Bozo Tax Tip #9: Nevada Corporations

Posted on May 4, 2021 by Russ

As we continue with our Bozo Tax Tips–things you absolutely, positively shouldn’t do but somewhere someone will try anyway–it’s time for an old favorite. Given the business and regulatory climate in California, lots of businesses are trying to escape taxes by becoming a Nevada business entity. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.

Now, if you’re planning on moving to Nevada forming a business entity in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada entity is, well, bozo.

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Bozo Tax Tip #10: Email Your Social Security Number!

Posted on May 3, 2021 by Russ

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

This is a repeat for the eighth year in a row, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and while the IRS’s response has improved, that’s just an improvement from awful to mediocre.

I have some clients who are incredibly smart. They make me look stupid (and I’m not). Yet a few of these otherwise intelligent individuals persist in Bozo behavior: They consistently send me their tax documents by email.

Seriously, use common sense! Would you post your social security number on a billboard? That’s what you’re doing when you email your social security number.

We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my mother, it might go in a straight line to her. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem—communicate in a secure fashion to your tax professional.

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IRS Reminds Taxpayers of April FBAR Deadline. So What!

Posted on April 9, 2021 by Russ

The IRS sent out a press release this morning noting the FBAR deadline remains April 15th.  The FBAR is the Report of Foreign Bank and Financial Accounts (FinCEN Form 114), and must be filed if you have $10,000 aggregate in one or more foreign financial accounts at any time during the year.  My reaction is “Who cares.” And this is a deadline you can ignore (for now).

The penalties for willfully not filing the FBAR are very significant.  They start at $100,000 or half the balance in each account, whichever is greater.  I absolutely am not encouraging individuals to get in trouble with the FBAR.

But the IRS press release left out a significant issue vis-a-vis the April 15th deadline for the FBAR: There is an automatic extension until October 15th.  There are no penalties and no issues at all with filing the FBAR between April 16th and October 15th.  Indeed, the FinCEN automatic extension is how I (and most tax professionals) would like to see IRS deadlines work: automatic extensions for filing (but you have to pay the tax, if any, on the due date).  But I digress.

So if you have an FBAR filing requirement and you are not ready to file, relax.  You have six more months to get the FBAR filed—a fact the IRS left out of its press release.

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If You Used Poloniex and Did Not Report Your Crypto…

Posted on April 2, 2021 by Russ

…now is a very good time to amend your tax returns to include those cryptocurrency gains and losses.  The Department of Justice announced that a federal court in Massachusetts ordered Circle Internet, the former parent company of Poloniex, and Poloniex to provide a list of all U.S. taxpayers who conducted at least $20,000 of transactions from 2016 through 2020.  This is a “John Doe” summons, and is the same tactic the IRS used to get this information from Coinbase.

I would expect it will be at least 30 days before the information releases the Department of Justice, and then several more weeks (to months) before the IRS starts comparing the lists of individuals with Poloniex transactions to filed tax returns.  If you forgot to include Poloniex sales on your tax returns (or if your actions were more deliberate), you have a window to act.  It is almost always better to come clean to the IRS before they send you a notice.

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25 Million (and Counting)

Posted on April 1, 2021 by Russ

Today is April Fool’s Day.  I wish this post were a joke–and I guess in one way it is.  Unfortunately, what I’m reporting is true.

Yesterday, National Taxpayer Advocate Erin Collins told a webinar that 25 million tax returns need a human to process.  Some returns must be filed on paper (for example, split-interest trust returns, Form 5227), other returns fall out of processing due to errors in processing, and some taxpayers choose to file paper returns.  The IRS Covid operations page says there are 9.2 million returns as of March 15th needing to be processed–some received as far back as July 2020.  Most likely, Ms. Collins’s remarks mean another 16 million returns fell out of processing and are awaiting a human to push them through the system.

