News

January 8, 2024: Tax Season Opening

The IRS has just announced that it will begin accepting and processing 2023 tax returns on Monday, January 29th, 2024.

December 20, 2023: Penalty Forgiveness

The IRS has announced that it will waive penalty fees for taxpayers who owe less than $100,000 in back taxes for the years 2020 and 2021.  The decision to forgive the failure-to-pay penalties is attributed to the temporary suspension of automated reminders during the pandemic; however, the IRS now plans to resume sending collection notices. Taxpayers who meet the eligibility criteria will automatically receive the relief without needing to take additional action. Those who have already paid the failure-to-pay penalty will receive a refund.

November 13, 2023: What the Prez paid

Based on their TY’22 tax returns as released by the White House, President Joe Biden and First Lady Jill Biden paid $137,658 in federal income taxes on $579,514 in earnings, yielding an effective tax rate of 23.8% that was compatible to that of the prior year.  In TY’21, the Bidens reported earnings of $610,702 and paid federal taxes of $150,439, equivalent to an effective tax rate 24.6%.

By comparison, Vice President Kamala Harris and her husband Douglas Emhoff reported $456,918 in adjusted gross income in TY’22, a fraction of the $1.7 million reported in TY’21.  They paid $93,570 in federal income tax, for an effective federal rate of 20.5%.

June 17, 2023: Not all IRS Notices are the same

The IRS recently apologized for issuing CP14 Letters to California taxpayers eligible for 2023 disaster-related postponements and stated that these communications good be ignored [see Blog entry dated 6/8/23].  But the same is not true for late-filing or late-payment notices even if the taxpayer qualifies for disaster-postponement relief.  Instead, recipients of these notices should contact the tax authority immediately to request abatement of any assessed penalty.  NOTE:  CP14 Letters are balance due invoices that are generated automatically whenever a scheduled due date has passed to inform taxpayers that they have 21 days to pay.  Late-filing or late-payment notices, on the other hand, are issued on a case-by-case basis and must be addressed on an individualized basis.

June 8, 2023: IRS Penalty Notices Issued in Error

In tweets released late yesterday, the IRS stated that California taxpayers who qualify for the disaster-related October 16th postponements (August 15th for Modoc and Shasta counties) still have until the October 16th (August 15th) postponement deadlines to pay their 2022 tax liabilities. The IRS stated that taxpayers receiving erroneous CP14 letters do not need to call the IRS or their tax professionals.  The tax authority acknowledged that the CP14s are automatically generated when taxpayers have a balance due, but that taxpayers eligible for the disaster postponements do not have any balances currently due.  The IRS apologized to taxpayers and tax professionals for any confusion.”

March 20, 2003: Deductible Medical Expenses

The IRS has just posted FAQs to help taxpayers determine whether certain costs related to nutrition, wellness and general health are medical expenses that may be paid or reimbursed under an HSA, FSA, Archer MSA or other health reimbursement arrangement.  The FAQs explain that an eligible expense must be for the treatment of a diagnosed disease or illness (like programs for substance abuse, alcohol use disorders, or smoking cessation).  Some expenses may only be deductible if they're prescribed by a doctor to treat a specific disease.  For example, a gym membership purchased as a result of a diagnosis for obesity or high blood pressure would be deductible, while a membership bought for the individual's general health would not be.

March 9, 2023: Bad Advice

With AI and ChatGPT headlining so many stories, TaxBuzz decided to take the technology for a test drive by asking, “What [filing] status I should use when filing my taxes?”  In response, ChatGPT very helpfully provided the definitions of all filing options and then said, “You can consult a tax professional to help determine the best option for you.”  That’s probably a good idea!

TaxBuzz posed additional questions, seeking advice on various real-world scenarios, and discovered that the software providedincorrect answers in every case!  It seems that ChatGPT often started out on the right track but then missed important nuances in – not to mention updates to – the tax code.  In fact, the software developer admits that ChatGPT’s current version is only trained on data sets available through 2021.  It should also be noted that expertly trained humans have access to trusted and verified libraries of information that can be used to verify tax strategy claims. ChatGPT simply doesn’t have the same level of brainpower or education.

March 2, 2023: Storm Relief (CA conforms)

California has just announced that it will conform to the IRS’s postponement of filing and payment deadlines to October 16, 2023, for taxpayers located in all California counties except the Imperial, Kern, Lassen, Modoc, Plumas, Shasta, and Sierra.  This applies to all returns and estimated taxes due prior to the October 16th deadline, as well as payroll tax returns but not employment and excise tax deposits.

March 1, 2023: FBAR Penalty (SCOTUS rules)

With a narrow margin, the Supreme Court sided with the taxpayer, a dual citizen who did not file Foreign Bank Account Reports (FBAR) for 5 years while living in Romania.  As per the Bank Secrecy Act (BSA), US citizens and residents are required to report their foreign holdings to the US Treasury each year.  The BSA authorizes penalties of as much as $10,000 for unintentional failures to file.  The issue at hand was whether that penalty should be assessed on a per-form or per-account basis.  The IRS concluded that Mr. Bittner violated the law 272 times, once for every account that was not reported in each of 5 years.  The taxpayer, on the other hand, believed that he had violated the law only 5 times, once for each annual report he had failed to file.  The Court agreed and held that “the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.”

However, the Court was careful to emphasize the difference in the statutory language that applies to willful (rather than non-willful) violations:  “Because Congress explicitly authorized per-account penalties for some willful violations, the government asks us to infer that Congress meant to do so for analogous non-willful violations as well.  But, in truth, this line of reasoning cuts against the government. When Congress includes particular language in one section of a statute but omits it from a neighbor, we normally understand that difference in language to convey a difference in meaning.”

February 25, 2023: CA Storm Relief EXTENDED

As Southern California braced for blizzard – including in the mountains outside Los Angeles – for the first time since 1989 and much of the rest of the state endured catastrophic flooding, mud- and landslides, the IRS announced that it would further extend the tax filing deadline for taxpayers affected by the winter storms.  Previously postponed to May 15th, the deadline was pushed yet farther to October 16th.  Taxpayers throughout California may now delay filing income tax returns that were originally due on April 18th, along with different business returns normally due on March 15th or April 18th and returns of tax-exempt organizations typically due May 15th.  Additionally, eligible taxpayers may postpone 2022 contributions to their IRAs and health savings accounts until October 16th.  Since the IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area, extension requests need not be filed.

But since CA’s tax authority has not (yet?) announced that it will conform to the federal extension and because not all of CA’s 58 counties are covered under the federal relief order, I urge all taxpayers to submit an extension request regardless.  Submitting Form 4868 for individual filings and comparable forms for business filings is a simple and routine task that may ensure that those taxpayers who mistakenly believe that they’ve qualified for disaster relief are in fact protected from a potential late filing penalty.  And because an extension merely extends the time for filing not payment, taxpayers ineligible for federal (or state) disaster relief should submit payments on or before April 18th sufficient to cover any outstanding liability that may result when the TY’22 returns are eventually prepared.

February 11, 2023: State Relief Payments

The wait is over.  The IRS has decided that it will not tax the special payments made by 21 states in 2022.  As a result, affected taxpayers will not have to report these payments – including California’s Middle Class Tax Refund – on their federal returns.  The IRS did not specifically state that these payments are excludable disaster relief payments or that they qualify for the general welfare exclusion.  Instead, the tax authority determined that it would be “in the interest of sound tax administration” not to challenge a taxpayer’s position if he chose to exclude these payments from gross income.  A state-by-state list of eligible payments is available on the IRS website.

February 8, 2023: Wait!

The IRS has asked taxpayers who received special tax refunds or payments from some states during 2022 to delay filing their returns until the tax authority has determined whether such refunds/payments are federally taxable.  The warning applies mostly to taxpayers in California, which offered a Middle-Class Tax Refund last year to millions of residents. Other states may be affected as well, including Colorado, Delaware, Georgia, Hawaii, Idaho, Illinois, Maine, New Mexico, South Carolina, and Virginia, which sent rebates to taxpayers after they reported budget surpluses.  The IRS advises that “the best course of action is to wait for additional clarification on state payments rather than calling the IRS.  We also do not recommend amending a previously filed 2022 return."

January 13, 2023: And so it begins…

The IRS will begin accepting and processing TY’22 returns on January 23rd.  IRS Free File opens today, allowing participating providers to accept (but not yet submit) completed returns.  Many commercial tax preparation software companies and tax professionals will also accept returns prior to January 23rd but must wait to submit these returns until the IRS systems open.

The tax authority has projected that more than 168 million individual returns will be filed, most before the April 18th filing deadline.  NOTE:  This year’s filing date falls on the 18th since the 15th falls on a Saturday and is automatically deferred to Monday.  However, Monday is Emancipation Day, which commemorates the abolition of slavery and is deemed a holiday for federal tax-filing purposes.  California, as well as many other – but not all – states have conformed to the April 18th deadline.  An outdated list if filing deadlines in 2022 is available here – the list for 2023 has not yet been published.

January 10, 2023: CA Storm Relief

The IRS has just announced that California storm victims have until May 15, 2023 to file various federal income tax returns and make any tax payments that would otherwise have been due between January 8th and April 18th of the current year.   Relief is offered to any area designated by the Federal Emergency Management Agency (FEMA), which includes individuals and households that reside or have a business in Colusa, El Dorado, Glenn, Humboldt, Los Angeles, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Bernardino, San Diego, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Ventura, Yolo and Yuba counties qualify for tax relief. Other areas added later to the disaster area will also qualify for the same relief. An updated list of eligible localities is available on the IRS’ Disaster Relief page.

Additional relief for eligible taxpayers includes deferral of (1) IRA and HSA contributions for TY’22 until May 15th; (2) 4th quarter estimated tax payments that would be due January 17th may instead be submitted with the 2022 filed on or before May 15th; and (3) quarterly payroll and excise tax returns normally due on January 31st and April 30th.  NOTE:  Penalties on payroll and excise tax deposits due on or after January 8th and before January 23rd will be abated if the tax deposits are made by January 23rd.

Relief is granted automatically to any taxpayer with an IRS address of record located in the disaster area. Therefore, taxpayers do not need to contact the agency to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.  The IRS will also work with any taxpayer who lives outside the disaster area but whose substantiating records are within the affected area. Taxpayers qualifying for relief who live outside the disaster area should contact the IRS at (866) 562-5227.

January 6, 2023: Audit Stats (2022)

In its study, Syracuse University found that the IRS audited 626,204 returns (out of more than 164 million individual income tax returns filed in 2022), roughly 33K or 5% less than in the prior year.  Syracuse found that the IRS relied more on correspondence audits, with about 85% of audits conducted through the mail.   Together, the odds of being audited was just above 1/3 of 1%.  In 2021, “the odds of audit had been 4.1 out of every 1,000 returns filed (0.41%)." While the odds of millionaires receiving some attention by the IRS rose to 2.8%, about 700,000 millionaires received no scrutiny whatsoever.  In fact, fewer millionaires were subjected to a regular (non-correspondence) audit than the lowest-income wage-earners (1.1 versus 1.27%).

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November 21, 2022: IRS stats released

The Department of the Treasury has just released its 417-page summary report about individual income tax returns for 2020 [that’s not a typo].  Some of its most salient facts include:

• Taxpayers filed 164.4 million individual income tax returns in TY’20, 4.2% more than in TY’19.
• Adjusted gross income (AGI) rose by 5.2%.  Roughly 1/3 of this increase was attributable to net capital gains.
• Wage income increased by only 1.7% to $8.4 trillion.  Unemployment compensation jumped to $405 billion in the first pandemic year, up from $21.4 billion in 2019. 
• Taxable income grew by 6.3% to $9.8 trillion.
• The average federal income tax rate in 2020 was 12.6%, up from 12.3% in 2019.
• Taxpayers earning from $2 – 10 million paid the highest average rate (28%), although the wealthiest taxpayers who earned more than $10 million enjoyed a lesser average rate (25.5%); most likely because the bulk of their income was in the form of long-term capital gains, which are subject to lower rates. 

October 11, 2022: Smishing

It’s a thing!

It’s phishing via text message.  More accurately, smishing is a cyber-security attack carried out over mobile text apps rather than e-mail.  Smishing text messages often purport to be from your bank, asking you for personal or financial information such as your account or ATM number.  Attackers hope that you’ll open a URL link within the text message that will lead you to a website or app that poses under a false identity.  The smishing scheme is successful once the cyber-criminal has gained access to your private information enabling him to steal funds from a bank account, commit identity fraud to illegally obtain a credit card, or leak private data to the highest bidder.

The IRS warns that smishing attacks now also attempt to gather data by sending out fake text messages, known as lures, that offer COVID relief, tax credits, and even help setting up an online account with the tax authority.  As before, the IRS reminds taxpayers that it does not send e-mails or texts asking for personal or financial information.  If you receive such a message, the IRS asks that you forward the scammer’s text message to 7726 (SPAM).

August 26, 2022:  Tax Insurance /p>

It’s not so much “tax” insurance – since we already know that we will be taxed – as it is audit coverage.  In the event a policy holder’s tax position on a return is successfully challenged by the IRS, the insurer will typically cover any additional tax owed, as well as interest and penalties. The policy may also cover legal and accounting fees incurred in defending a challenge and pay a gross-up to cover the tax due that will be owed when the insurance proceeds are paid out.  Paul Caron, Dean of the Pepperdine Caruso School of Law, reports that the IRS will receive a nearly $80 billion funding boost under the newly enacted Inflation Reduction Act, with nearly $46 billion earmarked for enforcement. As a result, the IRS will not only have the budget to increase the number of audits it performs but also be able to litigate more of the tax positions it reviews.

Tax insurance policies, which usually have policy terms between 7 – 10 years, are only written on tax positions that are strong and supportable and are not meant to cover instances of known wrongdoing.  While there were less than a handful of insurers 4 or 5 years ago, there are about 20 insurers that offer such policies today as demand for coverage becomes ever more popular.  Roughly 6,000 policies were placed in 2021, compared to 500 policies written in 2015.

June 9, 2022: Updated Mileage Rates

For the first time since 2011, the IRS has instituted a mid-year raise to the applicable mileage rates.  Effective on July 1st, taxpayers may now claim the following amounts [in cents/mile]:

IRS Commissioner Chuck Rettig stated that the adjustment is intended to reflect the “recent increase in fuel prices.”

May 16, 2022: Biometric Data

While the IRS previously promised to eliminate its online authentication program with ID.me, it seems that the tax authority will continue to work with the third-party authenticator after all despite strongly voiced concerns regarding poor customer service, sign-up difficulties, and undesired direct marketing solicitations.  The IRS now offers taxpayers two methods to sign up for an online account that allows access to individual account information including balance, payments, tax records and more:  Taxpayers may either provide biometric data (as before) or verify their identity during a live, virtual interview with agents.

The Office of the Taxpayer Advocate has stated that “prior biometric data stored, including files that were already collected from customers who previously created an IRS Online Account, will be permanently deleted by March 11, 2022.”  Taxpayers who nevertheless remain concerned about the possible misuse of personal information may – as per ID.me – opt out from receiving marketing e-mails, delete selfie image and other biometric data, or close their account.

April 18, 2022: It's not even "the other half"

As the tax season draws to its close today, it seems that 40 million Californians owe a debt of gratitude to its fellow citizens.  Well, at least to a very small percentage of fellow compatriots:  One-half of 1% of the state’s population.  These are the 96,322 taxpayers with Adjusted Gross Income (AGI) in excess of $1 million.  In the aggregate, they reported $300 billion of taxable income (equal to an average of $3.1 million per taxpayer) and collectively paid $35.3 billion into the state’s coffers (or an average of $366K per taxpayer).  High-income taxpayers contributed 39% of CA’s total individual tax collections.  NOTE:  The combined income of these elite taxpayers totaled 9% of CA’s wage and salary earnings, 42% of taxable interest income, and 45% of dividend income, reflecting “how investments, not paychecks, drive the income of the most wealthy” as per the LA Times.

Narrowing the focus and examining only the 10,344 wealthiest Californians who earned at least $5 million, the data show that these taxpayers owed $19 billion in state taxes (equal to 21% of total collections).  In contrast, the state Franchise Tax Board (FTB) reports that three-quarters of all returns are filed by taxpayers with an AGI under $100K, and that half of all returns are filed by taxpayers with AGI less than $50K!  These statistics not only prove that there is an enormous divide between the have and have-nots in CA , but also refute the oft-quoted misconception that the rich don’t pay tax.

March 18, 2022: Crypto Currency Question

The IRS reminds taxpayers that there is a virtual currency question at the top of the federal Form 1040 that asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”  All taxpayers must answer either “Yes” or “No.”

