Archives for February 2022

Can the IRS Expand its Audit Years?

February 23, 2022 by Frank

You receive an IRS notice that it will be auditing tax year 2020. Can the IRS expand the audit to include subsequent tax years?

What Tax Years Can the IRS Audit?

The basic rule is that the IRS can audit for three years after you file, but there are many exceptions that give the IRS six years or longer. For example, the three years is doubled to six if you omitted more than 25% of your income. This 25% rule can apply to tax basis too. If fraud is involved, there is no statute of limitations (SOL) restricting an IRS audit exam.

Why Would the IRS Expand the Scope of its Audit?

Generally speaking, the typical IRS auditor will only audit the year(s) in the examination notice sent to the taxpayer. IRS agents handle multiple audits and their case managers want them to complete those audits ASAP. IRS agents feel that their caseload is excessive and generally wish to complete the audit, close the case file, and move onto the next case. They generally do not want to expand the scope of their audits.

However, let’s not forget the purpose of some audit examinations. The IRS may believe, based on information in its files, that the taxpayer may have under reported his income or claimed deductions for which he was not entitled. Objectives of an audit exam or to collect additional revenues and to remind taxpayers of the importance of complying with the tax laws.

The findings of the Treasury Inspector General for Tax Administration (TIGTA) are that if a taxpayer erroneously claimed a deduction or took a tax credit in one year, there is a good chance that the same deduction/credit was erroneously claimed in another tax year. If the SOL bars the IRS from examining earlier years, that obstacle will not apply to years that follow the year of the current tax examination. If the same income or deduction/credit item is found in a subsequent year, the agent, with managerial approval, can expand the audit exam to additional years.

What happens if you do not respond to an IRS audit letter? TIGTA’s findings noted that when the IRS selects a taxpayer for examination, some taxpayers fail to respond to the initial audit notice. The TIGTA recommendation (which IRS management agreed with) is to “change the subsequent return process to address only subsequent year returns in which the taxpayer did not respond to the initial contact letter for the current examination.” In other words, if you don’t do anything (or don’t respond to the very first letter) it may carry worse consequences than if you respond with a full concession owning up to your error. Thus, it may be in the taxpayer’s best interest to proactively agree with the IRS rather than do nothing.

If You Are Selected for an Audit – Should you File An Amended Return?

If you have concerns about the accuracy of your tax return and the impending audit notice you received, you need to immediately contact your tax professional for guidance as to best strategy to implement to ensure your tax compliance. If you have concerns about fraud that you may have committed, an experienced tax professional will request that you seek legal counsel and the attorney can engage your tax professional using a Kovel Letter to protect your attorney/client privilege.

Repetitive Audits

You may have heard that the IRS has a policy against “repetitive” audits. These generally apply when the IRS has conducted an audit exam pertaining to the same issue in the prior year and the prior audit resulted in a “no change” examination. They do not apply where the IRS has assessed an audit deficiency in a prior year examination or of Schedule C (sole proprietorships) taxpayers.

Tax Tip #1

If you receive a notice of an audit examination, immediately share that notice with your tax professional who is intimately familiar with the return that was prepared by him/her. The preparer can review the documentation you provided to prepare your return, review your IRS tax transcripts, and make an educated assessment of why you were selected for the audit and how best to prepare for that audit.

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.

IRS Crisis Is Worse than Previously Reported

February 14, 2022 by Frank

On January 25 we reported that the IRS had 11.6 million returns from prior years that it had not processed going into the 2022 tax season. It now appears the IRS may have had a “rounding-error.”

Unprocessed Tax Returns Reach 24 Million

Per the Associated Press, nearly 24 million taxpayers are still waiting for the Internal Revenue Service to process their tax returns from last year — a number far larger than the previously reported 11.6 million by the agency — with many unprocessed refunds held up for 10 months or more.

Per Anonymous IRS Sources

The pileup of work that remains from last year, according to three people who spoke on the condition of anonymity because they were not approved to speak publicly, comes as the tax agency struggles to hire and train new staff, and respond to growing bipartisan pressure from lawmakers and tax preparers to clear the logjam and provide relief to taxpayers.