What does this mean?  If you have to paper-file something with the IRS, or if you file an amended return with the IRS (all amended returns are reviewed by a human), you should expect it to take many months–maybe a year–to be processed.  If you file your return electronically, there’s about a 90% chance it will be processed just fine.  However, if your return is one of the 10% or so that falls out of processing, your return could sit in a virtual stack for months.  What’s worse is there is nothing you can do about this. 

The reality is that until IRS operations fully resume at their Service Centers (I expect that to happen late this summer), the backlogs will only grow.  Commissioner Rettig’s remarks that (paraphrasing) things are fine are disingenuous at best and outright lies at worst.  The IRS remains broken, and we’re all suffering as a result.

 

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More IRS Correspondence Follies

Posted on March 25, 2021 by Russ

Two more examples came in yesterday’s mail regarding the IRS’s troubles with correspondence.  First, clients received an Automated Underreporting Unit (AUR) notice in late December (2020) regarding income allegedly not included on their return.  It was included, and we faxed a reply a few days later to the IRS.  In yesterday’s mail the IRS reissued the same notice.  All of the content is identical.  The only changes are the date of the notice and the “AUR Control Number.”  Here’s how I began my response:

First, this notice appears to be identical to the CP2000 for Tax Year 2018 dated December 21, 2020 that I responded to on December 30, 2020.  Because everything on this notice is identical, my response is also identical.

Besides wasting my time, this just adds to the backlog of correspondence the IRS must weed through.

Second, an ongoing major issue is that the IRS has been issuing Notices of Deficiency before they read responses to AUR notices.  Taxpayers are forced to file Tax Court petitions to preserve their rights, adding more backlog into the system.  Clients of mine are impacted by this (they received an AUR notice in November, timely replied (and we have proof the IRS received the reply), and then received a Notice of Deficiency.  We replied to that with the hope (almost certainly forlorn) that the IRS might respond to the reply prior to the last date to petition Tax Court.  In yesterday’s mail there was a letter from the IRS acknowledging they received that most recent reply, but that they need more time to respond.  Given what we’re seeing, I strongly suspect my clients will be filing a Tax Court petition in a few weeks.

IRS correspondence remains broken.

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Miccouskees Reach End of the Road

Posted on March 22, 2021 by Russ

The Miccouskee Tribe runs a very successful casino outside of Miami.  The tribe itself is a sovereign nation and is exempt from federal taxation.  However, its members are US citizens and owe tax on all their income.  The tribe offered some unique (if bad) advice to its members: Don’t report the income–which is taxable–to the IRS, and don’t list distributions from the tribe on anything.  The then chairman of the tribe noted that if the IRS ever found about the income, trouble would ensue.  And that (as you might expect) happened.

The IRS found out and issued notices of deficiency.  Two members of the tribe fought the notices in Tax Court and had a partial victory (they lost on the tax and most of the penalties, but did have the accuracy-related penalty removed).  They appealed to the 11th Circuit.  Last week, the Court handed down its opinion upholding the Tax Court.

First, as I’ve said in the past everything is income unless Congress exempts it.  And there’s nothing in the Code exempting class II gaming: “[T]he very statute that allows tribes to run class II gaming activities—the Gaming Act—also says that any “per capita payments” made from those activities must be “subject to Federal taxation.””  The members argue that the Miccosukee Settlement Act or “land lease” payments exempt them from tax.

Unfortunately for the members, the Miccosukee Settlement Act is about a highway, and does exempt income from that highway building from federal taxation.  The casino (and income from the casino) has nothing to do with that, so the members lose.  Then they argue that the payments are exempt because they are from a lease of the tribe’s lands.  There’s a problem: you need a lease if you’re going to argue that a lease exempts the income from taxation.

The tax court found that there was no lease agreement, and that finding was not clearly erroneous. Indeed, [the members] have not pointed to anything in the record even resembling a lease agreement. And a closer look reveals why: no lease ever existed. [Citations omitted]

Oops.

