The IRS announced on December 29th the standard mileage rates:
These rates do apply to electric and hybrid vehicles along with gasoline and diesel vehicles.
It’s time once more for that super prestigious award I give out, the Tax Offender of the Year. One year there will be no candidates, but 2022 absolutely isn’t the year. Let’s look first at some who didn’t make the cut.
Melissa Horner of Bozeman, Montana tried the old favorite of withholding employment taxes but not remitting them to the government. This scheme works when you start it (government isn’t efficient), but never works in the long run. The IRS rightly sees this as theft, and all such cases are investigated. It also doesn’t help when the withheld taxes are used for vehicles and home renovations. She received 30 months at ClubFed and must make restitution of $2,878,522.
Philip J Layfield is enjoying 12 years at ClubFed for a scheme that was described by the judge who sentenced him as “sheer evil.” Mr. Layfield, a disbarred attorney, specialized in personal injury cases. He took funds from settlements and used them for personal expenses and also didn’t file and pay taxes. He also did a Ponzi-like scheme of paying previous clients who he embezzled settlements from with more recent settlements.
Another criminal described as “one of the most evil people that I have ever dealt with in the law” is spending 14 years at ClubFed for a multi-million dollar investment fraud along with cheating on his taxes. Christopher L Burnell of Highland, California promised rates of returns as high as 100%. You know the old saying, “If it sounds too good to be true it probably is.” Well, that was the case with Mr. Burnell, as the money went towards gambling and luxury items.
Just missing out on the top three were John, Helen, and Dimitrios Zourdos of Rome, New York. The three (John and Helen are married and Dimitrios is their son) operated three Dippin Donuts shops. They had a unique method of paying their employees, remitting taxes, and reporting income: If a payment came in cash, it never happened! They provided their accountants with books that didn’t show the cash going in or out, and paid employees off the books. The scheme worked for five years (from 2012 to 2017), but the IRS discovered this with predictable results. John received 30 months at ClubFed, Helen received 20 months, and Dimitrios received 10 months. They must also make restitution of more than $2 million to the government. You could say there was a hole in their scheme.
Coming in third place were Bruce Bise and Samuel Mendez. They founded a cryptocurrency company called Bitqyck, and raised $24 million in an “Initial Coin Offering (ICO)” from over 13,000 investors. You can guess where the money went: personal expenses, cars, luxury furnishings, and rent. At least they took casino trips and helped our economy in Las Vegas! Well, the money they took shockingly didn’t make it to their tax returns, and our government lost out on $1.6 million in taxes. (Mr. Bise and Mr. Mendez separately had a civil settlement with the Securities and Exchange Commission.) Mr. Bise and Mr. Mendez each receive 50 months at ClubFed and they must make restitution to the IRS.
Just missing the brass ring was Matthew Marshall of Whitefish, Montana. As an author who one day wants to write detective fiction I was intrigued by this story which, at first, I took as fiction. Mr. Marshall defrauded a Montana investor of $2.3 million by claiming to be a former Force Recon Marine and CIA operative who needed funds to run fake CIA rescue missions in foreign countries. Yes, that’s accurate. Yes, the investor was defrauded. As noted in the press release:
“Marshall promoted a fantasy world filled with fake missions carried out by fictitious operatives for clandestine agencies in faraway lands for phony purposes. It was all fake, but unfortunately it was paid for with real money from a real victim. And the money never went anywhere except to Marshall’s personal accounts,” U.S. Attorney Leif Johnson said. “The lengths to which Marshall went to carry off this fraud can hardly be overstated. He used a phone application to send fake text messages; he created false emails; he sent the victim prayer beads collected during a fake mission; and he got a tattoo to falsely signify that he was a member of ‘Force Recon,’ etc. The list goes on.
Mr. Marshall will enjoy six years at ClubFed and must make restitution of $3,254,327.
