Archive for the ‘IRS’ Category

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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.

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An Identity Protection Unit Saga: Part 6

Monday, April 22nd, 2024

When last we left the saga of my client and his tax year 2020 refund, we were waiting for a call from the Taxpayer Advocate Office.  Well, we received the callback and my client’s refund check was issued last Friday.  Post Office willing, it should reach him in Arkansas sometime this week.

As for the Taxpayer Advocate, once I spoke with them they were (as I’ve found in the past) extremely helpful in getting this resolved. Indeed, I don’t think this could have been resolved without their assistance.  It turns out that my client’s return needed two special processes run in order to be processed and the refund issued.  That took about three months (once the Taxpayer Advocate Office was involved).  Unfortunately, all of us (as taxpayers) are paying for this: my client is receiving nearly $5,000 of interest on his refund.

Let’s examine how this could have been prevented:

1. The IRS could have had better instructions on verifying your identity.  When my client verified his identity with ID.me, he thought he had completed the process; after all, he had verified his identity.  My client was not alone in this; the IRS later changed the instructions about verifying your identity to note that you still need to verify your identity with the IRS.

2. Follow-up Letters from the Identity Protection Unit.  The IRS should send out a second letter six months after the first letter to those who have not yet verified their identity.  My client likely would have called or messaged me about this, and I would have let him know that he did have to go through the verification process with the IRS.

3. More IRS employees trained and working at the Identity Protection Unit.  Calling the IRS’s Identity Protection Unit is a saga in itself; too many times you will get the message, “We’re sorry, but due to extremely high call volume in the topic you’ve chosen we cannot take your call at this time. Goodbye.”

4. Better training of Identity Protection Unit employees. As noted in Part 3, many of these employees seem to regard tax professionals with POAs as non-persons.

5. The IRS should send letters from the Identity Protection Unit to IRS Power of Attorney (and Tax Information Authorization) representatives–especially for those who reside outside the United States.  Mail in the US is generally reliable; mail outside the United States can be hit and miss (or miss and miss).  A client of mine living in Central America recently received an Identity Protection Unit letter; it only took seven months to get to her.  As a reminder to the IRS, the taxpayer in this situation has authorized his or her tax professional to be notified (and, in the case of a Power of Attorney, to act on behalf of the taxpayer).  The IRS’s refusal to copy tax professionals on Identity Protection Unit letters is a major cause of problems.

6. Better IRS computer systems.  This is not something that the IRS can really control, but hopefully the computer improvements that are coming will assist in this area (it certainly can’t hurt).

7. Acknowledgments and more realistic time-frames from the Taxpayer Advocate Office. The representative I dealt with is buried; he told me that the four months it took for him to get to my client’s case was “typical.”  The intake individuals at the Advocate need to be aware of this and communicate this to people who are obtaining the Advocate’s services.

Finally, let’s consider Joe and Mary Doe.  As I wrote in part 4,

They desperately need their $20,000 tax refund…and they’re stuck in limbo. If they did exactly what Mr. Smith did, they would have done everything correctly…and be stuck in limbo. If you wonder why there’s frustration with the IRS, and why members of Congress have IRS liaisons, look no further.

I wish I could tell you with certainty that things with the Identity Protection Unit will improve in the future. I think they will, but some of these issues appear systemic; it will take top-down changes at the IRS to cause improvements in this area.  We can always hope.

Previous posts on this:

An Identity Protection Unit Saga: Part 1
An Identity Protection Unit Saga: Part 2
An Identity Protection Unit Saga: Part 3
An Identity Protection Unit Saga: Part 4
An Identity Protection Unit Saga: Part 5

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Bozo Tax Tip #4: The $0.68 Solution

Tuesday, April 9th, 2024

With Tax Day fast approaching it’s time to examine yet another Bozo method of courting disaster. And it doesn’t, on the surface, seem to be a Bozo method. After all, this organization has the motto, Neither rain nor snow nor gloom of night can stay these messengers about their duty.