Taxpayers may check “No” if they have not engaged in any transactions involving virtual currency during the year; they merely held virtual currency in their own wallet or account or transferred virtual currency between their own wallets or accounts; or purchased virtual currency using real currency.  In most other circumstances, taxpayers must check “Yes.”

The most common transactions in virtual currency that require checking the “Yes” box, include:

• Receipt of virtual currency as payment for goods or services provided;
• Receipt or transfer of virtual currency for free that does not qualify as a bona fide gift;
• Receipt of new virtual currency as a result of mining and staking activities;
• Receipt of virtual currency as a result of a hard fork;
• Exchange of virtual currency for property, goods, or services;
• Exchange of virtual currency for another virtual currency;
• Sale of virtual currency; and
• Any other disposition of a financial interest in virtual currency.  NOTE:  If a taxpayer disposed of a virtual currency that was held as a capital asset through a sale, exchange, or transfer, the taxpayer is required to check “Yes” and use Form 8949 to figure the amount of capital gain or loss to be reported on Schedule D.

If a taxpayer received virtual currency as compensation for services or disposed of any virtual currency held for sale to customers in a trade or business, the taxpayer must report the income in the same manner as if wages or business income had been received in fiat currency (e.g., US dollars).

March 4, 2022: No tank tax!

While I presume Ukrainian citizens are currently focused on defense and survival rather than tax matters, the Ukrainian National Agency for the Protection against Corruption has nevertheless issued this helpful proclamation:

Have you captured a Russian tank or armored personnel carrier and are worried about how to declare it? Keep calm and continue to defend the Motherland!  There is no need to declare the captured Russian tanks and other equipment.

Apparently, it is assumed that any enemy equipment obtained will likely be destroyed or disabled and will, therefore, be worth less that the government-decreed de minimis amount of 248,100 Ukrainian hryvnia [equivalent to roughly 8,000 USD].

WARNING:  While Ukrainian citizens may not be taxed on the spoils of war, US citizens do not enjoy a similar exemption.  Recall that US citizens are taxed worldwide income from whatever source derived [IRC §61(a)], whether obtained legally or not [Commissioner v. Glenshaw Glass Co., 348 U.S. 426].  The US Supreme Court held that gross income exists when there are “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”  Commandeering an enemy tank surely grants the procurer such dominion, which therefore requires recognition of taxable income on Form 1040, Schedule 1, Line 8z (Other Income).

February 15, 2022: IRS Update Page

The Internal Revenue Service has set up a dedicated webpage to provide the latest information about the current tax season and the agency’s efforts to deal with the backlog of millions of previously filed returns.  The IRS hopes to raise taxpayer awareness and provide the timely information for filing TY’21 returns as well as information for those still waiting for prior-year returns to be processed.

February 8, 2022: Identity Verification for MyFTB

California’s Franchise Tax Board (FTB) just announced that it hascompleted its Real-time Identify and Proofing Enrollment process allowing for expedited access to MyFTB online accounts. Taxpayers may now register for MyFTB without waiting for a Personal Identification Number (PIN) letter to be sent by mail.  Instead, MyFTB accounts can be activated with verification by answering personal questions that have been compiled by TransUnion, a third-party credit agency.  Taxpayers unable to obtain TransUnion verification, will continue to receive their PIN letters in the mail.  NOTE:  Business representatives creating a MyFTB account to access entity accounts will not have the option for instant access and will continue to receive PIN letters in the mail.

February 7, 2022: No ID.me!

The IRS announced it will transition away from using a third-party service for facial recognition to help authenticate people creating new online accounts. The transition will occur over the coming weeks in order to prevent larger disruptions to taxpayers during filing season. During the transition, the IRS will develop an authentication process that does not involve facial recognition while continuing to work with its cross-government partners to develop authentication methods that protect taxpayer data and ensure broad access to online tools. NOTE: The transition announced today does not interfere with the taxpayer's ability to file current returns or pay taxes owed.

January 24, 2022: Advanced Child Tax Credit Letters

WARNING:  IRS Letters 6419 sent to taxpayers summarizing amounts of Advance Child Tax Credit payments received during 2021 may report inaccurate amounts!  Amounts may be confirmed by requesting an IRS transcript, going to the Child Tax Credit Update Portal, or verifying a taxpayer’s bank deposits.

January 21, 2022: Facial Recognition

Starting this summer, the IRS will require taxpayers who wish to access their accounts and pay their taxes online to enroll with a third-party facial recognition company.  Even those who have already registered on IRS.gov with a username and password will have to provide a government ID, a copy of a utility bill, and a selfie to ID.me, the Virginia-based identity verification company.  Unfortunately, The Verge reports that the current sign-up process is “time-consuming and glitchy.”

Although ID.me claims that it doesn’t sell, lead, or trade biometric data to any third parties, it can share information with its partners with users’ explicit permission and requires registrants to accept its biometric consent policy.  And the company may retain your biometric data for several years, even if you delete your ID.me account!

January 14, 2022:IRS Backlog

National Taxpayer Advocate Erin Collins released her Annual Report to Congress, calling 2021 “the most challenging year taxpayers and tax professionals have ever experienced.”  She stated that the “imbalance between the IRS’ workload and its resources has never been greater.”  While individual filings increased by 19%, IRS staffing decreased by 17%.  As a result, the IRS has a backlog of 6 million unprocessed individual returns (Forms 1040), 2.3 million unprocessed amended returns (Forms 1040-X), more than 2 million unprocessed quarterly payroll tax returns (Forms 941 and 941-X), and about 5 million pieces of unanswered taxpayer correspondence.  Some submissions date back to last April (!) and many taxpayers are still waiting for refunds 9 months after filing

January 13, 2022:  CA Mortgage Relief Program [file in sidebar under “Special Rules” at the top of the list]

California’s new program will pay up to $80K of mortgage, property tax and insurance bills for qualified applicants.  To qualify, a household must earn no more than the median income in its area (e.g., $118,200 for a family of four in Los Angeles County), and the home at risk of foreclosure must be the household’s primary residence.  The program is designed to aid only those homeowners who are already well behind on their mortgages on account of the pandemic and are not in the process of working out a repayment plan with their lenders.  Folks who have received other forms of government assistance or a previous loan forbearance from their lender are still eligible to apply.  And aid will be available for qualifying people with reverse mortgages.  However, assistance is only available to borrowers with mortgages offered by lenders who have elected to participate in CA’s program.  To date, the state estimates that lenders servicing roughly 83% of eligible loans are already participating and has reached out to the remaining servicers in an attempt to get them to sign up as well.

Additional information and applications are available online or by calling (800) 569-4287.  The program will remain available on a first-come-first-served basis to homeowners who became delinquent in 2020 or 2021 until its $1 billion budget is depleted. CA estimates that it will be able to assist 20 – 40K borrowers.

January 12, 2022:  Back-door ROTH Conversions [file in sidebar under “Help with Taxes” after “Education Credits”]

Under current law, if your modified adjusted gross income exceeds $140K (Single) or $208K (married) you cannot contribute directly to a Roth IRA.  But you can still put money into a ROTH by using a loophole dubbed “the backdoor strategy” by converting after-tax contributions to a non-deductible Traditional IRA.  The proposed Build Back Better (BBB) bill seeks to prohibit taxpayers of all income levels from converting after-tax savings into a Roth IRA, thereby preventing high-income earners from contributing to ROTHs.  Of course, the BBB has not yet become law.  Nevertheless, taxpayers should remain vigilant since the provision may be enacted in its previously proposed (or another) form with an effective date that is (as yet) uncertain.  CAVEAT:  While unlikely, the provision may even be enacted retroactively to year-start.

January 11, 2022:  Info Letters for 2021 Payments Received [file in sidebar under “Help with Taxes” at the top of the list]

The IRS will be mailing notices to affected taxpayers who received Advance Child Credit and/or Economic Impact Payments during 2021.  These letters are intended to help taxpayers to reconcile payments actually received and correctly calculate credits to which they may be entitled when filing their 2021 tax returns.  Do not throw these letters away; be sure to provide them to your tax practitioner along with all other data.

January 10, 2022:  The Tax Filing Season Begins [file in sidebar under “News Stories” at the top of the list]

The IRS has announced that it will begin processing business tax returns on January 7th and individual returns on January 24th, 2022.  Although the IRS Free File program will open January 14th, participating providers must hold all prepared returns until they can be filed electronically on the 24th.  NOTE:  Since Emancipation Day falls on April 15th in the current year, the federal tax filing deadline is automatically extended until Monday, April 18th.  Due to the Patriot’s Day holiday celebrated in Maine and Massachusetts, the federal filing deadline in those two states is postponed until April 19th.  Most, but not all states conform to the federal filing deadlines for state filings – be sure to check the applicable dates in your state.  The FTB has conformed; as a result, the filing deadline for California personal returns is April 18th, 2022.

Beginning October 26th, the IRS will charge a $67 user fee to issue a closing letter.  Courtesy letters were once issued to any estate that filed Form 706, verifying that the IRS had satisfactorily completed its review of the estate tax return.   In recent years, fiduciaries were advised to obtain a free IRS account transcript in lieu of the closing letter.  Today’s announcement finalizes the tax authority’s transition from paper to online reporting but provides certain executors with the ability to request a written letter for a fee.

The IRS has awarded new contracts to three private-sector collection agencies for the collection of overdue tax debts.  Starting today, taxpayers with unpaid tax bills may be contacted by one of the following three agencies: (1) CBE Group, Inc. (800) 910-5837; (2) Coast Professional, Inc. (888) 928-0510; or (3) ConServe (844) 853-4875.  REMINDER:  The Private Debt Collection program was established under federal law in 2016, allowing designated private contractors to collect certain unpaid tax debts on the government’s behalf.

In a few short days, the return processing center in Fresno will permanently close.  Originally scheduled for 2016, this closure is part of a larger, ongoing efficiency strategy.  Since more than 90% of all returns are now submitted electronically, processing of paper returns will no longer be done at the central California campus.  Instead, taxpayers located in Alaska, California, Hawaii, Ohio, and Washington are asked to mail returns to this address:

                Department of the Treasury
                Internal Revenue Service Center
                Ogden, UT  84201

In yet another retroactive change mandated by the American Rescue Plan Act of 2021,  taxpayers do not have to repay excess Advance Premium Tax Credits (APTC) received when they purchased healthcare coverage through the Marketplace.

When applying for insurance, taxpayers must provide an estimate of annual income.  Out-of-pocket insurance premiums and subsidies (in the form APTC) are then computed based on this earnings estimate.  Form 8962 must later be filed with the tax return to reconcile the APTC computed during the application process with the Premium Tax Credit (PTC) that is computed when preparing the return.  Excess credits (if any) must be repaid by increasing the tax liability (or reducing the tax refund).   It is this repayment that has been forgiven for TY’20 only.

But because many taxpayers have already filed tax returns prior to today’s announcement, IRS guidance states that affected taxpayers do not need to file an amended return or contact the tax authority.  Instead, the IRS will reduce the excess APTC repayment amount to zero and will reimburse people who have already repaid any excess amounts on their 2020 tax return. Taxpayers who received a letter about a missing Form 8962 should disregard the letter if they have excess APTC for 2020. The IRS will process tax returns without Form 8962 for tax year 2020 by reducing the excess advance premium tax credit repayment amount to zero.

Taxpayers who have filed their TY’20 returns may receive follow-up correspondence from the IRS to correct a Recovery Rebate Credit (RRC) that was improperly claimed on the federal return. As a reminder, the first and second Economic Impact Payments (EIPs) were advance payments received during 2020 and early 2021, respectively.  The amounts received – while not taxable – were required to be reconciled on the TY’20 return.  If the taxpayer correctly reported the EIPs, no further adjustment would be required.  However, if taxpayers reported incorrect amounts of EIP – too much or too little – or didn’t report any amount received, the IRS will make any necessary corrections, adjust the tax liability accordingly, and issue a letter of explanation. 

The IRS determines the eligibility and amount of the taxpayer's RRC based on the TY’20 tax return information and any amounts of EIPs previously issued.  In some instances, the RRC will be reduced by the amount of any EIPs already issued to the individual. In other cases, the IRS will increase the RRC if the taxpayer was entitled to but did not previously receive the EIPs.  The IRS will calculate the proper RRC amount, make the correction, and continue processing the return. Slight processing delays may occur.  Taxpayers may obtain additional information on a special Q & A page which explains what errors may have occurred. Taxpayers who disagree with the IRS calculation should review their letter as well as the questions and answers for what information they should have available when contacting the IRS.

Failure to file a Foreign Bank Account Report (FBAR) as mandated by the Bank Secrecy Act of 1970 can be costly.  US persons are required to file an FBAR if the aggregate maximum value of all foreign accounts exceeds $10K at any time during a calendar year.  The penalty for non-willful failure to file is $10K [adjusted annually for inflation, the penalty in 2021 is $12,921].  The statute, however, is not clear whether the penalty should be applied an a per-form or per-account basis.  Historically, the Treasury has stacked the penalties by assessing taxpayers for each account that was not properly reported.  In the recently decided case of Giraldi [Civil Action No. 20-2830 (SDW) (LDW) (D.N.J. Mar. 16, 2021)], the court held in favor of the taxpayer, reasoning that non-willful penalties assessed on a per-account basis could irrationally exceed willful violation penalties which are legislatively limited to the greater of $100K or 50% of the unreported account balance(s).  For example, if two individuals each maintained $100K in 20 foreign accounts; a non-willful violator could be penalized up to $200K (= $10K/ account x 20 accounts) while the willful violator would be penalized only $100K.

TWO CAVEATS:  (1) The distinction between willful and non-willful failure to file is a legal determination based on the taxpayer’s “willful blindness” to and “reckless violation” of FBAR requirements [Technical Advice Memorandum 2018-013].  (2) Giraldi was decided in District Court in the 3rd Circuit and is not binding on the IRS in all cases.

The IRS has just clarified that the purchase of personal protective equipment (e.g., masks, hand sanitizer and sanitizing wipes) for the primary purpose of preventing the spread of COVID are deductible medical expenses.  Medical expenses are deductible if itemized on Schedule A and if the aggregate of all medical costs exceeds 7.5% of Adjusted Gross Income (AGI).

Taxpayers have the choice to itemize or claim the Standard Deduction.  Due to the tax code change in 2018 which dramatically raised the Standard Deduction, most taxpayers no longer itemize.  As a result, today’s announcement is of little consequence.  It should, however, be noted that amounts paid for personal protective equipment are also eligible to be paid or reimbursed under health flexible spending arrangements (health FSAs), Archer medical savings accounts (Archer MSAs), health reimbursement arrangements (HRAs), or health savings accounts (HSAs).

Stimulus payments will arrive by direct deposit if taxpayers have previously provided bank information to the IRS..  If the info is unavailable, the IRS will instead mail a paper check or a debit card. 

Some taxpayers, unaware of the IRS policy and concerned that they may have received a fraudulent card, may inadvertently discard the debit card.  Not to worry!  Taxpayers who had not activated their cards by February 1st, will receive a letter from the IRS reminding them to activate their card or request a replacement by calling (800) 240-8100.

The IRS has announced that the federal income tax filing deadline for individuals for the 2021 tax season will be postponed from April 15th to May 17th, 2021.  States, however, are not always in compliance with federal guidelines.  To monitor this situation, the National Society of Accountants (NSA) has created a State Tax Updates Page with the latest deadline changes and will update the page as new information becomes available.

According to a recent analysis of Bureau of Labor statistics published by CPA Practice Advisor, the average American will pay $525,037 in taxes throughout his lifetime.  This sum equates to an average of roughly 34% of all lifetime earnings; ranging from a low of 24.48% in Alabama to 49.51% in New Jersey.  California and New York are in 4th and 6th highest place, respectively, at about 44% of lifetime earnings.  Taxes aggregated in this study included income tax, as well as vehicular, property and sales tax.

Some taxpayers may soon receive Form 1099-G reporting unemployment insurance (UI) or pandemic unemployment assistance (PUA) benefits they have never received, indicating that they are likely victims of a fraud scheme newly rampant in the COVID era.  California taxpayers are asked to report suspected fraud to the Employment Development Department (EDD) online or by calling (866) 401-2849.  Once the fraud has been reported, the EDD will investigate the case as identity theft and will, when the investigation is completed, issue a corrected 1099-G.  The EDD has not indicated how long this might take.  REMINDER:  Although California does not tax UI or PUA benefits, the IRS does. Reporting zero benefits or a lower amount than that reported on the 1099-G will delay the processing of the federal return.

