Taxable Talk

Creative Math, IRS Style

Posted on September 4, 2024 by Russ

One of our clients made a mistake on his payroll tax deposits: He shorted the IRS $4,590. He realized his mistake, and immediately made a correcting payroll tax deposit (albeit late). There’s a penalty for this, and it’s 10% (based on the number of days his payment was late)–which he paid in advance of an IRS assessment of a penalty.

The IRS assessed a $5,327.46 penalty. That’s a penalty of 116%, quite a bit more than 10%. The IRS sent a penalty notice in late June; my client immediately sent via certified mail a letter questioning the penalty. What did the IRS do? Did they put a hold on collection activities while they investigated? Did they perform the investigation, realize that an error was made, and send a $0 amount due notice? Or did they send an Intent to Levy (CP504B) notice?

The IRS ignored my client’s response and sent the CP504B Intent to Levy notice.

This morning, I called the IRS and tried to get this resolved on the phone. The representative couldn’t–without seeing how the penalty was calculated (which he couldn’t see), he could only note we disputed it and were going to file an Appeal. This afternoon, I submitted that Appeal request online [1].

In the end, my client’s issue should be resolved without him owing additional tax or penalties; the IRS clearly erred. However, my client has to pay me for services that shouldn’t have been needed simply because no one at the IRS did anything with his correspondence. Frankly, the IRS today rarely reads their mail timely or correctly. And that’s a huge issue.

[1] The IRS recently implemented an online upload feature. This allows responding to some notices by upload. I was able to upload all the documents needed for the Appeal (including the Form 9423 Collection Appeals Form) quickly and get an immediate confirmation they were received. This is excellent, and the IRS is to be praised for this. It shouldn’t have been necessary to file this Appeal if the IRS could read mailed correspondence, but at least there are some improvements happening at the IRS.

Posted in IRS, Payroll Taxes | Comments Off

The Case of the Missing $632,825.18

Posted on August 22, 2024 by Russ

The story you’re about to read is true. The names (and dollar amounts) have been changed to protect the innocent.

John and Mary Smith, long-time clients, filed an amended return for the 2017 tax year years ago. It took some time, but their claim for an approximate $750,000 refund was approved. Finally, in early 2023 a check was issued for $701,818.85 (the Smiths owed some back tax that the IRS correctly offset, and the IRS added interest per law).

Unfortunately, the check was returned to the IRS; the Smiths had moved and the IRS didn’t update the address. In June 2023 the IRS sent a new check for $632,825.18 (there was some additional tax to offset and the interest changed). That check, too, never arrived; the Smiths completed Form 3911 noting they didn’t receive the check. The IRS followed up a couple of months ago, and the Bureau of the Fiscal Service sent the Smiths a form to complete. It turns out that a business called Acme Auto Inc appears to have cashed the check; indeed, the copy of the check sent by the Fiscal Service shows it was made payable to Acme. Acme appears to be a real business, and the address on the check matches its address as registered with the state’s corporation commission/Secretary of State.

I can only think of three things that could cause this. First, Acme was also due a tax refund for the exact same $632,825.18, and the Fiscal Service erred and sent a copy of the wrong check. The chance of that seems about the same as it snowing today in Las Vegas.

Second, somewhere in the printing/generation of the refund the payees names (and address) got changed to Acme, and Acme deposited the check. Perhaps they were expecting a refund, or perhaps they just look at this as found money. There’s an obvious issue here: depositing money that you’re not due means that you get to pay it back with interest.

Third, the check was made payable to the Smiths and Acme (or its owner(s)) changed the payee to Acme. That’s theft, and quite illegal.

I cannot think of any other explanations for what happened. In any case, the Smiths have sent the form back to the Bureau of the Fiscal Service, and I’m certain that an investigation will determine the cause for this. Eventually (likely in early 2025), the Smiths should receive another check for about $650,000 (they will be due additional interest). As for Acme Auto, I hope that I’m wrong about what happened and the check copy we saw was simply the wrong one. Or that Acme still has that $632,825.18 around as they’ll need to pay it back. If not, they’re likely to receive a visit from law enforcement.

