It’s Only $1,300; Do You Really Have To Send Me the 1099?

Posted on January 26, 2014 by Russ

The deadline for mailing 1099s to recipients is this coming Friday, January 31st. That’s a postmark deadline. If you mail a 1099 on Friday and it takes two weeks to get to the recipient, that’s not a problem. (Well, it is a problem for the postal service, but not the sender.)

One of my clients sent a Form W-9 to an individual; that individual received $1,300 from my client so a 1099-MISC needs to be sent. The individual responded, “It’s not much money–it’s only $1,300. Can’t you just skip sending the 1099?” As I told my client, the answer should be no.

A few years ago the IRS wised up and added questions on business forms, such as Schedule C:

You now have to answer a question whether or not you made any payments in 2013 that would require you to file a 1099 (Question I); Question J asks, “If ‘Yes,’ did you or will you file required Forms 1099?” It’s pretty obvious that my client needs to check the “yes” box to Question I. Checking “no” on Question J after checking “yes” on Question I is an excellent way of asking the IRS, “Can you please audit me?”

I suspect the recipient would prefer that $1,300 be under-the-table. My client and I agree that we’re going to obey the law and issue the 1099. (He did receive the completed Form W-9.) As a reminder, if someone refuses to complete a Form W-9 you must begin backup withholding. I also suspect that reminding the recipient of that detail influenced his decision to complete the Form W-9.

Posted in IRS | Tagged , | 1 Comment

No More Ordering Transcripts Through Practitioner Priority Service?

Posted on January 23, 2014 by Russ

The IRS Practitioner Priority Service (PPS) is a wonderful tool for tax professionals. It allows us an easy way to obtain information on clients, set up installment agreements, and for practitioners to deal with the IRS. This morning I called PPS to order transcripts for a client. During the conversation, the helpful woman informed me that as of this coming Monday, January 27th, PPS will no longer accept requests for transcripts.

Supposedly you will now have to fax the Power of Attorney (IRS Form 2848) to the CAF unit, wait one week for the POA to be entered into the computer system, and then download the transcript from IRS eServices. The woman stated that this new policy is on the IRS website (I couldn’t find it) and that she was told this was going into effect by her supervisor.

I’m hoping the information I received is wrong, but I suspect it isn’t. This new policy is bad for a number of reasons:

– You can no longer use a Tax Information Authorization (IRS Form 8821) to obtain transcripts even though a Form 8821 authorizes a tax professional to receive transcripts and a tax professional is supposed to use Form 8821 when the goal is only to receive a transcript. You cannot order transcripts with an 8821 through eServices.
– It will delay getting taxpayers into compliance with the IRS.
– It will take even longer to resolve issues with the IRS.

In any case, this was a surprise I could have done without.

UPDATE: I asked the NAEA if they knew anything about this. Robert Kerr emailed me back stating he suspects the staffer was misinformed but that he sent it to the National Office for clarification.

Posted in IRS | Tagged | 3 Comments

More Work for Tax Professionals: Submission IDs for Efiled Returns

Posted on January 22, 2014 by Russ

When a taxpayer efiles his or her tax return, he or she (or a married couple if it’s a joint return) sign Form 8879. There was a change to Form 8879 for 2013 that tax professionals need to be aware of. Here’s instruction 6 of ERO (Electronic Return Originator) responsibilities:

6. Enter the 20-digit Submission Identification Number (SID) assigned to the tax return, or associate Form 9325, Acknowledgement and General Information for Taxpayers Who File Returns Electronically, with Form 8879 after filing. [emphasis added]

In the past, the taxpayer signs the 8879, the tax professional signs it and files it away. Now, the taxpayer signs it, the tax professional signs it, and the return is filed. Once the IRS accepts the return, the software company will assign the Submission Identification Number (SID) to the return. The tax professional must either print another copy of the Form 8879 (this one would have the SID on it) and attach it to the Form 8879, print a copy of Form 9325 (Acknowledgement and General Information for Taxpayers Who File Returns Electronically), or the tax professional must write the SID on the original 8879.

This isn’t a big deal, but tax professionals need to be aware that there’s an additional step you must go through after the return is efiled. For tax professional like me that keep scanned copies of originals, there’s another document that will have to be scanned. This adds a small amount of time to each tax return. It doesn’t seem like much, but that extra minute for every tax return probably equates to an additional 500 minutes of time if you efile 500 returns in a tax season.