The IRS’ criminal investigation division warns that while the agency has until now focused its resources on informing the public of proper reporting guidelines for virtual currency transactions, it will now be turning to more stringent enforcement.  The shift in focus is due in part to an ever-widening tax gap between calculated and actual tax liabilities, often the result of un- and/or under-reported crypto-currency transactions.  To help ensure compliance, the IRS has placed a question prominently on page 1 of Form 1040 that asks taxpayers whether they have a financial interest in or have been involved in a any transaction with a virtual currency during the tax year.

The IRS has just announced that the 2021 tax filing season for TY’20 returns will start on Friday, February 12th.  Typically, the tax authority begins accepting and processing individual income tax returns in late January, but the IRS needed extra time this year to update and test its systems to reflect late-year tax changes approved by Congress, including a second round of economic stimulus payments.

Forbes reports that Hitesh Patel has been sentenced to 20 years for his role in operating and funding call centers that defrauded US victims out of millions of dollars between 2013 and 2016.  As part of the scheme, scammers utilized a network of call centers in India to call potential victims in the US.  Using personally identifiable information obtained from a number of sources including social media, scammers impersonated agents from the IRS or US Citizenship and Immigration Services (USCIS) to demand that taxpayers pay fake tax bills immediately or face arrest, deportation or other legal action.

The US Treasury Inspector General for Tax Administration (TIGTA) referred to the con as "the largest scam of its kind that we have ever seen,” accounting for 1 of every 4 scams reported and topping the IRS’ Dirty Dozen scam list.  Patel has since admitted that losses of loss of between $25 million and $65 million are attributable to him.

Despite the perils of COVID, it seems that we are living longer.  As a result, the IRS has updated the tables used to compute required minimum distributions (RMD) from retirement plans for calendar years beginning January 1, 2022.  Under these revised regulations, a 72-year old IRA owner who uses the Uniform Lifetime Table to compute his RMD may now base his withdrawal amounts on a life expectancy of 27.4 years, rather than 25.6.  (That’s a 7% increase.)  This means that retirees will be required to withdraw less from their retirement plans and – if the IRS is correct – live longer to enjoy retirement!

While an autograph is in fact a “person’s handwritten signature” [Merriam-Webster], practical usage distinguishes such signature as one that is collectible.  And indeed, that is precisely what 176 “lucky” taxpayers in Rhode Island may do!  Excused as a mere technical glitch, the State Department of Revenue issued tax refund checks signed by none other than Mickey Mouse and Walt Disney.  Upon realizing its mistake, the tax authority promptly voided the checks and promised to re-issue valid replacements (presumably properly signed by Seth Magaziner, Treasurer and Peter Keenan, State Controller).  Recipients of the now invalidated checks now have what will indubitably become collector’s items.

Can the same be said for those COVID Stimulus checks that bear Donald Trump’s scrawl?

Like Mickey’s signature, a president’s signature on a government check is not only unprecedented but also has no legal significance since the president is not an authorized signatory of checks issued by the Internal Revenue Service.  It appears that President Nixon attempted to similarly politicize a government program when he demanded that his signature appear on Social Security checks.  But for a determined government official, Nixon may have gotten his wish.  Robert Ball joined what would become the Social Security Administration in 1939 and served as Commissioner from 1962 to until his retirement in 1973.  An indefatigable champion of the program, he was known as “Mr. Social Security.”  When Nixon sought to take credit for a benefit increase just prior to the 1972 election, Ball warned that the ploy would backfire and threatened to resign.  In contrast, the LA Times writes that today the highest echelons of the federal government are occupied by Trump toadies who are willing to assuage Trump’s most childish demands.

Thus, COVID stimulus payments sent out by paper checks did in fact include Trump’s signature.  But because recipients of these payments so desperately needed the funds to ease pandemic hardships, their checks have long been cashed.  Trump’s signature, therefore, is just that:  A signature not a collectible autograph.

Stimulus Payments

• Supplemental Security Income (SSI) and veterans will automatically receive Economic Impact Payments (EIP) without any further action.
• Recipients who did not file TY’18 or TY’19 returns, with qualifying children under age 17 must register online with the IRS to receive the extra $500/dependent  child payment.
• Recipients who previously filed either TY’18 or TY’19 returns may use the Get My Payment tool to check their payment status, confirm the payment type as direct deposit or check, and enter bank account information for direct deposit if the IRS has not yet sent the payment.

NOTE:  Automatic COVID direct deposits will only be sent to taxpayers who received refunds in either TY’18 or TY’19.  If returns were filed with tax liabilities due, recipients will instead receive paper checks in the mail since the IRS will not use bank account information that was provided at the time of filing to withdraw funds.

CARES Act

The July 15th extended deadline for filing and payment applies regardless of whether a taxpayer is actually sick or quarantined.  The IRS has clarified that the COVID- extension also applies to FBAR filings, RMD rollovers, IRC §1031 exchange and first quarter payroll deadlines.

California

FTB’s FAQ page is updated continuously and offers info on a wide range of topics, including:

• Extension of time to file and pay taxes.
• Cancellation or rescheduling of electronic payments.
• Suspension of collection activities.
• Skipping installment agreement payments.
• Statute of limitations for claims, protests, appeals, and assessments.
• Free tax preparation options.
• How provisions of the Federal CARES Act apply to California.

Service Interruptions

• The IRS has temporarily discontinued 3rd party authorizations – do not fax requests for Centralized Authorization File (CAF) numbers until further notice.
• The Income Verification Express Service is also on hold – the online Get Transcript service is still available.
• The IRS is currently not processing paper returns, responding to paper correspondence or staffing toll-free live service lines.

Recovery Rebate Credit (a.k.a. Stimulus Payments)

Provided in the form of federally issued checks, these payments are in fact tax credits that will be used to reduce the TY’20 tax liabilities of low- to moderate-income taxpayers.  Rather than wait until the 2020 returns are filed in early 2021, the IRS will issue these rebates in advance to provide taxpayers with immediate relief and hopefully stimulate our CV-ravaged economy.  Eligibility and credit amounts, therefore, will be provisionally based on information from returns already filed for TY’19 (or TY’18 if the 2019 return has not yet been filed).  HEADS UP:  There will be a reconciliation process when the TY’20 returns are eventually filed to provide additional benefits to taxpayers whose payments were improperly reduced or eliminated based on prior-year taxable income that was higher than actual current-year income.  Conversely, failure to properly reduce the credit on a TY’20 return will be treated as a mathematical error, subject to immediate assessment.  However, it does not appear at this time that taxpayers will have to repay excess credits received.

The IRS expects that the first wave of checks will be automatically deposited into the same bank account reflected on a taxpayer’s 2018 or 2019 return beginning April 13, 2020.  Paper checks will be mailed to taxpayers who did not provide direct deposit information on their returns beginning in May.  Taxpayers who have already filed returns for TY’18 or TY’19 need not take any further action.  Taxpayers who have not previously filed – whether delinquent or not required to file as per mandated filing thresholds – should immediately file to become eligible for the CV-relief payments.  EXCEPTION:  Social Security recipients who do not usually file will not be required to file returns at this time.  Relief payments will be automatically deposited to their bank accounts beginning April 17th based on information provided on 2019 Forms SSA-1099 or RRB-1099.

Stimulus checks for dependents ($500) will be sent out to parents only if the dependent child is under age 17 at the end of 2020.  FILING TIP:  Taxpayers may want to forego claiming the dependent child as well as the $500 Child Tax Credit on the parental return, so that “child” may instead file an individual return to become eligible for his own $1,200 CV-19 relief check.

The Treasury expects to deliver 5 million checks weekly in the next 20 weeks (through the end of 2020).  Taxpayers with the lowest incomes will receive their checks first.  PHASE OUT:  Taxpayers with incomes in excess of $75K (Single), $112.5K (HOH) and $150K (MFJ) will receive reduced benefits.  No benefits will be paid to taxpayers with incomes exceeding $99K (Single), $136.5 (HOH) and $198K (MFJ).

GOOD NEWS:  The stimulus payment is not taxable.

Miscellaneous Tax Provisions

Employer-paid sick and family leave benefits mandated by the Families First Coronavirus Response Act (FFCRA) are treated as taxable wages to recipient employees.  RELIEF:  Employers, however, may defer the payment of their share of Social Security taxes (6.2%)  on these benefits.  Medicare taxes (1.45%) may not be similarly deferred.

Reversing previously enacted TCJA changes, taxpayers may now carry-back 2018 – 2020 losses for up to 5 years.  Losses from 2019 and 2020 may be used to offset 100% of taxable income.

Retirement-related Provisions

CV-affected taxpayers under age 59½ may withdraw up to $100K from retirement accounts – including IRAs and employer plans – without incurring the usual early withdrawal penalty.  The withdrawn amount may be re-contributed to the account within 3 years, without being subject to the usual annual contribution caps.  If not re-deposited, the withdrawn amounts will be included ratably as taxable ordinary income over a 3-year period.

Required Minimum Distributions (RMDs) have been waived for 2020.  ALSO SUSPENDED:  2019 RMDs that had previously been properly deferred to April 1, 2020.

Administrative Issues

The IRS has announced that the Practitioner Priority Service Line, the e-Services Help Desk and the e-Services FIRE and AIR System Help Desks are closed until further notice.  SUGGESTION:  IRS online services such as Where’s My Refund and Get Transcript remain available.

The IRS has announced that it will accept e-mailed and digital signatures on documents related to the determination or collection of a tax liability.  APPLICABLE TO:  Extensions of the statute of limitations for assessment and collection, waivers of statutory notices of deficiency, closing agreements, and any other statements or forms needing the signature of a taxpayer traditionally collected by IRS personnel outside of the standard filing procedures.

MISC DEADLINES:  The date for filing Gift Tax returns (Form 709) has been extended to July 15th as per IRS Notice 2020-20.  California’s CDTFA has extended the due date for Q1 Sales and Use Tax filings and payments to July 31, 2020.  Real property taxes have not been canceled or extended under federal relief legislation and should be timely submitted to local authorities.  RELIEF:  While each jurisdiction may apply differing rules, Los Angeles County plans to offer its residents the opportunity to submit an online request for penalty waiver due to CV-19 related delays.

For two weeks I’ve had no internet.  It seems that my cable provider is unable to keep up with the demand of new stay-at-home schoolers, workers, gamers and Netflix watchers.  Working offline for most of every day, I’ve had to set my alarm for midnight so that I can jump online to respond to e-mails, collect uploaded tax data, log on to tax and bookkeeping software that is inaccessible without an internet handshake and two-factor authorization, do time-sensitive research and e-file.  Sleep has become a bit of a luxury in this COVID-era.  BUT…

Only moments after the largest economic relief bill in US history passed, my internet access was restored!  If coincidences count, I can only conclude that the legislation intended to offer direct payments to the majority of Americans, expand unemployment benefits and provide a $367 billion program for small businesses almost instantaneously convinced everyone that they no longer needed to work from home.  Computer use must have dropped to the point that I could access the internet during daylight hours.  I was a happy camper for about 6 hours.  And then my fellow home-stayers must have discovered that they now had time to vacuum, do laundry, bake bread [read about the worldwide shortage of yeast] and watch TV.  Soon enough, power went out…

Six times in a 2-day period; once for nearly 26 hours!

The lights have since come on and while I have momentary WiFi, I’d like to provide a brief summary of the behemoth bail-out bill referred to as the Coronavirus Aid, Relief and Economic Security Act (CARES) signed into law on Friday, which provides financial aid equal to one-half of the entire $4 trillion annual federal budget!  These are the most salient provisions of the 335-page bill:

• Payroll protection loans up to $10 million (may be forgiven to cover basic operating expenses without realization of Cancelation of Debt income).
• $50 billion to encourage companies to retain employees on payroll and cover 50% of workers’ paychecks up to $10,000.
• $600/week additional unemployment benefits for up to 4 months; benefits have now been extended to gig workers as well.
• $130 million cash infusion to hospitals (with an additional $45 billion available through FEMA).
• $500 billion of guaranteed, subsidized loans to larger industries, including airlines and hospitals.

Tax-specific provisions include:

• Tax credit rebates of up to $1,200/individual and $500/child (phased out to zero for Single taxpayers with AGI between $75 and $100K; $150K if MFJ and $112.5K if HOH).  Stimulus checks will be sent to all who have already filed a TY’19 return or previously filed a TY’18 return.  SUGGESTION:  Non-filers – including students, people on public assistance or working people whose income was below the applicable filing threshold – may wish to file a 2018 or 2019 return to qualify for rebate check.  NOTE:  Undocumented workers who filed using a TIN are not eligible to receive a check.
• Deferral of employers’ payroll tax deposits; half deferred to 12/31/21 and half to 12/31/22.
• Reinstatement of Net Operating Loss (NOL) carrybacks for 2018 – 20 taxable years.
• Penalty-free withdrawals of tax retirement funds of up to $100K, with income recognized over a 3-year deferral period.
• A waiver of Required Minimum Distributions (RMDs) for TY’20.
• Increased charitable contribution limitations and a $300 deduction for cash contributions allowed for taxpayers not itemizing deductions.
• Federal (not private) student loan payments may be deferred without late fees and penalties until 9/30/20.

Courtesy of the publishers at The Week:

As mentioned in yesterday’s blog entry, I suggested to readers to treat this tax season as any other with regards to the extensions proffered by federal and state tax authorities.  Rather than rely upon an unaccustomed date (July 15th) that may be forgotten or overlooked, I recommend that taxpayers either file timely now or submit Form 4868 as they normally would to obtain an automatic extension until October 15th.  A closer look at the COVID-19 relief reveals that numerous returns commonly filed by individual taxpayers are not covered by the emergency legislation.  For example, Foreign Bank Account Reports (FBARs) and gift tax returns (Form 709) can only be extended past the April 15th deadline if an extension request is filed for the taxpayer’s income tax return (Form 1040).  Like the missus talking to the cat [above], I would almost prefer if my clients knew nothing about that darn July 15th extension!

On the other hand, it’s nice to know that federal collection and enforcement activities have been temporarily relaxed:

• Payments due between April 1st and July 15th for taxpayers under existing installment agreements have been suspended.
• Pending Offers-in-Compromise (OIC) applications will have until July 15th to provide additional supporting documentation.
• Payments on existing OICs may be suspended until July 15th.
• Liens and levies will generally be suspended during the relief period.
• New field, office or correspondence audits will not be initiated at this time, although the tax service will continue to hear appeals by telephone.
• New certifications to the Dept. of State for taxpayers who are “seriously delinquent” will be suspended.
• New delinquent accounts will not be forwarded to private collection agencies.

The questions have piled on.  The IRS has replied on its new FAQ page dedicated to filing and payment deadlines.  Critical issues that have been addressed include:

• The COVID-19 extended deadline of July 15th is available for only certain types of returns and filers.  Specifically excluded are fiscal-year taxpayers, partnership and S-Corp returns that were due March 15th, and non-profits which must file by May 15th.
• Relief is also not extended for payroll, excise, estate and gift taxes; nor are information returns covered.
• Most importantly, 2nd quarter estimated tax payments due June 15th must still be timely filed.  [Yes, 1st quarter ES payments can be postponed to July 15th without penalty or interest accrual, but 2nd quarter payments are subject to their usual deadline and must, therefore, be paid sooner than the postponed ES #1 liabilities.]

BEWARE:  This can become complex and confusing.  And taxpayers may become forgetful.  I, along with many practitioners, am suggesting that the conventional payment schedule be maintained to avoid unintended oversights.  Keep in mind that the extension merely provides 90 days of relief during which unremitted funds will collect no interest in the bank.

AND:  State tax authorities have independently offered COVID-19 relief, in some cases postponing the filing deadline, in others deferring payment deadlines but not necessarily offering consistency or conformity with federal guidelines!

SUGGESTION:  Unless unduly affected and financially burdened by the pandemic, it’s best to stick with filing and customary payment deadlines.

BONUS:  The IRS has clarified that the deadline for prior-year contributions to IRAs, employer retirement plans and health savings accounts has been extended from April 15th to July 15th.  If you choose to take advantage of this extension, be sure to mark you calendar.  It would be a pity to forget the contribution deadline and forgo the benefits of these tax-saving strategies.

The National Society of Accountants (NSA) has just published a concise summary of COVID-related extension deadlines adopted in each state.  While the data is ever-changing and a few inaccuracies are already included [e.g., Hawaii has deferred its income tax filing deadline to July 20th], the list is nevertheless helpful if only to provide a reminder to taxpayers that states do not automatically conform to federal tax guidelines.  Links to each state’s tax authority provided in the attached PDF offer taxpayers the opportunity to obtain the most up-to-date information directly from the proverbial horse’s mouth.

