Archives for January 2022

IRS Is In Crisis Mode

January 25, 2022 by Frank

This comes as no surprise to taxpayers and tax professionals. Now the IRS’s Internal Watchdog has issued a warning. It likely is going to get worse!

Who Is the IRS Watchdog?

The Taxpayer Advocate Service (TAS) serves as the watchdog over the IRS. It is also known as the Taxpayer Advocate Office (TAO). It is an independent organization within the IRS and it serves as your voice at the IRS. TAS helps those taxpayers whose problems cannot be resolved at the normal administrative channels at the IRS, and those problems are causing a financial difficulty for the taxpayer.

Note: The problems are so bad at the IRS that TAS announced on November 10 that it stopped accepting new cases.

What Is the Crisis?

Per Erin Collins, head of the National Office of the TAS, in her annual report to Congress, stated that the IRS is in “crisis”. Keep in mind that IRS announced in its News Release IR-2022-08 that it will begin began accepting e-filed returns on January 24. While not every one of the close to 143 million U.S. taxpayers will be filing their returns in January or February, millions will file. So what is the crisis?

Ms. Collins reported to Congress that the IRS, due to staffing shortages and backlogs, has a crisis because it is still processing tax year 2020 returns. We are not talking about a few thousand unprocessed returns, but rather at least 11.6 million returns which is far in excess of its annual average of 1 million unprocessed returns going into the next filing season.

IRS Commissioner Charles Rettig acknowledged that the IRS is still processing some 2020 returns. He stated that all paper and e-filed returns with refunds owed that were received before April 2021 have been processed if they did not contain any errors or require further review; however, as of Dec. 23, 2021, there were still some 6 million unprocessed individual returns. And the Service has struggled to answer a record number of taxpayer and preparer phone calls, Rettig said.

However in our opinion, the crisis far extends beyond unprocessed tax returns. Other unacceptable conditions at the IRS include:

Mail sent to the IRS lying unopened for months – mail that includes tax returns, checks, and responses to IRS notices;
Taxpayer records not being maintained to reflect current transactions and correspondence;
90-day letters demanding payment from taxpayers even though the IRS had cashed the checks;
Automated compliance action letters being erroneously sent to taxpayers in total disregard of the mess at the IRS. These incorrect tax notices and letters generate written responses and phone calls from taxpayers explaining that their returns were filed properly and payments were made;
The time that it will take the IRS to respond to these millions of letters from taxpayers notifying the IRS that its records are not correct will undoubtedly seriously increase the announced IRS paper backlog; and
The IRS finished the 2021 filing season with a backlog of 35.3 million returns that required manual processing.

Salient Observations Made by Erin Collins – Director TAS

The agency is also dealing with a surge in phone calls. In FY 2021, the IRS received about 282 million telephone calls. Customer service representatives only answered about 32 million, or 11 percent, of those calls.

During last year’s filing season (Jan. 1 through May 17), just 7% of taxpayers reached an agent. The IRS received more than 145 million calls from Jan. 1 through May 17, or more than four times its normal call volume.

The agency’s workforce has shrunk 17% since 2010, while the number of individual returns increased 19% in that same time frame. There simply are not enough agents to answer the phones, process tax returns, and resolve issues as per taxpayer correspondence.

During 2021, tens of millions of taxpayers were forced to wait extraordinarily long periods of time for the IRS to process their tax returns, issue their refunds, and address their correspondence.

In addition to the normal annual tax filings, the IRS has a backlog of another 2.3 million of unprocessed amended personal income tax returns (Form 1040X) primarily related to last minute tax law changes and incentive payments.

In addition to the backlog of individual income tax returns, the IRS reported significant delays in processing Forms 941, Employer’s Quarterly Federal Tax Return, and Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. As of December 15, the IRS reported it had 2.8 million unprocessed Forms 941 and about 427,000 Forms 941-X in its backlog.

Paper is the IRS’ kryptonite, and the agency is still buried in it.

The coronavirus pandemic “did not create new challenges for the IRS as much as it highlighted longstanding challenges and areas that require attention”.

Commissioner Rettig’s Response

“In many areas, we are unable to deliver the amount of service and enforcement that our taxpayers and tax system deserves and needs. This is frustrating for taxpayers, for IRS employees, and for me. IRS employees want to do more, and we will continue in 2022 to do everything possible with the resources available to us.”