Posted in IRS | Comments Off

Hurricane Debby Tax Deadline Relief; Deadlines Extended for Impacted Taxpayers to February 3, 2025

Posted on August 9, 2024 by Russ

This year is supposed to be a very active year in the tropics, with over 20 tropical storms (some of which will be hurricanes) predicted. Hurricane Debby made landfall in Florida, and then made a second landfall in the Carolinas with ongoing issues in Pennsylvania and the northeast (much of the area is under flood and or tornado watches).

The IRS announced today relief for impacted taxpayers in Florida, Georgia, and the Carolinas. From the IRS announcement:

Affected taxpayers in South Carolina, North Carolina, Florida and Georgia now have until Feb. 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). Currently, this applies to:

All 46 counties in South Carolina.

The following 61 counties in Florida: Alachua, Baker, Bay, Bradford, Brevard, Calhoun, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Escambia, Flagler, Franklin, Gadsden, Gilchrist, Glades, Gulf, Hamilton, Hardee, Hendry, Hernando, Highlands, Hillsborough, Holmes, Jackson, Jefferson, Lafayette, Lake, Lee, Leon, Levy, Liberty, Madison, Manatee, Marion, Monroe, Nassau, Okaloosa, Okeechobee, Orange, Osceola, Pasco, Pinellas, Polk, Putnam, Santa Rosa, Sarasota, Seminole, St. Johns, Sumter, Suwannee, Taylor, Union, Volusia, Walton, Wakulla and Washington.

The following 55 counties in Georgia: Appling, Atkinson, Bacon, Ben Hill, Berrien, Brantley, Brooks, Bryan, Bulloch, Burke, Camden, Candler, Charlton, Chatham, Clinch, Coffee, Colquitt, Cook, Crisp, Decatur, Dodge, Echols, Effingham, Emanuel, Evans, Glynn, Grady, Irwin, Jeff Davis, Jefferson, Jenkins, Johnson, Lanier, Laurens, Liberty, Long, Lowndes, McIntosh, Mitchell, Montgomery, Pierce, Richmond, Screven, Tattnall, Telfair, Thomas, Tift, Toombs, Treutlen, Turner, Ware, Wayne, Wheeler, Wilcox and Worth.

The following 66 counties in North Carolina: Alamance, Anson, Beaufort, Bertie, Bladen , Brunswick, Camden, Carteret, Caswell, Chatham, Chowan, Columbus, Craven, Cumberland, Currituck, Dare, Davie, Davidson, Duplin, Durham, Edgecombe, Forsyth, Franklin, Gates, Granville, Greene, Guilford, Halifax, Harnett, Hertford, Hoke, Hyde, Johnston, Jones, Lee, Lenoir, Martin, Montgomery, Moore, Nash, New Hanover, Northampton, Onslow, Orange, Pamlico, Pasquotank, Pender, Perquimans, Person, Pitt, Randolph, Richmond, Robeson, Rockingham, Sampson, Scotland, Stokes, Surry, Tyrrell, Vance, Wake, Warren, Washington, Wayne, Wilson and Yadkin.

Individuals and households that reside or have a business in any one of these localities qualify for tax relief. The same relief will be available to any other counties added later to the disaster area. The current list of eligible localities is always available on the Tax relief in disaster situations page on IRS.gov.

Given flooding today in Pennsylvania, I expect at least some counties in the Keystone state to become a federal disaster area and be eligible for this relief.

Let’s hope that the prediction for an active hurricane season is wrong and this is the last such storm to impact the United States in 2024.

Posted in Florida, Georgia, North Carolina, Pennsylvania, South Carolina | Tagged Hurricane.Debby | Comments Off

Why Did the IRS Send Me a $1.87 Refund?

Posted on August 1, 2024 by Russ

In mid-June I received mail from the IRS. That’s not unusual; I receive a lot of mail from the IRS (generally, correspondence for clients). But this was different: it was a check for $1.87. Here’s the check:

Now, I wasn’t expecting a refund (I owed tax, which I paid with the filing). It’s definitely labeled as a tax refund, but no explanation accompanied the check. That’s not unusual; the checks and the notice of explanations are generally sent from different offices. I ran a transcript, and there’s nothing noted on my account for 2023 that gives an explanation (no entry for $1.87). So I waited, figuring that I would receive a notice in the mail within a few weeks.

