IRS Provides Guidance on Tax Treatment of Bitcoin

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Its status has been up in the air for some time now, but today the IRS provided guidance on the tax treatment of online currency such as Bitcoin.  The official position is that virtual currency is not to be treated as legal-tender currency, but should be treated as property instead.  Bitcoins, therefore, should be reported and taxed as ordinary income, or as assets subject to capital gains, as the case may be.

[V]irtual currency is treated as property for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.

Therefore, in real world applications, employees who are paid in virtual currency must pay taxes on that income just as they would pay taxes on dollars.  And an employer would have to withhold taxes, report these wages on a W-2, and comply with payroll tax laws.  And, of course, a 1099 is required for the self-employed who are paid in Bitcoin.

Perhaps of greater concern to some Bitcoin users around the world is the impact this IRS notice will have on “miners” (computer geeks who compete to unlock new Bitcoin by cracking codes).  If they want to be 100% legit, they will have to go back and determine how much Bitcoin they mined throughout the year, its fair market value on the date it was mined, and include it in their income.

TAP Now Accepting Volunteer Applications

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Do you live in Alaska and have a spare 200 to 300 hours per year to donate to a good cause?  You may want to think about volunteering as a member of the Taxpayer Advocacy Panel (TAP).

TAP is “a federal advisory committee that listens to taxpayers, identifies major taxpayer concerns, and makes recommendations for improving IRS services.”  As a TAS committee member, one of your primary responsibilities will be to put together an annual report (containing said recommendations) for the Taxpayer Advocate Service (TAS), the Treasury Department Secretary, and the IRS Commissioner.

The IRS is actually seeking TAP committee members in several states (19 to be exact), not just Alaska.  They want alternates in a handful of states as well.  And they need one member to represent international taxpayers.  If you’re interested in the international position, don’t worry too much about travel; it looks like the IRS is not requiring any in-person meetings from the international member.

The great thing about this service opportunity is you don’t have to be a tax preparer, accountant, tax attorney, or any kind of tax professional to join the panel.  You have to be accepted to the panel, but you don’t need to have any special connection to the IRS or the tax community at all.  Federal advisory committees in general are required to seek out people from a variety of backgrounds and viewpoints.  The “underrepresented groups” sought by TAP include U.S. taxpayers living abroad and Native Americans.

April 11th is the deadline to apply to become a member of the panel.

The Unlikely IRS Phone Scam Victim

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Have you heard about those IRS phone scams?  No, it’s not what you’re thinking; not scams sponsored by the IRS.  They are scams perpetrated by individuals posing as IRS personnel, and they have been more prevalent than ever in the past couple years.  If you haven’t heard of them then maybe the IRS isn’t being aggressive enough with its public announcements and warnings.  If you do know about these schemes then maybe you have pondered the questions “Who are these people that pay thousands of dollars to phony IRS agents?  Can’t they tell it’s a scam?  How can someone be so gullible?”

I have definitely had these kinds of thoughts, that is until reading the story of Halah Touryalai, staff writer for Forbes.  She was recently contacted by one of these scam artists and almost fell for it.  This is an expert on finance and investing; somebody who should probably know better.  And even though she stopped short of doling out the $5,000 that they were demanding of her, they definitely had her going.  This is somebody who has always paid her taxes and never had a reason to doubt herself.  It only goes to show that if these scam artists call with enough urgency and authority in their voices, they can successfully dupe just about anybody.

Touryalai was told a whole host of lies on the phone that day:

  • The IRS had launched an investigation against her
  • She had attempted to defraud the government by not reporting all her income
  • The IRS was going to get a warrant for her arrest
  • The IRS was going to seize her property
  • The IRS had already issued a bank levy to collect the tax debt
  • The IRS had suspended her driver’s license and passport
  • Her social security number had been “blacklisted”
  • Somebody was waiting at her office to arrest her when she arrived
  • She could avoid further action if she paid $4,900 within the next hour

Be careful out there!  As long as you know how the real IRS operates, you’ll be fine.  The IRS will never demand that you make payments over the phone.  They will rarely contact taxpayers by phone without first sending notices by mail (and certainly not for a measly $4,900!).

2014 Tax Season: Status Check

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Today the IRS released some key filing season statistics to show how they are doing compared to last year at this time.

So far the IRS has received some 49.6 million tax returns and has processed around 98 percent of them.  A vast majority of those returns were filed electronically — about 46.6 million.  If you hadn’t noticed, as much as the IRS loves sending taxpayers mounds of mail, they really do not like receiving it.  Hence the constant emphasis on e-filing.

So far the IRS has paid out over 40 million tax refunds; most of them being directly deposited.  As much as the IRS loves sending taxpayers mounds of mail, they really do not like sending paper checks.  Hence the constant emphasis on direct deposit.

One stat that always blows my mind is the average refund amount, which is now over $3,000.  I think that number tapers off as we approach the tax filing deadline since those who are eager to file early are typically the same people who expect a fat tax refund.  Personally I would rather pay what I owe in April than give the government an interest-free loan throughout the year.