You be the judge if his response was satisfactory.

Tax Tip #1

File early, if for no other reason, to reduce the likelihood that you will be a victim of ID theft. In addition, filing early will hopefully get in front of the IRS processing line for returns received by the IRS.

Tax Tip #2

While many taxpayers have taken advantage of e-filing, many of those taxpayers continue to remit any balance due by paper check. If the IRS loses your check or is slow in processing it, your account may show a balance due and you will not have proof of payment. The IRS offers many options to remit payment electronically. Taking advantage of these electronic payment options, will provide you with an immediate written confirmation from the IRS that it received your payment stating the amount of the payment and the date processed.

Tax Tip #3

Try and be patient! In addition to the normal annual tax filings, last year there were millions of amended tax returns filed which the IRS is reviewing and which will further delay processing of 2021 tax returns due to the manpower shortage.

Tax Tip #4

Document, document and document and be diligent. Far too many taxpayers claimed that they had not received their stimulus payment only to discover that they had. Paradigm shift needed. Whereas many taxpayers have become accustomed to the IRS sending payment by check, now the IRS is also making direct deposits. Before stating that your refund or stimulus check was not received, first review your bank statements for deposits from the U.S. Treasury.

Tax Tip #5

Congress helped create this crisis at the IRS by not adequately funding it, limiting the IRS’s ability to hire experienced tax professionals, enacting numerous last minute tax laws that strained IRS resources, and having the IRS be responsible for processing unemployment benefits and child care advance credits without any additional resources.

If you have a tax problem, the IRS is not answering your call or dropping your call because you have been on hold too long, your correspondence to the IRS goes unanswered and threatening notices continue to be received despite your best efforts, and the TAS is not taking on new cases, CALL YOUR LOCAL CONGRESSIONAL REPRESENTATIVE(S) and ask to speak with the constituents services manager (or casework manager).

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.

Retirement Planning – Health Savings Account (HSA)

January 18, 2022 by Frank

Kiplinger published on January 5 an article by Kevin Webb, CFP, about using HSA accounts to fund retirement.

Déjà vu: Our July 5, 2016 Blog Discussed this Strategy.

When financial advisors write about retirement planning, their focus is usually on 401(k) & 403(b) plans, Individual Retirement Accounts (IRAs) – traditional and Roth, and perhaps non-qualified plans. How often are the overlooked HSA plans mentioned?

What is an HSA?

An HSA is a tax-advantaged way to save money to pay for qualified medical expenses. Generally, most HSA participants contribute the amount of anticipated health care costs they will incur for the year, and then withdraw funds from their HSA account to pay for those medical costs. At the end of the calendar year, if all goes as planned, the HSA account balance is zero as all the funds contributed to it (to lower taxable income) are withdrawn to pay medical expenses.

It is available for people who are covered by a high-deductible health insurance plan. While some high-income earners may find themselves ineligible for a Roth contribution or IRA tax deduction as their earnings exceed stated income ceiling thresholds, HSAs have no income limits on who can contribute.

What is a High Deductible Health Plan (HDHP)?

A HDHP has a higher deductible than a traditional insurance plan. The monthly premium is usually lower, but you pay more health care costs yourself (your deductible) before the insurance company starts to pay its share.

For 2022, the IRS defines a HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, co-payments, and coinsurance) can’t be more than $7,050 for an individual or $14,100 for a family. (This limit doesn’t apply to out-of-network services.)

Generally speaking, a HDHP best fits those with minimal health care needs. Whereas this group of individuals often dismiss health care coverage and opt to pay-as-they-go since they are healthy, it may be in their best financial interest to go with a HDHP and create an HSA account. As we generally incur more health issues as we age, it is all the more important to take full advantage of an HSA while you can.

HSA owners who wish to maximize the HSA benefits should be able to comfortably pay their medical expenses using after-tax dollars rather than reduce the HSA account balance to pay for those medical bills. The HSA retirement benefits are maximized by investing the contributions for growth and not withdrawing them right away for current medical costs. When they are withdrawn immediately, the account loses one of its three tax benefits (see below), as it is being denied the opportunity for tax-deferred growth.