Before I get to the winner, I want to highlight a case that unfortunately has no tax charges. Had it had any such charges, this would be tops on my list for 2022. Instead, this is a pure fraud case. Karl S Greenwood pled guilty to wire fraud and money laundering related to “OneCoin” earlier this month. Mr. Greenwood allegedly earned €2.735 billion in fraudulent profits from this scheme. He, and alleged co-conspirator Ruja Ignatova (aka “the Cryptoqueen”) did not have a high opinion of their victims:
In an August 9, 2014, email between Greenwood and Ignatova, Ignatova described her thoughts on the “exit strategy” for OneCoin. The first option that Ignatova listed was, “Take the money and run and blame someone else for this . . . .” And in a September 11, 2016, exchange with Ignatova’s brother, Konstantin Ignatov, Greenwood referred to OneCoin investors stating, “These ppl are idiots,” to which Ignatov responded, “as you told me, the network would not work with intelligent people ;)”
Mr. Greenwood will be sentenced in May.
Automating procedures and paperwork is a boon to all of us. It increases productivity and allows for all of us to have a higher standard of living. This also includes those of us who intend to violate the law. If you can automate criminal actions, it increases the potential for ill-gotten gains.
Kevin Kirton of Dallas, Georgia decided that automation was a great idea. He developed computer programs to file fraudulent tax returns with the IRS. The program stole identities and could be used to file the returns. As I said, automation helps on the dark side, too. The program could even be accessed remotely! And there was more:
To help conceal the fraud activity, Kirton developed techniques to hide Internet Protocol addresses so the IRS could not trace a fraudulent tax return back to one particular origination point. Kirton also set up a bootleg phone system that he believed would not be susceptible to wiretaps to communicate with other criminals.
Unfortunately for Mr. Kirton, the government did discover this and executed a search warrant. They found hundreds of prepaid debit cards in the names of the victims, fake driver’s licenses, and a Treasury Inspector General for Tax Administration (TIGTA) report, “Income and Withholding Verification Processes are Resulting in the Issuance of Potentially Fraudulent Tax Refunds.” Mr. Kirton was arrested.
If I was arrested I would seek counsel and would be quite careful in what I did. Mr. Kirton had different ideas:
While Kirton’s case was pending and he was out on bond, he telephonically contacted an associate who was detained at the Robert A. Deyton Detention Facility, seeking to influence the testimony of a cooperator in his case. Recorded jail calls between Kirton and his jailed associate show that Kirton repeatedly sought to convey veiled threats to the cooperator through the jailed associate. Due to this conduct, Kirton’s bond was revoked and he was detained pending resolution of his case.
Mr. Kirton pleaded guilty in June 2021 to access device fraud and aggravated identity theft; he was sentenced this past March to six years and nine months at ClubFed. He must also make restitution of $629,551.
That’s a wrap on 2022. I wish all of you a Happy, Healthy, and Prosperous New Year.
The Tax Foundation produced a report showing the overall gain (and loss) of population and taxpayers’ Adjusted Gross Income (AGI) during the second half of 2019 through the first half of 2020. For the most part, high tax states were the biggest losers while low tax states were the biggest winners. While the data includes a portion of the pandemic, “These data, therefore, capture many of the interstate moves made early in the pandemic—between mid-March and mid-July 2020—but do not necessarily capture the bulk of pandemic-related moves, many of which occurred later in 2020 and even into 2021. As such, when interpreting these data, it is important to keep in mind that many of these moves happened before the even more pronounced shift away from large cities and high cost-of-living areas that occurred during the pandemic. [emphasis in original]”
Some of these losses are eye-popping. New York (which is dead last on this list) lost $19.5 billion in AGI and 248,305 taxpayers. California (ranking 46th) lost more in population (263,344) but “only” $17.8 billion in AGI. Meanwhile, Florida gained $23.7 billion in AGI and 166,707 in taxpayers (ranking 4th). Idaho topped the list with a gain of $2.1 billion in AGI and 36,655 in taxpayers.
This is one area where it’s a zero-sum game. Every taxpayer who moves between states ends up somewhere else. If a state loses enough population, the state is forced to make changes. Indeed, that time is likely coming soon for New York and Illinois–their current trends are just not sustainable. Meanwhile, the legislature in New York proposed tax increases. (To her credit, Governor Hochul vetoed the legislation.)
