Archives for January 2020

Why Does It Take the IRS So Long to Issue Your Tax Refund?

January 28, 2020 by Frank

Is “Filter X: to Blame?

Background

Perhaps you are one of the many taxpayers who are concerned that your refund took forever to be processed by the IRS. Your tax professional instructed you to check the IRS’s website Check My Refund Status. Frustrated, you called the IRS (1-800-829-1040) and after being placed on hold for an eternity, the person who answered the phone was of little help.

If your call to the IRS was answered, you were one of the “lucky” taxpayers. During fiscal year 2019, the IRS received approximately 100 million telephone calls, but the agency’s customer service representatives answered only 29 percent of the calls.

The Reason for the Delay

Per the IRS’s Taxpayer Advocate Office (TAO) 2019 annual report to Congress, one of the most serious problems with the IRS is its processing of refunds.

The Internal Revenue Service’s new anti-fraud filters are unnecessarily flagging millions of tax returns and delaying legitimate tax refunds for weeks or months, according to a new report from the TAO.

The report noted that during the 2019 filing season, the IRS used a new refund fraud filter known as “Filter X” that ultimately flagged and stopped the processing of nearly 1.1 million tax returns. About a quarter of those refund delays took more than 40 days to process; about one-half took more than four weeks to be processed, and a review of 309 cases by the TAO showed that 236 taxpayers had to wait an average of 141 days. Moreover, the false positive rate for other non-identity theft refund fraud filters was a whopping 71 percent. That means 71 out of every 100 tax refunds stopped by the IRS’s fraud filters were ultimately determined to be legitimate.

Tax Planning Tip

Delays in issuing refunds often cause financial hardship to taxpayers who depend upon those refunds. While it is nice to receive a refund rather than owe the IRS come April 15^th, when you significantly overpay your taxes you are giving the IRS an interest-free loan.

The objective should be to file your tax return with an insignificant refund due you or a small balance owed to the IRS. This “break-even” can be achieved if a taxpayer works closely with their tax professional throughout the tax year to ensure that W-2 wage withholdings or estimated tax payments closely approximate the projected final taxes due.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Mileage Deduction Lost Despite Taxpayer Maintaining Mileage Log

January 21, 2020 by Frank

“Tax Specialist” Fails to Sustain Schedule C Deductions When Audited by the IRS

Background

A married couple (H. Samadi, TC Summary Opinion 2018-27) included a Schedule C on their personal income tax return which reflected the husband’s translation services, real estate activity, and tax preparation services. The Schedule C reflected a loss which was used to offset other sources of income.

The husband self-prepared their joint income tax returns identifying his occupation as a “tax specialist” and his wife as a register nurse.

The husband was part of a group of five friends and family that intended to buy homes, renovate them, and sell them for a profit (house flipping). He was a licensed real estate agent who had access to properties that were for sale. The investment group had decided that Samadi would manage the properties purchased.

Samadi prepared mileage logs to document the mileage he drove to see the potential investment properties. He relied on IRS Pub. 463, Travel, Entertainment, Gift, and Car Expenses, in preparing these mileage logs. He maintained a daily spreadsheet on his computer for each year’s mileage log. He input the starting and ending addresses, beginning and ending mileage, miles traveled, and business purpose of each trip. According to the mileage logs, he drove 24,882 miles in 2013 and 25,220 miles in 2014.

IRS Findings

The mileage book reflected that the taxpayer made two round-trips on Saturdays. He drove almost 190 miles to pick up his “client”, drove back the same distance to show a potential investment property to his “client” (near his personal residence), drove 190 miles to return his “client” back to their home, and then returned to his residence. His “client” was his brother-in-law or another member of the investment group. The group did not buy any investment properties in the years audited. During these tax years, Samadi did not earn any real estate commissions.

Business deductions are allowed for ordinary and necessary expenses in the course of a trade or business.

The IRS denied the real estate deductions on Schedule C because the taxpayer could not provide any evidence to suggest that he was continuously and regularly buying and selling real estate as a real estate agent to clients. At best, the IRS found that the husband’s activities were in the exploratory or formative stages of forming a business of flipping houses and that the business had yet to commence.

In addition to assessing taxes for the denied tax deductions, the IRS assessed accuracy-related penalties because the Samadi’s had not acted reasonably and in good faith with respect to the substantial understatement of income tax. The taxpayers were unable to explain which IRS publications or other authority they consulted to determine whether the husband was carrying on a trade or business. Further, the husband held himself out to be a tax specialist and prepared tax returns as a business. Therefore, he should have been able to consult the tax law or regulations to determine whether he was carrying on a trade or business.