But there’s more–to have exemption, there must be clear statutory exemption.  The Court found there was none.  And the payments from the casino do not derive from the land, so the lease is irrelevant anyway.

So the Miccosukee members are out of luck.  They could appeal (either asking for en banc review by the entire circuit or to the Supreme Court), but neither is likely to be granted.  It appears to be the end of the line for the battle, and the members of the tribe need to start writing their checks to the IRS.

Case: Clay v. Commissioner

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Commissioner Rettig, Come Clean and Stop the B.S.

Posted on March 18, 2021 by Russ

Last week I wrote a post titled 18 Months and Counting.  As promised, here’s the follow-up and it can be summed up with a simple line, “The IRS is lying to everyone about correspondence.”

Commissioner Rettig today said he is “hopeful to get through the backlog by summer,” and that there’s a 24 million return backlog of business and individuals per TIGTA.  And he said that the IRS always has a backlog.  But I and other tax professionals are seeing paper-filed returns take one year to be processed (and I’ve seen reports of longer).  That’s not normal.

I am not stating that Commissioner Rettig is lying in his testimony.  Indeed, I strongly suspect everything he said is the truth…but not the whole truth.  He sidestepped the question about the backlog stating there’s always inventory of returns.  No Congressmen followed up on that issue, but had they asked the question, “Is it normal to have a one year backlog for returns?” then we might have gotten more answers.  Additionally, no one asked about the delay in correspondence.

I didn’t see anything in the testimony (and I will admit I did not watch all of it) regarding the backlog in correspondence.  It’s ridiculous and is causing anyone who is corresponding with the IRS plenty of pain.

Today, the National Taxpayer Advocate asked for a multi-year budget for the IRS and guaranteed funding.  The IRS is the only (or one of the only) government agencies where more money spent generally leads to more revenue for the government.  Her point is well-taken: It is impossible to plan long-term when the budget falls off a cliff annually.  That’s on Congress to fix and is not up to Commissioner Rettig.

For Commissioner Rettig, though, here are three simple questions that I’d like answers to:

  1. What is the delay in correspondence?  You said in January you’re actually opening mail timely.  How timely is the IRS in reading mail?  And what’s a realistic time-frame to get this delay down to three months?
  2. You stated that an “inventory” of returns is normal.  Is it normal for paper-filed returns to take a year to be processed?  Given that we’re in the midst of another Tax Season, and given many returns cannot be e-filed (either due to complexities within the returns or limitations within the IRS), what’s a realistic time-frame for the IRS to catch up?  (Hint: Summer is not realistic.)
  3. The IRS has issued a series of erroneous notices.  The most recent involved CP59 notices.  Is the IRS doing any forward planning regarding automated notices, turning these off so that this issue doesn’t recur?

(My guess on the answers:  It will take 1-2 years for the correspondence backlog to get reduced to the point the IRS routinely responds within three months…and that’s 1-2 years once the IRS fully reopens the IRS campuses.  Likewise, I suspect it will take at least another year before the IRS backlog in tax returns is down to something manageable.  And I highly doubt the IRS has done any forward planning on notices.)

You likely can think of other good questions for Commissioner Rettig.  I’d love to see our Congressmen and Senators ask these questions, and get some realistic answers.  It would be enlightening to all.

UPDATE: My thanks to the commentator who pointed out that I had originally typed, “…many returns cannot be paper-filed….”  You can tell it’s been a long Tax Season (already).

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IRS Reportedly Extending Federal Individual Due Date from April 15th to May 17th

Posted on March 17, 2021 by Russ

Multiple news reports  state that the IRS will extend the April 15th tax deadline to May 15th.  Because May 15th falls on a Saturday, that effectively pushes the deadline to Monday, May 17th.  I would expect this would be for all April 15 deadlines (primarily Forms 1040, 1041, and 1120) but we will have to wait for the formal announcement.