It appears that most states have indeed postponed filing and payment deadlines from April 15th to July 15th, although some have adopted alternative deadlines:  Mississippi (5/15), New Jersey (6/30), South Carolina (6/1) and Virginia (6/1).  Other states – including Delaware, Massachusetts, New Hampshire, New York, Ohio, Tennessee and West Virginia – have not (yet?) announced changes.  Those states that do not impose individual income taxes, need not of course change filing deadlines:  Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Check the list.  Check it twice!  Contact the tax authority or me for most accurate information.

Families First Coronavirus Response Act (the Act):  Since enactment two days ago, the IRS has clarified that small and mid-size employers may take immediate advantage of refundable payroll tax credits created to fully reimburse the employer for the cost of providing COVID-19 benefits to employees.  As per News Release 2020-57, businesses may use payroll tax funds that they would otherwise be required to remit to the tax authority to pay employee benefits.  While onerous trust fund penalties would normally apply when an employer misappropriates payroll tax funds, the Act provides for an exception under which employers may use some or all of the payroll tax deposits to provide sick leave benefits.  In fact, if an employer pays more in benefits to his employees than he would otherwise be required to deposit with his payroll tax returns, he may file a request for an accelerated credit so that he can be made whole expeditiously.

Under the Act, employees may receive up to 80 hours of paid sick leave for absences related to COVID-19.  Paid childcare leave benefits have been expanded if the employee’s children’s schools are closed or childcare providers are unavailable.  Employers receive full reimbursement for these benefits in the form of a dollar-for-dollar offset against their payroll tax obligations.  Employers with fewer than 50 employees are not required to offer these benefits if the viability if their business is threatened.  A temporary moratorium on all enforcement actions for violations of the Act will be offered for a 30-day period, if the employer has acted reasonably and in good faith in his efforts to comply with the new legislation.

Extensions:  The Treasury Secretary has announced that the April 15th filing deadline has been extended to July 15th.  As a reminder, the tax authority had previously only extended the payment deadline.  Now, taxpayers – including individuals, trusts, estates and business entities – may file their income tax returns as late as July 15th.  While the IRS has not yet clarified, it is assumed that taxpayers who need additional time beyond July to file will have file a form to request an extension to October.  IRS Notice 2020-18 clarifies that the extension applies only to income tax returns and income tax liabilities but does not address whether the extended deadline also applies to 2nd quarter estimated tax payments normally due on June 15th, IRA contributions, or payroll tax filings and payments.  

Following suit, California extended its filing and payment deadlines to coincide with the federal mandate.  Relief is offered to all taxpayers, in contrast to the federal relief that applies only to those “affected by the COVID-19 pandemic.”

Taxpayers who have already filed and arranged to have tax return and estimated tax liabilities automatically withdrawn by the tax authorities on the respective due dates, may contact the IRS at (888) 353-4537 and the FTB at (916) 845-0353 to cancel their pre-arranged payments at least 2 business days prior to the scheduled payment dates.

Closures:  In response to several state directives to shutter all non-essential businesses, some IRS facilities have been forced to close, including Fresno and Philadelphia.  Walk-in services at all locations have been temporarily halted and staffing has been reduced by about 50% at IRS campuses in Kansas City, Ogden and Austin.  The US Tax Court has announced that it, too, has closed its building.  Taxpayers must file all petitions by mail which will be held for delivery when the Court reopens.  CAVEAT:  Taxpayers must adhere to the rules for timely mailing evidenced by a US Postal Service postmark or a delivery certificate from a designated private delivery service.

The Families First Coronavirus Response Act was signed into law yesterday, mandating that small to mid-size employers must provide paid sick and/or family leave to each employee unable to work (or tele-commute).  Employers who have provided such benefits to their employees may then claim an equivalent amount of refundable credit against their FICA taxes or self-employment tax.

While many questions remain about the implementation and specific provisions of the new legislation, a few things are clear:

1. This mandate applies to employers (including government employers) with fewer than 500 employees.
2. Employees are eligible for such payments if they are subject to a federal, state or local quarantine order, have been advised by a healthcare provider to self-quarantine, are experiencing symptoms of COVID-19, are caring for others, or must provide at-home care to child out of school.

It is still uncertain how the federal law will work in conjunction with the family leave program offered by the State of California.

On a separate and disturbing note:  The governor of Pennsylvania has ordered all “non-life-sustaining” businesses within the state to close effective immediately.  The National Society of Accountants understands that accounting, bookkeeping, tax preparation and payroll businesses are included in the order and may not continue physical operations.

In response to the IRS announcement that it would push back its payment deadline from April 15th to July 15th, California’s tax authority (FTB) has revised its previously announced deadlines [see March 15th blog entry below].  The FTB has now postponed the following filing and payment deadlines for individuals and businesses until July 15th:

• 2019 tax returns.
• 2019 tax return payments.
• 2020 1st and 2nd quarter estimated tax payments.
• 2020 LLC taxes and fees.
• 2020 non-wage withholding payments.

As with the federal deferral, California will not assess penalties or interest on deferred payments during this period but unlike the IRS, the FTB’s COVID-19 relief applies not only to payments but also to filing.  Relief is extended to all California taxpayers, who need not claim any special treatment or call the FTB to qualify.

Nevertheless, the FTB recommends that taxpayers file as soon as possible, if only to obtain refunds to which they may be entitled sooner.  As a practitioner, I have advised my clients to comply with long-standing filing and payment deadlines if at all possible.  The proffered relief may be of tremendous benefit to some, but for others it merely provides an excuse to procrastinate.  Many folks are currently (in)voluntarily committed to momentary inactivity and could use this down-time to clear their desks of the onerous chore of gathering tax data and completing the filing process in a timely manner by April 15th.  Life will eventually and inevitably return to its norm and when it does, we might find ourselves overwhelmed with previously common-place tasks of getting kids off to school, commuting to work, resuming interrupted activities, shopping, and re-acquainting ourselves with friends and family; hardly the time we would then wish to use to comply with an IRS or FTB extension deadline!

Yesterday, the IRS made its eagerly anticipated announcement that it would extend deadlines.  The proclamation was followed by an onslaught of misinterpretation, confusion and misreporting as I received minute by minute updates from reputable media sources as well as professional tax associations.  Here’s what we know now:

The IRS has extended the deadline for payments but did not extend the deadline for filing returns.  That deadline to submit income tax returns remains – as before – April 15th.  Payments, however, that would otherwise be due on April 15th may now be postponed up to 90 days on amounts up to $1 million.  Corporate tax filers may delay payments on amounts up to $10 million.  Postponed payments will not be assessed penalties or interest during the 3-month deferral period.

To be clear, the IRS expects taxpayers to adhere to the usual filing deadline.  Should that not be possible for any reason – whether or not related to COVID-19 – taxpayers must file Form 4868 to request an automatic extension to October 15th (as in all years).  The IRS has provided a coronavirus link on its website to provide guidance and useful resources to taxpayers during these turbulent times.

We next await the possible enactment of the Families First Coronavirus Response Act which would grant sick and family leave coverage to individuals working for small and mid-sized businesses.  Paid sick leave will likely apply to anyone who must quarantine or is attempting to obtain preventative care.  Additional clarification is, of course, needed and will hopefully be forthcoming if the bill is passed.  Meanwhile, Congress ponders additional relief provisions that may include a payroll tax moratorium, payroll tax relief for independent contractors and workers in the gig economy, a return of Net Operating Loss (NOL) carrybacks, even a one-time payment of $1,000 to all adults.  Check back for updates…

Although the IRS proudly attributes the decline of tax-related identity theft to improved security measures, the tax authority also cautions taxpayers that they must be watchful.  To help individuals recognize early signs of theft, the IRS has provided the following checklist of fraud indicators:

1. An e-filed return is rejected because a return with the same Social Security Number has already been filed.
2. A taxpayer receives a notice that income reported on the tax return is less than income reported on a W-2 or 1099.
3. A taxpayer who has not yet filed a return receives authentication letters (5071C, 4883C or 5747C) asking for confirmation of his identity.
4. A taxpayer who has not yet filed a return receives a refund check in the mail.
5. A taxpayer receives a tax transcript he did not request.
6. A taxpayer who created an Online Services account receives a notice that the account was accessed or disabled.
7. A taxpayer who did not create an Online Services account is told that an account has been established in his name.

Vigilance is key!  And to help unsuspecting taxpayers, the IRS is now required to notify potential victims if unauthorized use of an individual’s identity may have occurred.  And the IRS must ensure that the victim of tax id fraud will not be subject to any penalty for underreporting income resulting from the unauthorized use of his identity.

California has just announced that taxpayers affected by the coronavirus have been granted an extension to file 2019 returns and make certain payments until June 15th, 2020.  This relief includes moving the various tax filing and payment deadlines that occur between March 15th and June 15th, including:

• Partnerships and LLCs taxed as partnerships now have a 90-day extension to file and pay by June 15th.
• Individual filers now have a 60-day extension to file and pay by June 15th. 
• Quarterly estimated tax payments normally due April 15th are now due June 15th.

The FTB advises taxpayers to write “COVID-19” in black ink atop the tax return to alert the tax authority of the special extension period.  The FTB will waive interest and any late filing or late payment penalties that would otherwise apply. 

BEWARE:  The IRS has not yet followed suit and currently advises that “taxpayers should continue to file and submit tax returns as they normally would."  For the moment, the deadline for filing an individual federal income tax return remains April 15th, 2020.If more time is needed, an extension must be filed.

Other states have taken independent action that ranges from office closures to deadline extensions.  It is best to check with the individual tax authorities directly.  Contact information and web-links are available on the State Info page of this website.

In a recently published Tax Tip, the IRS touts direct deposit for refunds as free, easy, secure and the fastest way to get a tax refund.  Taxpayers can request that their refunds be deposited into not only one but also two or three accounts and can use direct deposit even if filing paper returns.  Of course, combining direct deposit with IRS e-file is the fastest way for taxpayers to receive their refunds.  When using direct deposit, there’s no risk of having a paper check stolen or lost.  In fact, the IRS uses the same system to deposit tax refunds that Social Security and Veterans Affairs use to deposit benefits into millions of accounts.  And direct deposit saves money:  It costs the IRS more than $1 for every paper refund check issued, but only a dime for each direct deposit made!

The IRS has published a new tax form, featuring larger print and a standard deduction chart to make it easier for older Americans to read and use.  Taxpayers age 65 or older – whether working or retired, married or single – have the option to use Form 1040-SR, which allows income reporting from other sources common to seniors such as investment income, Social Security and distributions from qualified retirement plans, annuities or similar deferred-payment arrangements.  All lines and checkboxes on Form 1040-SR mirror Form 1040, and both forms use the same attached schedules and forms (if needed).  Taxpayers who itemize deductions can file Form 1040-SR and attach Schedule A.  For taxpayers who take the standard deduction, Form 1040-SR includes an easy-to-use chart listing the standard deduction amounts as well as the bonus standard deduction available to seniors.

Because of new wage and income reporting requirements, the IRS announced it would discontinue use of the Form W-2 Verification Code beginning with TY’19.  Federal law now requires employers to submit Forms W-2 by January 31st each year, which helps the IRS combat fraud and identity theft and supersedes the need for a verification code.  Rather than rely on the code, the earlier filing date allows the IRS to successfully  cross-reference wage information submitted on the W-2 with entries placed on the tax return.

Actually, I don’t but I know that many of you do.  In fact, in a recent study conducted by OnePoll, 3 out of every 4 persons surveyed stated that filing a tax return ranked amongst their most stressful activities; even more taxing [pun intended] than a doctor’s visit, holiday shopping, paying off a credit card, visiting with the in-laws or attending a parent-teacher conference.  Respondents said that they would rather lose an hour’s sleep each night, get a bad haircut, give up chocolate, walk to work or eat of bowl of insects (!) than prepare a tax return.

It’s a good thing you don’t have to!  Just call me.

The US and France have recently memorialized an understanding that the French Contribution Sociale Generalisee (CSG) and Contribution au Remboursement de la Dette Sociale (CRDS) taxes are not social taxes covered by the existing totalization agreement on Social Security between the two countries. As a result, the IRS will not challenge foreign tax credits claimed for CSG and CRDS payments. Taxpayers have up to 10 years to file a claim for refund of US tax with respect to a foreign tax credit. The 10-year period begins the day after the regular due date for filing the return (without extensions) for the year to which the foreign taxes relate. The IRS will soon update information on claiming these taxes as foreign tax credits.

The IRS has just published a reminder to seniors who turned 70½ last year that they must begin receiving RMDs on or before April 1st this year.

While many taxpayers choose to defer withdrawals from retirement accounts, IRS rules require that mandatory distributions must begin once a plan participant reaches the age of 70½.  Such distributions must occur annually prior to the close of the calendar year.  Under a special exception, first-time distributions may be postponed until as late as April 1st of the next calendar year.  Thereafter, all future RMDs must occur before December 31st each year.  If a taxpayer elects to postpone that first distribution, he will be required to make two withdrawals in one year; the first to cover the RMD for the year when the critical age threshold was met in the prior year and the second to cover the RMD required in the current calendar year.

Example
A taxpayer who was born July 1, 1948 and turned 70½ in 2019 chooses to postpone the first required distribution (for 2019) until April 1st, 2020.  That taxpayer must nevertheless receive the second RMD (for 2020) by December 31st, 2020.   TAX TIP:  If the taxpayer wishes to avoid including both RMDs in taxable income in the same year, the taxpayer could instead elect to request the first withdrawal on or before December 31st, 2019.

The required distribution rules apply to owners of traditional IRAs, SEPs and SIMPLEs but not Roth IRAs. They also apply to participants in various workplace retirement plans – including 401(k), 403(b) and 457(b) plans – although some employees who are still working can, if the workplace plan allows, wait until April 1st of the year after retirement to start receiving distributions.

Failure to timely receive the RMD is subject to the Excess Accumulation penalty, equal to 50% of the amount that should have been withdrawn.  NOTE:  State tax authorities may also assess penalties.

You may be surprised to learn that less than 1% of all individual returns filed are audited.  According to the IRS data book, only 934,000 individual returns were audited in 2017 (the last year for which data is currently available); another 166,000 business returns were examined, dropping the combined audit rate to one-half of 1%.  The bulk of these audits were correspondence audits that often entailed no more than a letter from the tax authority suggesting that the taxpayer correct a line entry or a math error or reconciling overlooked items of income for which the IRS received corresponding W-2s and 1099s from payees.  Only 30% of all audits involved a face-to-face meeting with an examiner of the sort that triggers nightmares and mythical angst.  While 24,000 audits went against the taxpayer yielding the Treasury an additional $11.5 billion in collections (ca. $480K/taxpayer), nearly 34,000 taxpayers received refunds from the IRS totaling $6 billion (ca. $176K/taxpayer) at the conclusion of the examinations.

And yet, in a recent survey conducted by Lexington Law, 25% of taxpayers fear being audited.  The survey further found that men – particularly men over age 55 – were 12% more afraid than women.  Shall we assume a guilty conscience?!

While some returns are selected randomly for examination, others are flagged because the taxpayer may have (legitimately?) claimed greater than the average amount of deductions, claimed Earned Income or other refundable credits that are often exploited by tax cheats,  or claimed home office and mileage deductions that are frequently found to be unsubstantiated.  The key to prevailing in an audit is documentation; yet older men are 32% more likely to throw away their tax records prior to the expiration of the 3-year statute of limitations.  Older women, by contrast, typically save tax records anywhere from 4 to 11 years after filing.  So maybe more men irrationally fear an audit not because of deep-rooted pangs of remorse but because they are hoarding cords, costumes and crap mail [who knew?] rather than mileage logs and goodwill receipts?

The IRS has just announced that it would expand its pilot Identity Protection PIN (IP PIN) pilot program to taxpayers in 10 states:  California, Delaware, Florida, Georgia, Illinois, Maryland, Michigan, Nevada, Rhode Island and Washington DC.

The IP PIN is a 6-digit number assigned to eligible taxpayers to help prevent the misuse of their Social Security Number (SSN) on fraudulent federal income tax returns. An IP PIN allows the IRS to verify a taxpayer's identity at the point of filing, preventing someone else from filing a tax return using the fraud victim’s SSN.

Taxpayers, who last year filed a tax return from one of the pilot states, may go to the Get an IP PIN tool, authenticate their identities and obtain an IP PIN immediately without waiting for the IRS to send it in the mail.  Because security is paramount, taxpayers must validate their identities through a rigorous two-factor authentication process called Secure Access.  There will be no manual option for taxpayers who cannot authenticate their identities.

All other taxpayers – as well as those who fail the online authentication process – will receive IRS-issued IP PINs by mail.  Confirmed victims of tax-related identity theft will be required to use these IP PINs to e-file their returns until their cases have been resolved.  These taxpayers must, therefore, provide a newly issued IP PIN to the return preparer each year.