It’s now August 1st, and I still haven’t received anything. I could call the IRS up and they may see something that I don’t in my account. But it’s $1.87, and it’s just not worth my time figuring this out. Yes, there’s a possibility this refund is erroneous (indeed, I suspect that’s the case) but it’s just $1.87! Yes, we tell clients to not cash refund checks they’re not expecting–indeed, if this was $187 (rather than $1.87) I would be on the phone to the IRS to figure out what’s going on. Yes, if this refund is erroneous I may have to pay it back with interest (so that might be $1.97 in three years).

The IRS is supposed to send a notice and perhaps I’ll get one before year-end. I’m not holding my breath.

This is more humorous than anything else (because it’s $1.87), but it’s typical of the kind of issues we see. I’m currently having to appeal an erroneous late filing penalty for a client who filed his tax return on December 15th (his tax deadline) because the mailing receipt from Australia shows the date as “15/12.” (In most of the world–but not the United States–the day appears before the month.) In my letter asking for the appeal, I really wanted to say, “Does anyone consider there aren’t fifteen months anywhere in the world?” I didn’t–I kept the letter directly on point including the citation to § 7502(a)(1) of the Internal Revenue Code (which governs timely filings).

These are two examples of the IRS’s major issues with correspondence. Unfortunately, I haven’t seen any improvements this year (only regression).

Posted in IRS | Comments Off

A Phish A Day…

Posted on July 26, 2024 by Russ

Phishing is something tax professionals see daily. We have antivirus and malware protection installed throughout our network and on all workstations, but I still see a phishing email a day. Here’s one:

There are a number of clues that this is a phishing attempt:

The sender’s name and email address don’t match;
The email isn’t personalized;
The grammar is atrocious; and
The email isn’t signed.

So be careful out there!

Posted in Tax Preparation, Taxable Talk | Comments Off

The Real Winners of the 2024 World Series of Poker

Posted on July 18, 2024 by Russ

I was not one of the 10,112 entrants (a record field) in the 2024 Main Event of the World Series of Poker. Yesterday saw the winner being crowned. He received a cool $10 Million, but how much of the winnings would he keep? For the record, 1,517 of the entrants (about 15% of the field) received part of the $94,041,600 prize pool with a minimum cash being $15,000.

One important note: I do need to point out that many of the players in the tournament were “backed.” Poker tournaments have a high variance (luck factor). Thus, many tournament players sell portions of their action to investors to lower their risk (and/or “swap” action with other entrants). It is quite likely that most (if not all) of the winners were backed (or had swaps) and will, in the end, only enjoy a portion of their winnings. I ignore backing and swaps in this analysis (because the full details are rarely publicized). Now, on to the winners.

Congratulations to long-time professional poker player Jonathan Tamayo of Humble, Texas (suburban Houston). Mr. Tamayo’s ten days of grinding poker culminated when his eight-three outflopped Jordan Griff’s nine-six on a nine-eight-three flop. The turn and river didn’t change anything, and Mr. Tamayo walked away with a cool $10 million…before taxes. As a resident of Texas he avoids state income tax; however, he does owe both federal income tax and self-employment tax. Overall, he’ll pay an estimated $3,992,302 to the IRS (just under 40% of his winnings).

The second place winner is the aforementioned Jordan Griff. Mr. Griff, a resident of Schaumburg, Illinois (suburban Chicago) and his wife are expecting their first child soon. An amateur gambler, Mr. Griff avoids self-employment tax; however, as a resident of Illinois he will be paying state income tax on his winnings. I estimate he will owe $2,210,808 to the IRS and $297,000 to Illinois (an estimated total of $2,507,808).

Niklas Astedt of Goteborg, Sweden is widely considered one of the best (if not the best) online poker player in the world. His third place finish showed he’s no slouch at live poker. The US-Sweden tax treaty exempts Mr. Astedt’s winnings from US withholding (and taxation). Sweden does not tax gambling winnings in Sweden (the companies offering poker in Sweden do pay tax, of course). It appears that Mr. Astedt’s US winnings of $4,000,000 will be subject to about 35% taxation in Sweden (or $1,400,000 lost to tax).

