Archives for April 2022

Where Is My IRS Tax Refund?

April 26, 2022 by Frank

My neighbor, relative, work associate, etc. received their refund, why haven’t I received my refund?

Why Some Refunds Take Longer than 21 Days

For taxpayers who file electronically and choose direct deposit of their refund, their refunds sometimes take longer than the IRS’s announced expected time frame of 21 days.

Many different factors can affect the timing of a refund after the IRS receives a return. A manual review may be necessary when a return has errors, is incomplete or is affected by identity theft or fraud.

Other returns can also take longer to process, including when a return needs a correction to the Child Tax Credit or Recovery Rebate Credit amount, includes a claim filed for an Earned Income Tax Credit (EITC) or an Additional Child Tax Credit, or includes Form 8379, Injured Spouse Allocation , which could take up to 14 weeks to process.

To check the status of a refund, taxpayers should use the Where’s My Refund? tool on IRS.gov. Information for the most current tax year filed is generally available within 24 hours after the IRS acknowledges receipt of a taxpayer’s e-filed return.

For those taxpayers who cannot file electronically or simply refuse to do so, the IRS states that they should wait at least four weeks before checking the status using the Where’s My Refund? tool.

Tax Tip #1

Taxpayers should not rely on receiving a refund by a certain date, especially when making major purchases or paying bills. In addition to the above listed reasons that the IRS may delay the processing of a refund claim, the policy and procedures of your financial institution may delay the posting of the refund to your account.

Tax Tip #2

Calling the IRS to inquire about the status may be helpful in the following situations:

21 days or more have passed since you electronically filed and you have not received any correspondence from the IRS requesting that you contact it for additional information;
Six weeks or more since a return was mailed and you have not received any requests for additional information from the IRS; or when
Where’s My Refund? tells you to contact the IRS.

Tax Tip #3

The tax filing season is when the scammers and ID thieves surface in large numbers. Like the roaches they are, the lights have been turned on. Accordingly, if you receive any phone calls or mail asking for information, do your due diligence to make sure that it is indeed the IRS who is asking for this information. Scammers use fictitious phone numbers that appear to be from the IRS, and mailings often copy IRS logos and images to make them appear legitimate. If you work with a tax professional, always send that mail correspondence to them and notify them of any phone call requests from the IRS. Your tax professional is intimately familiar with the return s/he prepared and should have familiarity with IRS issues which the IRS may be asking for more information.

Tax Tip #4

When calling the IRS, be prepared to prove your identity. Have your current and prior year return in front of you as you will likely be asked to verify information on those returns. Also, be prepared for very long wait times and possible phone disconnects.

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.

Self-Prepared Tax Return Errors

April 20, 2022 by Frank

Senior IRS Stakeholder Liaison Officer Identifies Errors Found on Self-Prepared Returns Usually Not Found on Professionally Prepared Returns

The IRS Audit Under Reporting (AUR) Program Overview

The IRS’s Audit Under Reporting (AUR) program matches third-party information returns (e.g., W-2s, 1099s) against income reported on a taxpayer’s return. If there is a mismatch, i.e., income reported by a third party that the IRS does not find on the taxpayer’s return and is concerned that there is under-reported income, the CP-2000 notice is sent.

Typical Self-Prepared Errors That Generate CP-2000 Notices

Many taxpayers mistakenly believe that if all of their income is reported, their return will not be selected for an audit review. That is a false understanding. While reporting all income will eventually result in a no-change audit finding, why put your tax return in the cross hairs of the IRS?

A common self-prepared error is the income was reported, but on the wrong line of the return. The IRS computers are looking for the third-party income on the proper line item of the tax return. If not found there, the computer reports the discrepancy.

Another common self-prepared error was identified as reporting all income as a lump-sum amount, rather than by individual payer. IRS computers match income by individual payer against the individual items listed on the taxpayer’s return.

AUR System Identifies Potential Under-reported Income – What Happens Next?

If the computer does not have a match, the return is sent to an agent to review the return to verify whether the income was omitted. If the agent reviewing the return discovers that the income was reported on another line on the return, the IRS does not issue the CP-2000 notice.

