Taxable Talk

Tomorrow, March 15th, is the first big tax deadline day. There are three tax deadlines on Friday:

First, partnership and S-Corporation returns are due. If your return isn’t completed, file an extension (Form 7004). If you file by mail, use certified mail, return receipt requested. You always want proof of your extension.

Second, Form 3520-A is due. This is one of the two forms for foreign trusts. Again, if your return isn’t completed there’s a simple solution: file Form 7004. You will almost certainly have to mail the extension for a Form 3520-A; you can find where to mail it in the instructions to Form 7004.

Finally, the Form 1042 series (Form 1042, Form 1042-S) are due. These are the information return series regarding payments to non-Americans. You can file Form 1042-S via the FIRE system (if you’re registered); Form 1042 generally has to be mailed to the IRS.

The deadline is a postmark deadline. If you mail your form via certified mail today or tomorrow and it takes a month to get to the IRS, it’s still considered timely (as long as it’s postmarked on or before March 15th). That’s why you want to use certified mail: You get proof (which is a good thing in dealing with the IRS).

Yet another entry in the “Math Is Hard” file, again from our friends at the Internal Revenue Service. From the Washington Post comes the news that it will take the IRS between 12 and 18 months to catch-up on the backlog from the 35-day shutdown. The Post was quoting information from two House staffers who heard this from the National Taxpayer Advocate.

On January 16th, the IRS had a backlog of 2.5 million unanswered pieces of mail. That’s up to 5 million now. Two of those unanswered pieces of mail are from me on behalf of clients (both disputing CP2000 notices). They had to be mailed to the IRS because the IRS turned off their fax machines during the shutdown. I told my clients that they’ll get a response…eventually. My hope is that the IRS has turned off the automatic issuance of Notices of Deficiency. Once you have one of those, the only way to stop the process is to file a Tax Court petition. (I think that has happened, as neither client has received a follow-up notice or a Notice of Deficiency.)

So let’s see what we have. Millions of pieces of unanswered mail. New tax forms that most IRS employees haven’t been trained on. Computers that are, in some cases, older than I am. Add in new tax law and you have the recipe for…well, let’s not call it a masterpiece. Perhaps goulash or a stew, or one of those horrific casseroles that I remember from the dorms at Cal. Suffice to say this is going to be a trying Tax Season.

Oh, I shouldn’t forget: If Congress and President Trump don’t come to an agreement in about two weeks (and President Trump put the odds at less than 50-50) the whole shutdown may repeat.

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.

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.

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.

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!