That Was the Year that Was

Posted on October 18, 2015 by Russ

Last November I wrote about “The Horrible, No Good, Very Bad Upcoming Tax Season.” This definitely wasn’t the best tax season but it also wasn’t the worst (but it was close to the bottom). The four issues that I identified as problems were tax extenders, the IRS budget, the Affordable Care Act (aka ObamaCare), and the IRS Property/Capitalization regulations.

Tax extenders were passed late, but there weren’t any surprises. Thus, the impact to the 2015 Tax Season was minimal.

The same can’t be true for the IRS budget cuts. This probably impacted me more than any of the other issues I faced. Calling the IRS was almost a joke. The “Practitioner Priority Service” hold times were so bad that I’d hate to think of what they were for regular numbers. Unfortunately, I see no improvement possible with the IRS budget until the IRS scandal is resolved. That’s not going to happen until we have a new President, so we have probably two more years of misery in dealing with the IRS.

(The Obama Administration promised to be the most transparent in history. Its record is one of obfuscation and deceit, not of being open and honest.)

For the most part ObamaCare did not impact many of my clients. Of course, for 2014 tax returns a client could self-certify they had health insurance. Coming for 2015 returns will be IRS Forms 1095-B and 1095-C. Almost everyone will need to provide tax professionals with a health insurance form.

The property regulations almost had a huge impact. A literal reading of the regulations was that everyone impacted needed to file a Form 3115. The IRS realized that they didn’t have the personnel to handle the incoming tsunami of paperwork and, at the last moment, issued procedures that basically mitigated the impact of the new regulations.

While I’ll post about the upcoming season in another month, it looks like deja vu all over again. Once more, tax extenders haven’t passed, we have another year of impacts of ObamaCare, and the IRS budget constraints will continue. Unfortunately, this year I’m not taking a vacation to New Zealand and Australia in December. In any case, tax professional will likely be grouchy next tax season, too.

Posted in IRS, Tax Preparation, Taxable Talk | Tagged , | 1 Comment

It’s October 13th and I’m Still Not Ready to File my Taxes; What Should I Do?

Posted on October 12, 2015 by Russ

Somewhere, there’s a procrastinator wondering that exact question. He’s likely thinking, “I don’t have to do anything; I have until October 15th!” That’s not a good answer (with one exception [1]).

First, most tax professionals will not be able to fit you in. I took in one new client appointment this week—and he’s filling a cancellation. Determine your income, gather all your documents, and do your best. Tax forms are available online (the IRS website is actually quite good). Commercial tax software, though flawed [2], is a good choice at this point in time.

If possible, file electronically. If you must mail your tax return, use certified mail, return receipt requested. That means going to a post office or using an automated postal center (there’s one at the supermarket near my house).

Normally it’s better to extend than amend. If you’re a procrastinator, you can’t extend. Thus, if you file your return and you’re still a bit uncertain, consider meeting with a tax professional next week. He or she can review the return and determine if your return needs to be amended.

The clock is about to strike midnight.

[1] I have one client who is on extension who was impacted by the terrible flooding in South Carolina. That client has a lot more to deal with right now than filing taxes. The IRS and the South Carolina Department of Revenue extended the tax deadline for impacted South Carolinians until February 16, 2016.

[2] I disagree with fellow tax professional Robert Flach on his description that all tax software is fatally flawed. For individuals in simple situation it works perfectly. It doesn’t make math mistakes. And it usually allows for seamless electronic filing. I agree with Robert that the ability to look at a return and evaluate what’s on it (does it pass the smell test) is vital but when you’re up against a deadline, you don’t have a choice.

Posted in IRS, Tax Preparation | 3 Comments

Gilbert Hyatt Goes to Washington…Again

Posted on October 11, 2015 by Russ

The Franchise Tax Board sent out a release on Friday noting that oral arguments in California Franchise Tax Board v. Hyatt will take place on December 7th. This is the second time this case has reached the US Supreme Court. Back in 2002, the Supreme Court ruled that Gilbert Hyatt could sue the Franchise Tax Board in Nevada. That was after the FTB rummaged through his trash. The FTB was then hit with over $400 million in damages. However, the Nevada Supreme Court threw out much of the decision, though the court upheld that the FTB committed fraud against Mr. Hyatt.