Jason Sagle of Sudbury, Ontario was unlucky to finish in fourth place; his pocket jacks were cracked by the Ace-three of Niklas Astedt. Mr. Sagle, a former paramedic and insurance salesman, received $3,000,000 for his finish. Canadians with gambling winnings in the United States face 30% withholding (but can file a tax return to recover part of the withholding based on gambling losses). Professional gamblers in Canada may (in the future) be facing taxation on their winnings (court cases are working their way through the Canadian judicial system on this, with decisions expected late this year). For now, Mr. Sagle gets to enjoy $2,100,000.

Finishing in fifth place for $2,500,000 was Boris Angelov of Sofia, Bulgaria. The professional gambler benefits from the US-Bulgaria tax treaty (there is no withholding on his winnings). Mr. Angelov also benefits from the Bulgarian tax regime; his gambling activity in Bulgaria is not taxed (the online and live cardrooms in Bulgaria do pay taxes). Bulgaria has a flat 10% income tax rate, so he gets to keep 90% of his winnings ($2,250,000).

Andres Gonzalez, a professional poker player from Cartagena, Spain, finished in sixth; he was another victim of Niklas Astedt. Mr. Gonzalez was unlucky when his pocket jacks lost (what poker players call) a race to Mr. Astedt’s Ace-Queen. Like Mr. Angelov and Mr. Astedt, he won’t be paying any US taxes (the US-Spain tax treaty exempts gambling winnings). However, Spain is not a low tax environment; he’s facing an estimated 47% income tax rate on his $2,000,000 of winnings (losing $940,000 to tax).

Noted high-stakes professional player Brian Kim (a regular on the Triton Series) finished in seventh place for $1,500,000. A resident of Las Vegas, Mr. Kim avoids state income tax but does have to pay self-employment tax. He’s estimated to pay 39.41% in tax (about $908,874).

Joe Serock, another professional poker player from Las Vegas, was the eighth place finisher for $1,250,000. Mr. Serock’s Ace-Jack fell to Niklas Astedt’s pcket queens. I estimate that Mr. Serock will lose just over 39% of his winnings to tax ($491,091).

Malo Latinois, a native of France but a resident of the Dallas suburb of Carrollton, was the first player knocked out at the final table of nine when his Ace-King fell to Jordan Griff’s pocket threes. France does not tax its citizens residing outside France (unlike the United States), so Mr. Latinois will only be paying US income tax. He faces an estimated tax bite of just over 39% ($391,057).

Here’s a table summarizing the tax bite:

Amount won at Final Table	$31,250,000
Tax to IRS	$8,576,384
Tax to Skatteverekt (Sweden)	$1,400,000
Tax to Agencia Tributeria (Spain)	$940,000
Tax to Illinois Department of Revenue	$297,000
Tax to National Revenue Agency of Bulgaria	$250,000
Total Tax	$11,463,384

That means 36.68% of the winnings at the final table goes toward taxes.

Here’s a second table with the winners sorted by their estimated take-home winnings:

Winner	Before-Tax Prize	After-Tax Prize
1. Jonathan Tamayo	$10,000,000	$6,007,698
2. Jordan Griff	$6,000,000	$3,492,192
3. Niklas Astedt	$4,000,000	$2,600,000
5. Boris Angelov	$2,500,000	$2,250,000
4. Jason Sagle	$3,000,000	$2,100,000
6. Andres Gonzalez	$2,000,000	$1,060,000
7. Brian Kim	$1,500,000	$908,874
8. Joe Serock	$1,250,000	$758,909
9. Malo Latinois	$1,000,000	$608,943
Totals	$31,250,000	$19,786,616

Once again, a player ended up placing higher than his actual finish based on after-tax results. This year, Mr. Angelov of Bulgaria effectively finished in fourth place because of Bulgaria’s flat 10% income tax rate.

The Internal Revenue Service did not end up with taxes that exceeded the first place winnings; the agency will have to be content with finishing in second place (based on pre-tax prizes) with a haul of just $8,576,384. Still, you can’t say that the IRS didn’t do poorly because the house always wins.

Posted in Gambling | Tagged WSOP | Comments Off

US-Russia Tax Treaty Mostly Suspended Beginning August 16th

Posted on June 21, 2024 by Russ

The IRS announced today that based on a request from Russia last August that most of the US-Russia Tax Treaty will be suspended beginning August 16, 2024. One impact: Russians who have gambling income in the US that’s subject to withholding (for example, poker tournaments) will be facing 30% withholding from August 16th onward. That does not impact this year’s World Series of Poker (currently running at the Horseshoe and Paris casinos here in Las Vegas), but will impact the 2025 WSOP.