A recently published report from the US Government Accountability Office (GAO) disclosed that the IRS has an inventory of 4,487 guns and 5,062,006 rounds of ammunition.  That’s a lot of bullets – roughly one bullet for every 28 taxpayers!

Only special agents of the IRS Criminal Investigation Division (CID) are allowed to carry weapons. The Treasury Inspector General for Tax Administration (TIGTA) explains that CID agents execute search and arrest warrants on those suspected of violating US tax laws.  Because suspected criminals may violently resist arrest, special agents may use deadly force to protect themselves and must be fully prepared to respond with force when necessary.  As a result, all special agents receive extensive weapons training; nevertheless, there have been 11 instances of accidental weapons discharge.  Okay, so the TIGTA report found that special agents actually fired their guns accidently more often than they intentionally fired them in the field.  But the same report found “that some special agents are not maintaining an appropriate level of weapons proficiency” and that the IRS “did not always take consistent and appropriate actions when special agents failed to meet [mandated] requirements”.

While armed CID agents will only show up at your doorstep if they are investigating a criminal (not civil) matter, it should be noted that roughly 3,400 investigations are initiated annually.  Approximately 2,700 of these investigations lead to indictments of which almost all result in convictions.  Finally, about 80% of those convicted are sentenced to jail terms averaging 41 months.

Of course, most taxpayers will never run afoul of CID.  Typical audits, IRS inquiries and examinations involve civil matters that often result from mathematical errors and negligence rather than fraud and tax evasion.  Facts and circumstances may be used to distinguish between careless mistakes and intentional misrepresentation.  But taxpayers should be forewarned that a civil examination can morph into a criminal investigation at any time.  In fact, Forbes cautions that a taxpayer may be told that he or she is merely a witness in the early stages of an investigation. But statements made in the hopes of being cooperative may, as the investigation continues, transform the witness into a target.  “If you are approached and questioned by a Special Agent, ask for his or her business card. Firmly but politely state that you do not want to answer any questions and that you will have your attorney contact the Special Agent.”

Caution is the key!  (As well as, of course, complete and careful reporting at the outset.)  Think about it:  Do you really want an under-trained and inexperienced gun-toting agent to come to your door?!

To be or not to be?  Along with Hamlet, tax pros have had to ponder this question since the enactment of the Tax Cut and Jobs Act (TCJA) which entitles individual taxpayers and some trusts and estates to a deduction of up to 20% of Qualified Business Income (QBI) from a trade or business.  As per IRC §162, taxpayers may claim allowable business expenses associated with a profitable business activity that is operated with continuity and regularity.  However, the ownership and rental of real property does not – as a matter of law – constitute a trade or business. Instead, the issue is one of fact and circumstance in which the scope of the taxpayer’s activities in connection with the property must be so extensive as to give rise to the stature of a trade or business.  As a result, most common rental real estate activities will not automatically qualify for the §199A deduction unlessthe taxpayer can substantiate that managing and operating the rental property rises to the level of a §162(a) trade or business.

Some of the facts that may be considered in determining whether the activity is a trade or business include the amount of time devoted to the activity on a regular, continuous and substantial basis and whether 1099 information returns have been issued to service providers and suppliers to whom amounts were paid in excess of $600 in the course of business.  NOTE:  1099s must be issued on or before January 31st.

TIP:  Practitioners hope that the IRS will issue additional guidance as a result, affected taxpayers may wish to submit an extension in anticipation that final regulations will be issued prior to the extended filing deadline on October 15th.

CNN counts the ways the shut-down affects all of us.  Because this is a tax blog, take particular note of the following:

While the Trump administration has promised that tax refunds will be mailed on time and has not yet delayed the tax filing day (# 34), the IRS isn't staffed to answer questions about changes from the new tax law (#33).

Federal court offices operating with fees and other reserve funds will run out of money January 18th (#66).  The US Tax Court closed its doors on December 28, 2018 but trial sessions scheduled for the weeks of January 7th and 14th were to proceed as scheduled.  Trial sessions scheduled for the week of January 28th in El Paso, Los Angeles, New York, Philadelphia, San Diego, and Lubbock are canceled.  And the Department of Justice has asked for a delay to a lawsuit that could invalidate the Affordable Care Act under which millions obtain health insurance (#9). 

Of course, not spending money actually costs the government money in interest, the ultimate back pay it will give without getting work in exchange, uncollected fees and more (#42).  The US risks losing its AAA credit rating if the shutdown drags on (#57).  And, critically, federal agencies that aren't funded, are more susceptible to cyberattacks (#65). 

The IRS has just opened its Free File program, which is a partnership between the IRS and the Free File Alliance, a group of twelve industry-leading private-sector tax preparation companies that have agreed to provide free commercial online tax preparation and electronic filing.

The online program, which is accessible only through the IRS website, offers easy-to-use, brand-name software at no charge to taxpayers with Adjusted Gross Income (AGI) below $66K.  Taxpayers may select the software product that best suits their situation.  NOTE:  Each Free File partner sets its own eligibility standards that are generally based on age, income or state residency.  Some Free File partners offer the preparation of state tax returns in addition to federal.  Taxpayers can do their taxes online from IRS.gov or use the IRS2Go mobile app to do their taxes on their mobile phones, tablets or any app-enabled device. 

Free File will be available to taxpayers from January 11th through the mid-October deadline for extension filers. Taxpayers, regardless of income, can use Free File to file an extension from the April 15th deadline.  More than 53 million taxpayers have used Free File since the program’s inception 17 years ago.  It is estimated that as many as 100 million taxpayers (70% of all filers) will be eligible to use the program this year.

While the IRS has worked with the Alliance to ensure the safety of the program, taxpayers should be aware that Free File does not offer individualized advice or assistance during the preparation process.  As a result, the IRS website cautions that users of the program “must know how to do their taxes.”  While free is always tempting, many taxpayers may have situations that are more complicated than what Free File was designed to handle.  With that in mind, I invite my readers to contact me for help.

BREAKING NEWS:  The White House Office of Management and Budget has just announced that contrary to a long-standing policy, the IRS will pay tax refunds even though the agency is subject to the federal government shut-down.

This government shut-down must end!  I dare not make a political statement in this blog, nor do I wish to belittle the hardships that many government employees currently face as they are furloughed without pay or called upon to work with promises of deferred compensation.  Add to that, many early tax filers will soon discover that the IRS will not issue tax refunds until the warring parties have settled their funding disputes and the government has re-opened for business.  In the interim, as per its Lapsed Appropriations Contingency Plan, the IRS is not processing amended returns or providing income verification services.  The tax authority has discontinued all audit functions and non-automated collections which may offer a temptation to certain scofflaws but only fails to bring in precisely those dollars about which our legislators continue to haggle.

During the shut-down, the IRS has also ceased responding to taxpayer questions and closed its telephone helplines.  Some might argue that these call sites were always less than efficient or effective; particularly since the IRS itself proclaims that tax advice received from the IRS on the phone is not binding.  As per Treas. Reg. §601.201(k)(2), “oral advice is advisory only and the Service is not bound to recognize it in the examination of the taxpayer’s return.”  So, you might ask, why even call?  According to the Washington Post’s classical music critic Anne Midgette, you might call just to be placed on hold – with various sources claiming that the average hold time ranges between 45 and 70 minutes (!) – and listen to the hold music.  While not “exactly a masterpiece of the genre,” she quotes one customer who claimed that she “spent untold hours singing and whistling harmony and counterpoint to this beautiful music.”  Another taxpayer wrote to the IRS “that this is the only music that calms my German shepherd.  I need a 10-hour loop of this, please.  If you need to bill me, you can just add it to the tax levy I am already paying on.”

With such accolades, my curiosity was instantly piqued and so I placed a call to (800) 829-1040, expecting – no, hoping – to be placed on hold.  Instead, my call was picked up instantly with a recording that announced that “live telephone assistance is unavailable at this time.”  Okay; now cue the music…

But sadly, it seems even the background melody is on hiatus during the government shut-down.

Market Watch has published a list compiled by tax professionals of the most common audit triggers and cautions taxpayers to be beware of:

• Taking higher than average deductions – based on statistical data, the IRS compares individual returns to national averages and may scrutinize returns on which deductions for charitable contributions, mortgage and student loan interest are greater than typical deductions claimed by taxpayers in comparable income brackets.

• Claiming that a for-fun hobby is a for-profit business – while income from all sources is reportable, deductions for expenses may be limited.  For example, net hobby income cannot be reduced below zero.  [Be sure to read up more on the Hobby Loss Rule.]

• Withdrawing retirement account assets early – since the IRS is notified by financial institutions of all distributions taken, taxpayers may be subject to under-reporting and under-payment penalties in addition to applicable early distribution penalties if the withdrawal is not properly reported on the tax return.  [Check out exceptions that may apply to the Early Withdrawal Penalty.]

• Deducting unreimbursed employee business expenses – keep in mind that these expenses must be ordinary and necessary.  An ordinary expense is one that is common and accepted in a particular field of business, trade or profession; a necessary expense is one that is helpful and appropriate for a particular business, trade or profession.  NOTE:  This deduction is no longer available for 2018 and beyond.

Okay, be mad.  You have a right to be but as Forbes contributor Kelly Erb cautions, “don’t take it out on your tax pro or your software manufacturer.”  Your anger should be directed at Congress which – while it self-servingly claims accolades for avoiding yet another government shut-down by passing the Bipartisan Budget Act of 2018 – has created yet another tax nightmare.  Hidden in the 640-page legislation, are tax provisions that had already expired and have now been extended retroactively for the 2017 tax year!

Mind you, these extensions were passed on February 9th, 40 days after the close of the 2017 calendar year and 12 days after the IRS officially kicked off the current tax season!  More than 18 million tax returns have already been filed and processed; many of those will now have to be amended.  Federal tax forms will have to be revised.  Tax software will have to be updated.  Tax pros will have to attend yet more educational seminars.  Taxpayer information will have to be disseminated.  NOTE:  I have already updated my Summary of Important Tax Data and Highlights of Pertinent Code Changes for TY’17.

Tax Practice Pro, Inc. rightfully and indignantly asks, “What the HECK were they thinking?”  As The Hill attempts to explain:

[The] Tax Cuts and Jobs Act is being sold as a permanent fix to our tax code, but because of the gamesmanship and contortionist gimmicks the bill includes, it is setting us up for yet another era of tax extenders. These are sometimes narrow, sometimes broad tax preferences that get passed as “temporary” but then almost always get renewed year after year.  [Hidden] in the clamor for comprehensive tax reform, lawmakers let them expire at the end of 2016.

But to satisfy powerful special interest lobbies such as NASCAR track owners, film and television productions, rum sales from Puerto Rico, even electric motorcycles, these extenders have now “hitched a ride” on unrelated legislation “largely without pay-fors or offsets.”

In an email to tax professionals, the IRS has said that it is reviewing the retroactive extender provisions:  “We are assessing these significant changes in the tax law and beginning to determine next steps. The IRS will provide additional information as quickly as possible for affected taxpayers and the tax community.”  Stay tuned…

With the 2017 filing season only days old [the IRS and FTB each began accepting e-filed returns on January 29th], it is disappointing to note that already a new fraud scheme has emerged.  As has happened before, cyber-criminals have stolen client data from the unprotected computers of several tax practitioners, filed fraudulent returns and then, in a new twist, have used taxpayers’ real bank accounts to request auto-deposits of tax refunds.  Then, with tremendous audacity, a woman posing as a debt collection agency official contacted the taxpayers to explain that the refund was deposited in error and asked the taxpayers to forward the money to her.

While this notice has been disseminated to practitioners urging the professional community to remain vigilant of phishing e-mails, malware and other methods used to gain access to client data, the warning should also be heeded by the public.  Taxpayers are reminded that they should be alert to any unusual activity such as receiving a tax transcript or tax refund they did not request.

Taxpayers who receive a direct deposit refund that they did not request should take the following steps:

• Contact the Automated Clearing House (ACH) department of the bank/financial institution where the direct deposit was received and have them return the refund to the IRS.
• Call the IRS toll-free at (800) 829-1040 (individual) or (800) 829-4933 (business) to explain why the direct deposit is being returned.
• Keep in mind interest may accrue on the erroneous refund.

New Medicare cards offer greater protection to more than 57.7 million Americans
New cards will no longer contain Social Security numbers, to combat fraud and illegal use  

The Centers for Medicare & Medicaid Services (CMS) is readying a fraud prevention initiative that removes Social Security numbers from Medicare cards to help combat identity theft, and safeguard taxpayer dollars. The new cards will use a unique, randomly-assigned number called a Medicare Beneficiary Identifier (MBI), to replace the Social Security-based Health Insurance Claim Number (HICN) currently used on the Medicare card. CMS will begin mailing new cards in April 2018 and will meet the congressional deadline for replacing all Medicare cards by April 2019. Today, CMS kicks-off a multi-faceted outreach campaign to help providers get ready for the new MBI.

“We’re taking this step to protect our seniors from fraudulent use of Social Security numbers which can lead to identity theft and illegal use of Medicare benefits,” said CMS Administrator Seema Verma. “We want to be sure that Medicare beneficiaries and healthcare providers know about these changes well in advance and have the information they need to make a seamless transition.”

Providers and beneficiaries will both be able to use secure look up tools that will support quick access to MBIs when they need them. There will also be a 21-month transition period where providers will be able to use either the MBI or the HICN further easing the transition

CMS testified on Tuesday, May 23rd before the U.S. House Committee on Ways & Means Subcommittee on Social Security and U.S. House Committee on Oversight & Government Reform Subcommittee on Information Technology, addressing CMS’s comprehensive plan for the removal of Social Security numbers and transition to MBIs.

Personal identity theft affects a large and growing number of seniors. People age 65 or older are increasingly the victims of this type of crime. Incidents among seniors increased to 2.6 million from 2.1 million between 2012 and 2014, according to the most current statistics from the Department of Justice. Identity theft can take not only an emotional toll on those who experience it, but also a financial one: two-thirds of all identity theft victims reported a direct financial loss. It can also disrupt lives, damage credit ratings and result in inaccuracies in medical records and costly false claims.

Work on this important initiative began many years ago, and was accelerated following passage of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). CMS will assign all Medicare beneficiaries a new, unique MBI number which will contain a combination of numbers and uppercase letters. Beneficiaries will be instructed to safely and securely destroy their current Medicare cards and keep the new MBI confidential. Issuance of the new MBI will not change the benefits a Medicare beneficiary receives.  

CMS is committed to a successful transition to the MBI for people with Medicare and for the health care provider community. CMS has a website dedicated to the Social Security Removal Initiative (SSNRI) where providers can find the latest information and sign-up for newsletters. CMS is also planning regular calls as a way to share updates and answer provider questions before and after new cards are mailed beginning in April 2018.

A client wrote, “With the passage of the Republican tax bill, we have a few questions.”  Another client asked, “With all the new tax legislation in the works, do you think…?”  A third inquirer astutely mentioned that he was “sure [that I was] getting a lot of questions from clients now.”

Indeed.

And while I can already address many issues, there are at least as many others for which I do not yet have answers.  It’s really too early to formulate tax strategies based on tax reform that has in fact not yet been officially signed into law, let alone analyzed by the practitioner community.  The proverbial ink isn’t even dry and already rumors abound that modifications will be made, that legislative corrections will be introduced to plug newfound loopholes, and that special interests will attempt to force change whether by influence or lawsuit.

Only a week ago, I was bombarded with communications from various professional associations recommending – at first – that taxpayers who would likely forfeit a deduction for state taxes under the proposed reform rules pre-pay their state income tax liability for 2018.  Citing IRS Rev. Rul. 82-208, practitioners were assured that such payments would be "deductible under §164(a)(3) of the Code" as long as the taxpayer made a good faith estimate of the tax that would be owed in the future year.  Days later, advisors began to back-peddle posturing that the deduction might be disallowed since it would result in a distortion of income.  Ultimately, Congress settled the matter by inserting a last-minute clause which definitively outlawed the tempting ploy.

With revisions occurring as fast as shrewd strategists seek to interpret the new rules, it is premature to establish any definitive course of action.  Instead, taxpayers should work with what is known and should do so with only a few days remaining prior to the anticipated effective date beginning with the 2018 tax year.  For the most part, the current tax reform will be prospective rather than retroactive.  A surprising exception appears to be the medical deduction currently limited to only those expenses which exceed 10% of the taxpayer’s Adjusted Gross Income (AGI).  New legislation will reduce the threshold to 7.5%; thereby allowing affected taxpayers to benefit from a greater reduction of taxable income.

