Our Taxing Times

Real Time Matching- Feedback Wanted

The IRS is seeking input from tax professional community, consumer groups and government reps on the idea of a Real time Tax System. The concept is that the matching of tax return info and what has been submitted to the IRS will happen when the return is filed and not months later. Right now it can take 12 to 18 months for the matching process to result in IRS notices to taxpayers.

This meeting with tax pros, consumer and government groups will be in Washington DC on Dec. 8^th at 9am at the IRS Headquarters Building Auditorium. If you are interested in attending, you should e-mail the IRS at CL.NPL.Communications@irs.gov or call them at 202-622-3359. There will be other meetings after the first of the year for different groups. This is reported in IR-2011-114 which hasn't shown up on the IRS website at this time.

Since I will be in school that day, I thought I would share my feedback here.

In theory, it’s a good idea.  I would like to see the CP2000 and other notices be sent out sooner. It can be hard to reconstruct info to answer a notice 18 months later. But info matching depends on the IRS having the 1099 and W-2 info in their computers to compare to the tax return info. A reverse of the current process.

I will prepare my W-2s as soon as I get my payroll software update. With any luck, I can start right after Christmas. Once they’re done, I’ll file them. But most employers aren’t that quick. W-2s and 1099s don’t have to be to the IRS until Feb 28^th at the earliest. That’s just 6 weeks before the April 15^th filing deadline. While there may be ways to speed up getting 1099s and W-2s ready to match, for real time processing to work the tax filing deadline will have to be moved back. You have to have the 1099s and W-2s in first then match it to what the taxpayer files. Taxpayers will get their W-2s and 1099s in January but they’ll have to wait until later in the year to file their return. I predict a wave of lost papers which will increase to matching errors. Even if the filing deadline is only moved back 3 months that means we’ll be finishing extensions in January. And I think 3 months is very optimistic. I can see us preparing most of the returns for 2012 in 2014 under a real time system.

There will have to be a second matching sweep to take into consideration late filed info returns and things like K-1s and amended returns. So the new system could cost more.

And I can imagine the outcry from taxpayers who count on their refund in February and would now have to wait months for their money.  It might die down in later years if the first year goes well. But, I bet there will be several years of changes while the system is tweaked.

I hope this process of meetings and stakeholder input will give the IRS some ideas to speed up the matching program. But to get real time matching would be an upheaval of our system. The question is how much will that really save in money and aggravation? A CP2000 sent 16 months after the return is filed can provide a challenge to get records together for that taxpayer. But re-issuing lost W-2s and 1099s and helping clients come up with missing docs would be a bigger problem and affect more people.

Schedule E Changes

Since Congress has been to busy playing partisan games, they have left taxes alone for the most part. So, needing something to do, the IRS has been revising tax forms. Okay, there is a reason for all these changes and it’s not a really a whim.

To try to cut the tax gap, Congress had previously passed into law new 1099 reporting rules. These have resulted in a major revision to the Sch D and the creation of Form 8949 to document the totals on the Sch D. Sch C and F now have lines to report income from credit and debit cards separately from other income. They also have a checkbox if there are expenses that should have had a 1099 issued and if the taxpayer did that. The Sch E also has the same changes as the business and farm schedules but also some special changes of its own.

The Schedule E-Supplemental Income and Loss is a catch all type of form. The first page is used to report rental and royalty income and expenses for 3 properties. The second page brings in the K-1 information from Partnerships, S- Corps, Estates and Trusts. This year, the second page is unchanged but the first page requires a lot more info than in previous years.

To begin with, the IRS now wants more info about the property generating the income. They want the full address of the property and I understand that Modernized e-File requires that info to file the return. No short cuts or partial info allowed. And the property type now is identified by standardized property types; single family, multi-family, royalty, etc. The personal use days and rental days must be on the form for each property. Before, we just had a yes or no check box to verify if the taxpayer met the personal vs rented rules. Now we need the actual days. And there are the same questions about needing and issuing 1099s as on the Sch C and F.

Now to income. The new Sch E does have a line to enter credit/debit card payments and a second line to report other income. One difference the Sch E has from the C and F is that it allows the taxpayer to adjust for sales tax, cash back and tips that could be included on the 1099K. Line 3a is credit/debit income, line 3b is non-line 3a income and line 4 is not the total of 3a and 3b but “total not including amounts on Line 3a that are not income.”

The final major change to the Sch E is the total section. The side column of totals is gone and replaced by dedicated lines at the bottom. Credit/debit card income and total income are broke out for rental vs royalty properties. And mortgage interest, depreciation and total expenses have moved from the side to the bottom.

While the new form is still identifiable as the Sch E, there have been a lot of changes to it. We’ll see if the changes help decrease the tax gap or just made a confusing form even more confusing.

IRS Debit Cards

I'm still finishing up the little snippets of info I learned at the last tax update.