Posted in Gambling, International | Comments Off

Is IRS Correspondence Broken?

Posted on May 30, 2024 by Russ

As a tax professional with quite a few clients, our clients receive IRS notices. Much of this correspondence (not all, but a large portion) has to be responded to. My three most recent cases are making me think there are major issues with the IRS handling mail.

Client #1 received an Automated Underreporting Unit (AUR) notice alleging four items: two 1099-NECs not reported, one 1099-MISC, and some capital gains. We timely responded in December pointing out with backup documentation where all the alleged unreported income was on the tax return (it was all there). Earlier this month we received a notice reducing the alleged unreported items to three (one of the 1099-NECs was removed from the list). We just sent basically the same response with the same documentation to the AUR group (and hope it won’t take four back-and-forths to go through a four-item list).

Client #2 received a notice alleging a “Math Error” on his return. You have exactly 60 days to respond. We did so–and this is required to be mailed using certified mail, return receipt requested (which we did). The IRS alleged we didn’t timely respond. I sent back documentation proving we timely responded. It’s been several months, and we’re still waiting on a response.

Client #3 received a notice alleging his return was untimely filed. His return was required to be mailed; he was outside the United States and sent it with tracking from New Zealand (timely). It wasn’t received timely (but that’s the fault of the Postal Service, not my client) and doesn’t impact him; there’s a rule in tax called the Postmark Rule which governs this situation. My client has now received a letter from IRS Collections even though we disputed the entire issue months ago.

It’s not just me. If you’re a tax professional, prepare to be very depressed when you read this Twitter/X thread from a CPA in Indiana named Mike Sylvester. An excerpt:

…[The Taxpayer Advocate agent’s] case load has tripled since 2019.

She said the cases she sees now the IRS is wrong almost every time. She said The IRS correspondence system is beyond broken. Her words, not mine.

She said the IRS broke during Covid and still has not recovered.

Then the part that just floored me. Understand the long time policy of The Taxpayer Advocate is only contact them as a last resort. Try to work the problem with the IRS hard yourself first.

I told her another problem I am having and how many times the IRS and I have gone back and forth. She told me I was wasting my time and I should have opened a Taxpayer Advocate case several months ago.

She said I need to open cases faster…

I am still shocked by this.…[emphasis in original]

There is plenty more, and reading through the comments made me depressed. One comment is that there are fewer than 12 individuals working at the IRS Philadelphia Service Center to handle correspondence! My experience with the Taxpayer Advocate Service (TAS)–when they get to your case–has been excellent. However, it’s clear they are buried.

Major work is needed with correspondence, and tax professionals and taxpayers are suffering. TAS is supposed to be a last resort; it should not be a necessity most of the time. Yet it may become so (if that has not already occurred).

Posted in IRS | Tagged National.Taxpayer.Advocate, Taxpayer.Advocate.Service | Comments Off

The “Joy” of 1959 Technology

Posted on May 13, 2024 by Russ

Clients of ours (call them John & Betty) just received their IRS refund. It was off by $1,250, exactly the amount of an estimated tax payment they made. They made that payment using IRS Direct Pay (and I saw their transaction receipt), so it wasn’t a question–as it often is–of whether or not the clients made that estimated payment. Why didn’t the IRS see that estimated payment?

Betty made that estimated payment in early January, noting it was for the 2023 tax year. She used her social security number, so she did everything correctly. However, she didn’t reckon with the IRS’s antiquated technology: The main IRS computer system dates to 1959.

You read that correctly. The main IRS computer system is likely older than most of the readers of this blog.

On John & Betty’s tax return, John’s name is listed first (along with his social security number). Betty made that estimated tax payment using her name and her social security number. “But my name is right on the tax return; why can’t the IRS match that payment with the return?” There is no good answer to that question, but the correct answer is because the main IRS computer system dates to 1959 and cannot handle this.

There was another issue with their refund: they received no explanation of why their refund was short $1,250. I explained to them that the refund is issued from one IRS office while the explanatory notice comes from a different IRS office; the notice can come four weeks before to four weeks after the refund.