The devil is in the details, which is why I am counseling my clients to wait and see how things shake out.  There will be plenty of time in the new year to adapt to the new rules and assimilate them into a workable strategy.  But for those of you who nevertheless want a glimpse of what’s to come, Forbes has published an excellent summary of "What your Itemized Deductions on Schedule A will look like after Tax Reform."

Each year, US employers use the H-1B visa to import foreign labor to fill specialty occupation positions such as architects, engineers, teachers, researchers, medical professionals, computer specialists, accountants, attorneys, economists, librarians and “fashion models of distinguished merit”.  The maximum number of visas is capped at 65,000 per year, of which 6,800 are reserved for Chile and Singapore under certain free trade agreements.  An additional 20,000 visas are available to individuals who have received an advanced degree from an American university.

With limited visas obtainable, employers scramble to be amongst the first to apply; particularly since the US Citizenship and Immigration Services (USCIS) stops accepting applications as soon as the agency thinks it has enough H-1B visa petitions, including the backlogged applications, to meet but not exceed the allowable cap.  The number of applications has risen steadily in recent years (currently 236,000).  Since 2014, the cap has been reached within mere days after the early April start of the application season!

In a cleverly titled article [You Lost That Loving Feelin'. Whoa, That Loving v. IRS Feelin'], the National Association of Enrolled Agents (NAEA) explains that  the fallout from the Loving v. IRS case continues unabated.  When the ruling went against the IRS four years ago, it prevented the tax authority form imposing basic competency and ethical standards upon unenrolled tax preparers.  That ruling come back to bite us in Sexton v. Hawkins when the court found that the IRS Office of Professional Responsibility (OPR) had no jurisdiction over a disbarred attorney preparing tax returns and providing tax planning advice. Amazingly, had the attorney remained in good standing, OPR could have taken some action against the individual. But because he had been culled from the herd, unenrolled and disbarred, OPR had no disciplinary authority over the practitioner.  OPR has no jurisdiction over former Circular 230 practitioners who continue to prepare and advise taxpayers.

About a month ago, my post mentioned the arrest of hundreds of callers in India impersonating IRS agents who extorted millions of dollars from US taxpayers (Another Scam!). And then there was radio silence.  It was like so many hot news stories with attention-grabbing headlines, quotable sound-bites and scandalous photos, which quickly disappear from the front page, migrate to the back page and soon evaporate altogether.  We are always left to wonder what happened after the car chase, after the arrest, after the storybook wedding, after the jackpot was won…

A follow-up report of substance is rare and so I was thrilled when I stumbled across just such a sequel:  Here is the back story of the Indian cop who took down a massive IRS call-center scam.

I was recently invited to celebrate a client’s 100th birthday.  That was an event I did not plan to miss and when I had to beg off of a conflicting engagement, my disappointed friend remarked, “Wow, your clients must love you to stick around that long!”  Sure enough, this was not my first centennial event as I long ago had the honor to commemorate Lucille’s landmark achievement.  Then, Lucille stuck around for another 7 years.

But this was Meryl’s day.  What a treat it was to watch as friends and family fawned over her and as her husband solicitously ensured that her every wish was granted.  It was all the more remarkable given that this couple arrived in separate cars for their first tax appointment, pushed past each other as they entered my office, crammed themselves into opposites ends of my 6-foot couch and announced in vociferous unison – with obviously many years of practice – “We want you to know that we hate each other, but… we want to file jointly.”

Instantly intrigued, I learned that they heated each other almost from the word “go” more than 50 years earlier.  But both loved their quirky canyon home and vowed that they would never move out; so she lived upstairs and he downstairs, studiously avoiding each other except once each year when they came to my office to file their joint tax return.  Why joint?, you ask.  Well, most of the money was Meryl’s and so it was beneficial for her to file jointly rather than separately to get the extra personal exemption and enjoy more favorable rates.  For him it was also cheaper since she paid his taxes!

But sometimes life throws a curve.  Meryl now sadly suffers from dementia and needs 24/7 care.  An old family friend has stepped up to the plate: he arranges for caregivers, pays the bills, and fetches the old folks when they need to venture into town from their precarious perch atop a slide-prone hillside via a rutted dirt road.  Whether he has mediated a truce or Meryl has forgotten her anger or simply because age has mellowed the couple, hate has once again turned to love.

I guess everything can come full circle in 100 years.

I’m pleased to say that my clients are learning to recognize scam phone calls in which a caller purports to be an IRS agent threatening collection action or even jail if the taxpayer does not immediately submit a payment. I still get queries from worried folks but most of these begin by announcing that a scammer had contacted them; my clients no longer fret that they’ll go to jail or that the FBI will show up with guns drawn.  Instead, taxpayers want to know what they can do to help stop these nuisance calls.

But every so often, a client brags that he has engaged in conversation with a scammer, if only to try to elicit information and then report it to the authorities or because he wants the scammer to know that he was “onto him” or because “it’s fun”.  Forbes warns about the dangers of responding to these calls, even if you think you’ve got the upper hand, with so much as a simple “yes” answer to even the most innocuous question like “Can you hear me?”  Your reply may be recorded and used by the scammer to authorize bogus charges on a credit card, phone or utility bill.

The author lists six reasons why you should never engage with scammers:

1. When you engage with a scammer, you’ve confirmed that the scammer has called a working phone number and that you’ll answer the phone.  Identity theft isn’t just about getting money out of you one time or stealing a tax refund check, it’s an entire industry dedicated to putting your identity profile together piece by piece, collecting key bits of information about you which can then be stored, repackaged and sold to the next highest bidding scammer.


2. When you tell scammers to “stop calling my house” or “don’t call me at work” or “this is my cell phone,” you may inadvertently give out more information about your phone number and you’ve just added to the database of information that scammers want to collect about you.


3. When you tell scammers that you know you don’t owe anything, you might indirectly confirm your name and Social Security Number and much, much more.  Simply replying that you are current with your tax obligations may imply to the scammer that you’re a taxpayer, that you have a job and that you have sufficient funds to pay your bills; all valuable information to add to your identity profile.


4. While it may be tempting to threaten the caller with comments like “I’ll get you, I’m a lawyer” or “How dare you, my dad is a cop” or “Just wait until my Army husband, Bill, gets home,” you are merely adding to your profile and even that of other family members.  Scammers routinely match pieces of data to other data and then create a profile that may accurately describe you as Jane Smith, SSN 123-45-6789, a lawyer who lives at 123 Elm Street, Anytown, USA 12345.  Your spouse’s name is Bill; he works for the government; your dad is a cop.  This data, along with information gleaned from other sources including social media, is incredibly valuable to scammers.


5. You might be breaking the law. In most states, and according to federal law, you can record phone calls with the consent of just one party to the call. But in 12 states (California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, Pennsylvania, and Washington), you need the consent of both parties to record a call.


6. You’re never going to make a scammer feel bad. Threats, bad language, telling them off; scammers have likely heard – and said – far worse. You’re not fazing them one bit so don’t waste your time.

In 2016, Indian authorities arrested dozens of managers of 9 call centers from which more than 700 callers made thousands of calls a day impersonating IRS agents to accuse American taxpayers of failing to pay their taxes and threaten them with jail time if they didn’t pay up immediately.  The US Treasury Inspector General for Tax Administration claims it received more than 1.7 million complaints of such calls in the last 3 years; more than 8,800 victims have paid more than $47 million as a result of these scams.  The fallout from the arrest has been a near-immediate and dramatic drop in the number of related complaints.  Head for my Fraud page for additional information, tools and links to report and protect yourself if you think you’ve been victimized, even an ever-expanding list of telephone numbers that scammers have used when demanding call-backs from potential prey.

Unfortunately, when one scam ceases to be lucrative, another arises in its place as opportunistic criminals develop an expanding arsenal of tools designed to defraud taxpayers.  Most recently, the IRS warned practitioners about e-mails that state “"I need a preparer to file my taxes." Always eager to serve new clients, an unsuspecting practitioner may download a potential client's tax information or access a site with the potential client's tax information but will, instead, fall prey to a clever phishing scheme designed to mine critical information.  It’s almost enough to scare careful tax professionals from taking on any new clients!  Alas, my business depends on your loyalty and your referrals whom I will eagerly welcome.  All I ask is that new folks provide me with the source of their referral.

As part of its efforts to crack down on tax fraud, the IRS is issuing IP PIN letters to taxpayers who reported or were identified as victims of identity theft.  Because the IRS will reject your return if it is e-filed with your SSN but an incorrect or missing IP PIN, it is imperative that you provide your tax practitioner with a copy of the letter (if you received one).

Additionally, the IRS has instituted the use of a 16-digit W-2 Verification Code on some (but not yet all) W-2s issued this January.  If your W-2 has this code, it must be entered into the preparation software to ensure proper e-filing of your return; therefore, you must be sure to submit the original W-2 or a clearly legible copy when providing your tax data.

In some instances, taxpayers may receive letters from the tax authorities asking them to verify their identity.  While some taxpayers may worry that these letters are themselves fraudulent, IRS Letter 5071C and FTB Form 4734D are in fact legitimate.  Taxpayers are asked to respond to ensure further processing of their returns and ref und requests.  If you are concerned about these letters, kindly forward a complete copy to me so that I may advise further.

The FreeFile program – a partnership between the IRS and commercial software providers – is now open and available through the IRS website. While higher income earners may only obtain free fillable forms, taxpayers with incomes of $64,000 or less may use free software to prepare federal and even some state returns.

If you’d like in-person assistance from an IRS agent, you may visit a Taxpayer Assistance Center.  In prior years, the IRS served taxpayers on a walk-in basis but now requires that an appointment be scheduled in advance by calling (844) 545-5640.

The IRS anticipates issuing most taxpayer refunds in less than 21 days. However, a new law requires the IRS to hold refunds tied to the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until February 15th so that the tax authority may match information from Forms W-2 and 1099 with information reported on tax returns.  The hold, together with bank processing times and bank holidays, means that taxpayers should not count on seeing those tax refunds until the week of February 27th.

If you are concerned about the status of your refund, head for the Where's My Refund? tool on the IRS website or the IRS2Go app on your smart-phone.  Information is generally available within 24 hours after the IRS has received your e-filed tax return or four weeks after mailing your paper return.

It’s five (5) days before the deadline!  And you’ve just now realized that your taxes are due.  But…

The head of the National Treasury Employees Union reports that taxpayers are standing in line outside some walk-in service centers beginning at 4 AM.  The New York Post reports that one taxpayer visited six public libraries and two IRS offices in Harlem and Lower Manhattan in pursuit of a Form 1040EZ and came up empty.  The Washington Post reports long lines outside the IRS Taxpayer Assistance Center in Dallas, where many taxpayers were turned away because the shelves in the room where preprinted forms are normally stocked were bare; apparently the office printer had been removed because the maintenance contract was deemed too costly.

What to do?!

Call me.  I have a brand new laser printer, extra toner cartridges, a garage stacked high with fresh reams of paper, and software that can generate and print any tax form you might need.

Just days ago, I warned readers to beware of a bogus e-mail scam used to mine taxpayer data from unsuspecting victims who click on a link in response to an e-mailed request to “kindly verify your information from a 1040 tax return that you filed within the last six years.”  Then, yesterday, the tax authority sought to encourage taxpayers to use the government’s Identity Verification Service website in response to an IRS request.

Amazingly, this IRS request is legit.  While it may sound confusingly and suspiciously similar to the scam, the crucial difference is that the IRS makes its request by US mail in correspondence identified in the header as “Letter 5071C”.  I remind you again that the IRS never contacts taxpayers by e-mail or phone – the tax authority communicates only by mail.

Letter 5071C is generated by the IRS after a suspicious tax return has been filed with a real person’s name and/or Social Security Number.  To determine whether a real taxpayer or a scammer has filed the return in question, the IRS will ask a series of questions about previously filed returns that only the real taxpayer can answer.  Once a taxpayer’s identity has been verified and the IRS has confirmed that the real taxpayer filed what had been suspected to be a fraudulent return, the IRS will process and issue the taxpayer’s refund within about six weeks.  If however, the real taxpayer did not submit the suspicious return, the IRS will reject the return and work with the taxpayer to recover his identity; a process that unfortunately may take many months.

Individuals, who are fearful of using the IRS website to confirm their identities online, may also contact the IRS via a toll-free number listed in the letter.  The IRS reminds internet users to always look for a URL web-address ending in “.gov” – never “.com”, “.org” or “.net” when attempting to access an IRS-sponsored site.

If ever you are unsure if you received a real or fake message from the IRS, call me.  I’ll be happy to help you sort things out.

Speaking to a friend with a sympathetic ear, I had just finishing lamenting that I had not left my office since Tuesday.  It’s Thursday now and with only the occasional meal and bathroom break, I’ve been at my desk from early morning to late at night.  It’s tax season; the middle of tax season!  I really shouldn’t expect to walk out the front door into glorious sunshine or head for the beach to enjoy the summer temperatures or even take a late-night stroll under the stars.  I was tempted but for a moment, if only because the night air was almost balmy.  Instead, I emptied my shredder, took out the trash and sat right back down at my desk.

I had just closed one client file and was about to begin another when Outlook chimed, “You’ve got mail” announcing the arrival of yet another blog, e-blast and newsletter keeping me abreast of all things tax.  I scanned the headlines broadcasting Senate hearings on tax fraud, unclaimed tax refunds for non-filers, the tax consequences of naming rights, injured spouse relief, and empowerment zone designation extension.  Trust me; I was not more interested in these topics than you are.  And then, I stumbled upon Tax Official Dies in Office, Co-Workers Don't Notice for Two Days.   That grabbed me!

As it turns out, a tax auditor in Finland died in his office on Tuesday but was not discovered by any one of his 100 co-workers until Thursday!  Everyone just thought that he wanted to work in peace and was silently poring over returns.  I told you, it takes concentration!

It’s not that his office-mates were asocial and uncaring.  Apparently his closest colleagues had been out at meetings.  According to the BBC News, “He was found only when a friend called to have lunch with him.”  I imagine a scene in which the friend pops into the office with a sandwich bag in hand and sits across from the auditor.  The friend doesn’t even notice that the auditor, a quiet sort of fellow, is a bit more reticent than usual.  But when the auditor doesn’t even take a bite out of his favorite hoagie, the friend takes a closer look and finally realizes what should have been obvious days earlier.  The head of personnel in the Helsinki office explains that “everyone at the tax office [i]s feeling dreadful - and [that] procedures would have to be reviewed.”

That gets me to think:  I work alone.  No co-workers, no office-mates, and no clients for days at a time since I limit appointments to only a few days a week.  I sit at my desk, buried under mounds of tax data, crunching numbers.  And there’s nobody who knocks on my door to share a sandwich with me.  I wonder how long it would take to discover that I was no longer just concentrating but that I had passed on.

USA Today reports that “your chances of facing an IRS audit rate dropped to the lowest level in at least a decade in 2014 and are expected to fall further this year.”  In 2013, the IRS audited more than 1.2 million individual taxpayers; this represents a mere 0.86% of returns filed.  With recent declines in IRS funding, it is expected that your chances of being audited will continue to decrease.  An analysis of IRS data confirms that audits fell in every category and across all income levels, even as the number of individual tax returns filed have risen.  The IRS audited less than 1.1 million taxpayers with incomes under $200K in 2014 (versus 1.4 million in 2010) and only 34K individuals with incomes in excess of $1 million (vs. 41K in 2012).  But before you cheer, think about IRS Commissioner John Koskinen’s warning that the audit rate decline could eventually "corrode" Americans' faith in the federal tax system and undermine voluntary payment compliance.  "If you're in Des Moines and you're writing that check, and you feel that maybe your neighbor down the street isn't, or is getting away with something, that's a problem".

The Obama administration has announced today that the federal health insurance exchange has issued incorrect tax information to approximately 800,000 insureds.  Corrected Forms 1095-A are expected to be issued by the first week of March. Taxpayers who received incorrect tax statements should wait to file their 2014 federal income tax returns. Those who have already filed may have to amend their returns.

It would seem that last year’s roll-out fiasco and the legal challenges to the Affordable Care Act (ACA) currently pending before the US Supreme Court were not yet enough to worry taxpayers.   Late last week, California's health exchange was forced to apologize for mailing incorrect tax forms to roughly 100,000 people who purchased private coverage.  Although Covered CA is in the process of sending out revised 1095-A forms, this mistake could delay tax filings or force taxpayers to amend already filed tax returns.

The exchange explained that most of its errors were related to the number of months a household had coverage, precisely the information needed to determine if taxpayers may be subject to the Individual Shared Responsibility Payment that could be as high as 1% of household income for every month in which members of taxpayer’s household did not have qualifying medical coverage during 2014.  NOTE:  The maximum penalty increases to the greater of $325 or 2% of household income in 2015.