The IRS will not be offering debit cards in 2012. This was a program where taxpayers could sign up to have their tax refund loaded into a debit card by the IRS instead of getting a paper check or direct deposit. The official reason is lack of interest in the program last year.

Well, DUH! As I said last year, the IRS was very late in getting the info out to their target taxpayers. The idea was to help keep taxpayers away from RALs and RACs and save them some money. But the program wasn't even announced until mid-January. Let's face it, most of these clients are in the minute they get all their W-2s and would have had their refund before they could sign up for the program.

The IRS hasn't ruled out the program but if they want the program to work they have think Thanksgiving to start enrollment not the end of January.

New Form 2848

The IRS has release a revised Power of Attorney (Form 2848).  On the surface, it doesn't look like a major revision but there is a big change to the form. The new form is for one person only.

The new 2848 does not have a place for the spouse for a married couple. Only one taxpayer is listed in the header and can sign. In the instructions on line 7, the form says:

If a tax matter concerns a year in which a joint return was filed, the husband and wife must each file a separate power of attorney even if the same representative(s) is (are) being appointed.

Actually this change makes sense. There have been several times I've sent/faxed a joint POA and later found out that I couldn't get the spouse's info because it was never entered into the system. Hopefully, this change will solve that problem.

A Holiday Question

I finally started getting in the Christmas mood. I was out running errands and saw a star like the Christmas Star I drew as a kid. That did it.

So how about a Holiday question. Just for fun.

What broad profession is featured in so many Christmas stories, movies, and plays? AND.... what are the stories, movies and plays? Not looking for every version, spin-off and remake of an original. Think of everything that gets categorized as "Christmas" and what jobs the characters have.

I'll give everyone a few days and then combine the responses from here, the office Facebook page, and Twitter (mactax).

Have fun!

I Can't Speel.

I received a nice reply from Kurt Olsen about yesterday's post; Turbo Tax Defense?

You got it right- I did not blame Turbo Tax for my mistake. I deliberately steered away from the so-called Turbo Tax Defense. 

Treasury Reg 1.6664-4 (b) says "An isolated computational or transcriptional error generally is not inconsistent with reasonable cause and good faith."  I made a transcriptional error and I used Turbo Tax for the limited purpose of showing that I was reasonable in my attempt to correctly determine my tax liability. 

I was inspired by the Thompson case. http://www.ustaxcourt.gov/InOpHistoric/Thompson2.TCM.WPD.pdf

And I want to apologise for mis-spelling Mr. Olsen's last name and thank him for being such a good sport about it.

Turbo Tax Defense?

The Turbo Tax Defense is back in the news. Sort of. The Tax Court has reversed the accuracy penalty in the case of Kurt C Olson v, Commissioner (TC Summary 2011-131).

Mr. Olson used Turbo Tax to prepare his 2007 tax return. When the IRS matched the numbers reported on the Olson’s return and the K-1 they received, there was a discrepancy which increased the tax by $9297. The IRS also added an accuracy related penalty of $1859. Mr. Olson fought that penalty on the grounds that it was a data entry mistake and not an attempt to play less tax.

There have been several other Tax Court cases blaming tax software for preparation errors and they weren’t won by the taxpayer. What makes this one different is that Mr. Olson didn’t blame Turbo Tax. In fact, he took every step to prepare an accurate return but made a mistake. A long time Turbo Tax user, he knew he was faced with a special situation. He upgraded the software package, followed the interview, and listed all the K-1 info (EIN and Name). His only errors were incorrectly entering the interest received from the K-1 into the software and not catching it when he reviewed the return. In this case, it’s really not a Turbo Tax Defense as much as an “I entered the wrong number” defense. That kind of human error doesn’t deserve a huge penalty.

It doesn’t matter if you use a tax professional or tax software you are responsible for what is on your return. You need to review the forms before you sign. If you have any questions, ask the preparer or the software help line. You can’t hope all is okay and then blame the tax preparer or software when there is an error. Mr. Olson did his best to prepare an accurate return and didn’t deserve a 20% penalty for a data entry mistake he admitted was his and the Tax Court agreed.

Still Batching.

Each year, the IRS  issues a Refund Cycle Chart. The purpose is to give tax preparers an idea when to tell clients to expect their refund. And believe me, that's a question almost every client asks.

I wondered with this being the final year of modernized e-file (MeF) phase-in if we would see a change in the chart. We've been told for years that returns processed under the new system could see a direct deposit within 5 business days. And I have heard from a few clients that they did get their refund sooner than I said they would. My problem was that there was no way for me to know how the return was processed, legacy or MeF. Unless that info is added to the acknowledgement I receive from the IRS, the only way to know which system was used is to continually check for acknowledgements. MeF returns are supposed to be accepted within minutes not hours.