The Triple Tax Benefits of an HSA

HSAs offer:

Unlike a flexible spending account (FSA) where the contributed funds have to be spent or are lost, HSAs allow account balances to roll over into future years. This makes HSAs an ideal long-term investment account (and medical retirement plan). HSAs provide:

Tax deductions on contributions;

2. Tax-deferred growth; and

3. Allows Tax-free withdrawals if used for qualified medical costs.

Paradigm Shift Needed

Many taxpayers contribute the maximum they can to their 401(k) plan, and with any remaining money, they contribute that amount to an HSA. Perhaps a paradigm shift is needed. Contribute the maximum amount allowed by the IRS to the HSA and contribute the remaining funds to a 401(k) plan. While both 401(k) and HSA plans allow pre-tax contributions, the monies withdrawn from a 401(k) plan are subject to income taxes whereas HSA plans, if properly done, can have those contributions and earnings come out tax-free. If the HSA withdrawals are used to pay for medical expenses, they are free of income tax.

Another benefit of HSA plans are that they do not have any limitations on when a health care expense is incurred and when it is reimbursed. If you maintain those health care expenses that you incurred out-of-pocket while the HSA plan was in effect, you can reimburse yourself for those medical expenses many years later free of income tax. That’s right – tax-free income received in your retirement years. IRS Notice 2004-50 Q&A 39 discusses the rules that govern these distributions.

Unlike qualified retirement plans that dictate when you must begin to take distributions from those plans, there is no such requirement with an HSA plan. You decide when you wish to make those tax-free withdrawals.

Are Death and Taxes Certain?

What happens upon your death? Well, upon the death of the second spouse, the HSA becomes taxable compensation to the beneficiary who receives the HSA.

That is the case unless you make a gift of your HSA plan to a beneficiary who will then receive the same benefits that you enjoyed. While death can not be avoided, sometimes taxes can be avoided.

Tax Tip #1

We suggest you search HSA in the search box of our blog to read prior posts on HSAs and FSAs.

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.

Taxpayer Options When You Owe the IRS & Receive Notice of Intent to Levy

January 12, 2022 by Frank

Once the IRS makes an assessment against a taxpayer, it is required to send a series of notices to the taxpayer before it takes enforced collection action.

Substitute for Return

When a taxpayer fails to file a tax return, the IRS will sometimes file the return for the taxpayer. The IRS refers to this as a “substitute for return”. The IRS uses third party reporting information (W-2, Forms 1099s, etc.) provided to it to compute the taxpayer’s taxes due. When the IRS computes the taxes due, it does so using the filing status most advantageous to the IRS, ignores any tax credits the taxpayer may be eligible to claim, and when computing gains on sales, the tax is based on the gross proceeds and the IRS ignores the taxpayer’s cost. The IRS uses SFRs to motivate the taxpayer to file their own return. The IRS thinking is that when the taxpayer sees the taxes due computed by the SFR returns, he or she will file a return simply to reduce their tax liability.

Assessment of Taxes

After the taxpayer files their return or an SFR return is prepared for them by the IRS, the IRS assesses the tax due it. Once taxes are assessed, the series of IRS collection notices begin.

Notice of Intent to Levy

When a taxpayer has failed to respond to the series of IRS notices, the IRS’s “final” notice will state its intent to levy against the taxpayer. “Levy” is just another word for “seize”. The two most common types of levies are garnishment of bank accounts and wages. A levy is used to collect the taxes due the IRS.

A bank levy is that the IRS will seize whatever funds are in the taxpayer’s bank account as of the date of the levy notice. It’s a one and done process, unless the IRS sends the bank another levy notice.

A bank levy differs from a wage garnishment. When a taxpayer’s wages are garnished by the IRS, the wage garnishment continues indefinitely until the IRS debt is satisfied.

Action Steps to be Taken by Taxpayer Upon Receipt of Intent to Levy Notice

Unfortunately, far too many taxpayers do not respond to IRS notices. They often do not open IRS notices sent to them realizing it they often are not good news. Once their bank accounts are seized or wages are garnished, they get religion and want to resolve their IRS tax debt. Unfortunately, ignoring IRS notices has simply added to the taxes, interest and penalties they owe and certain appeal rights may have been lost.