Do note that this new procedure appears to only apply to federal individual returns (Form 1040). The Form 8879-C (signature document for corporate returns, Form 1120), Form 8879-S (signature Document for S-Corporation returns, Form 1120S), and Form 8879-F (signature document for fiduciary returns, Form 1041) do not have SIDs. I also looked at California signature documents and did not see any reference to SIDs.

Posted in IRS | Tagged | 1 Comment

The Trouble With Bitcoins: Taxation

Posted on January 19, 2014 by Russ

National Taxpayer Advocate Nina Olson noted in her recent report that the IRS needs to issue specific guidance around digital currency:

The use of digital currencies, such as bitcoin, is growing. Between July and December, 2013, bitcoin usage increased by over 75% – from about 1,700 transactions per hour to over 3,000. In the same period, the market value of bitcoins in circulation rose from about $1.1 billion to $12.6 billion. However, the IRS has yet to issue specific guidance addressing the tax treatment or reporting requirements applicable to digital currency transactions. Unanswered questions may include:

1. When will receiving or using digital currency trigger gains and losses?
2. When will these gains and losses be taxed as ordinary income or capital gains?
3. What information reporting, withholding, backup withholding, and recordkeeping requirements apply to digital currency transactions?
4. When should digital currency holdings be reported on a Report of Foreign Bank and Financial Accounts (FBAR), or Form 8938, Statement of Specified Foreign Financial Assets?

Taxpayers are speculating on the Internet about the answers to these questions. Some of this speculation is incorrect, incomplete, or misleading. It is the government’s responsibility to inform taxpayers about the rules they are required to follow. The IRS should issue guidance that addresses the tax treatment and information reporting required in connection with digital currency transactions, including answers to the basic questions listed above.

So let’s look at the two basic questions regarding Bitcoins: How are they taxed, and what reporting is required when using them.

Let’s cover the very first issue: If you make money with Bitcoins, it is absolutely taxable. The US Tax Code is quite simple in that respect: Everything is taxable unless Congress exempts it, and nothing is deductible unless Congress allows it. If you make money with Bitcoins, it is absolutely taxable.

The next question is how are gains taxed, and here is the major issue that the IRS and the courts have yet to decide. Are Bitcoins going to be regulated as a foreign currency or will they be treated like a capital asset? The problem for the IRS is that Bitcoins share features of both but also lack features of both.

Foreign currencies (such as the Euro and the British Pound Sterling) are defined in the US Tax Code; generally, income from foreign currencies is ordinary income under Section 988 of the Tax Code. The problem is that there’s nothing foreign about Bitcoins; they haven’t been issued by any government.

So maybe they should be taxed as a capital asset? But most capital assets can be held, and there’s nothing tangible about Bitcoins. A Bitcoin is ethereal but it has real value. If a Bitcoin is a capital asset, every time you sell a Bitcoin you have a capital gain or loss, and Bitcoins would follow capital gain rules and gains would be preferentially taxed.

Unfortunately, how Bitcoins are taxed is a major question that needs to be answered. Until the IRS comes out with guidance, tax professionals must make guesses.

The best tax summary I’ve found on Bitcoin and taxes is from Tyson Cross, a tax attorney in San Diego. A few of the points he makes that I agree with:

1. Gains are taxable when realized. This is absolutely clear under the US Tax Code. If you accumulate Bitcoins and sell them, use them to buy stuff, or trade them for things, you have gains.

2. The basis for a Bitcoin when it is “mined” is unclear.

3. If you keep Bitcoins on a foreign exchange, you may have to report your Bitcoins on an FBAR (Report of Foreign Bank Account, Form 114 (formerly Form TD F 90-22.1)).

Mr. Cross gets into quite a bit of detail on these issues, and his reasoning. If you are active in Bitcoins, I strongly advise reading the article.

One thing that he notes repeatedly (and I agree with) is that every time you use a Bitcoin, you have a taxable transaction and a gain or loss on that Bitcoin. It’s one thing to buy and hold Bitcoins; it’s quite another to be accumulating and using them actively. If you do so, your recordkeeping for your tax returns will need to be quite extensive.

Something that Mr. Cross does not cover (except for the FBAR) but is mentioned by Nina Olson are information reporting requirements with Bitcoin. I expect the IRS to mandate reporting of Bitcoin transactions similar to how dollar transactions are reported. It would not surprise me to see a heightened requirement for Bitcoin reporting (the IRS might consider Bitcoins as a means around the US financial system).