Hiring of IRS Employees – Help on the Way?

IRS Commissioner Charles Rettig has announced that the IRS is hiring new employees to address this backlog of unprocessed tax returns. Really? The IRS processing employees are usually hired at the GS-3 level – at a salary of $24,749. How many job seekers will there be at this pay level? Hard to say, because the federal government does have a very attractive benefit package and does offer advancement opportunities.

Once the employees are hired, they need to be trained. How long will that process take?

Looking at past hiring success at the IRS may give us an idea. The IRS sought to fill 5,000 positions for several campuses across the country in time for this tax season, but was able to hire less than 200. The situation is so dire that for the first time, officials are offering $500 referral bonuses to employees if a new hire stays in the job for a year. The agency has one of the government’s oldest work forces. The IRS has been experiencing far more retirements of experienced agents than they can possibly replace. Its submission processing unit — responsible for opening the mail — lost 20 percent of its staff last year to retirements, departures and transfers to other IRS departments, officials said. The Treasury Inspector General for Tax Administration reported that as of August 2021, IRS faced a total staff shortfall in the submission processing unit of about 2,598 persons.

The IRS’s Taxpayer Advocate Office (TAO) stated that although the IRS has several initiatives underway to help address its hiring shortages, “… to date these approaches have not been successful.” It urged the agency to delay a planned closure of its processing center in Austin — part of a long-term consolidation as more business is done electronically — “until hiring and backlog shortages are addressed.” [DUH! The IRS was oblivious to the ramifications of shutting down one of its processing centers.]

The TAO office stated that “Just like many industries across the country, jobs are available, but people are not applying. In [our case,] applicants may not like the shifts or pay — many of these are lower graded positions that were below the $15.00 minimum hourly rate.”

The IRS is considering reallocating its human resources by deploying agents from other departments to the tax return processing unit. Great. Help solve one problem by creating manpower shortages in other areas. And how will those redeployed agents feel about being assigned to open the mail?

Congressional Considerations

Currently, the politicians who greatly contributed to this backlog of returns due to last minute tax law changes, expanding IRS’s responsibilities, and cutting back on its budget are now advocates for applying pressure on the IRS to clear its logjam. Many taxpayers and tax professionals have written to their Congressional representatives about the chaos at the IRS. Perhaps with mid-term elections approaching, Congress will do something to save face.

One proposal to reduce the backlog includes suspending tax collections and excusing some penalty enforcement. The IRS collection notices that are being suspended are mostly those that are computer generated. Hence, there would be no meaningful manpower hours saved. A potential downside to not sending these computer-generated notices is that they warn taxpayers of their tax filing and tax remittance responsibilities. They are the predecessor to the final intent to levy notice. So if the IRS does away with the warning notices and is required by statute to send it notice of intent to levy, is this really anything more than rhetoric to appease its critics? Imagine the reaction of taxpayers when they receive a notice of intent to levy their bank accounts, social security, retirement benefits, and wages without receiving the advance warning notices.

The IRS inspector general found that the IRS continues to suffer from severe hiring shortages, inefficient practices and old equipment (some IRS computers date back to the 1960’s). That includes mail processing woes, since its systems have “outdated dust collectors” that cause paper jams. Poor scanners, meanwhile, meant the IRS last year missed out on $56 million because of “untimely check deposits,” since the agency could not tell if envelopes it received contained checks.