IRS notices should never be ignored. Doing so only exacerbates the problem. The taxpayer’s response, along with a copy of the notice, should be sent by certified mail using the envelope provided by the IRS. The purpose in sending a response is to demonstrate that the taxpayer is concerned about their taxes and is not ignoring them. Depending upon various factors, a taxpayer response may place a hold on IRS collections.

Possible IRS Resolution Alternatives

Installment Agreement – The IRS gives the taxpayer the right to pay taxes in installments.
Audit Reconsideration – In some limited cases, the IRS permits audits of returns after collection has begun.
Hardship on Taxpayer – A hardship exists if levy action prevents the taxpayer from meeting necessary living expenses. The IRS should not undertake collection action if a hardship is present.
Currently not Collectible – If a taxpayer cannot pay taxes owed without placing them in a financial hardship (unable to pay necessary living expenses), then the IRS will defer collection by classifying the case as “currently not collectible (CNC)”. If this is done, collection is deferred until sometime in the future (usually two years).
Bankruptcy – Bankruptcy will discharge taxes in some cases. We recommend that an experienced bankruptcy attorney work with an experienced tax resolution specialist.
Offers in Compromise – The Internal Revenue Code permits the IRS to accept an amount less than the full amount if there is doubt as to collectibility, and/or doubt as to liability. While OICs are publicized by many firms on cable TV and the Internet, be aware that of the 7.4 million tax resolution cases settled by the IRS according to its 2020 news report, 14,288 taxpayers got accepted into the OIC program. That is less than 1/4 of 1% of all cases settled by the IRS. An OIC should only be submitted if there is a strong possibility that it will be accepted due to (1) the fact that OIC submissions toll the statute of limitations, giving the IRS additional time to collect the taxes due it; and (2) require a significant time and financial investment by the taxpayer.
Abatement of Penalties – In almost all cases, an abatement of penalties should be sought. It is easy to request that penalties be abated, and the abatement of penalties could substantially reduce the amount of a taxpayer’s total tax liability.
Taxpayer Advocate – The Advocate will help with almost everything except negotiating a payout with a Revenue Officer.
Possibility of Amended Returns – Original returns should be reviewed to determine if amended returns will reduce tax liability. If so, they often should be prepared and filed.
Has the IRS Made a Valid Assessment? Check the statute of limitations. Generally, an assessment must be made within three years from the date the return was filed, plus any extension executed by the taxpayer. In addition, the IRS has ten years after the taxes are assessed to collect the taxes. If the IRS has not followed the proper procedure, the assessment may not be valid, and the taxes cannot be collected.
Form 911 – The Taxpayer’s Emergency Number. This form requests that a Taxpayer Assistance Order be issued to stop certain action being taken by the IRS. The taxpayer must be “suffering or about to suffer a significant hardship as a result of the manner in which the internal revenue laws are being administered.”

Tax Tip #1

While the use of the above alternatives was until a year ago fairly easy to avail oneself of, due to the pandemic, IRS budget cuts, early retirements, and IRS inefficiencies, many of the above are very difficult to implement due to the inability to reach someone at the IRS.

Tax Tip #2

At all levels of the IRS, the taxpayer has certain rights, and the taxpayer should take full advantage of these rights. If a taxpayer owes taxes, it is usually in the taxpayer’s best interest to seek professional advice in helping to resolve the matter. Carefully choose your tax professional . . . not all tax professionals, attorneys, CPAs, and enrolled agents have the experience and training in resolving IRS tax problems.

Tax Tip #3

All communications with the IRS need to be in writing and you need to be able to prove the mailing of the notice, return, payment, etc. to the IRS. If you are speaking with an IRS agent on the phone, be sure to document the name and proper spelling of the agent’s surname with whom you are speaking and the agent’s IRS identification number, the date of the call, and the issues and agreements reached during that call.

Tax Tip #4

If a person instructs you that you qualify for an OIC and a Form 433-A(OIC) has not been prepared and reviewed by you and the tax representative, run, don’t walk away from that representative. There is no way that one can determine if a person qualifies for an OIC without doing a financial information statement (FIS). Analyzing a FIS is also very helpful in determining if the taxpayer qualifies for an installment agreement, what type of an installment agreement or CNC status.

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.