And finally, the statistic that has left me wondering is the irs.gov website traffic.  This is one of the only stats that has dropped since last year.  The only other stat that is lower this year is the number of e-filed returns by tax professionals, but this is probably going to continue to drop as the number of e-filed returns prepared by taxpayers from their home computers (self-prepared returns) continues to rise.  Could the decreased website traffic mean that people are relying more heavily on tax software?  Could it mean that taxpayers are turning to the phones more than in years past?  There are a million possible explanations.

Sacramento Pot Shop Refuses to Negotiate with IRS

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It has been a while since I have seen news about the tax problems of medical marijuana dispensaries.  The one I saw today involves a Sacramento-based pot shop by the name of Canna Care.  The IRS has imposed an $873,000 penalty under a 30-year-old tax code known as “280E.”  The IRS is refusing to allow standard business expenses such as those incurred for payroll and rent.  This has always been the sticking point.

What makes this story a little different is that Canna Care is not the least bit interested in negotiating with the IRS.  The IRS has expressed a willingness to settle for $100,000 but apparently this pot shop has morals and will not pay a dime until ordered by a judge to do so in tax court.  After all, Canna Care is known as an “evangelical medical marijuana provider.”  Well, this is according to the Sacramento Bee article.

When I visited the Canna Care website (www.cannacare.net) I could not verify this unique designation.  In fact, many of the links on the website don’t work at all.  And probably the most frustrating is a video thumbnail of “the first commercial in history to be played on … a major US television station” (which I have to believe is really meant to read “the first medical marijuana commercial in history…”).  This “private video” can only be viewed with a password.  I suppose if I knew we would be going to court, I would want my client to keep quiet and minimize their internet footprint for a while too.

FTB Holding $16 Million in Returned Tax Refunds

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When you move to a different residence, do you immediately contact your creditors to let them know where you are?  Suuuure you do.  When you get around to it…

It’s no secret that some people spend their lives moving from place, just one step ahead of the IRS or other taxing agencies.  Although certainly not advisable, some people have good reasons for keeping their location a secret.  And then there are the others.  The brilliant 45,000 or so people in California who haven’t claimed their prior year state refund(s) yet.  The refund amounts range from $1.00 to $54,000.00 (total more than $16 million), and a majority of these people simply moved and didn’t update their address with FTB.  In other words, it isn’t so much that they haven’t claimed the refunds, but they were returned by the Postal Service due to the FTB having a bad address.

There is an easy fix to this problem.  Keeping your address up-to-date would be one way, but there is an even better fix.  DIRECT DEPOSIT.  If you use direct deposit for your tax refund, you get your payment so much quicker, and if you move you still get paid right on schedule (assuming you didn’t change banks).

New Commish, 2014 Tax Season, EITC

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A few noteworthy events caught my eye in the world of tax relief today.

First, the Senate approved Obama’s nomination of John Koskinen in a 59-36 vote, confirming him to fill the top position at the IRS; a position that has been vacant for over a year.  Commissioner Koskinen will take his post beginning next week and we’ll definitely keep a close eye on him to see if he will fulfill his promise of restoring public trust to the agency that has been fighting a dismal public perception for years.  Obviously, this is not something that he’ll be able to do overnight.

Second, the IRS announced that the opening of the 2014 tax season will be on January 31st.  This is when the IRS will begin accepting 2013 tax returns.  The IRS encourages taxpayers to file electronically.  If you are due a refund, this is definitely the quickest way to get it.  Also, the IRS reminds us that we always have the option of requesting an automatic six-month extension using Form 4868.  The IRS tends to encourage extensions because it spreads out the influx of tax returns so that things don’t get too bottlenecked.

And finally, TIGTA, the IRS watchdog, reported on increasing abuse of the Earned Income Tax Credit (EITC) by tax preparers.  The IRS has always had a problem with EITC abuse and fraud because it is a refundable tax credit that can mean money in the pocket of whoever claims it and qualifies (or appears to qualify).  TIGTA noted that too many tax preparers fail to do their due diligence by completing and attaching Form 8867, the Paid Preparer’s Earned Income Credit Checklist.

2013 IRSAC Report

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The Internal Revenue Service Advisory Council (IRSAC) released its annual report today, which included recommendations for improving efficiency at the IRS.  Here are some of the points that stood out to me:

1. Expand awareness of OPA

Online Payment Agreement (OPA) is a tool that some taxpayers may use to enter into installment agreements if they meet certain criteria.  IRSAC says that the IRS should be doing more to encourage taxpayers to use OPA rather than call and waste their time on the phone.

 Of the more than 3.1 million total installment agreements created in FY 2012, less than 3 percent (92,519) used the OPA to enter into an installment agreement.

The reason I don’t use OPA is I have found that getting a live body on the phone normally results in a better deal.   Plus, the other day I was playing around with it and it wasn’t even working.