Professional tax preparers, when reporting income on a gross amount on the face of the return, know to include a backup schedule with the return that lists the individual payers by name and the amounts of income they each reported to the IRS. If the IRS agent reviewing the return sees the income reported on a supplemental schedule, the issue hopefully will be closed.

They senior stakeholder remarked that when an agent is reviewing a return, the human element is introduced. Some agents, if there is any discrepancy between the third-party information returns and the income reported on the return, will propose an audit adjustment. Other agents, depending upon their personal guidelines as to the degree of accuracy, may overlook what they consider minor or insignificant adjustments.

Tax Tip #1

If you self-prepared your return and receive a CP-2000 notice, be sure to respond by the due date shown on the notice (to protect your administrative appeal rights), send copies (not originals) to the IRS of your additional documentation to support the amounts reported on your return to the address shown on the CP-2000 return, and if you agree with the IRS’s findings and are submitting payment, be sure to send the payment to the payment address shown on the CP-2000 notice.

Tax Tip #2

Consider engaging an experienced tax professional to prepare your return. If for no other reason, the anxiety of receiving unnecessary IRS notices will no longer be an issue.

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.

How the Wealthy Can Avoid Mortgage Interest Limitations

April 12, 2022 by Frank

Taxpayers and politicians in high property states cried “foul” when the property tax deduction was capped at $10,000 . . . but not a whimper was heard with respect to a mortgage interest deduction tax savings technique.

Current Mortgage Interest Limitations

The tax code limits the mortgage interest deduction to $750,000 (for married filing joint (MFJ) taxpayers) of all debt on a primary residence and vacation home. For homes bought on or before Dec. 15, 2017, interest can be deducted on $1 million of home debt by MFJ taxpayers.

As residential and vacation home prices skyrocket, the mortgage interest tax savings of owning a home are capped by the $750,000 ceiling limitation.

An Example of the Limitation

Let’s assume an individual wants to buy a $4 million vacation home and is required to make a down payment of 20% ($800,000). Thus, he/she has a $3.2 million mortgage. The individual is limited to deducting interest each year up to $750,000 of the loan.

Investment Interest Deduction

If a taxpayer itemizes their deductions, they may be able to claim a deduction for their investment interest expense. Investment interest expense is the interest paid on money borrowed to purchase taxable investments. This includes margin loans for buying stock in a brokerage account. It does not include interest to purchase tax-advantaged investments such as municipal bonds.

The amount that one can deduct is capped at their net taxable investment income for the year. Any leftover interest expense gets carried forward to the next year and potentially can be used to reduce taxes in the future.

Wealthy individuals who invest and hold significant amounts of stocks and bonds, after consulting and working closely with their investment advisor, real estate attorney and tax professional, may be able to circumvent the $750,000 mortgage loan limitation by borrowing on their investment portfolio and using that cash to put down on their newly acquired real estate investment. For example, up to $4 million of investments could be sold to generate the funds for the purchase of the investment property and thus avoiding exceeding the $750,000 threshold. If unsuccessful investments are included in the sale along with successful investments, the individual could possibly have no tax liability resulting from the sale of his investments. If there is tax liability and the sales are structured properly for tax efficiency, the investor would be subject to the lower long-term capital gains rate. The investor could then reenter the stock market by purchasing his investments on margin. If the individual took out a loan on his investment property, not secured by the investment property, and invests the loan proceeds in his investment portfolio, he has converted the interest on the loan to an investment interest tax deduction.

Tax Tip #1

Before implementing such a plan, a number crunching exercise is needed along with a review of long-term financial planning considerations. While tax planning should be a part of every financial decision, the tax savings should not be the driving force – sound financial planning is of upmost importance. Tax savings are the cherry on the top of a great financial plan.

Since investment expense is limited to investment income, how much investment income will the individual generate? Will sufficient investment income be generated to make this tax strategy effective? What costs (consulting fees, taxes on stock sales, optimization of investment portfolio, etc.) will be incurred to implement this strategy? Will those costs be recovered? Over what time period?