Mailing Woes – Burden of Proof is on Taxpayer

January 5, 2022 by Frank

Failure to follow IRS mailing rules causes taxpayer to lose refund claim.

Facts: Crispino vs. US

The Crispino v US federal district court case in New Jersey addresses some very important administrative law principles regarding the mailing of tax returns to the IRS. The IRS assessed the taxpayers taxpayers $134,000 finding that they did not properly report an IRA rollover as a taxable event. The taxpayers claim they filed a claim for refund before the statute of limitations expired.

Problem #1: The IRS collected the tax via two levies against the taxpayer. Money was now in the hands of the IRS.

Problem #2: The IRS says it never received the refund claim and thus denied issuing the refund. The taxpayers then refile their refund claim.

Problem #3: The IRS notifies the Crispinos that the second filing of their refund claim was made after the statutory period to claim the refund had expired and again denied their claim for refund.

How Did the Taxpayer Prove Their Refund Claim Was Timely Filed?

Their tax representative asserted in a deposition that that he mailed a refund claim using a postage label printed from a Stamps.com postage meter on April 15, 2015. Having heard nothing about the claim, the tax rep also testified that at some point in 2015 he checked on the claim’s status and learned that the IRS did not have a record of receiving it. In November of 2015, the tax rep mailed a copy of the (supposedly) earlier filed claim. On December 31, 2015, IRS mailed a notice of disallowance on the basis that the claim was untimely because it was filed beyond two years of the tax’s payment.

IRS Regulations Stipulate How to Prove Date of Mailing

IRS regulations (regs) provide that Section 7502 is the only way to prove that documents that IRS never receives were actually mailed.

As Leslie Book, a professor of law at Villanova University of Law discusses in his Procedurally Taxing Blog post, this is important because a statutory tax-filing requirement generally can be satisfied only by actual, physical delivery. Section 7502 provides an exception to the physical delivery rule if a document is postmarked before the deadline and received after the deadline. In addition, sending the document via registered or certified mail, or with an authorized private delivery service, establishes that the document was in fact received even if the document never was received or the IRS has no record of receiving it.

The issue as to whether a taxpayer can introduce extrinsic evidence to prove mailing in the absence of using a 7502-proscribed method or whether Section 7502 was the exclusive way to prove mailing has been contested over the years. Some circuits said yes; others said no. The Third Circuit, where an appeal in this NJ case would lie, had come down in favor of allowing a taxpayer to prove mailing beyond what Congress established in Sec. 7502.

Other than direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated private delivery service as provided for by paragraph (e)(2)(ii) of this section, are the exclusive means to establish prima facie evidence of delivery of a document to the agency, officer, or office with which the document is required to be filed. No other evidence of a postmark or of mailing will be prima facie evidence of delivery or raise a presumption that the document was delivered.

The Crispinos challenged the reg’s validity citing other court cases and Rule 406 of the Federal Rules of Evidence. Professor Book thoroughly analyzed each of these arguments and their merits, which is beyond the scope of this post. As Professor Book states in his blog, “the Crispinos are out of luck, at least insofar as getting a court to consider the claim’s merits. Whether they have a cause of action against their practitioner is another matter. The case is yet another reminder that if one is snail mailing something important to the IRS, it is worth the extra time and money to mail it in a way that eliminates any risk of non-delivery.”

Tax Tip #1

Carefully choose your tax professional. If your tax pro instructs you to mail returns or documents to the IRS, use certified or registered mail, AND keep those proof of mailing receipts. If your pro will do the mailings, then request copies of the proofs of mailing for your files. Remember that you, the taxpayer, are ultimately responsible for the filing of your taxes and paying your taxes due.

Tax Tip #2

When mailing tax returns or important documents to the IRS, be sure to read IRS Reg. 301.7502-1 regarding proofs of mailings that the IRS will accept. The IRS says that certified and registered mail are acceptable, but Priority Mail is not mentioned. If the IRS local service centers were open, you could request a hand-stamp proof of delivery. If you choose to use a private carrier such as FedEx, UPS ,or DHL, be careful as not every mailing from these carriers will satisfy the IRS rules to prove date of mailing. https://www.irs.gov/filing/private-delivery-services-pds lists which of these services the IRS will accept as proof of mailing.

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.