Tax Law Overview

Generally, the IRS’s determination of a deficiency is presumed correct, and a taxpayer bears the burden of proving it incorrect. In addition, deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deduction claimed.

If the taxpayer produces credible evidence with respect to any relevant factual issue and meets other requirements, the burden of proof may shift to the IRS.

IRC Sec. 162(a) provides that “there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. The courts have found that “to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and . . . the taxpayer’s primary purpose for engaging in the activity must be for income or profit.”

Furthermore, Sec. 162 does not permit current deductions for startup or pre-opening expenses incurred by a taxpayer before beginning business operations. {See IRC Sec. 195(a) for possible relief}

Court’s Findings

The Tax Court decided in favor of the IRS that the taxpayer was not engaged in a trade or business related to his real estate activities. It found that the taxpayer had not provided any credible evidence that he was engaged in a trade or business and thus the burden of proof had not been shifted to the IRS. The court state that looking at investment properties did not rise to the level of being engaged in a trade or business.

Since the taxpayer was found not have been engaged in a trade or business, the veracity of the mileage logbook was not determined as the taxpayer was not allowed any Sch. C deductions related to his real estate activities.

The court satisfied itself that the IRS’s 20% accuracy-related penalty attributable to a substantial understatement of income or to negligence or disregard of rules and regulations had been properly approved by the IRS. The burden is then on the taxpayer to come forward with persuasive evidence to show he acted with reasonable cause and in good faith with respect to the underpayment of tax.

The court took note of the fact that the taxpayer held himself out as a “tax specialist” and was unable to provide any evidence that he researched the tax law or IRS regulations regarding what constitutes a trade or business. In fact, the taxpayer testified that he did not see a purpose for referring to any regulations in preparing their joint income tax return.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Annuity Annuitizations and RMDs

January 14, 2020 by Frank

Many Say that Annuities Are Complex – Add Required Minimum Distributions (RMDs) to an Annuity and Confusion Reigns

RMD Rules – Simplified Version

Taxpayers who turn age 70 ½ on or after January 1, 2020 are required to begin taking RMDs from their Individual Retirement Accounts (IRAs) in the year that they turn age 72. Unfortunately for taxpayers who turned age 70 ½ before January 1, 2020, they will continue to be bound by the old IRA RMD rules – RMDs required to begin at age 70 ½.

Immediate Annuity RMD Rules for Traditional IRAs

If a taxpayer purchases an immediate annuity, he has a contract in which he contributed a lump sum of money in return for a stream of fixed annuity payments that begin immediately. In other words, the date of the single contribution is when the contract is annuitized, or shortly thereafter. As such, the contract never has a cash value, and therefore has no basis for determining an RMD. Thus, an immediate annuity does not figure in the calculation of the taxpayer’s RMDs and has no RMD requirement of its own.

RMD Rules if a Taxpayer Annuitizes a Traditional IRA

If a taxpayer has only one IRA account that is annuitized, the answer is simple. The annuitized amount that comes out of the IRA each year will satisfy your RMD obligation.

What happens if you are required to take RMDs and you have two IRA accounts? Let’s assume IRA “A” has a $100,000 value and IRA “B has a $90,000 value as of December 31 of the preceding calendar year? Let’s assume your combined RMD distributions would equal $8,000. If your IRAs weren’t annuitized, you’d be able to take the full $8,000 total from either of your IRAs separately or, between the two IRA in any amounts you prefer, as long as the total distributions were at least $8,000.

What if, however, you happen to annuitize IRA “A” and start to receive $9,000 a year? Will the $9,000 you receive from IRA “A” annuity satisfy your total RMD of $8,000? Good question.

Ed Slott, a well-known IRA expert, says “there is actually some debate over whether or not a distribution from an annuitized annuity can be used to satisfy RMDs for other IRAs in the year of annuitization. On one hand, once annuitized, IRA annuities generally follow defined benefit plan rules instead of the defined contribution rules. That would lead you to believe the answer is no. On the other hand, RMDs are based off of prior year-end balances. Since the annuitized annuity did have a prior year-end balance and wasn’t annuitized at the time, that might lead you to believe yes. In light of the grayness in this area, the conservative approach is to take the $8,000 annuity distribution from IRA “A” and an additional distribution from IRA “B” based on its prior year-end balance.