So how and when will the IRS rule on Bitcoins? It’s the government, so the ruling will come…eventually. I could only guess as to how they’ll rule. My instinct is that they’ll rule that it’s a foreign currency because that would tend to increase tax collection (Bitcoins would be taxed as ordinary income rather than as capital gains). Unfortunately, that’s only a guess.

Posted in IRS | Tagged | 1 Comment

We Will Soon be Able to Efile Past Due Individual Tax Returns

Posted on January 16, 2014 by Russ

One of the annoyances of tax preparation work is that past due tax returns must be paper-filed. Well, that will no longer be the case for 2012 tax returns. Tax professionals will be able to efile 2012 individual tax returns when the IRS begins to accept 2013 tax returns (on January 31, 2014).

From what I’ve been told by my software provider, the IRS’s Modernized efile Program has been adapted to accepting these returns. If your software provider will allow it, 2012 tax returns can be safely filed with a few keystrokes.

Unfortunately, amended personal tax returns still must be paper filed. I’ve been told the IRS is working on this, but don’t expect to efilie amended returns this year.

Posted in IRS | Tagged | 2 Comments

The IRS Has Better Things To Do than the RTRP Designation

Posted on January 13, 2014 by Russ

Recently, there has been some discussion in the tax blogosphere regarding the Registered Tax Return Preparer (RTRP) designation. The IRS wanted to make this a mandatory designation for unenrolled tax professionals (those who are not Enrolled Agents, CPAs, or attorneys). The IRS’s goal of a mandatory designation was challenged in federal court; the IRS lost last January and has appealed the decision (a ruling on the appeal is likely in the next few months).

New IRS Commissioner John Koskinen is proposing that if the IRS loses the court case that the RTRP designation continue as a voluntary program. Just last week the Taxpayer Advocate noted that the budget of the IRS needs to be increased. As I’ve said on a few occasions, that has no chance of happening until the IRS scandal is resolved. The IRS also noted that they may have to use funding from other IRS programs to administer ObamaCare.

Given that the IRS is short of funds, why should the IRS use precious funds to administer a voluntary program given that there are mandatory programs that they must enforce? Indeed, another point mentioned in the Taxpayer Advocate’s report was that identity theft programs at the IRS still need lots of work; that would be a far better use of any money gained by shutting down the mandatory RTRP program.

I also agree with Jason Dinesen: The RTRP program will hurt Enrolled Agents. There’s a saying among economists: If you promote something, you get more of it. If the IRS promotes the RTRP designation, there will be more RTRPs (to the detriment of EAs).

I do understand Robert Flach’s basis behind the idea of a voluntary organization promoting unenrolled (but skilled) tax professionals. I just believe that there’s no compelling reason that the IRS need be promoting this.

Posted in IRS | Tagged , , | 1 Comment

Fourth Quarter (2013) Estimated Payment Deadline Is Here

Posted on January 13, 2014 by Russ

The fourth quarter 2013 estimated tax payment deadline is Wednesday, January 15th. If you need to make an estimated payment, it must be postmarked on or before the 15th. If you use EFTPS, the payment must be made on or before the 14th; it takes one day for EFTPS payments to post.

If you mail your payment, I strongly urge you to use certified mail, return receipt requested. That gives you proof of mailing–something that is quite useful if your mail goes astray.

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Massages May Feel Nice, But Can You Deduct Them at the Poker Table?

Posted on January 12, 2014 by Russ

Last week I had an inquiry that asked me about deducting massages at the poker table. At many poker rooms and major poker tournaments, you can get a massage; the cost ranges between $1 and $3 per minute (plus a gratuity). If you’re playing an event like the World Series of Poker, where the chairs are (to put it kindly) not the greatest, a massage might make you feel quite good and ready for a few more hours of play. The question arose whether a massage while playing is tax deductible for a professional gambler.

Porfessional gamblers, unlike amateurs, are allowed to deduct all ordinary and necessary business expenses; that’s codified in IRC § 162:

(a) In general
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business….