For those who say it’s related to weather, sure, that’s a factor. Yet Maine–not exactly the warmest state in the Union–ranks seventh. Indeed, combine sound fiscal practices and great weather and you get Florida. I’d advise politicians in California, New York, and Illinois to carefully read the study (but I doubt they will).
Here’s an image from the Tax Foundation:
Two big announcements from the IRS today will have a major impact on 2022 tax returns (returns filed in 2023). First, the IRS announced a delay in implementing the $600 reporting for third-party payment platforms (Form 1099-K). Quoting from the announcement:
“The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan,” said Acting IRS Commissioner Doug O’Donnell. “To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements.”
I’ll change the verbiage to reality: The IRS is currently in no position to handle the flood of 1099-K’s that would come in, and this transition guidance gives them a year to (hopefully) get ready and smooth out a whole bunch of wrinkles. Do note that if you have a side business, income from that business is taxable (that’s been the law and nothing has changed).
Second, the IRS announced that brokers are not required to report additional information regarding disposals of digital assets (aka cryptocurrency) until final regulations are issued. This does not impact taxpayers’ responsibility to both report all dispositions nor answer the question regarding cryptocurrency that appears at the top of Form 1040. Announcement 2023-02 notes that the IRS plans to issue regulations with a notice of proposed rulemaking.
A notice of proposed rulemaking will be published that sets forth proposed regulatory text, explains the proposed rules, solicits public comments, and announces a public hearing. This process will allow the Treasury Department and the IRS to accept comments from affected taxpayers, industries, and other interested parties and enable the public to meaningfully participate in the regulatory process. After careful consideration of all public comments received and all testimony at the public hearing, final regulations will be published.
Depending on when the notice of proposed rulemaking is issued, this could delay the new rules until either the 2024 or 2025 Tax Seasons (2023 or 2024 tax returns).
Overall, this is good news for taxpayers, tax professionals, and the IRS. The IRS still has ~12 million returns to be processed, and computer systems that are older than I am. Had the IRS received the flood of 1099-K’s and issued notices when taxpayers properly don’t include erroneous items on their returns, the IRS wouldn’t have been able to handle the volume of correspondence. Putting this off a year makes it at least possible the IRS will be ready.
No, I’m not talking about my business: feel free to call or write us (but due to a water leak, our office is closed today, Thursday, December 8th–we’ll be in tomorrow). Rather, I’m talking about calling the IRS and writing the IRS.
Let’s start with calling the IRS. For tax professionals like me, we use the Practitioner Priority Service (PPS). When we reach agents from the IRS, they can usually resolve issues, or direct us to the personnel at the IRS who can resolve our issues. This is good for taxpayers and tax professionals. Unfortunately, there’s a but in this: “When we reach agents from the IRS….” The problem is reaching them.
On Tuesday, I had eight matters to resolve with the IRS (four business, four individual). At 7am I began calling PPS (the service is open from 7am – 7pm local time). I made 60 phone calls to PPS. On all of them I received the message, “We’re sorry, but due to high call volume in the topic you’ve chosen we cannot take your call at the present time. Good bye.” On some of the calls, I also had to do simple math (add six and eight) or repeat words (a theoretical way to stop automated dialing). All that did for me was make each call take more time to reach the “We’re sorry” message. (I alternated attempting to reach the business and individual queues, and was equally unable to reach either.)
I am not alone in being frustrated. The National Association of Enrolled Agents (NAEA) sent a letter to the IRS and Congress noting our frustration. One excerpt from the letter:
As you can see from the sentiments of enrolled agents across the country, accessing the PPS lines has become nearly impossible for tax professionals to gain the help they need from the IRS. We have received anecdotal evidence that less than one percent of callers can get through the PPS individual line. [emphasis added]
Once we get through, we’re usually on hold for at least 30 minutes. Sometimes the IRS will offer a callback option so I don’t have to listen to the IRS hold music for an hour. I can work on other matters while on hold so I don’t have to charge clients for that time. Still, the current phone system is untenable in allowing tax professionals to resolve issues.
I will be trying to call the IRS again tomorrow and we’ll see if there’s any improvement.