The ever-wonderful SCOTUSBLOG has links to the amicus curiea briefs that have been filed (and the FTB’s brief). Mr. Hyatt’s counsel was granted an extension until October 23rd to file his brief.

It will be interesting if this case–decided unanimously in its first Supreme Court iteration–is decided differently on the second iteration. In any case, a decision should come as early as March.

Posted in California | Tagged | 1 Comment

IRS to Tax Professionals: Rules for Thee but Not for Us

Posted on October 8, 2015 by Russ

Today I received an alert from the IRS that a new version of Publication 4557 is available. (At this point, only the web version of the publication is available.) Interestingly, the IRS notes the following:

To safeguard taxpayer information, you must determine the appropriate security controls for your environment based on the size, complexity, nature and scope of your activities. Security controls are the management, operational and technical safeguards you may use to protect the confidentiality, integrity and availability of your customers’ information. Examples of security controls are:

1. Locking doors to restrict access to paper or electronic files;
2. Requiring passwords to restrict access to computer files;
3. Encrypting electronically stored taxpayer data;
4 .Keeping a backup of electronic data for recovery purposes;
5. Shredding paper containing taxpayer information before throwing it in the trash.
6. Do not mail unencrypted sensitive personal information.

Further, Authorized IRS e-file Providers that participate in the role as an Online Provider must follow the six security, privacy and business standards to better serve taxpayers and protect their individual income tax information collected, processed and stored. See “Safeguarding IRS e-file” in Publication 1345 for more information. [emphasis added]

There’s nothing wrong with these recommendations; in fact, they’re excellent. But note that the IRS says that authorized e-file providers that participate in the role as an Online Provider must follow these rules.

I highlighted the last rule (#6, above) regarding mailing unencrypted sensitive personal information. Why? Because the IRS is one of the biggest offenders in this area. Indeed, just yesterday TIGTA (the Treasury Inspector General for Tax Administration) issued a report stating this. From the TIGTA press release:

In Fiscal Year 2014, the IRS mailed more than 141 million notices and 37 million letters to taxpayers for various reasons, to help them understand and meet their tax obligations. In a prior review, TIGTA reported that the IRS had not made significant progress in redacting or masking taxpayers’ SSNs from systems, notices, and forms. This audit was initiated to assess the IRS’s progress in eliminating taxpayer SSNs from correspondence.

TIGTA found that as of January 2015, the IRS estimates that it has removed SSNs from 58 (2 percent) of the 2,749 types of letters and 93 (48 percent) of the 195 types of notices it issues.

“A person’s Social Security Number is the most valuable piece of personal data identity thieves can obtain.” said J. Russell George, Treasury Inspector General for Tax Administration. “The fact that the IRS does not have processes and procedures to accurately identify all correspondence that contain Social Security Numbers remains a concern.”

There’s not much to add to this. The IRS needs to act on this as they are a far larger source of identity theft than tax professionals. I state that as I open up an IRS letter and an IRS notice to clients that both contain their social security numbers. And there was the IRS notice which didn’t have the full social security number but put the number within a bar code instead….

Posted in IRS | Tagged , | 2 Comments

Tax Relief for South Carolinians

Posted on October 7, 2015 by Russ

South Carolina was devastated by a 1000-year storm. Much of the state has been declared a disaster area. A friend of mine who lives in Columbia tweeted pictures that show the absolutely ridiculous amount of flooding. The IRS has offered relief for taxpayers in several counties in South Carolina.

Here is the IRS announcement:

WASHINGTON ––South Carolina flood victims, including individuals and businesses that previously received a tax-filing extension to Oct. 15, will have until Feb. 16, 2016, to file their returns and pay any taxes due, the Internal Revenue Service announced today. All workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization also qualify for relief.