The Tax Court has looked at this many times; for example, in Lychuk v. Commissioner (116 T.C. No. 27),

The Treasury regulations specify that ordinary and necessary business expenses include “the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business”, sec. 1.162-1(a), Income Tax Regs., such as “a reasonable allowance for salaries or other compensation for personal services actually rendered”, sec. 1.162-7(a), Income Tax Regs. The Supreme Court has explained that a cash method taxpayer such as ACC may deduct an expenditure under section 162(a) if the expenditure is: (1) An expense, (2) an ordinary expense, (3) a necessary expense, (4) paid during the taxable year, and (5) made to carry on a trade or business…The Supreme Court has stated that a necessary expense is an expense that is appropriate or helpful to the development of the taxpayer’s business…and that an ordinary expense is an expense that is “normal, usual, or customary” in the type of business involved, [internal citations omitted]

So where does a massage lie? Well, a poker player could argue that massages make long sessions more bearable; that they help a player concentrate; and that they make a player feel better. Those are all true, of course, but is it helpful for developing a poker player’s business? What would happen to the player if he did not have the massage? And therein lies the rub.

The IRS would argue that most poker players do just fine without a massage; that it is a luxury; that it is not necessary for a poker player to play; and that they involve elements of personal pleasure making them nondeductible personal expenses. Unfortunately for poker players who like massages, the IRS would almost certainly prevail on one or all of these arguments.

It’s hard to imagine a massage that doesn’t involve elements of personal pleasure. Indeed, that’s the reason poker players get massages (to feel better during a long session). The problem lies in that the Tax Code does not allow deductions for personal expenses. I know the manager of a spa here in Las Vegas. She stated that her business is a “…luxury, one that is not necessary. We want our customers to feel good and better.”

So we come back to the original question: Can a poker player take a tax deduction for a massage at the poker table? The answer is that it is almost certainly a personal expense that is not deductible.

Posted in Gambling | 4 Comments

FBAR Changes for 2014

Posted on January 7, 2014 by Russ

There have been some changes made by by FINCEN (the Financial Crimes Enforcement Network) for the Report of Foreign Bank and Financial Accounts (FBAR) for 2014. While overall these are minor, they will impact everyone who files an FBAR.

First, Form TD F 90-22.1 is no more. The FBAR has a new form number, Form 114.

Second, as of last July the FBAR must be electronically filed. The good news is that as of last October, your tax accountant can file the form for you as long as you complete Form 114a.

Third, as of January 1st, you don’t have to register to efile an FBAR. You can now just go the BSA efile website, follow the instructions and file the form. Do note that past experience is that the BSA efile website works well in Internet Explorer but might not work in Firefox or Chrome.

And most importantly, the definition of who must file has changed slightly. The new rule effective November 23, 2013, states:

United States persons are required to file an FBAR if:

The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported. [emphasis added]

It used to be that the rule was take the maximum value of each account, sum the maximums, and compare the sum to $10,000. Now, the rule (except for dollar amounts) matches that of FATCA (except for dollar amounts) in that it looks at your value in an account on one day.

Some things haven’t changed, though. The FBAR is due on June 30th and there are no extensions. If you have a foreign financial account you must check a box at the bottom of Schedule B even if you don’t need to file the FBAR. There’s a second box you must check if you need to file an FBAR, and you have to list the countries you have foreign accounts in (if you must file an FBAR) on your tax return. Thus, if you do need to file the FBAR, get your information together as your tax professional will need it in order to file your return.

Posted in FINCEN, International | 64 Comments

1099 Time

Posted on January 2, 2014 by Russ

As we finish the first week of January, we’re running some repeats of important issues.

It’s time for businesses to send out their annual information returns. These are the Form 1099s that are sent to to vendors when required. Let’s look first at who does not have to receive 1099s:

  • Corporations (except attorneys)
  • Entities you purchased tangible goods from
  • Entities you purchased less than $600 from (except royalties; the limit there is $10)

Otherwise, you need to send a Form 1099-MISC to the vendor. The best way to check whether or not you need to send a 1099 to a vendor is to know this before you pay a vendor’s invoice. I tell my clients that they should have each vendor complete a Form W-9 before they pay the vendor. You can then enter the vendor’s taxpayer identification number into your computer (along with whether or not the vendor is exempt from 1099 reporting) on an ongoing basis.

Remember that besides the 1099 sent to the vendor, a copy goes to the IRS. If you file by paper, you likely do not have to file with your state tax agency (that’s definitely the case in California). However, if you file 1099s electronically with the IRS you most likely will also need to file them electronically with your state tax agency (again, that’s definitely the case in California). It’s a case where paper filing is easier than electronic filing.

Note also that sole proprietors fall under the same rules for sending out 1099s. Let’s say you’re a professional gambler, and you have a poker coach that you paid $650 to last year. You must send him or her a Form 1099-MISC. Poker players who “swap” shares or have backers also fall under the 1099 filing requirement.

Posted in Gambling, IRS | Tagged | 1 Comment