Posts Tagged ‘2024.Tax.Season’

The “Joy” of 1959 Technology

Monday, May 13th, 2024

Clients of ours (call them John & Betty) just received their IRS refund.  It was off by $1,250, exactly the amount of an estimated tax payment they made.  They made that payment using IRS Direct Pay (and I saw their transaction receipt), so it wasn’t a question–as it often is–of whether or not the clients made that estimated payment.  Why didn’t the IRS see that estimated payment?

Betty made that estimated payment in early January, noting it was for the 2023 tax year.  She used her social security number, so she did everything correctly.  However, she didn’t reckon with the IRS’s antiquated technology: The main IRS computer system dates to 1959.

You read that correctly.  The main IRS computer system is likely older than most of the readers of this blog.

On John & Betty’s tax return, John’s name is listed first (along with his social security number).  Betty made that estimated tax payment using her name and her social security number.  “But my name is right on the tax return; why can’t the IRS match that payment with the return?”  There is no good answer to that question, but the correct answer is because the main IRS computer system dates to 1959 and cannot handle this.

There was another issue with their refund: they received no explanation of why their refund was short $1,250.  I explained to them that the refund is issued from one IRS office while the explanatory notice comes from a different IRS office; the notice can come four weeks before to four weeks after the refund.

“How do we get that refund?” Betty asked.  The only way is to call the IRS, explain the situation, and the IRS agent can verify that the estimated payment is sitting in Betty’s account and move it.  It will then process, with a second refund being issued (by check) with interest.  John asked, “We’ll really be paid interest on that?” I told them they will–interest works both ways–but that interest is taxable.

I told them to prevent this in the future they should use John’s social security number for making estimated payments.  They’ll do that this year.  But this exposes another issue: What should taxpayers do who sometimes file jointly ans sometimes file separately do?  There’s no good answer today for them (nor is there for taxpayers having marital issues); my current advice is to make estimated payments under each name/social security number but realize a phone call to the IRS will likely be needed after the return is filed and processed.  The long-term solution is for the IRS to have better technology.  That’s coming, but whether it will come soon is quite another question.

Do I Really Have to Wait for that $10 K-1 to Arrive?

Monday, February 12th, 2024

Earlier this week, a client came in for his annual visit (call him John).  John invested in a new investment partnership this year, and he was told by the partnership that the only item on his K-1 will be exactly $10 of interest income.  But John does not have the K-1; indeed, he won’t have it until sometime in July.  Does John have to wait until July to file his tax return?

Yes, he does.

The statement can be used to determine how much tax John owes for 2023; however, it cannot be used for filing.  You must have all your tax documents including all K-1s before you file.  It is far, far better to extend than amend.  Yes, that K-1 (for John) results in $3 or so of tax and is close to irrelevant for his tax situation.  But who knows what other items are on it?

When the K-1 is actually issued there could be:

  • A change from the $10 in interest income to something else;
  • Perhaps some of the interest income isn’t taxable on either the federal or state level; and
  • Perhaps there are other items that will be on the K-1 that have to be entered.

The K-1 is determinative in preparing (and filing) a tax return; the statement is not.  I know this personally: I’m an investor in a partnership whose K-1 shows up every year in early August.  In late March I’ll get a statement (similar to the one John has) noting their projected items of income and deductions so I can file an extension (and make an extension payment).  In the case of the partnership I invested in, they’ve invested in other entities and have to wait for the results of those underlying investments to formally arrive before issuing the K-1s.

When you invest in a partnership or S-Corporation, you need to be aware that to file by the April deadline you will have to have that K-1.  Partnerships and S-Corporations can (and these days often) obtain extensions until September 15th.  If you invest in an entity that takes the extra six months, you will be extending your tax return. 

John knew coming in that he would be extending.  He spoke to me last year about the new investment, and I told him an extension was likely.  If you make such an investment, be aware that an extension is likely in your future.


A Retroactive Tax Bill: What Can Go Wrong?

Thursday, February 1st, 2024

Last night, the House of Representatives passed tax legislation that would increase the Child Tax Credit for 2023, allow businesses to expense research and development expenses, tax relief for wildfires and the train derailment in East Palestine, Ohio, and some other provisions.  This legislation is now in the hands of the Senate, and it’s possible it won’t go anywhere (or it could pass tomorrow).  Issues that could derail the bill in the Senate include the SALT cap (the limit of $10,000 deduction on federal tax returns for state taxes paid), election year politics, and the fact that little has come out of the Senate.  And if it gets amended in the Senate, back to the House it goes.