Investment income that qualifies for the interest deduction on borrowed money includes bank interest, dividends taxed at ordinary rates and annuity income. It doesn’t include so-called qualified dividends, like those paid in company stock under an incentive compensation plan, or long-term capital gains.

Tax Tip #2

This strategy also works for home refinancings that are limited by the tax law that states that a new loan cannot be greater than the existing loan for interest deduction purposes. Say an investor wants to refinance a $1 million mortgage and increase their home debt to $1.6 million, using the extra $600,000 to invest in stocks. The interest on the $1 million mortgage remains deductible since the loan amount has not increased. In addition, the interest on the $600,000 that’s invested in taxable investments is tax deductible.

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.

“King Harold” – Possibly Passes Billions of Dollars Tax Free to His Heirs

April 5, 2022 by Frank

Shale King Harold Hamm passes stock valued today at $18 billion tax-free to his heirs using tax loopholes.

Who Is Harold Hamm

Harold Hamm is the owner of Continental Resources Inc., the shale drilling company he founded 50 years ago. One could argue that he is a poster child of the American dream. He was one of thirteen children born to a share cropper. He started his company with a $1,000 loan and turned it into a multi-billion company. Talk about (OPM) using other people’s money to get rich!

This is how he transferred billions of dollars, perhaps totally tax free, to his five children per Bloomberg News.

Advance Planning and Fortuitous Events

If Hamm had gifted his stock interest to his children during his lifetime, he would have incurred significant gift taxes. If the stock had remained in his estate and his children inherited the stock upon his demise, his estate would have incurred significant estate taxes.

Hamm decided to make lemon aid from lemons. He launched this estate plan in 2015 when the price of oil plummeted and the shares of his company significantly decreased in value. In mid-2020, the pandemic caused the oil industry a severe blow and interest rates plunged to record lows. At one point in 2020, his company’s worth was only $2.4 billion and had sunk 90% in value. Hamm was a wildcatter and knew it was time to strike (act). In terms of estate planning, it was the perfect storm.

The Tax Loopholes at Play

Hamm transferred $761 million to the five trusts (believed to have been grantor trusts) for his children. Since those shares were equally divided among his five children, the tax laws allowed those shares to be artificially devalued using what is called a minority interest discount. Depending upon how aggressive he was in valuing his stock, minority discounts of 20% to 30% are not uncommon. Thus, the value of the those transfers to the trusts were significantly below the value of his shares which were publicly traded. In all, it was reported that he created an LLC and over a dozen trusts to make his wealth transfers. Today, his family’s wealth is valued at about $18 billion.

Had Hamm simply transferred the shares to the trusts, he would have had to pay some very hefty gift taxes. Instead, he loaned those shares to the trusts and the trusts were required to pay him interest on those loans thus avoiding the gift tax. Since interest rates were at all-time lows, the trusts were able to pay the interest on those loans.

Since that July 2020 transfer, the value of Continental shares have increased 250% and are worth more than $2 billion each. Since that appreciation happened outside of his estate, they escape estate taxes upon his demise.

If you are keeping track, Hamm avoided all transfer taxes, gift and estate.

Other Billionaires

Bloomberg News mentions that it was not able to ascertain if Hamm’s trusts were dynasty trusts which allow future generations to avoid transfer taxes. For those of us who aren’t in a position to avoid taxes of this magnitude, perhaps we have some solace in knowing that if his children sell any of their shares they will be subject to long-term capital gains, taxed at a rate of 20%, and the billions of dollars remaining in Hamm’s estate will be subject to estate taxes upon his death.

Hamm is not the only billionaire who has taken advantage of the tax loopholes for the super rich. Other billionaires mentioned in by Bloomberg News included Phil Knight, the founder of Nike, Zoom CEO Eric Yuan, Sheldon Adelson of the Las Vegas Sands fortune, and Jane Lauder.

Tax Tip

Far too many taxpayers lack an estate plan. As Harold Hamm’s planning illustrates, planning before the event is usually the most advantageous approach. Regardless of the size of your estate, you should consult with an estate attorney and your tax professional to ensure that you have provided for your family by having a will, trusts if appropriate, and living wills and health directives.

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.