So, Russ, why not write the IRS letters to resolve matters? When we write the IRS, it goes into the black hole of correspondence. First, the average response time when we write the IRS is measured in months (three to six currently), so taxpayers have to wait longer for resolution. Second, some of the time when we respond by mail the IRS repeats what was said in the original notice, ignoring the response; in those cases, we now have to send another letter to the IRS. Third, the National Taxpayer Advocate correctly noted the IRS’s Achilles heal is correspondence. The volume is so large that the IRS does lose items. With a phone call, we have resolution (hopefully).
Some items must be responded to by mail. For example, I have two clients who received erroneous “Math Error” notices. The only way to challenge these notices is to write the IRS a letter. (In one case, the IRS notice would be correct except for two amended returns that have not been processed. In the other case, the IRS made the math error and miscalculated the client’s tax owed due to a tax treaty allowing for a favorable tax rate.) Based on experience, it will be mid-2023 before these clients have resolution on these matters.
The IRS is supposedly based on providing quality service for taxpayers and tax professionals. I do need to point out that when I reach IRS employees they almost always do provide a high level of service. Unfortunately, reaching those employees is near impossible today.
Cryptocurrency exchange FTX (FTX.com and FTX.us) appears to be in severe financial difficulties. Binance was going to purchase them, but that purchase isn’t going to happen. It appears that FTX could fail at any time. There are a number of issues here, but one thing anyone who uses (or used) FTX should do immediately is download their transaction history. You may need to use cryptocurrency tracking software and import it into the software via an ‘api.’ (If you use cryptocurrency tracking software, the instructions will be in the software.) This is something you should do now!
From a tax perspective, if FTX were to close and you don’t have your transactions, you have a nightmarish situation for preparing your 2022 tax returns.
I believe that nothing good will come of the FTX fiasco; it’s yet another similar occurrence in this cryptocurrency space. Many Congressmen will look at this and say, “Why don’t we just ban cryptocurrency and end this problem for good?” The odds of such a ban rose considerably this week.
Let’s say you really want the IRS to change how it treats an issue that impacts you. So you file a tax return including that item (as the IRS wants it done), adding $9400 of income and $2000 to your tax. Then you file an amended return (a “Claim for Refund”) removing the item. The IRS doesn’t timely process the return/refund (which is typical), so you file a claim in District Court. The IRS then issues the refund, but you don’t cash the check because you want this dispute to be heard in court. Is the matter moot?
That’s what was heard in the US District Court for the Middle District of Tennessee in the case of Jarrett v. United States. I wrote about the case earlier this year, and noted that it was quite likely the Jarretts wouldn’t like the result. And that’s what happened last month when Judge William L Campbell, Jr. dismissed the lawsuit.
The problem for the Jarretts is simple: Once the IRS refunds the money, what are you arguing? You asked for a refund and received it! That you would like the court to decide is nice, but, “The Court does not provide advisory opinions.” So the Jarretts are out the money to hire attorneys, and we (taxpayers and tax professionals) don’t know with certainty how staking should be taxed.
It’s not as if the Court didn’t recognize the problem here:
Plaintiffs also argue that a decision on whether Tezos tokens created through “staking” are taxable income is of significant public importance because there are other taxpayers who engage in the same activity. The Court is not persuaded that the existence of an unanswered tax question, which is unquestionably of interest to the group of taxpayers who create Tezos tokens, provides an exception to mootness in this case…The Supreme Court has long recognized the problems presented by Congress’ decision to require taxpayers to challenge adverse tax decisions on a backward-looking basis, i.e. after taxes have been paid or assessed.
Unfortunately, the issue is moot for the 2019 tax year (the year in question) but not for 2020, 2021, or 2022:
The Court finds no reasonable expectation that Plaintiffs will be subject to the same action again. As stated above, the instant controversy was limited to whether Plaintiffs were entitled to a refund of taxes paid for the 2019 tax year. This particular issue is not capable of repetition as any subsequent claim for refund would necessarily apply to a different tax year (“The tax amounts in dispute and the nature of the claim for a refund are specific to each individual tax year.” Moreover, as this is the Jarretts’ first suit to seek a refund after paying income tax on Tezos tokens, it is premature to speculate the Jarretts’ tax refund claims will repeatedly evade review. [citation omitted]
Eventually, there are likely to be one or more court cases that are precedential impacting cryptocurrency (which would be a good thing), but this is not going to be such a case: “Plaintiffs’ claim for relief is MOOT.”
