Our Taxing Times

RTM = FTR

When I first got into computers in the 1980's, I found a great book-Computer Wimp by John Bear. He was trying to take the fear of the unknown out of this new machine. One chapter dealt with how many problems could be solved if the new computer owners would just RTM- "read the manual" (sometimes there is an "F" in there too.) Now, most of us don't need manuals for computers but the same failure to read is an issue dealing with the IRS.

I know that the IRS notices can be challenging to read. The IRS knows that and they are working to simplify some of the notices. But too many taxpayers don't try. They open the notice, look through the papers, and if I'm lucky, bring it to me. Too often, I don't see them until the 2nd notice. If they do try to respond on their own, they don't FTR-Follow the Rules. Sending the letter back with a note saying "You're Wrong, I don't owe this" never works. However, using their form, saying you disagree with the changes and documenting why you disagree works so much better. Telling the IRS that you already sent what they are requesting never works as well as re-sending them the documentation they're requesting

But it's not just notices where taxpayers need to follow the rules. If you make an agreement with the IRS, read the rules. If you're paying on a 2008 balance due and come up owing on 2009, you have to pay that 2009 balance due or the IRS will cancel the installment agreement. It's in the rules for an installment agreement. You want to make to rollover from one IRA to another yourself and bypass the trustees? Okay. But you need to make sure you understand how the IRS counts the 60 day time limit and be sure you're not making too many rollovers in one year. I can't count the number of times I have had a client get huffy because I insist on following the procedures. It's easier to get it right the first time.

Follow the time constraints you're given. If you need more time, call and request it. If you don't have a history of blowing the IRS and their requests off, you will likely get the time you need. The same with meetings. Show up prepared, or call and get more time, then show up prepared.

The bottom line is that this is the IRS's playing field and they make they rules. They have to since they deal with over 200 million pieces of correspondence a year and want to treat everyone fairly. So-follow their rules. In the long run, it's easier. And yes, this goes for the states too.

Bad Tax Preparers

I couldn't say this any better so please check out Taxgirl's post on bad preparers.

The Most Dangerous Money

You've decided to start a new business. You've done your research, set up an entity, gotten a EIN (employee identification number), advertised and business has started to come knocking on your door. Now the next big step; hiring an employee. This post isn't going to cover labor rules or hiring strategies. I want to focus on the business killer - trust fund mis-management.

One step back, when you applied for you EIN, you were asked to estimate annual payroll. Based on that information, the IRS has set you up on a filing plan for employee reports and deposits. (If your original application didn't include employees you now need to contact the IRS and get set up for employees. And you have to do the same for your state and probably for state unemployment, too.)

An example

You agree to pay Sue $500 a week salary. That $500 will be reduced by her Social Security and Medicare contributions of $38.25 and her Federal and state withholding. That means you are writing her a check for say $375. That $125 that you withheld from her check is the most dangerous money, Trust Fund. It's call Trust Fund money since you are only holding it for Sue in trust until you are required to deposit it (based on the schedule the IRS and State give you.) Of that $125, $38.25 is her SS and Medicare and say $65 for Federal withholding and $21.75 for the state. You will also be expected to match the $38.25 for your part of SS and Medicare. And you will be kicking in for Federal and state unemployment; say another $10. So: $375 paycheck + $125 trust fund money + $38.25 matching SS/Med + $10 for unemployment=$548.25 is what Sue's week really cost you. You write her a check for $375 and then what do you do with the remaining $173.25? That is where too many employers get into trouble. That money is allotted to be paid in a few days to months but it's still sitting in the checkbook where it can be spent on other things. Since Sue is your only employee, I would guess you'll be set up for quarterly deposit. At the end of the quarter, you fill out the Federal 941 and your state's forms for withholding and unemployment. Then you discover  the IRS wants a check/deposit of $1836.58 to cover this quarter payroll liabilities. And the state will want it's share too. Which by this time, you don't have.

If you are going to hire employees, you have to find a way to not be in this predicament. Some employers use a separate checking account for payroll and move into it the salary plus employer's obligations before they write the paychecks ($548.25 for this example) Others subtract the whole about out of the checkbook at the time. No matter what system you come up with, you have to do it religiously. If you don't, the letters will start.

The IRS catches shorts in payroll deposits and filings a lot quicker than regular tax. They have to because these problems can grow huge quickly. Penalties on Trust Fund money (what came out of employee's paychecks) can be up to 100%. Even a few days late will see a penalty. Remember this is the employee's money. You promised Sue $500 a week not $375. Withholding, Social Security and Medicare are credited to her accounts whether you pay them or not. The IRS needs to deter/scare employers into keeping payroll obligations current. Hence, the high penalties and tough enforcement.

