DOMA Done, But Don’t File that Joint Return Just Yet

Posted on June 26, 2013 by Russ

The US Supreme Court ruled today that the federal Defense of Marriage Act (DOMA) was unconstitutional. That makes it appear that same-sex couples should be able to file joint tax returns. There’s only one problem: The IRS computers likely would reject such a return if it were filed today.

Suppose Jane and Susan are a legally married same sex couple. They are both on extension for this year. They hear about the decision today and think, “Great! We can efile our returns jointly, both federal and our state.” While legally I believe that’s correct (unless their state has some other law prohibiting same-sex married couples from filing jointly), the IRS computers haven’t been reprogrammed yet to take the return. I would urge same sex couples to wait for the IRS to acknowledge the ruling and an IRS announcement stating that IRS computers are now ready to accept such returns. I suspect it will be two months (maybe more) before the IRS is ready to accept such returns.

Let’s assume Jane and Susan efile their return today. Six weeks later their return is rejected, and they each get notices mailed to them. On the day Jane and Susan receive their notices the IRS announces they’ve reprogrammed their computers and same sex couples can now file jointly. Jane and Susan can’t just refile their return–they’re in the notice stage. They’ll each have to reply to the IRS. It would be a huge mess.

This is definitely a case where waiting for the IRS will make impacted couples lives far, far easier. As usual with the government, it’s hurry up and wait.

Posted in IRS | Tagged | 2 Comments

Loving Appeal to be Heard on September 24th

Posted on June 26, 2013 by Russ

The US Court of Appeals for the District of Columbia set oral arguments for September 24th in the IRS’s appeal of Loving v. IRS. This is the case that stopped the IRS’s scheme to regulate unenrolled tax professionals. While the oral arguments were heard in September, a decision on the appeal will likely not be rendered for weeks to months after the oral arguments (probably in early 2014).

I joined an amicus curiea brief supporting the original plaintiffs (Loving, et. al.) in the case.

Meanwhile, Nina Olson, the National Taxpayer Advocate, released her annual report to Congress. While I agree with many of the items in her report (more on that in a separate post), I disagree with her on preparer regulation. Ms. Olson’s views:

The National Taxpayer Advocate believes that the district court’s decision in Loving is based in part on an outdated understanding of return preparation and filing. The return preparation industry has changed substantially over the last few decades as a result of the ready availability of return preparation software, refundable credits, and refund-based loans. These changes underscore the significance of tax return preparers in our self-assessment system and the role of the tax return in making claims against the government. In fact, the National Taxpayer Advocate believes that the problems associated with refund claims in today’s tax system are directly analogous to the problem Congress sought to address in the original 1884 grant of regulatory authority to Treasury. [footnotes omitted]

Ms. Olson is correct that the return preparation industry has changed. However, having preparers take an open-book exam, and a small amount of continuing education doesn’t make a bad preparer into a good preparer. Yes, it will weed out the lowest of the low, but that’s about all it will do in that regard. The IRS’s preparer regulation scheme will cut the supply of preparers, and that will increase the cost to individuals; that’s basic economics.

Please note that I do agree with Ms. Olson that all taxpayers should make sure that their returns are signed by the preparer, and that the preparer’s PTIN is noted on the return.

In any case, the earliest we’ll see preparer regulation is sometime in early 2014…and only if the DC Court of Appeals overturns the ruling in Loving.

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Why Saying No to wsop.com If You Win the $111,111 “Free” Seat Is a Good Idea

Posted on June 25, 2013 by Russ

Tonight, wsop.com will be giving away a “free” entry into a $111,111 buy-in tournament that begins on Wednesday. To be eligible for the free entry, you had to sign-up in person for the new online poker site wsop.com at the World Series of Poker at the Rio Hotel and Casino here in Las Vegas. (You also had to sign-up no later than yesterday.) wsop.com will open for “real money” online poker play to individuals within Nevada sometime in the coming weeks. The promotion is to gain signups for what will likely be Nevada’s second legal online poker site.

How can anyone turn down a free entry into an event where first prize figures to be over $1 million? Taxes.

What, you say? If I were to win $1 million, paying taxes wouldn’t be an issue. And you’re right, of course. As long as you put aside about 40% of what you make (more, if you reside in a tax-disadvantaged state like California), you should be fine. The problem is that no matter how good a poker player you are, your most likely result is a loss; only about 10% of the entrants will “cash” (win money in the tournament). Even the world’s best tournament poker players lose most of the tournaments they enter.

