply them to the IRS upon request?  Instead, we get more “make work” for tax professionals (and taxpayers) for 2021 tax returns.  It adds time to return preparation without giving IMHO the IRS any real benefit.