IRS Commissioner Chuck Rettig is testifying on Capital Hill tomorrow, and I would expect him to make the announcement as part of his testimony.  I will have more on this when it is officially announced.

UPDATE:

It’s official — individual tax returns have been extended; the IRS’s official announcement is here.  However, the first quarter estimated payments have not been extended.  This is dumb because many taxpayers have their estimated payments made by their tax professionals when they file their returns.  Consider John Smith.  Mr. Smith legally files his tax return on May 1st and is now late with his 1st Quarter 2021 Estimated Payment!  Sorry, IRS, the first quarter estimated payment should be extended until May 15th, too.

And there’s more that have not been extended.  Corporate tax returns (Form 1120) due on April 15th are still due on April 15th.  Trust and estate returns (Form 1041) due on April 15th are also still due on April 15th.  Not extending all the deadlines is going to cause confusion–especially for those who file trust and estate returns.

There’s a cliche about half a loaf of bread being better than none.  I’d say the IRS gave taxpayers not even half a loaf of bread; rather, just a couple of slices of bread.

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18 Months and Counting

Posted on March 9, 2021 by Russ

Last year I wrote about one of my clients, James Smith.  The IRS “helpfully” changed his Employer Identification Number (EIN) for his business without telling him, and we have had to deal with numerous IRS notices relating to the EIN.  Given that all payments were timely made by Mr. Smith and his businesses, eventually the issues will all be resolved.

I do have to use eventually because I have no idea when the IRS will resolve the issues.  For example, in August 2019 we responded to an IRS notice alleging that Mr. Smith’s business owed payroll taxes and a civil penalty (for not paying those taxes) for 2012.  We responded with all backup paperwork showing the taxes were timely paid.  We have received a string of letters from the IRS–the first one was on October 21, 2019–stating:

We haven’t resolved this matter because we haven’t completed all the processing necessary for a complete response.  We’ll contact you again within 60 days with our reply.  You don’t need to do anything else for now.

The eighth such letter (dated March 8, 2021) arrived in yesterday’s mail.  This is more annoying than anything else, but it gives the reality of corresponding with the IRS today: Corresponding with the IRS today is broken.

There’s no other way to put it.  Responses aren’t read.  Mr. Smith’s current business somehow got changed to not being an S-Corporation in the efile system.  We wrote a letter to the entity unit providing proof that it is an S-Corporation (the IRS letter accepting the election to be an S-Corporation).  We’ve been waiting 14 months for that to get resolved.  The 2020 extension for Mr. Smith’s business had to be mailed to the IRS because they still haven’t fixed it.

Another client’s C-Corporation return was processed as an S-Corporation for 2017.  The C-Corporation owes significant tax (over $100,000) but cannot pay it.  Why?  Because if they were to pay it, the funds would be returned.  As processed, the S-Corporation doesn’t owe tax.  That entity wants to pay the tax it owes but until the IRS resolves the matter it cannot.  And I will–once it is resolved–ask for abatement of the late payment penalty and interest because this was all due to IRS error.

Meanwhile, I and other tax professionals are dealing with the IRS sending out Notices of Deficiency to clients.  These relate to notices from the Automated Underreporting Unit (AUR) alleging unreported income.  These clients all responded but because the IRS hasn’t read the responses, the Notices of Deficiency were mailed.  Now the clients must file Tax Court petitions in order to protect their rights.

Yes, we’re dealing with a pandemic but some of this is on Commissioner Rettig.  He announced in January that all mail is being timely opened.  That may be the case (I have my doubts) but there’s no chance that it is being timely processed.  Opening the mail, removing checks, and then putting it in bins is slightly better than not opening the mail.  And don’t get me started on the string of erroneous IRS notices.

Yes, I realize we’re in a pandemic but I have been able–with a few minor hiccups–to run my business.  The IRS can do better.  And I’ll expound on that in the next post in this series.

 

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