What’s the issue, you might ask? After all, I was “comped” the entry, so who cares if you win or lose. The problem is that you won a prize with a value–the value is clearly $111,111. Under the Tax Code, Caesars (owners of the World Series of Poker and wsop.com) will have to send you a Form 1099-MISC for $111,111. And that’s income to you. If you’re in the 25% tax bracket, that’s $27,778 of tax you will owe (plus state income tax, if applicable). Is playing that tournament worth that to you?

Well, it’s a gambling loss, so I’ll be able to offset it with my loss in the event. No, you can’t. Your winning the entry was not the result of a wagering activity. Instead, it was a contest. wsop.com will be randomly selecting one of the people who signed up for their site to win the prize. I personally went through a similar situation when I won a free trip to the Bahamas. My tournament entry was a prize, and could not be offset by the loss in the event. (And yes, I didn’t win any money in that event.) However, I could use the gambling loss to offset other gambling winnings from that year. If the winner has other gambling income and doesn’t cash in the event, he or she can use the $111,111 as a gambling loss.

I suspect that the individual who wins the entry won’t consider the tax impact of accepting the prize. Caesars likely won’t issue the 1099-MISC until December or January, so the lucky winner will likely savor his experience of playing with the high-stakes pros…until next January when he gets the bill.

Posted in Gambling | Tagged | 3 Comments

FBAR Deadline Is Now

Posted on June 24, 2013 by Russ

Almost every tax form uses a postmark deadline. For example, if you mail your tax return on April 15th (using certified mail, return receipt requested, of course), and the post office sends your return to Fresno via Fargo so it doesn’t get there for two weeks, your return is still timely filed. It was mailed by the deadline. Unfortunately, for every rule there’s an exception. The FBAR is where the exception can be very, very nasty.

What’s an FBAR? The FBAR is shorthand language for the Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1). If you have $10,000 in one or more foreign financial accounts, you must file an FBAR. This is determined by taking the maximum balance of each account at any time during 2012, summing the maximums, and comparing that sum to $10,000. If you reach that $10,000 number, you must file an FBAR.

Some examples of foreign financial accounts include bank accounts, securities accounts, and third-party payment accounts (e.g. Moneybookers/Skrill and Neteller). Online gambling sites are not considered foreign financial accounts.

You have two choices as to completing the FBAR. You can electronically file it using the BSA efile system or you can print the form and mail it to the Department of the Treasury. This form needs to be received by June 30th (for reporting 2012), and there are no extensions.

Since June 30th falls on a Sunday, the deadline is really Monday, July 1st, right? Wrong. This deadline isn’t extended, so if it is received at the PO Box in Detroit where FBARs are sent on Saturday, June 29th, it would likely be timely filed. It definitely will be considered timely filed if it is received on Friday, June 28th. That makes the true mailing deadline tomorrow, June 25th.

You can send it via FedEx, DHL, or UPS overnight; that would give you until Thursday, June 27th.

The good news is that many of my clients who file the FBAR have been able to use the BSA system without any problems this year. It appears that the system now works in most browsers (last year, it only worked in Internet Explorer). You get a receipt when you efile (which you should save, of course).

The penalties for willfully not filing the FBAR start at $100,000 per account or half the value of the account, whichever is greater. So if you have an FBAR filing requirement, this is something to take care of now. The form is not particularly odious, but the penalties are.

Posted in IRS | Tagged | 1 Comment

Onwards and Upwards into the 20th Century!

Posted on June 21, 2013 by Russ

Not to sound like a broken record, but if today is a vision of the future, boy, do I want the past.

I have another new client and needed to order transcripts. I called the IRS Practitioner Priority Service (PPS) and received (as usual) the good news that, “The average wait time is greater than 30 minutes.” For phone call #1, the wait time was 45 minutes. Unfortunately, in the middle of talking to the IRS representative, “Click.” I waited ten minutes to see if I’d get a phone call from her, but I didn’t, so I called back. The second wait time was 48 minutes.

(For the record, the first representative did call me back, about 15 minutes into the hold time of call #2. Her system crashed, and she apologized and noted that she couldn’t call back until it rebooted. I do not blame her, or the IRS, for that mishap–these things do happen.)

