Our Taxing Times

IRS E-Mails

In one word -ignore.

The IRS does not, repeat does not, initiate contact with taxpayers by e-mail. So any e-mails you receive saying you have a refund due or wanting info, are bogus and you do not want to respond. It doesn't matter how authentic they look, they are still scams and they just want your banking info or to plant a bug in your system.

If you want to do something, you can report the e-mail at phishing@irs.gov. The IRS has a whole page of info on e-mail scams and phishing on their web site.

TAS - Taxpayer Rights

The Taxpayer Advocate Service (TAS) annual report to Congress was released earlier this week. I wrote about the TAS’s number one issue, IRS funding, in a prior post. The report also deals with breakdowns in IRS procedures that impact taxpayers. This includes the “non audit”, math error notices that the IRS had the info to answer their own questions, delays in response time and in sending refunds, and that is just the start.

The TAS report asserts that most taxpayers don’t really know what rights they have when the deal with the IRS. The report cites a recent survey that found that 55% of taxpayers interviewed didn’t know that they had rights when working with the IRS. 61% didn’t know what the rights are. TAS is requesting new taxpayer rights legislation. The last was over 13 years ago. As a result, they are suggesting 10 Taxpayer Rights and 5 Taxpayer Responsibilities.

Taxpayer Rights:

1. Right to be informed.
2. Right to be assisted.
3. Right to be heard.
4. Right to pay no more that the correct amount of tax.
5. Right of appeal.
6. Right to certainty.
7. Right to privacy.
8. Right to confidentiality.
9. Right to representation
10. Right to a fair and just tax system.

Taxpayer Responsibilities:

1. Obligation to be honest.
2. Obligation to be cooperative.
3. Obligation to provide accurate information and documents on time.
4. Obligation to keep records.
5. Obligation to pay taxes on time.

It’ll be interesting to see if Congress can get together and update the Taxpayer Bill of Rights. And if they don’t, if TAS or the IRS will spend time and money promoting the rights as they stand now? The IRS has created a Taxpayer Rights Corner if you have questions right now.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax

2011-The Review

It’s a beautiful but windy winter day and I’d rather be out and about but I did want to do a quick end-of-year post. What I remember about taxes and the tax business in 2011. If you want more info on anything I mention, just search this site using the search widget to the right.

 Tax Laws

Congress spent the year posturing for the cameras and running for re-elections. There was little done in the way of taxes. They did manage to pass a 2 month extension of the payroll tax cut only because of public outrage at their fighting. The special committee on tax reform couldn’t come to any agreement so we are no nearer to real tax reform. They did manage to repeal the 1099 requirements for small businesses. We need to do something about the tax gap but they has to be a better way.

IRS Changes

With Congress playing their partisan games, the IRS didn’t have to worry about any last minute changes to the tax forms. They did keep busy changing forms to deal with previous tax revisions. We got a new Form 8948 to report capital gain sales and the Schedule D was changed to work with the new form. The Schedule C, F and E all now have lines to report 1099K income and to check if any expenses claimed are matched on 1099s (or should have been). The IRS has also been busy increasing penalties for not timely filing these forms. Speaking of penalties, the IRS is cracking down on preparers and EITC. Besides higher penalties for not doing proper due diligence on EITC claims, tax pros now have to file a completed EITC checklist (Form 8867) with the tax return. Modernized e-File and mandatory e-file continue to be implemented. The IRS will not be offering tax refunds on debit cards in 2012. The program was canceled because of lack of interest for the program in 2011. I still think there would have been more interest if the program was offered before January. Finally, the IRS is interested in real time processing of tax return. That means holding off processing returns until most of the 1099s and W-2s are submitted.

Preparer Licensing

Tax preparer licensing was a little bit of a roller coaster this year. The process continued with a few back steps. The minimum competency test is now available after being postponed a couple of times. Anyone who has taken the test still doesn’t know if they passed since the IRS wants to review the results. Fingerprinting of preparers is on hold while the IRS works out some issues. After the news that over 300 current prisoners were able to obtain PTINs most by lying about their criminal record, I think fingerprinting will be back once logistic issues are solved.

Tax Business

The business of tax preparation saw the end of RALs. While Republic Bank will still offer the refund loans until the end of April 2012, it was the FDIC’s banning of the programs back in February that really ended the programs. While the loans are gone, the banks have been allowed to continue their other refund program. The big tax prep companies really have been trying to get bigger. H&R Block tried to buy Tax Act tax software but was stopped by the Department of Justice amid monopoly concerns. Intuit has been aggressively wooing tax pros to their software and/or trying to hire them as customer support for their Turbo Tax software. We’re starting to see more ancillary services using the “Cloud” to help tax offices manage client info securely.

Our Taxing Times

2011 has been a good year for the blog. Counting this post, I will have written 186 posts which received an average of 74 page views a day. I may have gone overboard a little with the social media but I think they are part of the reason my readership is up.

I’m looking forward to 2012 and I have several posts planned before I get tied up in tax returns.

Have a Happy and Safe New Year!

 McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Metadata and the IRS

Anytime you use a computer, you leave a trail. The system records the documents and programs you access and when they were created or changed. This is called metadata and according to the IRS Chief Council it can be requested by the IRS. Information Letter Memorandum (ILM) 201146017 states that the IRS can request (subpoena) metadata and use it to corroborate other documentation presented in an audit.

Let’s say I’m being audited and I provide the IRS a scanned PDF of a receipt for a new computer bought in 2010. The IRS questions the date because it’s smudged and requests metadata from my computer. If the metadata shows the document was created after the date of purchase, I’m probably okay on that item. But if the creation date is before the purchase date and there have been changes to the document since then, I’m probably in a little trouble.