The Backlog Numbers

As of Jan. 28, the tally of outstanding individual and business returns requiring what the IRS calls “manual processing” — an operation where an employee must take at least one action rather than relying on an automated system to move the case — came to 23.7 million, the taxpayer advocate data shows. The number includes 9.7 million paper returns awaiting processing; another 4.1 million that were suspended because of errors with stimulus payments, pandemic relief or other issues; 4.1 million amended returns and 5.8 million pieces of correspondence awaiting action between the agency and taxpayers to resolve issues before the returns are completed. In January, National Taxpayer Advocate Erin Collins had reported a backlog of at least 10 million returns based on IRS data. An IRS official, meantime, said the agency counts the inventory from last year’s filing season at about 6 million paper returns for individual taxpayers. Both numbers are far higher than the unprocessed returns the IRS faced before the pandemic — in the past, the agency typically carried over 1 million or fewer returns into the next tax season. The stockpile does not include audits lingering because of pandemic slowdowns, enforcement and collection actions, appeals of audits, notices of tax liens, penalties or other business in the pipeline.

Tip #1

Electronically file your return if you are not already doing so. File ASAP! E-filed returns can generally be processed quickly unless they are flagged for errors, identity theft or other issues. The IRS is taking approximately ten months to process the paper returns of roughly 10 percent — about 17 million people — who still paper file Form 1040.

Tip #2

Consider paying the IRS during the tax year your best estimate of what you will likely owe so has to avoid having to wait for a refund. Last year the vast majority of taxpayers — about 77 percent — received refunds. Since returns are processed in the order in which they were received, it means that 2022 returns showing a refund will be placed at the end of the line until the prior years’ refunds claims are processed.

Tip #3

Stop paying the IRS by check. Using one of the IRS’s online payment options, such as the EFTPS system we have recommended on several occasions.

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.

Refinancing Considerations

February 9, 2022 by Frank

Should you refinance? What if you owe the IRS tax debt?

What is a Refinance (Refi)?

When you refinance your home, you are getting a new mortgage to pay off your existing mortgage.

Why Refinance Your Home?

Since getting a new mortgage takes time and there is often a monetary cost, why refinance your home? One common reason is that your current mortgage has a relatively high interest rate and today’s interest rates are lower. By taking advantage of a lower rate, you can get the same size loan for lower monthly payments. The typical advice is that if you can get a rate at least one percentage point lower than your current rate, a refinance may be worth pursuing.

In addition to the savings from those lower monthly mortgage payments, you also need to consider the costs to refinance your home. Mortgages cost money, so a new loan is only worth your while if you would pay less in fees than you would save on the payments. A typical rule of thumb to compute the break-even point on a mortgage refinance is to divide the total loan costs by the monthly savings. So if your refinancing fees total $2,000 and you save $100 a month, divide 2,000 by 100 and you get 20. That means it will take 20 months to recoup the cost of refinancing. That computes the pay-back period, not the internal rate of return.

However when looking at the refinancing costs the lender charges, don’t overlook the additional interest you may have to pay. If your current mortgage term has 15 years remaining, and you replace it with a 20-year mortgage, that is an additional 5 years of interest you will be paying and need to consider when computing your break even point. As you approach the halfway point of the existing mortgage, the principal portion of your payments may begin to exceed the interest portion.

Another major consideration is how long do you plan to live in your current home. While that may be somewhat unpredictable, you need to evaluate health considerations, children moving out of the house, and employment security to name a few points to ponder.

What If You Have IRS Debt?

If you owe the IRS and need funds to make the down payment for an offer in compromise or wish to reduce your IRS debt to obtain a more favorable IRS tax resolution option, refinancing your home may be a viable option to obtain those funds. Don’t forget that the equity in your home is an asset. The IRS definitely considers the equity in your home an asset.

There may also be a situation where you are asking for a resolution from the IRS to settle your debt, and the IRS will not agree to it unless you withdraw equity from your home to first pay down your IRS debt. In many situations, a person with IRS tax debt doesn’t have a good credit rating and lenders refuse to provide them with the refinancing, HELOC, etc. This presents a problem because the IRS wants to get its hands on it. What can you do? You need to make an application with at least three (3) lenders to access the equity in your home. If your credit is bad, the lenders will likely deny your request. You need to get those denials in writing and provide them to the IRS. This should satisfy the IRS that you cannot access the equity in your home.

Tip #1

Check your credit score with all three of the major credit bureaus. The lower your credit score, the higher rate of interest you will be required to pay. It may be worthwhile to research how you can improve your credit score before applying.