“After the year of annuitization, things begin to become a little clearer. Most experts agree that there is no way to use the income from the annuitized annuity in IRA “A” to offset any of the RMD that must be taken from IRA “B.” In this situation, your annuity payout will only satisfy the RMD for IRA “A.” To put it another way, under the defined benefit plan rules that the annuitized IRA now follows, the annuity payment is the RMD for that IRA account. Your RMD for IRA B, with a total value of $90,000, would be just under $4,000 next year.” The $1,000 “excess” from IRA “A” could not be used to offset part of IRA “B’s” RMD, and hence, $4,000 would need to come out of IRA “B” to satisfy the RMD requirements.

RMD Rules if a Taxpayer Takes Withdrawals from a Traditional IRA

If we assume the same facts as above, but instead of annuitizing IRA “A”, the taxpayer makes an election to take lifetime withdrawals from IRA “A” of $11,000 per year. The $11,000 withdrawal satisfies IRA “A” RMD requirement of $8,000. The question is can the excess $3,000 be used to satisfy $3,000 of the $4,000 RMD of IRA “B”?

We believe the answer is “yes”. When a policy is annuitized, it is an amount paid over a period certain. Common periods for a period certain annuity are 10, 15 or 20 years. There are no benefits paid after that time period. On the other hand, when a lifetime withdrawal benefit is taken, the period of time for those withdrawals is unknown since it is paid over one’s lifetime. Upon death, those payments cease.

Tax Planning Tip #1:

While your investment advisor may calculate your RMD, it is ultimately your responsibility to ensure that the proper amount is annually withdrawn from your IRA account. You should consider asking your tax professional to check the RMD computation.

Tax Planning Tip #2:

If you have an annuity IRA, check and double-check with the insurance carrier, your investment advisor and your tax professional regarding the RMD rules.

Tax Planning Tip #3:

Talk to your investment advisor and tax professional about creating a Qualified Longevity Annuity Contract (QLAC) which we wrote about in our July 22, 2014 blog. A QLAC allows you to use a portion of your savings to purchase a deferred annuity to create an income stream of regular income for the rest of your life. It also allows you to delay your RMDs by 15 years until age 85.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

“Novel” Argument that IRS Collections Violated Consumer Fraud Law

January 8, 2020 by Frank

Taxpayer Argues that IRS Is Subject to Fair Debt Collection Practices Act (FDCPA)

Background

Edward T. Kennedy (2018-1 U.S.T.C. ¶50,290) claimed that the IRS’s conduct when it assessed him for unpaid taxes violated federal consumer protection law and requested that the IRS accept his request for audit reconsideration. In addition to suing the IRS, Kennedy suit included the Commissioner of the Department of Treasury, “John Doe” an unnamed employee of the IRS, Equifax, and the CEO of Equifax.

Kennedy also sought damages for the intentional infliction of emotional distress and loss of reputation with respect to the collection of his federal income tax liability. The individual claimed that he suffered intentional emotional distress because he received a letter from the IRS informing him that he owed $75,957.35 in unpaid taxes and that the IRS threatened to levy against his social security benefits to collect the unpaid taxes.

Court Findings

The court found that the FDCPA expressly excludes and does not apply to an IRS officer performing his official duties. Moreover, the federal tax obligations were not considered “debts” under FDCPA because they do not arise out of a consumer transaction. Additionally, the taxpayer’s argument that the IRS was not licensed to collect debts in the state of Pennsylvania was considered frivolous.

The court dismissed the claims against Equifax and its CEO because the claims against those parties had been dismissed in another lawsuit that Kennedy had previously filed. Thus, the court had only to be concerned about the claims against the IRS and the unnamed IRS employee.

When a taxpayer sues an IRS employee acting in his official capacity, it has been long established that he is suing the U.S. Government. The individual clearly sought damages for the IRS’s collection activities and while the Federal Tort Claims Act (FATCA) waives immunity for many governmental acts, it expressly maintains immunity for cases arising from the assessment or collection of taxes. The court found that the government had not waived its immunity from tort suits and that no taxpayer may sue the U.S. with respect to the assessment or collection of any tax. Thus, that part of Kennedy’s suit was dismissed.

With respect to the emotional distress argument, the court dismissed it because as discussed above, the government did not waive its immunity from suit.

The court agreed with the IRS that it did not have to accept the taxpayer’s request for audit reconsideration because the taxpayer failed to provide evidence of an intervening change in the law, new evidence or a clear error of law.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.