Well, that’s not really the Postal Service’s motto. It’s just the inscription on the General Post Office in New York (at 8th Avenue and 33rd Street).

So assume you have a lengthy, difficult return. You’ve paid a professional good money to get it done. You go to the Post Office, put proper postage on it, dump it in the slot (on or before April 15th), and you’ve just committed a Bozo act.

If you use the Postal Service to mail your tax returns, spend the extra money for certified mail. For $4.40 you can purchase certified mail. Yes, you will have to stand in a line (or you can use the automated machines in many post offices), but you now have a receipt that verifies that you have mailed your return.

About fourteen years ago one of my clients saved $2.42 (I think that was the cost of a certified mail piece then) and sent his return in with a $0.37 stamp. It never made it. He ended up paying nearly $1,000 in penalties and interest…but he did save $2.42.

Don’t be a Bozo. E-File (and you don’t have to worry at all about the Post Office), or spend the $4.40! And you can go all out and spend $3.65 and get a return receipt, too (though you can now track certified mail online). For another $2.32 you can get the postal service to e-mail the confirmation that the IRS got the return (for the OCD in the crowd). There’s a reason every client letter notes, “using certified mail, return receipt requested.”

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Bozo Tax Tip #5: Procrastinate!

Monday, April 8th, 2024

Today is April 8th. The tax deadline is just seven days away.

What happens if you wake up and it’s April 15, 2024, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t, while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download the extension form and mail off a payment to your state, too. If you mail your extension, make sure you mail it certified mail, return receipt requested. (You can do that from most Automated Postal Centers, too.)

By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too.

But what do you do if you wait until May 18th? Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).

There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: The interest is taxable.

NOTE: If you reside in a federally declared disaster zone, you have an automatic extension of time to file and pay. If you reside in Maine or Massachusetts, your tax deadline is Wednesday, April 17th.

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Bozo Tax Tip #8: No Tax Form, No Income!

Wednesday, April 3rd, 2024

Two years ago I was speaking with a new client:

“Russ, I just found out that I don’t get a tax form for the income I earn. That means I don’t have to report it, right?”

This individual is filing his first tax returns. He just graduated college, and is self-employed. He (thankfully) did keep good books and records, but no one sent him a 1099-NEC (several businesses should have) so his uncle told him he didn’t have to report anything.

Yes, the US has a ‘voluntary’ tax reporting system, but here voluntary doesn’t mean you can skip income without paperwork. A better word than voluntary is “self-reporting.” We self-report our income, and the fact that tax paperwork isn’t sent for everything is one of the causes of the tax gap. As I explained to my client, all income is taxable unless Congress exempts it. Congress didn’t exempt his self-employment income (indeed, it’s over $100,000). I asked him if he might want to buy a home in the next two years (which I already knew he did want to do). I asked him how he was going to qualify for a mortgage without tax returns filed showing income.

I explained to him that his uncle was correct in that many individuals do receive income ‘under the table’ and don’t report it. I also explained to him that not filing a tax return when you have income is a crime, and you can go to ClubFed for it. It’s a lot easier to file and pay your taxes and sleep peacefully at night then to do the opposite. My client agreed, and his return was filed.

Of course, for those who want to live on the edge you can: Ignore income that doesn’t come with tax paperwork. You may want to remember that if you’re ever audited the IRS might just do a bank account analysis and wonder where those deposits are coming from.

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Bozo Tax Tip #10: Email Your Social Security Number or EIN!

Monday, April 1st, 2024

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

This is a repeat for the eleventh year in a row, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and while the IRS’s response has improved, that’s just an improvement from awful to mediocre.

I have some clients who are incredibly smart. They make me look stupid (and I’m not). Yet a few of these otherwise intelligent individuals persist in Bozo behavior: They consistently send me their tax documents by email.

Seriously, use common sense! Would you post your social security number on a billboard? That’s what you’re doing when you email your social security number.