Informational reporting documents are required to be issued by ACA marketplace providers (Form 1095-A), insurance companies (Form 1095-B) and employers (Form 1095-C) who have provided healthcare coverage to individuals and their families.  While Forms 1095-A must be issued this year, non-marketplace 1095 forms need not be sent until 2016.  Some insurance companies and employers may issue the forms voluntarily, but taxpayers should not worry if none are received this year.  Instead, they should be on the look-out for the forms and make sure to provide them to their tax practitioners next tax filing season.

Although the IRS has stated that offshore tax evasion remains amongst its highest priority areas for criminal enforcement in 2015, the tax authority has recently announced that it is planning to close various European offices.  Frankfurt, London and Paris will be shuttered in addition to the Beijing office which was already closed earlier this fiscal year.  In an attempt to assuage Americans abroad, the IRS claims that it “remains committed” to servicing the expatriate community andmeeting international obligations.  It will just do so with a significantly reduced footprint!

The IRS has just launched its new online directory of tax professionals, intended to help taxpayers find a qualified return preparer.  The directory is a searchable, sortable listing featuring the name, city, state and zip code of attorneys, CPAs, enrolled agents and those who have completed the requirements for the voluntary IRS Annual Filing Season Program (AFSP). Taxpayers may search the directory using the preferred credentials or qualifications they seek in a preparer, or by a preparer’s location, including professionals who practice abroad. All preparers listed also have valid 2015 Preparer Tax Identification Numbers (PTIN).  Tax return preparers with PTINs who are not attorneys, CPAs, enrolled agents or AFSP participants are not included in the directory, nor are volunteer tax return preparers who offer free services.

And, yes, I’m listed in the directory!

A while back, I got a call from a taxpayer who wanted to know if she had to claim the income she received from selling eggs.  Momentarily surprised that a resident of the urban sprawl that is Los Angeles would find space and zoning approval to raise chickens, I nevertheless promptly launched into my spiel:  All income, “from whatever source derived”, is reportable [IRC §61(a)].  I explained that she would be required to attach Schedule F Profit and Loss from Farming to her individual return and would have to claim the sales proceeds in full but could then deduct allowable expenses such as antibiotics and breeding costs.  Only when the caller stated that she had not taken any medications and that she was not responsible for the expenses associated with the insemination, did I realize that she was talking about selling her eggs!

Now that’s a horse – or shall I say an egg (?) – of a different color!  Just last week, the Tax Court ruled that money received for eggs donated to infertile couples was “compensation” and not “damages” despite the fact that the donor claimed to have suffered a painful procedure that was potentially damaging to her present and future health since she had voluntarily signed a contract to undergo both the surgical process and the attendant pain [Perez v Commissioner, TC # 9103-12, February 14, 2014].  Judge Mark Holmes wrote that any other ruling would yield “no limits on the mischief” others might seek to argue:  A professional boxer could, for example, claim that the payments he received for his latest fight should be excludable from income because they were payments for his cuts, bruises and nose bleeds and a hockey player could argue that his million-dollar salary constituted payment for the chipped tooth he would inevitably suffer at some time during his career.

IRA Rollovers.  The Tax Court (Bobrow v Comm. TCM 2014-21) has ruled that taxpayers are allowed only one rollover per year effective on January 1, 2015.  The rule applies to the aggregate of all IRAs and the year begins on the date of distribution (regardless of calendar or taxable year).  As before, any distributed amounts must be re-deposited into the original or a new account within 60 days.   Trustee-to-trustee transfers are excluded from this limitation.

Inherited IRAs.  The US Supreme Court (Clark v Rameker, June 12, 2014) has held that inherited IRAs are not deemed “retirement funds” and therefore not protected from creditors in bankruptcy proceedings.  Traditional IRAs and other retirement accounts – including 401(k) plans and tax-sheltered annuities – remain protected under the US bankruptcy code (Title 11, US Code §522).

Deferred Compensation.  Contractual rights to receive payments under a §457 deferred compensation plan are similarly protected from creditors under the Bankruptcy Code.  Nevertheless, Darryl Strawberry stood helplessly by as the IRS recently auctioned off the deferred compensation agreement that was part of his 1985-90 contract with the New York Mets.  The IRS had placed a levy against Strawberry’s assets long before the start of his bankruptcy proceedings and therefore held a priority claim resulting from an unpaid tax debt of $542,572.  The proceeds of the auction totaled roughly $1.3 million; an unnamed winning bidder will get a monthly check from the Mets for $8,891.82 over the next 18-plus years.

As per Rev Proc 2014-55, the IRS has eliminated the annual filing requirement of Form 8891 U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans for US citizens and residents who own Canadian Registered Retirement Savings Accounts (RRSP) effective immediately.  In the past, US taxpayers could only benefit from tax deferral by attaching Form 8891 to their return and making an election under the US-Canada tax treaty.  Many taxpayers failed to comply with this and another requirement; namely that they file Form 8891 each year to report contributions made, income earned and distributions received from RRSPs and Registered Retirement Income Funds (RRIFs).  Before today’s change, these omissions would have to be retroactively corrected by making a time-consuming and costly request for a private letter ruling from the IRS.  Now taxpayers may qualify for automatic tax deferral as if they had invested in US-based retirement accounts.  NOTE:  This change affects federal reporting requirements only; not all states confiorm.  California taxpayers, for example, are not eligible for tax deferral and must report all income earned inside the RRSP each year.

According to a taxpayer attitude survey conducted annually by the IRS Oversight Board, 86% of those queried said it is not at all acceptable to cheat on income taxes.  While the public’s attitude has remained relatively unchanged from year to year, it is nevertheless important to note that some respondents believe that it is acceptable to shave “a little here and there” or even “as much as possible”.

While cheating does not always rise to the level of criminal intent, taxpayers should note that the IRS Criminal Investigations (CI) division initiated 5,314 cases and recommended 4,364 cases for prosecution; increases of 12.5 and 18% respectively over the prior year.  The conviction rate for fiscal 2013 was an impressive 93%!

For those of you who have not recently looked at a calendar, I’d like to remind you that April 15th is just around the corner.  Yep!  It’s time to address what you’ve tried so hard to ignore:  TAXES.

Actually, I’m offering you an “out”.  All you have to do is reply by e-mail and ask me to file an extension on your behalf.  Then you get to bury your head in the sand for another few months until the ultimate deadline on October 15th.

Of course, I would be remiss if I did not remind you that an extension merely extends the time for filing but not payment.  As a result, I would like to suggest that we submit a payment with the extension request if you think you might have an outstanding tax liability for 2013.  But even that is easy:  Give me a call or shoot me an e-mail so that I can run the numbers for you.  If we decide that a payment should be made, I’ll ask you to sign Form 8878 and provide me with a copy of a voided check so that I may authorize the IRS to automatically debit your bank account on April 15th for the agreed-upon amount.  If you owe money to the FTB (state), I’ll provide you with a payment voucher and mailing instructions.  It really couldn’t be easier!

So even if you’re hoping that the tax authorities will miraculously disappear, I’m still here.  And I’m waiting to hear from you…

Wouldn’t it be nice if the IRS was just waiting for your call, ready to answer your questions, offer guidance and resolve your issues?  Alas, the National Society of Accountants (NSA) reports that:

• The IRS could only answer 61% of calls from taxpayers; down from 87% ten years earlier.
• Callers who did get through had to wait roughly 18 minutes on hold.
• Taxpayers could choose to visit IRS walk-in sites instead.  Where these sites handled as many as 795,000 questions during the filing season a decade ago, only 110,000 were addressed last year (a drop of 86%).
• Taxpayers who communicated with the IRS by mail did not fare any better; 53% of the 8.4 million letters received from taxpayers were deemed “over age” (more than 45 days old) at year-end.  Ten years ago, only 12% were found to be “over age”.

To make matters worse, the IRS has announced that it will only answer “basic” tax law questions on its telephone lines and in its walk-in sites during the current filing season but will not answer any tax law questions after the filing season!  In contrast, improved customer service continues to be the highest priority for California’s Board of Equalization (BOE), promising that it is just “call away to assist you”.

To  a great extent, IRS’ decline in customer service can be blamed on budget cuts – some, if pundits are to be believed, due to retaliatory measures taken by Congress for the tax authority’s missteps in reviewing the tax exemption requests of certain non-profit groups.  Legislators have carved almost $1 billion out of the IRS’ budget in the past four years, including amounts allocated to training (reduced from $172 million to only $22 million), resulting in a workforce reduction of 8,000 employees.

But there’s always a silver lining.  The National Society of Tax Professionals (NSTP) reports that audits of individual tax returns have reached the lowest rate since 2005; less than 1 % were audited in 2013.  Nevertheless, roughly 11% of taxpayers with incomes exceeding $1 million – versus 3% of those reporting between $200,000 and $1 million were audited and only 0.4% of those reporting incomes under $200,000 who didn’t file a Schedule C, E, F or Schedule 2106 – were audited.

A worried client called me in a panic this morning moments after he hung up the phone with someone who claimed to be from the IRS.  My client described the events as follows:

A message was left on my phone, indicating that I was responsible for a tax deficiency and insisting that I call him back at (415) 251-6327.  I called the number a few times and kept getting voicemail indicating that the mailbox was full.  Finally, I reached a man who answered “IRS”; there was a lot of background noise as though he were in a business office. He said that several attempts had been made to send me a certified letter, but no one was available to sign for it.  He then indicated that since I did not respond, I am now guilty of criminal tax evasion and would be arrested tomorrow unless I made immediate arrangements to pay $6,859.  If I did not pay, additional legal fees of $25,000 would accrue and my bank accounts would be attached, wages garnished and credit ruined.  He encouraged me to seek the services of a tax attorney.  He then indicated that the only acceptable form of payment would be a "payment voucher."

By coincidence, I had received a warning about this latest IRS scam yesterday.  It sounded as though my client’s caller had lifted the script nearly word for word.  As a result, I was able to appease my client that he did not have any outstanding tax liability with the IRS and that he had done just the right thing by contacting me to obtain reassurance and guidance.  The IRS has asked victimized taxpayers to report these types of calls to the Treasury Inspector General for Tax Administration at (800) 366-4484, as well as file a complaint with the Federal Trade Commission.

Sadly, this is not the only scam making the rounds; just the latest.  In October, for example, California’s FTB alerted the public that scammers were contacting elderly people in Beverly Hills to inform them that they had received red light traffic tickets which had been referred to FTB for collections. The scammers instructed victims to load money onto a prepaid debit card and send it to a bogus address. The scammers even had the gall to refer victims to an actual FTB phone number for reference.

The tax authorities ask everyone to remain vigilant, to never give out Social Security, bank or credit card numbers over the telephone or by e-mail.  Neither the IRS nor the FTB have the ability to process funds from third-party issued debit cards, prepaid credit cards, or wire transfers.  In fact, neither the IRS nor the FTB will initiate contact with individuals by phone, e-mail, text messages or social media to request personal or financial information, including PINs, passwords or similar confidential access information.  These sorts of scams should be immediately reported to phishing@irs.gov.

On the other hand, if you are legitimately contacted by one of the tax authorities, you should act promptly but don’t panic!  There may be many reasons why a notice was sent to you; most cover a specific issue about your account or tax return while others may require payment, notify you of changes or ask you to provide more information.  In all cases, each  notice will offer specific instructions on what you need to do to satisfy the inquiry.  The IRS offers additional tips to taxpayers, including:

• If you receive a notice advising you that the IRS has corrected your tax return, you should review the correspondence and compare it with the information on your return.
• If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.
• If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree. Include any information and documents you want the IRS to consider with your response. Mail your reply with the bottom tear-off portion of the IRS letter to the address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
• You should be able to resolve most notices that you receive without calling or visiting an IRS office. If you do have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the notice with you when you call.
• Keep copies of any notices you receive with your other income tax records.

Even easier, contact me!  Make sure to provide me with a copy of the correspondence you received – keep the original in your files – and I’ll do my best to address the issues and offer you peace of mind.  In some circumstances, I will ask you to complete a form granting me the authority to communicate directly with the tax authorities on your behalf.  In other instances, it may be simpler and cheaper to provide you with encouragement to handle the matter on your own.  But it’s always best to check with me first.

Exactly a year ago, I wrote that I was “mesmerized by the stunning tableau” of the Malibu coastline from my hilltop perch at the Pepperdine Law School.  At the time, I was bundled up to ward off the “polar cold” of winter winds buffeting the palms and rustling the leaves of eucalyptus and olive trees.  Today, I am wearing a T-shirt and wishing for even a slight breeze to cool the summer-like temperatures beneath endless azure skies.

Reluctantly asked to leave this extraordinary vista, I ventured indoors, put on my sweater, scarf and woolen coat to protect against an overactive air conditioning system and joined internationally recognized academicians as they wrestled with the future of a tax system that they believe is unsustainable in its current form.

Joseph Bankman (Stanford University) explained that we currently have a two-tier tax structure which separates those who are subject to low rates from those who pay – or will pay – exceptionally high rates and proclaimed the inefficiency, not to mention inherent inequity of this system.  To illustrate his point, he randomly assigned male attendees to the low-rate group and females to the high-rate group.  When the ladies in the lecture hall protested, Bankman reassigned short and tall folks to each category until a gentleman who had obviously played basketball in his younger years groaned at the prospect of becoming subject to a proposed 70% rate while his short (and may I mention fat?) neighbor got off scot- and tax-free.  Bankman accommodated by dividing the group into fat/skinny taxpayers, blue- and brown-eyed, and finally – at the pinnacle of political incorrectness – into black and white folks.  Unfair?  No more so, Bankman claimed, than the categories actually in effect:  Current and future taxpayers.

Edward Kleinbard (University of Southern California) asked, “What did our kids ever do to us to deserve the fiscal mess we will leave them?”  Our current federal debt-to-gross domestic product (GDP) ratio is already at 70% and likely to rise to even higher levels.  Believing that the government’s economic projections are based on unrealistic assumptions (including perpetual full employment, along with no recessions or wars ever again!), Bankman said that “we will not grow ourselves out of this.”  Instead, serious tax reform is required.

He proposed elimination of all Bush tax cuts [made permanent under the American Taxpayer Relief Act of 2012 (ATRA)] as well as the deductions for mortgage interest, charitable contributions and all other Schedule A items.  The resulting tax savings would yield $4.6 trillion [with a “t”!], $664 billion, $278 million and $1.2 trillion, respectively, over the next five years.

James Repetti (Boston College) offered specific suggestions to improve the estate and gift tax regimes by

1. eliminating the minority discounts afforded to the transfer of partnership and LLC interests,
2. ensuring – in contrast to a recent Obama Administration proposal – that the exemptions for estate and gift taxes remain identical to avoid favoring the transfer of assets after death over those transferred during life,
3. decreasing the exemption to $3.5 million (rather than its current $5.34 million) and increasing the highest marginal rate to 45% (in contrast to the 40% currently in effect),
4. eliminating Crummey Powers to ensure that gifts eligible for the annual exclusion are indeed gifts of present interest, and
5. instituting a lifetime cap on Grantor Retained Annuity Trusts (GRATs) used by wealthy individuals to transfer assets with minimal or even zero gift tax consequences.

Bruce Bartlett (former deputy Assistant  Secretary of the Treasury) outlined the history of tax reform from the Kennedy era to the present day and made a compelling case for the need to eliminate tax “loopholes” (known as “expenditures in government lingo).  He argued that sanctioned tax savings – available to the individual taxpayers in the form of Schedule A deductions – are responsible for 70% of the government’s revenue loss.  By the same token, most provisions favoring businesses were successfully eliminated nearly 30 years ago with the passage of the 1986 Tax Reform Act (TRA) and that there’s “nothing left to cut on the corporate side.”  The focus, therefore, must be on individual tax reform.

As though he had been a fly on the wall, absorbing prognostications and recommendations, Rep. Kevin Brady (R-Texas), chairman of the Ways and Means Health subcommittee, recently announced that his “preference is to advance comprehensive tax reform” rather than focus on temporary extensions that do not promote economic growth in the long run.  Nevertheless, while the House has no plans to extend any of the 55 tax provision that expired on December 31st, U.S. Chamber of Commerce President Thomas Donohue does not think that we will see “comprehensive tax in this election period” due to “too many differing interests, combined with an upcoming midterm election.”