2. Reduce processing time for Form 2848, Power of Attorney

3.4 million Power of Attorney forms were filed in fiscal year 2012, but less than 10 percent were filed electronically.  The IRS subsequently discontinued electronic filing a few months ago.  IRSAC recommends going back to electronic filing and making changes to the form in order to reduce errors that cause them to be returned.  I use e-fax to file my Power of Attorney forms.  It is quick, inexpensive, and paperless — as close to electronic filing as you can get.  In my experience, the processing time has been relatively quick: around 5-7 days usually.

One of the other problems that IRSAC addressed is duplicate filing, which happens when a practitioner files a 2848 and then doesn’t have the patience to wait a week.  If that practitioner then calls the IRS and tries to gain access to the account before the POA has been processed, the IRS representative will have him/her fax the POA while waiting on the phone.  Sometimes the IRS rep will forward that POA on to the CAF Unit without first checking with the practitioner to see if it has already been filed.

3. Update the transcript request policy on the PPS Line

The Practitioner Priority Service (PPS) phone line is for tax attorneys, accountants, enrolled agents, and such.  If you have ever dealt with the IRS by phone then you know how ridiculous the hold times can get.  The IRS call center employees should be answering unique questions, taking financial information, and resolving tax accounts; they shouldn’t have to do something that a practitioner can easily do him/herself.  Some firms have a habit of calling in and tying up phone lines for simple transcript requests when transcripts can more efficiently be ordered electronically via the IRS website or through the automated phone system.

Cindy Thomas Defends "Low-Level" IRS Employees in Sharp Email to Lois Lerner

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At the height of the IRS Tea Party targeting scandal, high-level IRS employee Lois Lerner blamed low-level IRS employees in a Cincinnati office for flagging tax-exempt applications that contained words such as “tea party” or “patriot.”  Lerner had said that “line people . . . didn’t have the appropriate level of sensitivity about how this might appear to others.”

But one of these underlings in Cincinnati showed plenty of sensitivity in a May 10th email to Lerner that was made public this week by investigators on the House Ways and Means Committee.  Her name is Cindy Thomas, then-director of that office.  She took offense to Lerner’s labeling of her and others as “low level employees,” noticing right away that the Cincinnati tax-exempt division was being blamed in order to protect high-level IRS management.  Tax law and IRS news can be dull at times, but Thomas’ email reads like a juicy piece of gossip:

As you can imagine, employees and managers [in the Cincinnati tax-exempt division] are furious…How am I supposed to keep the low-level workers motivated when the public believes they are nothing more than low-level and now will have no respect for how they are working cases?  The attitude/morale of employees is at the lowest it has ever been…the previous 1½ years inside the determinations unit has been miserable enough because of the division’s workload and lack of help with strategic planning from Washington…Now our leader is publicly referring to employees who are the ones producing all of this work with fewer resources than ever as low-level workers!

This is obviously more than a defensive response from a manager with a bruised ego.  I respect the way she stood up for her employees.  And because I know first-hand the condition the IRS is in (and the condition it has been in for several months now), I don’t doubt anything she said.  This email, though emotionally-charged as it is, goes to the heart of the scandal in a way that is more raw and sincere than anything we have seen to date.

FTB Updates Top 500 List

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The California Franchise Tax Board (FTB) updated its “Top 500 Delinquent Taxpayers” list this week.  And to dispel any doubt about the effectiveness of this program, FTB also announced that the list shrunk to only 350 before it went live on their website.

Two times a year, the FTB publicizes a list of individuals and corporations with the biggest state tax debts.  Those on the Top 500 list are identified by name, city/state/zip, amount due, tax lien filing date, and information about state-issued licenses.  The license information is relevant because one of the consequences of being in the Top 500 is the FTB has the authority to suspend state-issued licenses such as drivers license, contractor license, state bar membership, medical board, bureau of real estate, department of insurance, etc.

There are several doctors, attorneys, real estate agents, and contractors on the Top 500 list.  There are about 14 individuals shown to be licensed by the State Bar of California and, interestingly, all but one of those licenses are still active.  The one that is no longer active bears the status of “disbarred,” which leads me to believe that the bar itself revoked the license, not the FTB.  Perhaps the FTB understands that suspending a bar license would severely restrict its ability to collect what is owed.

At the top of the list is the individual with the largest state tax debt on the books — the one I like to call “the winner” — Mr. Mon Bill Hom of Los Angeles.  Hom happens to be an attorney with an active bar license.  He owes $6.3 million, with tax problems dating back at least to 1995 (the year the tax lien was filed).  In looking at his state bar profile, it appears that he was suspended for two years back in 1999 after the IRS cleaned out his client trust account and he didn’t have the money to replace it.

I started this post by saying that the Top 500 Delinquent Taxpayers list is an effective enforcement tool.  Back in August the FTB sent out letters to the potential Top 500 candidates explaining to them that they can avoid being publicly named by resolving their accounts before October 15th.  And in a span of about two months, 150 of them came forward and resolved their accounts with the FTB by either paying in full, entering into an acceptable installment agreement, or settling by way of Offer in Compromise.  I’m sure some of them appealed their cases or filed bankruptcy (which also results in removal from the list), but FTB stated that it was able to collect $5.3 million specifically from debtors trying to avoid the Top 500 list.  I’d call that a success.