Following this week’s disaster declaration for individual assistance issued by the Federal Emergency Management Agency (FEMA), the IRS said that affected taxpayers in Berkeley, Charleston, Clarendon, Dorchester, Georgetown, Horry, Lexington, Orangeburg, Richland, Sumter and Williamsburg Counties will receive this and other special tax relief. Other locations may be added in coming days, based on damage assessments by FEMA.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Oct. 1, 2015. As a result, affected individuals and businesses will have until Feb. 16, 2016, to file these returns and pay any taxes due. Besides the Oct. 15 extension deadline, this also includes the Jan. 15, 2016, deadline for making quarterly estimated tax payments. A variety of business tax deadlines are also affected including the Nov. 2, 2015, and Feb. 1, 2016, deadlines for quarterly payroll and excise tax returns.

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The agency automatically provides this relief to any taxpayer with an IRS address of record located in the disaster area. Taxpayers need not contact the IRS to get this relief.

Beyond Designated Disaster Areas

The IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227.

The South Carolina Department of Revenue is following suit; they are providing the same relief as the IRS.

Note that the relief is automatic; impacted taxpayers need not do anything. The exception to this are impacted taxpayers who do not live in one of the counties noted in the IRS declaration.

Posted in South Carolina | 2 Comments

Well, That’s One Way to Avoid ClubFed

Posted on October 5, 2015 by Russ

Peter Mizioch pleaded guilty on September 4th to one count of preparing a false tax return. Mr. Mizioch was allowed by the sentencing judge to go on a Caribbean cruise. Mr. Mizioch is now answering to a higher authority — he suffered an apparent stroke on September 12th and then died of an apparent heart attack on the 13th.

The AP story notes,

Phoenix police then scrambled to get evidence of his death before his body was cremated because they were still looking at him as a lead in his wife’s unsolved slaying. Mizioch had denied any involvement, and he was not charged with her killing.

As for the tax charges, Mr. Mizioch pleaded to using fictitious consulting fees to lower his income for his construction business. Mr. Mizioch had agreed to make restitution of $566,390 to the IRS.

Posted in IRS, Tax Evasion | 1 Comment

There Is No Magic OID Process

Posted on October 4, 2015 by Russ

One of my clients handed me a 1099-OID today. That’s income to him, duly noted on his now-filed tax return. A different individual decided to promote a very different OID plan, an “O.I.D. Process.” He’ll be spending nearly six years at ClubFed.

Duffy R. Dashner (aka Kevin Dashner) was a resident of Reseda, California (in the San Fernando Valley area of Los Angeles). He and co-conspirators founded a business called O.I.D. Process. The business filed phony Original Issue Discount (OID) refund claims–a whopping 200 refunds claiming $228 million.

The OID refund scheme has been around for some time. There’s supposedly a secret account that you can have access to by just filing some Form 1099-OIDs. You just claim that the money was all withheld, so you didn’t get any of it, and soon you have a tax refund! What can go wrong (besides it being illegal)?

Anyway, Mr. Dashner decided to promote his business via website. He had weekly conference calls to clients to help them prepare the returns. They received a 20% “refund acquisition fee” for all checks issued by the IRS, and they demanded clients change their address to an unnamed attorney (well, the DOJ press release says he’s an attorney but who knows for how long that will continue) to make sure that the conspirators got their share of the ill-gotten gains. Clients also had to pay an up-front registration fee.

Mr. Dashner pleaded guilty in June to conspiracy to submit false claims. He received 57 months at ClubFed and must also make restitution of $1,769,418. If someone tells you there’s a magic way of anyone getting money from the IRS by filing a Form 1099-OID, run, don’t walk, in the other direction.

Posted in Tax Fraud | 1 Comment

Uber and Under-the-Table Kickbacks

Posted on October 4, 2015 by Russ

The ride sharing services Uber and Lyft are now active here in Las Vegas. There’s an interesting article on Buzzfeed about how Uber and Lyft got into Nevada. One of my clients asked me a question: Does he have to pay income tax on kickbacks from the local strip clubs, err, gentlemen’s clubs?

The last time I checked the Tax Code there was no exemption for kickback income from these clubs. Yes, it’s taxable. And further, some of the clubs are now issuing 1099s for these kickbacks. The IRS has investigated both clubs and taxi drivers here in Las Vegas in the past few years. The IRS ordered clubs to issue 1099s and taxi drivers to report kickbacks as income. Uber and Lyft drivers will also have to report their income…unless they want to get in trouble.