If you find yourself in this situation, don't panic but don't ignore it. Put into place procedures so this won't happen again. File your reports and send in what you can. Call the IRS or your state department of revenue and work with them. Don't make promises you can't keep but get caught up and stay that way.

HIRE and 941's

It is time for the 941 (payroll reporting) form to be completed for the 2nd quarter of 2010. 941s can be confusing to the new employer and with the new payroll forgiveness provision in the Hiring Incentives to Restore Employment Act its even more trouble. This provision gives employers who, after February 3rd, hire new employees who have been unemployed for the last 60 days (or worked less than 40 hour) a break on their matching taxes for those employees. Generally an employer matches the employee's Social Security and Medicare withholding. HIRE allows the employer to not pay their Social Security portion for the new hires. But some employers are getting it wrong.

According to a BNA article, the IRS is reporting that they are already seeing problems in 941s claiming the forgiveness. On the current 941, the total amount of Social Security and Medicare are calculated and then the forgiveness adjustment is made. Employers are putting the forgiveness on the wrong line. The IRS is also seeing math errors and EIN issues. The plan is for the IRS to try to correct the errors. If they can't, more info will be requested from the employer. If the employer doesn't respond, the iRS will void the forgiveness and process the 941 without it.

The IRS is also planning on doing some audits of the HIRE provision. The auditor can ask for anything but most likely they will want the employee affidavit that they meet the out of work requirements and proof that an employee was not terminated just to hire someone for the credit. Also expect some matching to insure that employers don't take the payroll forgiveness and the Work Opportunity Tax Credit for the same employee. (The qualifications for the WOTC are more restrictive than for the payroll forgiveness.) The WOTC rewards keeping the  qualified new hires employed for 52 weeks. The max is the lessor of $1000 per employee or 6.2% of the wages they earned during those 52 weeks. You can take the payroll forgiveness or the WOTC but not both for the same employee. If you have taken the payroll forgiveness and than realize that the WOTC would have been a better credit, you can amend your 941s with the new 941X.

IRS info on the HIRE Act

This Year's Spin

It's that time of the year for H&R Block's (HRB) annual letter(s) to independent tax preparers. A friendly letter inviting those who are looking to sell their practice, to consider HRB. They will be happy to talk to you about buying it. This is the second letter I have received since the end of tax season. The tone of this letter was a little different from others I have received. (Besides recruting new businesses to buy, the letter may also be aimed at investors and those who advise them.)  This letter included a slick paper reprint of a Reuters article about JP Morgan/Chase getting out of the refund loan business.

Chase has long been a popular, stable and respected RAL bank and its decision has left many of its clients looking for a new bank. But unlike SBBT last year, they have plenty of notice to check the other banks. And despite what the Reuters article says, Republic is not the only option open to independents. River City Bank, SBBT(they say they have approval) and Refund Advantage also provide RAL programs. But that has not stopped HRB from spinning the situation. From their letter; "Approximately 20 million taxpayers seek refund settlement products each year. We expect to grow our business in this client segment because we will have products that meet consumer demand and are not available to all our competitors."

The spin:

• "Seek refund settlement products" this includes not just Refund Loan but the other programs which do not advance money but allow the preparer's preparation charges to be deducted from the refund(RAC). Even SBBT offered these last year as did EFS (e-Collect).
• There is the implication that only Republic Bank (in the Reuters reprint) will be available to independents in 2011. Not so, right now there are at least 5 doing some form of "refund settlement" product. (RAL or RAC).
• Growth for HRB because they can offer RALs because of their deal with HSBC. This tax season, most Jackson Hewett offices could not offer RALs because of SBBT's lack of approval. Despite that their major competitor was out of the business, HRB early season returns were down about 6%. The early season is when you do your RAL business. With a major competitor out, HRB should have seen a rise in early season business not a decrease. They still have a good chunk of the RAL market but their numbers show it's falling.

The cold hard truth is there are still 6 months before 2010 tax returns can be e-filed. A lot can happen in that time to upset HRB's dreams of a RAL almost monopoly. It won't take a bank failing to get approval for their program. All it takes is the suppression of one little letter; the debt indicator.

The debt indicator is currently part of the acknowledgment we receive when an e-filed return is accepted by the IRS. It can be one of 4 letters; N, I, F or B. "N" means that a quick look at the taxpayer's file shows no claim against the refund. The others show a debt and who to the taxpayer needs to contact for more information. When there is a RAL application, the bank gets a copy of the debt indicator. If a debt is showing, no loan (although no debt doesn't automatically mean the RAL is approved.) It's the way the RAl banks minimize their risk. Without the debt indicator, the banks may stop approving or become very conservative. In the mid-1990s, the IRS stopped releasing the debt indicator a couple of weeks into the season and approval rates dived. Even with fewer approvals, the rumor was that HSBC (at that time just Household) lost $25 million. 