This ruling follows a trend of the IRS requesting computer files during audits. They can also request a digital Quickbook file. I don’t know what taxpayer protections the IRS will put in place when they handle this data. If they want to trace the creation and changes to a specific document, I can understand that. However, I would need to be assured that they aren’t snooping at other files. But this may not be something we will have to worry about in most audits. I’m sure the costs of obtaining and analysis of the metadata will restrict its use to bigger cases especially if fraud is suspected.

Thanks to Brian Mahany at Due Diligence for the heads up.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Low Income Tax Clinics

The only thing worse than a notice from the IRS is needing help to deal with the notice and not having the money to pay for that help. That is why the IRS has a grant program to help service agencies establish Low Income Taxpayer Clinics (LITC) in their area.

Low Income Taxpayer Clinics will help qualified taxpayers with IRS notices, representation before the IRS, and even help them file past year returns. To qualify, the taxpayer must have income that is below 250% of the Federal Poverty Guidelines for their area. In Kansas, that means that a household of 4 must have income below $55,875.

Once a taxpayer qualifies for help, the LITC will assign a qualified tax expert to work the case. All work is pro bono. The taxpayer pays nothing.

The LITCs are run by a wide variety of agencies. They must be affiliated with universities, legal aid groups, churches or other 501(c) organization. They can apply to the IRS for matching funds up to $100,000 on an annual basis with most grants running January to December. Currently, there are 165 clinics with at least one in every state and the District of Columbia and Puerto Rico. In Kansas, one clinic is through the University of Kansas Research Center and a second is a project of the Cerebral Palsy Research Foundation. Many of the clinics can provide multi-lingual assistance.

To find a LITC in your area, the IRS has Pubs 4134 and 4134(SP) with a current list. (Downloads)

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.

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.

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.

Actually Reporting 1099K Income

The new credit card reporting requirements have been in the news lately. But in case you missed it, here’s a short review. The Housing Assistance Tax Act of 2008 requires the companies that process credit card to issue a 1099K to the businesses they pay. For example, I take credit and debit cards from clients to pay for tax returns. I scan their card and the company approves the payment which appears in my business bank account a few days later. At the beginning of the year, I may receive a 1099K from the processing company. My annual charges are less than the $20,000 /200 transactions requirement so I may not receive a 1099K. CHANGE - This minimum only applies to third party payers like PayPal. Merchant card processers will issue 1099Ks for any charges or debits. Thanks to John for the catch.

These procedures were developed to help cut the Tax Gap. (Taxes not paid on business income that isn’t reported are a major contributor to the Tax Gap.) The major target was people who have income from eBay and other online stores which is seldom reported. If a bricks and mortar business is not reporting all their income, I would suggest it’s their cash receipts that are not reported  not payments that go through their bank account.

If I do receive the 1099K, I will have to report that info on the new line 1a on my Schedule C. (The Schedules C, F, and E have been revised to include 1099K reporting.) However, I will have to subtract the 1099K amount from my gross receipts first so that I don’t double report income. If I don’t get a 1099K, I’ll just report that income with my cash and check income as always. And while the IRS added lines for the credit/debit income, they haven’t added lines for the deductions from the credit/debit income. Huh!

I want Line 1a on my Schedule C to match what was reported to the IRS on the 1099K but that income might not all belong to me. If I ran a restaurant, part of that payment may have included a server tip and it definitely included sales tax. That is not taxable to me. I could actually have credit card sales for food and drinks of $37,000 but receive a 1099K for $45,000. I need to take as an expense deduction on my Schedule C the sales tax and tips that I passed through to others. This may also mean a bookkeeping change on my part to track these deductions. For 2011, some businesses will have to recreate these deductions from their current records. Besides tips and sales taxes, business might also allow cash back or a charity contribution to be added to a credit/debit charge. These will also need to be deducted.

Farmers may not have to worry about tips but they actually have to break out their 1099K income on 2 different lines. One line is for resold animals and the other is for the raised items. And they might have to change the way they track settlement charges and sales tax too.

From what I understand, the IRS will be giving us some guidelines. However, we business owners need to understand that the 1099K may give rise to special deductions to keep from paying too much in taxes.

New 1099 Checkboxes

Do you remember all the cheering from tax preparers and small business owners a while back? The expanded 1099MISC requirements were repealed and we were back to only have to issue to individuals we paid over $600 for services in the year. They’re still in effect but now the IRS had modified the forms for the Schedule C, E and F to include 2 check boxes. The first one wants to know if you were required to file 1099s for anyone and the second one wants to know if you did or will file them all. These are no win questions.

If you should have filed the forms and mark that you weren’t required to file them, you might get a letter asking why the forms weren’t filed and please file them now. If you said you would be filing them and didn’t file them, you could get a letter asking for the missing 1099s. You best bet is to file the returns on time and prevent the letters and save yourself some money.

Any 1099 you issue should be sent to the recipient by the end of January. However, you have until February 28^th the send the IRS their copy (paper or electronically) If you don’t you are subject to penalties. Up to 30 days late, each 1099 could cost you $30. The cost goes up to $60 between 30 days and the 1^st of August. After August 1^st, the late fee is $100. For each 1099 that was late, you could pay $30, $60 or $100. That can add up. And if you don’t plan on issuing a 1099, you can’t deduct the expense. Is it finacially worth not fileing the 1099s? I don't think so.

While 1099MISC is the 1099 I prepare most for clients, these rules apply to any 1099 form. So you are warned, get your info together and file your 1099s on time.