The refund chart makes it looks like the IRS is keeping the batch processing format. Batch processing is the IRS's procedure of only starting to process returns once a week. In 2011, a return that came in on Monday sat until Thursday when processing began. MeF is suppose to end that for most returns. Processing will begin as soon as the return is accepted. The chart isn't showing a change in that process.

There are a couple of changes in this year's refund chart. The first is that the cut off has moved from Thursday to Wednesday. The IRS projects the direct deposit refund to be a week later (5 business days.) So, a taxpayer who's return was accepted on January 17 th or 18th should see a refund deposited on January 25th. BUT a return accepted on January 19th will not be deposited until February 1st. That's 10 business days. (That's because of batch processing. a return accepted by the January 25th cutoff time will get their refund on the 1st also.) Hopefully in practice, the January 19th filer will see a deposit much sooner and the chart will be mostly for returns processed under the old system. We'll see. But moving the deposit day from Friday to Wednesday could be a big help to some  taxpayers. Because of the time a bank can hold a deposit before they will let the account holder draw against that money, many taxpayers knew they had the refund in their account but had to wait until Monday to touch the money. The new system won't change the holding but the earlier in the week deposit may mean that taxpayers can access their money in time for the weekend.

The second change is that the IRS has cut the processing time for refund checks. For as long as I can remember, a paper check ran a week behind the direct deposit. Refund checks are mailed on Friday for first of the week delivery. The Friday mailing hasn't changed but it's a week earlier. Direct deposits are released on Wednesday and checks are mailed on Friday.

I'm hoping that this chart is just a guide and that clients get their direct deposits on the 5 business day time frame not this batch processing timing.

The 2012 chart can be downloaded here.

A Date - Sort Of?

The IRS has finally, sort of, set a date to open registration for the new competency testing for the RTRP (Registered Tax Return Preparers) designation. According to IR 2011-111(not on the IRS website yet), tax preparers can begin scheduling their test date next week (week of Nov. 28). (We’ll see!) The test will be administered at Prometric testing sites and will cost $116. At first, not all Prometric locations will offer the test but the IRS expects to add sites quickly and soon offer testing in all 260 US offices. But the first test takers will not know if they passed the test for 2 to 6 weeks. The IRS wants the time to figure out what is pass/fail and to “validate” the exam. Once the test is vetted, the IRS says that candidates for the RTRP will know if they passed once they finish the test. But the early birds will have to wait until mid- January 2012 for their results. Still 2 to 6 weeks is better than the 2 to 6 months it could take the IRS to issue the SEE exam results for EAs. Then the Service would look at questions with high error rates and pull them out of grading consideration if it could  be argued the question wasn't clear. I remember 6 or 7 questions that were given to everyone for that reason.

But back to the RTRP. The IRS has put the fingerprinting requirement on hold for now. This doesn’t mean that they are backing off of their requirement to make sure RTRP candidates have not engages in unsuitable (fraud, perjury, theft) behavior. But there are some concerns about fingerprinting. The IRS is looking at who they want fingerprinted and who will actually do the fingerprinting. However, use of the RTRP designation will not wait on background check. Once a paid preparer has their PTIN and passed the competency test and tax compliance check, they will receive their RTRP certificate. They may still be subject to the background check once the IRS figures out the procedures.

A reminder - PTINs must be renewed annually. The cost this year is $63 and can be done online on the IRS web site.

First Things First

The big tax talk today is the prognostications that the Debit Reduction Super Committee won’t make their report deadline. This isn’t a big surprise. I wrote a post last month where Secretary Geithner was quoted saying that the committee wouldn’t have a report on time. They can continue to work on a proposal but automatic budget cuts will start being put into place.

Why can’t they come to agreement? Much has to do with partisanship and different views of what will be best for the economy and the country. But Congress has always been made up of individuals with different views of the best action and still managed to function. What’s different now?

Last night I happened to catch part of an interview with Harvard Law Professor Lawrence Lessig on C-SPAN. They were discussing his book Republic Lost: How Money Corrupts Congress and a Plan to Stop It. His thesis is that costs of running for Congress have changed the priorities for most of our elected officials. Public service has taken a second place to raising funds for re-election. Allotment of Congressional benefits such as committee seats are based on fundraising ability rather than knowledge and experience.

I haven’t read Professor Lessig’s book yet but the theory makes sense. It takes a strong Congressperson to vote to cut the Mortgage Interest Deduction when he/she knows they will need a contribution from the Realtor’s Association to stay in office. Let’s face it, Congress is no sooner sworn in than they start campaigning for re-election. It’s amazing that anything gets done but campaigning.

We need tax reform. We need to decide what we want our tax system to look like and build a Tax Code that reflects that ideal. Since it’s very clear that under the current dependence on contributions that can’t happen, maybe we need to take a step back and fix that problem first. Take care of campaign reform first. Then, with their dependence on re-election money ended, Congress can concentrate on building a tax system that’s fair for all.