In today’s E@lert (from NAEA), in a section labeled “Knuckleheads in the News…Continued,” the NAEA notes that the IRS has not changed its mind on eliminating disclosure authorization (DA). Once DA is retired, I expect average hold times on calls to the PPS to average ten to fifteen minutes longer than today. Perhaps the IRS’s motto should be, “Onwards and Upwards into the 20th Century!”

The fallacy is the IRS stating that by allocating more resources to the CAF unit–and their wonderful alleged ten-day processing period for faxed authorizations (Tax Information Authorizations and Powers of Attorney)–the problem will be handled. That’s just not the case. What most practitioners will do is (a) fax the authorization to the CAF unit (which I did) and call the PPS to order the transcripts. I don’t want to wait the average ten days to obtain a transcript. Apparently, the IRS hasn’t considered this.

Perhaps the next retirement from the IRS will be the ability to fax Tax Information Authorizations and Powers of Attorney to the PPS. I probably shouldn’t have written that; given the IRS’s most recent actions, someone at the agency could believe that doing that would solve the problem….

Posted in IRS | Tagged | 1 Comment

When 68 Minutes of Hold Time Is an Improvement

Posted on June 20, 2013 by Russ

So after the debacle on Tuesday I called back yesterday afternoon. The hold time was far better: 68 minutes. That’s almost a 7% improvement!

On the other hand, the representative I spoke with was quite helpful. Indeed, most of the individuals I’ve spoken with over the years at the Practitioner Priority Service do an excellent job. They are trying to help practitioners. The gentleman I dealt with on Tuesday was an exception (based on past experience).

Unfortunately, it appears that lengthy hold times may be here to stay. Yes, two phone calls aren’t a statistically significant sample size, but this appears to be a pattern. I’m hoping that this composite from Airplane! isn’t what tax professionals will be relating to in the future:

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Today’s Example on Why Removing Disclosure Authorization from IRS eServices Is a Miserable Idea

Posted on June 18, 2013 by Russ

Today I needed to order a transcript for a client. I had a signed Form 8821 (Tax Information Authorization). I couldn’t enter the form electronically using Disclosure Authorization as I didn’t have past information for the taxpayer. So I faxed the form to the IRS CAF unit, and I called the Practitioner Priority Service (PPS) to order a transcript.

Problem #1: I was on hold for 1:13:30 before the IRS picked up the call. That’s one hour, thirteen minutes, and thirty seconds. Now, I was warned that the wait time would be over thirty minutes, but 73 minutes is a bit ridiculous for the IRS.

Long hold times have been routine at the IRS. I keep track of this, and my four most recent calls to the PPS have had hold times of 31 minutes, 34 minutes, 38 minutes, and today’s 73 minutes. (I was told on the three previous calls, “The average wait time is greater than fifteen minutes.”)

Problem #2: The representative I reached did not have a working computer. In other words, he could not help anyone who reached him. Given that situation, and the fact that this situation only impacted him, why in the world was he connected into the PPS?

Now, I understand that the IRS computers do crash, and in that case an individual IRS representative shouldn’t be removed from the system. However, what good was there of having my representative answering calls when there was about a 0% chance of him assisting anyone?

Problem #3: The representative either couldn’t or wouldn’t transfer me to someone who could assist me. I explained what I needed (ordering a transcript). Why couldn’t he transfer me either back into the queue or to the IRS representative sitting next to him? The only option I received was to call back later, after he helpfully told me that the problem was impacting only his computer. He did apologize for the long hold time, though….

The joy of this is that this will be the new face of the IRS come August 12th. That’s when I’ll be explaining to my clients that the IRS is literally an agency stuck in the 1950s.

Posted in IRS | Tagged | 2 Comments

Go Directly to Jail. Do Not Pass Go….

Posted on June 16, 2013 by Russ

Usually when you’re sentenced to prison for a tax crime, you get a few days (or weeks) to get your affairs in order. That wasn’t the case on Friday for former New York State Senator Pedro Espada, Jr.

Let’s first cover the crimes that Mr. Espada was found guilty of. He was convicted in May 2012 of four counts of stealing from non-profit medical clinics. In October, Mr. Espada pled guilty to making false statements on his federal tax return for 2005. Mr. Espada received five years at ClubFed, must make restitution to the IRS for $118,531, restitution to the victims of his thefts (the amount has yet to be determined), and must forfeit $368,088. What did Mr. Espada do with the money he stole? Plane tickets, theater tickets, $20,000 in takeout sushi, and gifts for his family are just some examples of where the money went.