Right now we have the debt indicator but what about in six months. Congress still has lots of time cut it by sticking it into a bill. They did that a couple of times when working a preparer licensing. (Or, they could ban RALs completely.) The IRS could decide to stop releasing the debt indicator. No debt indicator may not end RALs but it would limit the taxpayers who received them and maybe make the banks think about if they want the risk.

So HRB, continue your spin. Please put all your advertising on your ablitlty to offer these programs. You're going to have more competion for the RAL market than you are acknowledging. Hopefully, it gets someone who was selling anyway more retirement money. And maybe your stock price will go up too. I just hope the shareholders know to sell before your contract with HSBC ends or the debt indicator goes. The problem with spinning is that when you stop it's hard to stand.

A Gambling Suggestion

I live within a 15 mile drive of 3 casinos. I have benefited from their proximity because of the number of clients who have found employment there and the number of clients who have found their slots. But I have a big grip - they are allowed to give hand written W-2Gs and 1099MISCs to their winners. (They also give tax advice but that's another post.)

Here's what happens. A casino patron wins, either a jackpot, tournament or a prize, and if the winnings are enough, the casino takes the winner aside to get some info and write up the required tax information form. Once the paperwork is completed the winner is given their copy and the casino employee goes to the next winner. The taxpayer then brings me that W-2G or 1099MISC when they do their taxes. Most of these are hand written and by the time I see them they are pretty much illegible. The first problem is they are written, mostly, by young women who penmanship borders on calligraphy. Pretty but there are always questions like; "is that a 2 or 5 or a or o?" These forms are written on NCR paper and the fading and fuzzy copies are my second issue. Finally, compounding the issue is that the client is taking less that good care of them. The W-2Gs and 1099MISCs end up stuffed in a wallet or purse for months. I have seen some mistreated W-2s but nothing like the condition of most gambling docs.

But...as inconvenient as these issues are to me, the real question is what the IRS gets. Who is transcribing the handwritten form into a computer form that can be searched and matched. Are the casinos sending the IRS copies of the originals and the iRS entering them or is the casino taking the taxpayer info from the W-2G or 1099MISC and entering it into a computer that generates the electronic file that is sent to the IRS? (My guess is the casino is transcribing but I can't get a confirmation on that.) My big problem is the CP 2000 notices clients get when there is a discrepancy between what the IRS has on file and what the client put on their return.

A 2008 return was filed with 5 1099MISCs from one casino and a 6th from a different casino (these were tournament winnings and considered prizes so Form 1099MISC). A CP2000 was received because of matching issues. Of the 5 from Casino A, what the IRS has on 4 of them does not match the copies I have. 1 was correct. Client only had one from Casino B but what the IRS had on record was over 40 times larger that the 1099MISC I had. The client contacted Casino B and they did admit there was a mistake and they sent a letter correcting that problem. Oh, and they didn't give the IRS the info on the 1099MISC the client did have so now there are 2 1099MISCs from Casino B. 3 of Casino A's 1099MISCs problems were with withholding. It didn't get into the IRS record at all and there were issues with the amount of the prize on 2 of them. Thankfully, the IRS accepted the copies of the 1099MISCs we sent in and the client received credit for all the withholding we showed but was all that money actually sent in or is it now part of the tax gap? And this was just one client for one year. How often does something like this happen?

I'm proposing that the casinos take one step out of their process and put the winner's info into a computer at the time of the win and use that info to generate a neat printed W-2G or 1099MISC. Make this the file the IRS gets. It may take up a minute or two more of the gambler's time but it will save the rest of us time and aggravation down the road.

Odds and Ends

No theme today. Just a bunch short notes.

July 1st marks the start of a couple of new tax provisions in Kansas. First, the sales tax rate increases 1% starting today. Hopefully, the extra revenues will keep the state running and refunds coming. Required online filling of sales tax and withholding returns becomes mandatory today. Both can be done online through the Kansas Business Tax Center.

Today also marks the debut of the tanning tax. A session in a tanning bed will generally cost you 10% more. Revenue from this excise tax will be used to help fund healthcare reform.

If you signed a contract to buy a house before April 30th and still haven't closed, you can relax. Taxpayers now have until September 30, 2010 to close on the house. (Just waiting of the President's signature) There is still interest, from realtors - not tax preparers, in re-opening the credit. Since this is an election year, this piece of crap ill conceived and administered credit may be back. 

Congress has a lot of tax and financial work to do this year and they need to focus on legislation. There are the rest of the extenders including AMT and the estate tax to start. But it looks like most of that will wait until after the election. (I wonder what would happen if reporters and cameras were banned from Capital Hill for a while? Would Congress get more done or would they waste even more time getting their free campaigning camera time?)