Let’s assume it passes; that would require the IRS to reprogram its computers.  The IRS uses the best of 1959 technology, so this would take a month or so.  Do we file tax returns for individuals (and businesses) impacted by this?  If this passes, impacted individuals (and businesses) who file now might need to amend their returns.  The IRS isn’t expedient in processing amended returns, so that’s not a great option.

Unfortunately, there is no best option.  Each impacted taxpayer is going to have to decide whether or not to file now or extend.  If we get an indication from the Senate whether this bill will pass or not, we may be able to make better decisions. Even though I reside in the capital of gambling and odds, I can’t provide you a quote of the chance this bill passes as written and gets signed into law.

I was hoping for a nice, simple straightforward Tax Season.  Unfortunately, Congress had different ideas.

The Upcoming Beneficial Ownership Information Disaster

Wednesday, November 29th, 2023

Is the light on the horizon the end of the long tunnel you’re transiting or the oncoming train?  Unfortunately, I see an oncoming train on the horizon in the new mandatory Beneficial Ownership Information reporting.  If you’re a business owner and don’t know what I’m talking about, read on.

Congress passed a law in 2021 called the Corporate Transparency Act (CTA) requiring most corporations, LLC, LLPs, or any other entity created by the filing of a document with a secretary of state or similar office of any state, district, or Indian tribe to report Beneficial Ownership Information (BOI).  Let’s assume you have an LLC for your rental property–let’s call it Steve’s Rental LLC–properly formed in Nevada.  Steve is the sole owner of this; he is subject to BOI reporting.  Steve must report his legal name, identification number (social security number), address, and include an image of an identifying document (e.g. driver’s license).  Initial reports for entities formed in 2023 or earlier is due by the end of 2024.  FINCEN announced this morning that reports for entities formed in 2024 are due 90 calendar days from the date of receiving actual or public notice of their creation or registration becoming effective to file their initial reports.  The reports must be submitted electronically through FINCEN.  I’d love to show you a draft of that report, but I can’t; nothing has been released.  Generally, a beneficial owner is one who owns 25% or more of the entity.

What if information changes? You have 30 days to file an updated report.  What if you have 20 LLCs, one for each rental you own? You have to file separate reports for each LLC.  There is an FAQ available, and FINCEN has a small entity compliance guide.

Why do I see problems on the horizon? First, many (most?) entity owners are unaware of this new requirement.  Second, accountants might not be able to assist.  While FINCEN said that reporting companies (filers of the BOI reports) can consult with professional service providers such as attorneys or accountants, some state bar associations are stating that filing these reports is the practice of law; thus, it would be unlicensed practice of law (UPL) for me to assist a client in practicing this.  (As of today, the Nevada Bar Association hasn’t come out one way or the other on this.)  UPL is subject to fines and jail time.

More importantly, many insurance companies for tax professionals have told their clients that preparing BOI reporting will not be covered under Errors & Omissions (E&O) insurance.  (E&O insurance covers errors and omissions a tax professional might make in servicing a client; it’s basically malpractice insurance for tax professionals.)  My insurance carrier has told me not to prepare BOI reports; I’ve heard from colleagues that other (again, most?) carriers are saying the same thing.  (I’ll have a post soon about “Comfort Letters;” those are vanishing because of pressure from E&O carriers.)

Tax professionals will likely tell their clients to talk to their attorneys or review the information on the FINCEN website.  Our draft Engagement Letters for the upcoming Tax Season state:

Beginning January 1, 2024, most US companies must by January 1, 2025 comply with certain disclosure requirements under the Corporate Transparency Act (“CTA”), including beneficial ownership information (“BOI”) reporting.  This engagement does not include assisting you with any CTA reporting requirements.  You have sole responsibility for your compliance with the CTA, including its BOI reporting requirements and the collection of relevant ownership information. We shall have no liability resulting from your failure to comply with the CTA. Information regarding the BOI reporting requirements can be found at We are not permitted to give you legal advice and recommend that you consider consulting with legal counsel if you have questions regarding the applicability of the CTA’s reporting requirements and issues surrounding the collection and reporting of relevant ownership information.  [Emphasis in Original]

I’d like to provide this service for a couple of reasons.  First, I would be assisting clients and that’s the business I’m in.  Additionally, I can see this being an income generator for my business.  However, as of today I strongly suspect most tax professionals will be referring their clients to their attorneys to comply with BOI reporting.