Tip #2

Depending upon the amount of the mortgage, you may have to pay a higher rate of interest if you applying for a jumbo loan. Keep in mind that an additional cost could be private mortgage insurance if there is insufficient equity in your home.

Tip #3

If you plan to refinance to take money out of the equity of your home, consider a Home Equity Line of Credit (HELOC). The costs to obtain a HELOC are substantially less than the cost of a refinance.

Tip #4

Consider refinancing your home to obtain a shorter mortgage term. If you currently have a 30-year mortgage, consider a refi where you obtain a lesser term loan, such as a 15-year term. The shorter term will increase your monthly payment, but your interest rate will be lower, meaning you’ll pay less interest over time.

Tip #5

When contemplating a refi, get advice from a financial and tax professional to make sure a refi is in your best interests. And since mortgages come with so many provisions, be sure to get all the details from the mortgage provider before signing on the dotted line.

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.

Cryptocurrency Tax Reporting Reminder

February 1, 2022 by Frank

As more individuals invest in cryptocurrencies (digital asset market exceeded $2 trillion in 2021), it is important to remember that trading and paying for goods in these currencies is a taxable event that must be reported to the IRS. Let’s look at some prior posts about taxpayer obligations.

Prior Posts – Cryptocurrency Tax Considerations

As we reported in our December 19, 2017, September 24, 2019 and October 15, 2019 posts, the IRS is using data analytics to identify taxpayers who are not reporting their transactions and John Doe summons to force the platforms offering this currency to reveal who their customers are. We also discussed that if cryptocurrency investments are held outside the U.S., that a Foreign Bank Account Report (FBAR) filing requirement (FinCen Form 114) may have to be made. For those taxpayers who don’t hold virtual currency for investment purposes but to pay for goods, that also requires such transactions to be reported. We suggest that you read these previously published posts using the links provided.

BRIEF Tax Overview

Cryptocurrency is considered property for tax reporting purposes, similar to stocks and bonds in some aspects. Accordingly, it may be subject to capital gains when exchanged or sold at a profit. If you exchange digital coins, cash out to U.S. dollars or make a purchase, you may have a taxable event.

The gain or loss is the difference between your purchase price (cost), known as the basis, and value upon sale or exchange. The applicable rate of taxation depends on how long you have owned the coin. You may qualify for long-term capital gains rates (usually 15% or 20%), depending on taxable income, if you hold the currency for more than one year. However, selling or exchanging assets after less than one year triggers short-term capital gains, with regular income tax rates, up to 37% for top earners.

Documentation Challenges

CNBC reported that one in ten persons invest in virtual currency. It was reported that roughly one-third trade weekly or monthly, and nearly a quarter trading daily. That’s a lot of transactions to be tracking.

The challenge for taxpayers is that they need to track these transactions and it’s difficult for exchanges to track the movement of assets and your cost basis. For example, if you purchase bitcoin on one trading platform and moved it to another platform, the second exchange would not know your original basis.

What happens if the platform you use doesn’t provide you with a Form 1099-B to report your gain or loss to the IRS? As with most tax documentation issues, the responsibility to maintain accurate and complete records is that of the taxpayer. Request the platform’s spreadsheet of transactions that it should be able to provide you. Keeping these spreadsheets in an orderly manner is another challenge if you switch investment platforms or brokers.

Tax Tip

Realize that trading you using virtual currency has income tax reporting requirements. It is your responsibility to track and diligently document each of your transactions. Helpful Hint: Do not wait until you have a taxable event to compute your basis, but rather track your basis with each transaction you make. At the end of each tax year, review your tax basis computation to make sure it is current and that you have backed it up to another source.

Brokers, if they report virtual currency transactions to the IRS as required, may only report the gross sales and not the cost basis of those transactions. If you are unable to document your tax basis, the IRS position is that you have a zero tax basis – meaning that the proceeds you receive is your taxable income for that transaction.

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.