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IRS Computers Won’t be Completely Shutting Down Over Columbus Day Weekend

Posted on October 4, 2015 by Russ

Next Monday, October 12th, is Columbus Day. That’s a federal holiday. In prior years the IRS computer systems completely shut down over the three-day weekend. There was no efiling, no pulling of transcripts, no anything in dealing with the IRS. It’s not as if there’s a tax filing deadline just three days later (well, there is).

The tax professional community has complained for years about this practice. The IRS has made changes, and they’re for the better:

Following concerns from the tax professional community, the IRS has modified its Columbus Day power outage to minimize the impact of this critical maintenance period as much as possible. This year, the Columbus Day weekend maintenance period will not affect the Modernized e-File operation, a change from previous years. The maintenance requirements, however, will affect the e-services secure mailbox operations between Sunday, Oct. 11 from around 3:00 a.m. Eastern Time until Monday, Oct. 12 at approximately 4:00 p.m. Eastern Time. Please note those times could vary, depending on normal maintenance issues.

During this period, the Transcript Delivery System, TIN Matching and e-File application will be available and you can use the online method to print and view your documents. However, if you choose to use the secure mailbox, you will not be able to retrieve your documents until after the maintenance period ends. Bulk TIN Matching and Transcript Delivery requests should be submitted by 2:00 a.m. Oct. 11, to ensure delivery to the secure mailbox prior to the start of the maintenance period. The IRS appreciates the feedback it has received regarding the Columbus Day period, and it has tried to reduce the impact of this outage as much as possible while balancing the need for timely system updates during a critical period. Thank you for your patience.

(I looked for a link to this on the IRS website but couldn’t find one. The quote is from an email sent to me on Friday.)

The change is good, though it would be even better if the IRS chose a different weekend for all their activities. Still, it’s progress.

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TIGTA: “IRS Can’t Track International Correspondence.” IRS: “So What.”

Posted on September 30, 2015 by Russ

The nature of my practice is such that I have a relatively large number of clients who live outside the United States. When one of my expatriate clients gets an IRS notice, I shudder. The IRS offices that handle international issues have issues with correspondence coming from the US. I’ve had to send the same item five times to the ITIN office…where it was lost five times. (At least they were consistent.) It turns out that the IRS doesn’t know what happens to much of the mail the agency sends overseas.

It was no surprise when I read a report issued by TIGTA (the Treasury Inspector General for Tax Administration) today titled, “Planned Improvements Have Not Been Made to Manage and Track Correspondence With International Taxpayers.” Here’s what TIGTA found:

Even though the IRS sent approximately 855,000 notices and letters to U.S. taxpayers living in other countries during Calendar Year 2014, it cannot determine taxpayer response rates. The lack of data on response rates for international taxpayers is problematic because this information is needed to determine the effectiveness of international correspondence on increasing taxpayer compliance and to make program improvements.

IRS data systems are not designed to accommodate the different styles of international addresses, which can cause notices to be undeliverable. Other factors complicate the delivery of international mail, making its delivery less certain than domestic correspondence.

In addition, the IRS generally does not know if international taxpayers receive the tax correspondence sent to them. Without specific controls to monitor and metrics to measure international tax correspondence, the IRS cannot determine the impact of its international tax correspondence on taxpayer compliance.

TIGTA made five recommendations; the IRS disagreed with all but one of them:

While the IRS generally agreed that TIGTA’s recommendations could provide additional insight into the factors contributing to undeliverable international mail, it does not believe this information would permit the IRS to overcome budgetary, statutory, and operational constraints as needed to achieve appreciable improvement in its current processes. TIGTA does not believe that the IRS’s response is adequate because current IRS processes for addressing international mail issues are ineffective or nonexistent.

So what should you do if you’re an international taxpayer? The easiest solution is to have someone in the US designated to receive a copy of your correspondence from the IRS. You can do this by completing Form 8821 and checking box 5a (“If you want copies of tax information, notices and other written communications sent to the appointee on an ongoing basis, check this box”). The instructions for Form 8821 are here.

By the way, I completely agree with what TIGTA wrote–that the IRS’s response is inadequate. But don’t worry, the IRS’s Annual Filing Season Program is continuing….

Posted in International, IRS | Tagged | 1 Comment