To recap, in Part 1 of this series I dealt with IRS failures in the 2022 Tax Season; in Part 2, I covered what the IRS should do to fix the mess. In Part 3, I wrote about what our firm got wrong. It’s now time to look at the opportunities (or change-points) to resolve our issues.
1. We’re upgrading our hardware and software. Our computer server is being replaced in a little over one week (which should allow us to access files faster). We’re switching to a unified back-end software before year-end; this should eliminate (I hope) or greatly reduce our internal systemic issues and increase our work-flow efficiency and speed.
2. We’re moving to a new office in December. We’re moving across the courtyard to a larger office that’s far better suited for our needs. We’ll have room for expansion. While I’ll miss having the only 17-sided office in the country (yes, it’s a heptadecagon!), the new office will work better for our staff.
3. We’re moving up our submission deadlines. We need to be able to better deal with the workload, and we simply couldn’t get everything done correctly and provide the proper level of service with our old deadlines. This does mean many of our clients may need to file extensions; however, while inflation is adding costs for all of us, the 24-hour day remains just 24 hours long. (The details will be in the Engagement Letters we send to our clients in December.)
4. We’re changing our work hours for the health and efficiency of our staff. We’re decreasing the hours we’re working during Tax Season. Everyone needs time to recharge, and working seven days a week isn’t healthy. We will be starting our increased Tax Season hours earlier, but our staff deserves time off every week–and they will be getting it this year.
5. We’re raising our rates for the 2023 Tax Season. There are two major components of this. First, as I’ve detailed in the past, inflation is impacting every input. From the paper we use to the software we rely on, everything has gone up between 10% to 488% from last year. Like every business, we must pass that on to our clients. Second, we believe we’ve been charging too little and we need to adjust our rates (while providing a far better level of service than we did in the 2022 Tax Season). (The details will be sent when we distribute our Engagement Letters.)
6. We’re not planning on net growth of clients for the 2023 Tax Season. When Price goes up, Demand goes down; that’s one of the outputs of the Law of Supply and Demand. We do expect to lose some clients because of our price increase, and we accept that. Additionally, we’re going to cap the number of clients based on the number of returns we can realistically complete with the level of service we want to provide. It’s quite likely that we will not be accepting new clients sometime early in 2023, so if you’re interested in using us, now is the time to let us know.
7. We’re attempting to hire another tax professional (or trainee). Even though the economy is in a recession, the job market remains extremely tough. We’d like to hire another tax professional, and we’re looking to do so. Our trainee from 2022 will be on board as a tax professional for the 2023 Tax Season, so that should help. Still, demand remains strong (and likely will continue to be strong as long as the Tax Code remains as convoluted as it is today).
Will these fix our issues from the 2022 Tax Season? At minimum, they should greatly reduce the issues we faced. However, no one can predict the future. I can promise that we’re not going to have a repeat of the issues we had during 2022, and we are building more resiliency into our systems.
I love IRS Direct Pay. It’s a simple method to make payments to the IRS for most (but not all) taxes individuals might have. And it works…well, it works most of the time.
I saw on Twitter the following:
On October 20th, the IRS Direct Pay application had issues with processing payments. The issue was fixed but approximately 4,600 taxpayers were impacted and duplicate payments were made and processed.
The Treasury Financial Agent is reaching out to all financial institutions to return the duplicate payments. However, if a taxpayer calls the IRS about this issue, they should be advised to contact their financial institution and have them return the duplicate payment(s) using ACH return reason code R10 (Customer advises not authorized) or R11 (Check truncation entry return).
The issue was sent to all financial institutions via the Federal Reserve Bank Operations Bulletin.