We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my brother, it might go in a straight line to him. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

The same issue holds for a business’s Employer Identification Number (EIN).  These should be treated like your individual social security number: send them using only a secure method.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem—communicate in a secure fashion to your tax professional.

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San Diego County Gets Extension Until June 17th

Wednesday, February 28th, 2024

Heavy rains and flooding in San Diego caused the area to be declared a federal disaster zone.  The IRS extended all tax deadlines in San Diego County from January 21, 2024 onward until June 17, 2024.  This includes individual, business, and employment tax returns.  California’s Franchise Tax Board granted the same relief for state taxes.

And there’s a blizzard warning for the Sierra Nevada, Lake Tahoe, and nearby areas from 10am PST tomorrow through 10am PST Sunday.  I’m expecting other areas in California to join San Diego County as federal disaster areas in the coming days.  Be safe!

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A Reminder for Charities and Officers in Charities

Thursday, February 15th, 2024

I live in a swing district in a swing state.  One of the things we dread is election mail.  The primary for state offices is in June, and already we’re receiving flyers.  I’m sure the robocalls are soon to come (the robo-texts have already begun). The television and radio ads have begun (there was an advertisement during the Super Bowl for a candidate). November 6th can’t come soon enough.

I happened to need to link to a blog post I wrote four years ago, and I noticed the previous post dealt with charities and the election.  Charities are defined in Section 501(c)(3) of the Tax Code.  It’s seems quite timely to remind everyone that one of the things charities cannot do is endorse a candidate.

So what does this cover? It includes the obvious (making political contributions, endorsing candidates, or speaking in favor or against a candidate) and some less obvious items (leasing space to a political campaign and using the organization’s mailing or email list for a campaign). There’s no de minimis rule, so if your 501(c)(3) gives $1 to the Trump or Biden campaigns, you could lose your 501(c)(3) status.

There’s a corollary that I want to emphasize: Officers (and employees) of 501(c)(3) charitable organizations must be very careful about their public statements for (or against) any candidate or cause. I am officer of and on the Board of Directors of a 501(c)(3) charity.  Let’s say I am for Assemblyman Smith in her candidacy for Nevada State Senate. I publicly endorse her. Of course, I, as an individual, can endorse whomever I wish. But I’m also an officer of a 501(c)(3). In my endorsement, did I note that this was my endorsement, and that nothing I’m saying is attributable to that charity? Am I careful doing that in all social media?

From a practical sense, it’s unlikely the IRS would go after a charity or a public foundation (which are 501(c)(3) charities). But they can, and an ounce of prevention is worth a pound of cure. If you’re an officer of a 501(c)(3) organization, it’s an excellent idea to make sure all officers and employees are aware of the rules.

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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.

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IRS Announces Simple Notice Initiative; Boy, Is It Needed

Wednesday, January 24th, 2024

Clients of ours received an IRS CP2000 alleging they owed additional tax.  The clients called us, and we reviewed their return; it turns out that the items the IRS thought weren’t included on their return were included (so we believe no tax is owed). We sent a response in early December.

Last week our clients received a response (we were supposed to have been copied, but we weren’t):

Our clients were perplexed by the response. Frankly, the following paragraph would perplex anyone:

Before we can resolve this matter, we need information from , and we haven’t received it yet. You should receive our complete response within   days. We don’t need any further information from you right now.

Most likely, this paragraph wasn’t supposed to be included (and only the previous paragraph noting that we’d receive another response within 90 days should have been included).  If you think this is a one-off, it’s not; a second client (who responded to an IRS notice on her own) received the identical response.

About an hour after the phone call I received an email from the IRS noting, “IRS launches Simple Notice Initiative resdesign effort.”  That’s needed, along with someone proofreading notices and responses before sending them.  The IRS is promising to redesign “up to 200 notices that make up about 90% of total notice volume sent to individual taxpayers.”  We shall see.

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