Taxable Talk

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.

No, I’m not talking about the two choices in this year’s presidential election. Rather, I’m talking about the situation if you have yet to send your tax paperwork to your tax professional. It’s just about time to panic.

Mind you, if your return is simple and straightforward, take care of it now: The deadline is in exactly two weeks. If your return has any sort of complexities, you must start working on it immediately. Your tax professional will need time to get your return done right. You need to turn in that paperwork post haste. Yes, if you’ve procrastinated you need to stop, sit down, and take the time to get things done.

If you file late, it’s as if you never filed your extension. So sit down, and get everything done now. Or you may be paying a significant monetary penalty if you don’t.

Thursday, September 15th is the filing deadline for business returns on extension: C-Corporations (Form 1120), S-Corporations (Form 1120S), partnerships and LLCs that file as partnerships (Form 1065), and trusts (Form 1041). You can either electronically file or mail your returns (it’s a postmark deadline), but if you mail the return use certified mail, return receipt requested so you have proof of filing.

Tomorrow’s also the deadline for making your third quarter estimated tax payments. You can pay electronically (though if you use EFTPS the deadline was Wednesday for the payment to timely post), or you can mail your payment. If you mail the payment, it’s a postmark deadline.

We’re now just 32 days away from the filing deadline for individuals on extension. As I said before, the time for procrastination is over….

There are a number of tax deadlines tomorrow, March 15th. Here’s what you need to know.

Calendar Year Corporations: If you have a calendar year corporation, your Form 1120 or Form 1120S is due tomorrow. If you’re not ready to file, simply file Form 7004. That can be electronically filed, or mail it. If you mail it, use certified mail, return receipt requested.

State Corporate Returns: Calendar year state returns are mostly due tomorrow, though not every state shares the March 15th deadline. (For example, Florida uses April 1st as its deadline.) Most, but not all, states allow a federal extension to apply for their state. If in doubt, check! For example, Pennsylvania requires a separate extension.

Form 3520-A: This is one of the forms for foreign trusts, and it has a due date of March 15th. (The other main form, Form 3520, is due on the same date as your personal tax return including extensions.) You can file an extension for Form 3520-A using Form 7004. This extension must be mailed to the IRS, so use certified mail, return receipt requested. The IRS does currently accept foreign postmarks so if you’re outside of the US go to your post office and mail it. Or use an approved private delivery service.

Form 1042-S (and Form 1042 series): This is a report of income paid to non-Americans. The filing due date (either electronic of mail) is March 15th. Other Form 1042s are also due tomorrow (the 1042 series of forms notes withholding on income paid to non-Americans).

If you are in doubt as to whether or not you will get your return done in time, simply file the extension now. There’s no harm with filing an extension today and filing your return tomorrow. There’s a big penalty if you don’t file your extension today or tomorrow and file your return on Wednesday.

It was with fear and trepidation that I picked up my phone and dialed the IRS’s Practitioner Priority Service (PPS). This is the telephone number that tax professionals use to obtain information from the IRS. Over the past year and a half calling PPS has been, to put it mildly, an adventure. It has taken hours (at times) to get through…if we can get through.

On my first call, I pushed the appropriate buttons and heard, “The hold time is estimated as less than two minutes.” And it was less than two minutes before someone picked up…on a Monday! For my second call, there was no hold time!

Now, this is a small sample size, etc, so things might go back to the way it was in 2015 tomorrow but at least for a day the IRS actually gave good customer service to tax professionals. Maybe this will be kept up for the rest of the 2016 Tax Season!

The IRS announced today that the 2016 Tax Season (for filing 2015 tax returns) will begin on Tuesday, January 19th. The tax deadline will be Monday, April 18th (for federal individual returns) except for taxpayers in Maine and Massachusetts–they get an extra day until Tuesday, April 19th (because of Patriots Day).

Normally I would write about the good, the bad, and the ugly of the extender legislation. It’s different this year, because the legislation passed by Congress and signed into law doesn’t have much that’s ugly. Instead, there’s some great news, some good news, and a bit of bad news.

Let’s start with what I think are the two best things about the extender legislation. First, many provisions were made permanent:

• Section 179 deduction of $500,000;
• Taxpayers age 70 1/2 (or older) can make $100,000 annual charitable contributions from their IRAs that will not be included in their income;
• The sales tax deduction (as an alternative to deducting state and local income taxes);
• The educator expense deduction (and it’s also indexed for inflation); and
• We have a sense of permanency on many of the extenders.  There are more items made permanent (some of which are detailed below), but the fact that these are made permanent makes it far easier to plan for taxes.

Second, a few states have barred Enrolled Agents (what I am) from calling themselves Enrolled Agents. While this provision has not impacted me directly, EAs in Ohio and North Carolina could not in the past call themselves EAs. This was due to lobbying from state CPA associations in those states. Section 410 of the PATH legislation (which is where the Extenders are) contains the following provision:

Section 410. Clarification of enrolled agent credentials. The provision permits enrolled agents approved by the IRS to use the designation “enrolled agent,” “EA,” or “E.A.” The provision is effective on the date of enactment.

So my colleagues in Ohio and North Carolina (and perhaps elsewhere) can now call themselves what they are.

There are a few more provisions that I would put in the “Good” section. The Child Tax Credit, the American Opportunity Tax Credit (an education/college credit), and the Enhanced Earned Income Credit were made permanent. The research credit and the five-year recognition period for the Built In Gains Tax (C Corporations converting to S Corporations) were also made permanent. (There are other items made permanent; I’m just noting the highlights.)

Some items were extended solely for five years. These include 50% bonus depreciation (which is being phased-out over five years), the new markets tax credit, the work opportunity tax credit, and a controlled foreign corporation provision.

Many other items were extended for just two years. Note that nothing was extended for simply one year, so we know today what 2016 taxes are going to be. This is likely the first time in ten years (or longer) that we’ve had a very good idea of what the Tax Code for a year would be on January 1st of that year. The two-year items include the ability to deduct mortgage insurance (as an itemized deduction), the “above-the-line” deduction for qualified tuition expenses, tax credits for renewable energy sources, and the exclusion for qualified mortgage debt forgiveness.

There are some bad items, and these include a couple of the points I’ve mentioned. I strongly dislike welfare being done through the Tax Code. It causes the Tax Code to be complex, and puts the IRS in a mission it shouldn’t be in. Second, I dislike refundable tax credits; they lead to fraud and are difficult for the IRS to manage.

Overall, the fact that this has passed means that Tax Season should be able to open around January 19th. And that’s perhaps the best news of all.