Just yesterday, I sat across from an IRS auditor in the Glendale Examination Office, armed with a meticulously organized file of supporting documentation and a stack of receipts to match every entry claimed on the return.  While we prevailed on almost every issue, we were subject to several sizeable haircuts for car and meal expenses.  I thought I would share the take-away lessons with you:

Miles
My client, a travelling salesman, kept a diligent log of business miles noting distance travelled and the purpose of each trip.  To accompany his log, the client provided his day planner verifying his around-town and out-of-region appointments.  While impressed, the auditor never-the-less denied the taxpayer’s claim that he used his car exclusively for business and reduced his previously-claimed deduction by 30% assuming that the taxpayer logically had to drive from home to office [considered a non-deductible commute] and that at least some miles were driven to accomplish personal errands.

RULE:  Whether using the actual expense method or the standard mileage allowance, taxpayers must pro-rate the use of a personal vehicle based on a percentage of substantiated business miles versus total miles driven during the year.  In general, the costs of commuting between home and work are nondeductible personal expenses.  Taxpayers may not convert commuting miles to business miles by making business calls on a cell phone while driving or placing advertising placards on the car.  Taxpayers must substantiate auto deductions with adequate records maintained contemporaneously in an account book, diary, log or trip sheet.

Meals
While on the road, my client often stopped for a quick bite to eat – a burger here, a bagel there – and claimed a deduction for business meals.  While his expenditures were quite reasonable [not one 3-Martini lunch was to found in the batch!], the auditor scrutinized each receipt and discounted most of them.  Meals consumed out of town while at a trade show in far-away places seemed to satisfy the auditor’s standard, but meals consumed in the local area did not survive the examiner’s hatchet.  Although some of the disallowed expenses surely represented the taxpayer’s cost of meeting a customer for lunch or dinner, my client sadly did not document these meetings on his receipts.  A simple notation (“Meeting Bob to negotiate purchase”) might have assured the auditor of the taxpayer’s business purpose but without such a quick scribble, the auditor chose to assume that the taxpayer was deducting the costs of his own daily breakfasts and lunches.

RULE:  The cost of entertaining a client or customer may qualify as an ordinary and necessary business expense if it is directly related to or associated with a trade or business.  The taxpayer must be able to show that his purpose was to actively engage in business during a meal or entertainment activity and that he had more than a general expectation of receiving income or some other specific business benefit in the future.  Meals with business associates and co-workers are generally not deductible.

Various college education tax credits and other benefits are available to eligible students.  While a taxpayer may qualify for more than one benefit, he may claim only one in any particular year.  Benefits are available to all taxpayers, whether they itemize or claim the Standard Deduction. The credits are claimed on Form 8863 Education Credits (American Opportunity and Lifetime Learning Credits) and the tuition and fees deduction is claimed on Form 8917 Tuition and Fees Deduction.

The recently enacted American Taxpayer Relief Act extended the American Opportunity Tax Credit for another five years until the end of 2017. The new law also retroactively extended the tuition and fees deduction, which had expired at the end of 2011, through 2013. The Lifetime Learning Credit did not need to be extended because it was already a permanent part of the tax code.  The American Opportunity Tax Credit will likely yield the greatest tax savings for most eligible students, although the Lifetime Learning Credit may offer better benefits for part-time and graduate students. The tuition and fees deduction may be the right choice for others, especially if they are ineligible for the credits.  All three benefits are available for students enrolled in an eligible college, university or vocational school, including both non-profit and for-profit institutions.  NOTE:  None of the benefits may be claimed by a nonresident alien or married person filing a separate return.

Other education-related tax benefits may be available to certain taxpayers as well, including tax-free scholarship and fellowship grants, student loan interest deduction of up to $2,500/year, tax-free interest on savings bonds used to pay for college, and qualified tuition programs or 529 plans.  Taxpayers with qualifying children who are students under age 24 may be able to claim a dependent exemption as well as the Earned Income Tax Credit.  Additional information is available in the IRS Publication 970 or online at the IRS Tax Benefits for Education Information Center.

Here's a friendly reminder to taxpayers who made ROTH conversions under a special rule in effect only during 2010:  While ROTH conversions are generally taxable in the year that the conversion occurs, the special rule allowed taxpayers to include only one-half of the taxable amount in each of the subsequent years 2011 and 2012 (or elect to include the full amount in 2010).  Taxpayers taking advantage of the rule that granted deferred recognition of income must now, of course, remember to report the remaining taxable amount when preparing their 2012 tax returns.

ROTH conversions in 2010 from Traditional IRAs must be entered on Line 15b of the 2012 Form 1040 or Line 11b of Form 1040A. Conversions from workplace retirement plans, including in-plan rollovers to designated ROTH accounts, must be reported on Line 16b of Form 1040 or Form 1040A.  NOTE:  Taxpayers who made ROTH conversions in 2012 or will make them in future years must file Form 8606 Nondeductible IRAs to report these conversions.  Additionally, taxpayers should be aware that income limits no longer apply to ROTH conversions.

Mortgage insurance premiums are deductible in 2012 and 2013. However, the 2012 Form 1098 Mortgage Interest Statement does not provide a box to report qualified mortgage insurance premiums paid. As a result, taxpayers should be sure not to overlook a deduction for which they may be eligible. Homeowners, who have purchased private mortgage insurance and use Schedule A to itemize deductions, may write off up to 100% of annual mortgage insurance premiums paid. Borrowers with incomes above $100,000 are subject to a phase-out of this deduction. Not all mortgages require homeowners to pay for a bank's mortgage insurance – generally, conventional mortgages for which the loan-to-value ratio is 80% or less, VA mortgages and most jumbo portfolio loans waive the insurance requirements. On the other hand, FHA and USDA mortgages require mortgage insurance.
On an unrelated issue, the Department of Treasury and HUD have developed the Home Affordable Modification Program (HAMP) designed to help financially distressed homeowners lower their monthly mortgage payments. Under this program, mortgage principal may be reduced over a 3-year period by a predetermined amount called the PRA Forbearance Amount (PRAFA) if the borrower can maintain the loan in good standing on the first, second and third annual anniversaries of the program's effective date. During that period, the lender will reduce the unpaid principal balance of the loan by one-third of the initial PRAFA on each anniversary date; thus, if the borrower continues to make timely payments on the loan for 3 years, the entire PRAFA will be forgiven. In some instances, borrowers will receive non-taxable incentive payments from the program administrator to encourage participation. However, incentive payments used to reduce the mortgage balance by more than the PRAFA will be deemed to be income-from-discharge-of-indebtedness, potentially not taxable if the taxpayer is insolvent or the loan qualifies as principal residence indebtedness.

Due to late enactment of the American Taxpayer Relief Act of 2012 (ATRA), the IRS postponed the opening of the filing season so that the tax authority could draft and revise affected forms as well as re-tool computer programs and processing mechanisms. Most taxpayers could begin filing on January 30th, although taxpayers submitting returns containing Form 4562 Depreciation and Amortization were required to wait until this morning at 9 AM Eastern Standard Time (EST). Returns containing Form 8863 Education Credits may still not be filed until Thursday, February 14th.

UPDATE (2/21/13):  While most individual returns can now be filed, the IRS has just announced it expects to only begin accepting returns in early March that contain forms used to claim various credits (e.g. Form 3800 General Business Credit, Form 5695 Residential Energy Credits, Form 5884 Work Opportunity Credit, Form 8396 Mortgage Interest Credit, Form 8908 Energy Efficient Home Credit, Form 8909 Energy Efficient Appliance Credit, Form 8910 Alternative Motor Vehicle Credit, Form 8936 Qualified Plug-in Electric Drive Motor Vehicle Credit, amongst others), as well as Form 8582 Passive Activity Loss Limitations.

UPDATE (3/8/13):  The IRS is now accepting all returns, including those accompanied by Form 5695 used to claim residential energy credits.  The IRS has completed reprogramming and testing its systems to accommodate the changes mandated by ATRA.  Although the tax season is finally in full swing at this late date, Acting IRS Commissioner Steven Miller has no plans to postpone the April 15th filing deadline.  He also does not expect that the recent federal sequester – defined by the Congressional research service as “the permanent cancellation of budgetary resources by a uniform percentage” – will delay the issuance of taxpayer refunds.  However, the impact of the sequester should be felt by summer when employees will likely be furloughed, resulting in extended waits at taxpayer assistance centers and on IRS telephone help lines.  Further, the Treasury has predicted “billions of dollars in lost revenue” since it expects to audit fewer returns.  But don’t get too excited – I would imagine that those returns that are examined will be subject to greater scrutiny and taxpayers will be held to higher standards as the IRS will be asked to do its part to help reduce the deficit.

Governor Jerry Brown's tax increase measure was approved by more than 55% of the state's voters, raising the statewide sales and use tax rate by 0.25% for the next four years (2013 – 2016).  As a result, California has the highest base sales and use tax rate in the nation!

The measure also raised personal income tax rates for high-income earners (those earning over $250,000) – the change affects only 1% of all personal income tax filers, but these filers currently pay about 40% of the state's income tax collections.  The rates were enacted retroactively and will be in effect for seven years (2012 – 2017).  The additional tax dollars raised under Proposition 30 (roughly $6 billion each year) will be allocated to California's schools; 89% to K – 12 schools and 11% to community colleges.

Just yesterday, I attended a tax symposium sponsored by the Pepperdine University School of Law situated in the hills of Malibu with awesome and distracting views of distant horizons and calm seas.  Mesmerized by the stunning tableau, I had to wonder how any meaningful study could be accomplished until I was directed to a comfortable, functional and utterly windowless lecture hall!
And so I spent an enlightening day in the dark, invited to join top tax analysts, policy-makers, nationally known attorneys, published law professors, scholars, and investigative reporters.  We were gathered to discuss tax policy under the second Obama administration in this year (2013) of the 100th anniversary of the birth of the modern American income tax.
Key take-away points included:

• Ostensibly enacted to raise revenue, an effective tax system should provide for general welfare and common defense, as well as establish justice, promote tranquility and preserve liberties.  We need a system of taxation that rewards taxpayers for their efforts and prudence, encouraging accountability, responsibility, productivity and economic growth.  Our current system focused on the taxation of income does not effectively achieve these goals.  Emphasis should, instead, be placed on the taxation of wealth.
  
  
• Alternatively (or in addition to the taxation of wealth), a consumption tax should be instituted. Estimates suggest that a national sales tax of 12.3% could remove as many as 150 million taxpayers from the current income tax rolls.
  
  
• The U.S. has the highest corporate income tax rate in the world.  As a result, businesses seek to shift income abroad but keep deductions here.  In this manner, the current tax system is ineffective and unsustainable.  Instead, the US should adopt a territorial system of taxation that exempts all foreign-sourced income from taxation.  But, to preclude inevitable revenue loss and economic distortion, interest-allocation rules should be enacted to prevent multi-national corporations from shifting interest deductions to high-tax jurisdictions and to ensure that only interest allocated to the U.S. would be deductible against U.S. profits.
  
  
• Earnings totaling $1.7 trillion are sitting untaxed off-shore!  The Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers with specified foreign financial assets that exceed certain thresholds to report these assets to the IRS.   Additionally, FACTA requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers to U.S. tax authorities.  Still in its infancy, the law – due to a lack of enforceable reciprocal agreements – lacks effectiveness.
  
  
• By general consensus, tax analysts believe that these and other proposed reforms will not be instituted in the near future.  Pulitzer Prize winning author David Cay Johnson stated that “Obama got what he wanted” with the recent tax code change.  Johnson suspects that there will be “some tweaking” but no major reform during these next four years.

Under a special provision of the newly enacted tax legislation, IRA owners age 70½ or older have until Thursday, January 31st to make a direct transfer to an eligible charity and still have that transaction count toward 2012. Alternatively, if an IRA owner had already received an IRA distribution during December 2012, he may now contribute some or all of the amounts received to a charity in the usual manner (by check or credit card); even though this transfer is not "direct", it will be deemed to be a qualified charitable distribution (QCD) for 2012.

Transferred amounts are not taxable and are not includible when determining income thresholds for the taxability of Social Security benefits or the deductibility of medical expenses. Of course, no charitable deduction may be claimed for any transferred amount.

The American Taxpayer Relief Act of 2012 reinstated and extended for two years the provision authorizing QCDs which had expired at the end of 2011. This allows IRA owners to exclude up to $100,000 from gross income if the distributed amounts are contributed directly by the IRA trustee to one or more eligible charitable organizations. QCDs are available regardless of whether a taxpayer claims the Standard Deduction or chooses to itemize deductions on Schedule A.

Investment Income Surtax

Beginning in 2013, net investment income in excess of threshold amounts ($200K if single, $250K if married) will be subject to a Medicare tax of 3.8%.  Investment income includes dividends, interest, net capital gains, annuities, royalties and net rents as well as the gain on sale of a principal residence in excess of the §121 exclusion; income sources specifically excluded  are tax-exempt interest, VA benefits, self-employed income, IRA and pension distributions.  NOTE:  Taxpayers may be subject to both earned and investment income surtaxes!

Capital Gains

The 0% and 15% rates on long-term capital gains expire on December 31^st.  It is anybody's guess whether these rates will be extended or comparable rates introduced.  Regardless, net capital gains are considered to be "investment income" subject to the Medicare surtax.

Medical Deduction Threshold

Taxpayers accustomed to claiming an itemized deduction for medical expenses may be surprised to discover that these expenses will have to exceed 10% (rather than 7.5%) of Adjusted Gross Income (AGI) in 2013 and beyond, although seniors – those who reach age 65 before year-end in 2013 through 2016 – may still benefit from the lower threshold.  NOTE:  No tax deduction is allowed for medical marijuana.

Itemized Deduction Phase-out

Although the federal reduction of allowable itemized deductions for high-income earners was eliminated for 2012, rumors persist that it may be reinstated for 2013.

Charitable Contributions

Rules for substantiation of deductions have remained unchanged and are stringently enforced – taxpayers must have a proper letter of acknowledgment issued by the donee organization in hand before the filing deadline if claiming a deduction for a donation in excess of $250.  Detailed lists and even photos of non-cash items contributed should be attached to receipts obtained from Goodwill and similar organizations. As always, contribution of appreciated assets will help taxpayers avoid tax on accumulated gains.

Qualified Charitable Deduction (QCD)

IRA owners over the age of 70½ who have not yet taken their annual distribution must do so before December 31^st and may wish to consider a direct IRA-to-charity transfer.  Transferred amounts are not included in income which helps senior taxpayers minimize the taxability of Social Security benefits as well as lower AGI thresholds for medical and miscellaneous itemized deductions.  NOTE:  Amounts contributed via QCD transfers are not deductible as charitable contributions.

Education Credits & Student Loan Interest

The American Opportunity Tax Credit as well as the deduction for student loan interest is scheduled to expire at year-end.

Estate & Gift Tax

Barring code changes, the unified credit currently set at $5.12 million is scheduled to revert to $1 million in 2013; the maximum tax rate currently set at 35% will rise to 55%.  Without Kevorkian-like measures, death prior to year-end is likely not possible (or desired) but gifting and estate planning is a must!  NOTE:  If some or all of the spousal exclusion remained unused in 2011 or 2012 [not available in 2013 or beyond], a Form 706 must be filed to elect portability.

§179 Deduction for Business Equipment

The allowable threshold of $139K is scheduled to drop to $25K, although various proposals suggest reinstatement at higher levels.  Similarly, bonus depreciation allowances will expire at the end of 2012.

Business Entities:  California requires businesses to pay a minimum franchise fee for each calendar year (in addition to a tax on income above certain thresholds).

Retirement Planning

In hopes of avoiding the AGI limitation on ROTH contributions (not applicable to conversions) some taxpayers have contributed to non-deductible Traditional IRAs and then promptly converted from Traditional to ROTH IRAs.  While it remains unclear whether the IRS will invalidate such step transactions, what is clear is that any amounts withdrawn from Traditional IRAs serve to increase AGI.  The withdrawals in and of themselves are not subject to the Investment Income Surtax but an AGI increase may cause investment income from other sources to fall victim to additional tax.

Alternative Minimum Tax (AMT)

Without a last-minute extension, AMT exemption amounts for 2012 will revert to $33,750 if single ($45,000 if married), subjecting many more middle-class taxpayers to the onerous tax.  Stay tuned for news regarding enactment of temporary relief…

Estimated Tax (ES) Payments

Always important to make all scheduled ES payments, it is equally crucial to track them to ensure proper crediting of your federal and state tax accounts.  In CA this year, it is even more critical to verify amounts already paid with amounts yet due since the recently enacted tax hike was made retroactive to the start of 2012.  As a result, high-income taxpayers may find that they have under-paid estimated tax liabilities originally based on tax rates no longer in effect.  Quarterly payments may be verified by checking your bank records, calling the IRS at (800) 829-1040 or logging on to www.ftb.ca.gov  NOTE:  CA taxpayers with quarterlies >$20K must pay electronically (http://www.ftb.ca.gov/online/webpay/index.asp.