This seems just like any other public corruption story…until we get to the denouement. It seems that Mr. Espada got the particularly brilliant idea of accusing the judge of tampering with jurors. Mr. Espada submitted an affidavit stating that occurred. Before Judge Frederic Block sentenced Mr. Espada he rebutted the accusation. He had phone records to show he was home, and there were records of when he entered the courthouse. “There is so simply no way I could have spoken to the jurors between the time they arrived and the time they reached their verdict,” Judge Block said. Oh, yes, Judge Block made sure to resolve this just before he sentenced Mr. Espada.

A helpful hint to anyone who is going to be sentenced by a judge: Do not accuse the judge of misconduct unless you have absolute ironclad proof (and your attorney agrees with that). It usually does not make a good impression on the judge. Judge Block also asked the prosecutors to see if an additional charge was merited against Mr. Espada for filing a phony affidavit. And Judge Block ordered the immediate incarceration of Mr. Estrada stating that he couldn’t trust Mr. Estrada.

Mr. Espada looks like an early candidate for this year’s Tax Offender of the Year award.

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IRS Scandal Update for June 16th

Posted on June 16, 2013 by Russ

Quite a bit of news on the IRS scandal this week:

Eliana Johnson of National Review Online debunks the idea of “rogue agents in Cincinnati.” I never thought it was rogue agents.

If you’re a religious organization, are you allowed to proselytize? I would think so; many churches have active missionary organizations. However, at least one IRS agent thinks that’s not allowed. The Alliance Defending Freedom, a pro-life legal group, made a tape available of an IRS agent stating that they’re not allowed to promote its faith. Some individuals at the IRS appear to need a reminder of the First Amendment.

An applicant for 501(c)(3) status thinks the IRS has also been targeting applicants wanting to promote free market activities.

Former Maryland Governor Bob Ehrlich writes on “Why the IRS scandal is worse than the others.” It’s an excellent read.

Meanwhile, we’ll see if those truly involved–they’re in Washington, not Cincinnati–come forward during the coming week. I suspect the Obama Administration is hoping this scandal will blow over. It won’t.

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IRS Scandal Update for June 9th

Posted on June 9, 2013 by Russ

Another week has gone by, and some Democrats want the world to believe that the IRS scandal is resolved. It’s not. Here’s the news I’ve seen over the last week.

Peggy Noonan has an excellent op-ed in the Wall Street Journal. An excerpt:

Some sophisticated Democrats who’ve worked in executive agencies have suggested to me that the story is simpler than it seems—that the targeting wasn’t a political operation, an expression of political preference enforced by an increasingly partisan agency, its union and assorted higher-ups. A former senior White House official, and a very bright man, said this week he didn’t believe it was mischief but incompetence. But why did all the incompetent workers misunderstand their jobs and their mission in exactly the same way? Wouldn’t general incompetence suggest both liberal and conservative groups would be abused more or less equally, or in proportion to the number of their applications? Wouldn’t a lot of left-wing groups have been caught in the incompetence net? Wouldn’t we now be hearing honest and aggrieved statements from indignant progressives who expected better from their government?

She’s right, of course. To date, no progressive organizations have come forward. None. Incompetence doesn’t pass the smell test.

Carter Hull, an IRS attorney in Washington, allegedly oversaw some of the targeting of conservative groups. Mr. Hull is retiring from the IRS. More on this in an interview on FoxNews with Eliana Johnson of the National Review Online:

So where does that leave us? I think we’re weeks (at best) and months (more likely) from finding the answer to the question: Who in Washington ordered this scrutiny. There is no doubt in my mind that this is the primary question that must be answered in this scandal.

There is a secondary question: Who at the IRS violated federal law and disclosed confidential information from conservative groups’ 501(c)(4) applications to progressive groups (such as Pro Publica)? It clearly was done–Pro Publica has admitted it. I expect individuals from Pro Publica to face a subpoena and be required to disclose that information.

Meanwhile, the Administration appears to wish that this scandal would just vanish. That definitely isn’t going to happen. Sooner or later the answers will come out. And it’s clear to any reasonable observer that the answers lie in Washington, not Cincinnati.

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