To date, no one has contacted us about this, but we do have individuals who used Direct Pay after October 17th to pay taxes. If you are an impacted taxpayer, follow the instructions noted above. If you’re one of our clients who was impacted, feel free to call our office.
This is, perhaps, the most painful post I’ve ever written for this blog. Why? I’m going to go over everything our firm got wrong with this past Tax Season. As the saying goes (Murphy’s Law), what can go wrong will go wrong and, boy, was that the case this year!
When the 2021 Tax Season ended (2020 tax returns prepared in 2021), we added an additional tax professional. We believed that would give us additional capacity for the expected growth for the 2022 Tax Season. Otherwise, we expected 2022 to be a repeat of 2021. However, that simply wasn’t the case.
1. We didn’t budget for returns taking 10% more time than last year (on average). For whatever reason, we found that the amount of time we had to spend working an average return increased by that 10%. Let’s say you spend 60 minutes (one hour) on a return; that would mean an extra six minutes. That’s not much…but multiply that by 1,000 returns and you have 6,000 minutes or an additional 100 hours. We didn’t budget for that (and didn’t see this coming). This won’t be the first time I mention that while inflation is surely impacting our pocketbooks, there’s been no inflation in the length of a day.
2. Mr. Murphy struck on the illness front. When I wrote Part 1 in April, only one of our employees had gotten Covid. By October, every employee had gotten Covid. (Interestingly, no one caught it in the office. Our office was built in the 1980’s and doesn’t have the best ventilation; one would think Covid would spread easily from employee to employee but that didn’t happen.) That took each employee out of the office for at least one week (in my case, two weeks). Additionally, last year’s flu shot was abysmal in preventing the flu (a reported 16% efficacy). All but one of us got the flu, too (amazingly, no one caught it from anyone at the office–maybe the office’s ventilation is better than I thought).
3. Personal and legal obligations kept me away from the business for several weeks. I had a family issue arise in January that kept me away from the office for almost the entire month. While Scott (my business partner) and everyone else pitched in during my absence, it put me behind. That’s a bad way to start a tax season. I was then unlucky enough to have to deal with a legal issue which kept me out of the office for a couple more weeks.
4. We dealt with two day-long power failures and two air conditioning failures. In Las Vegas, you simply cannot work in an office in the summer if there’s no air conditioning. Twice, the power was out for several hours and we closed. Twice, the air conditioning failed. (We do have a service contract that specifies same-day repairs, and the company we used was very efficient in fixing the issues). Still, that’s another week lost from preparing returns.
5. The first four items highlight that we didn’t have enough resiliency built into our planning. Consider an office of 100 tax professionals where one individual is ill. The other 99 can pick up the slack fairly easily. Now consider an office with five individuals with one out for an extended period; it’s far more difficult for the other four to effectively handle the increased workload.
6. We upgraded our internal paperless system and it didn’t work. We’ve used the same paperless system for more than a decade, and at the end of 2020 we “upgraded” to the new, improved version. Unfortunately, new and improved wasn’t the reality. It was slower and simply didn’t work. We downgraded back to the old, unimproved version (which we’re still on). The new version looked better but we’re far more concerned with quick retrieval of .pdf files, not the fact that the new system uses the cloud.
7. We discovered our systems were not robust enough to handle our growth. We discovered multiple failure points during the 2022 Tax Season relating to our internal systems and how returns flowed in our office. Most of these issues related to computer systems we use and were caused by using three different systems (excluding our tax software) for running the back-end of our office.
In many ways it was for us a perfect storm of issues. It resulted in poor communication to our clients (which is unacceptable to us) and poor performance by us (mainly in timely preparing returns).
So what are we going to do about this? That’s in Part 4 of this series coming next week. For now, I’ll quote Lewis Mumford who stated, “The Chinese symbol for crisis is composed of two elements: one signifies danger and the other opportunity.” [1] We’re looking at this as an opportunity for the 2023 Tax Season.
[1] I don’t speak or read Chinese, but I heard from a friend of mine that the Chinese symbol for crisis is actually not composed of an element meaning “opportunity;” instead, the second element means “change point.” Whether it’s a change point or an opportunity isn’t relevant: for us, it’s going to be both.