“How do we get that refund?” Betty asked. The only way is to call the IRS, explain the situation, and the IRS agent can verify that the estimated payment is sitting in Betty’s account and move it. It will then process, with a second refund being issued (by check) with interest. John asked, “We’ll really be paid interest on that?” I told them they will–interest works both ways–but that interest is taxable.

I told them to prevent this in the future they should use John’s social security number for making estimated payments. They’ll do that this year. But this exposes another issue: What should taxpayers do who sometimes file jointly ans sometimes file separately do? There’s no good answer today for them (nor is there for taxpayers having marital issues); my current advice is to make estimated payments under each name/social security number but realize a phone call to the IRS will likely be needed after the return is filed and processed. The long-term solution is for the IRS to have better technology. That’s coming, but whether it will come soon is quite another question.

Posted in IRS | Tagged 2024.Tax.Season | Comments Off

Surviving a Residency Audit

Posted on May 7, 2024 by Russ

A few years ago, one of my clients (call him Bob) moved from California to Nevada. He then had a very large capital gain (but while a Nevada resident). At the time, I advised him that a residency examination (audit) from California’s Franchise Tax Board (California’s income tax agency) was likely. Bob’s audit just concluded with a “no change” letter being issued. Why did he have a successful result?

1. Bob engaged with me prior to the move. We discussed what he needed to do, the records he needed to keep, and things not to do after his move. Bob listened, and (as noted below) kept his records.

2. Bob moved. Seriously, the most important aspect of not being domiciled in the state you’ve been residing in is to establish a new domicile in another state. That means actually moving! Did Bob’s family all move with him, or were his children still attending schools in California? Did Bob purchase a home (or rent a home)? Did Bob either put his old home for sale or rent it out long-term? Was Bob’s new home a real home, and a not a summer cottage? The Franchise Tax Board has seen all the dodges you can imagine (and probably some you haven’t) in moving without moving. The key aspect is to really move. Bob did.

3. Do all the little things. Bob changed his addresses with his financial institutions, registered to vote in Nevada, obtained new Nevada driver’s licenses and registered his cars as quickly as possible; he and his family divorced themselves from California.

4. Keep your records! Bob kept all the records that were needed: the contract with his movers, his lease of his new home, the sales contract for his old (California) home, etc. Digital (electronic) copies are just fine (but they need to be accessible and, depending on the tax agency, you may need to print them all out).

5. Cooperate with the auditor. The auditor is doing his job, and if you treat them well and send everything as requested, you will likely get a better result than when you don’t cooperate.

6. Realize a residency audit might happen years after your move. Bob’s residency audit occurred over two years after he filed the tax return noting the move. That’s typical for California. (I’ve only dealt with a residency audit from one other state, New York, and that also occurred two years after the return was filed.) California’s statute of limitations is four years from due date or date of filing (whichever is later). We recommend you keep your tax records for seven years (from the year in question); if you’re filing a California return, we recommend nine years (California’s extended statute of limitations is eight years; the IRS’s extended statute is six years).

7. A residency audit will take some time to resolve. Bob’s residency audit ended six months after it began–about what I expected. Residency audits involve the auditor reviewing records, and the more records you have the longer it will take. And you want to have all the records.

8. If you’re going to have a large capital gain after moving, try to make sure the gain occurs as far after the move as possible. Let’s say that today (May 7th) you’re moving from New York to Florida. You then sell some stock for a $30 million capital gain. Ideally, you would want that sale to be as late as possible after the move (not the next day). In Bob’s case, that time period was supposed to be weeks after the move but ended up being just days after. Bob still survived the audit–because he really did move when he said he did. The more time between the move and the gain, the less likely a residency audit; the best audits are the ones that don’t happen.

9. Try to stay out of your old state after the move. Bob kept out of California after his move to Nevada in the tax year in question (except for one trip related to the sale of his old home). If you’re spending all your time in your new state and not your old state, it reinforces that you have established a new domicile.

If you have a high income and you move from a high-tax state (such as California or New York) to a low-tax state (such as Nevada or Florida), you should expect a residency audit. If you prepare in advance for it–and you really moved–you can end up with a no change result.

Posted in California, Nevada | Comments Off