Tax Deadline Tomorrow! Are You Prepared?

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There’s a tax deadline tomorrow causing many people to work on their taxes into the wee hours tonight. Even though the federal government is closed, the second tax day is tomorrow, October 15, 2013. This second tax day is the deadline to file your personal federal tax return with the Internal Revenue Service (IRS) if you filed an extension to file your taxes by April 15, 2013, the first tax day.

On September 26, 2013, the IRS announced that “many of the more than 12 million taxpayers who requested an automatic six-month extension this year have yet to file.” These are likely the people that are going to be up late tonight enjoying tax returns instead of playoff baseball and Monday night football. Individuals and their tax preparers alike are guilty of procrastinating until this upcoming second tax day to prepare and file their tax returns.

Many people file a tax extension in April once they prepare their tax return and determine that they’re going to owe a tax liability. Others just need additional time to review their finances and prepare their tax returns. In either case, filing a timely tax extension in April only allows taxpayers extra time to get their tax returns filed. However, an extension to file does not extend the time that taxpayers have to pay any tax due on their tax return. This is often overlooked or simply ignored by taxpayers when requesting a tax filing extension.

If you filed an extension to file but owe a balance due, you will owe interest on any amount not paid by the April 15 tax filing deadline, plus you may owe penalties. The late payment penalty is generally ½ of 1% of any tax not paid by the original filing deadline of April 15, 2013. It is charged when reasonable cause for non-payment is not established, for each month or part of a month the tax is unpaid maxing out at 25%. Fear of not being able to pay the tax due often causes individuals to not file their tax returns, even if they have an extension to file. They’re often delaying the inevitable.

The IRS promotes payment plans to the public to entice the public to file their tax returns even if they cannot immediately pay the entire tax liability. Beware however, as the IRS is a collection machine, their job is to collect the debt owed; assuming of course that they return to work.

There are different types of payments plans allowed by law that may better fit your budget than the IRS may share with you, unless you know the rules. The IRS has a hardship program called currently non collectible status for taxpayers that are unable to pay the tax debt owed. Additionally, the IRS has a debt settlement program for tax payers that can prove that it is in the government’s best interest to collect less money than what is owed, this is called an offer in compromise. The point is that there are options available for taxpayers that cannot pay their taxes owed. The first step is to file your tax return, preferably before tomorrow’s second tax day deadline.

Further Attempts to Regulate Return Preparers

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The government is trying to impose regulations on tax return preparers again.  This time they are relying on rather questionable authority.  It is a post-Civil War statute called the “Horse Act of 1884.”

After the Civil War, individuals often filed loss claims against the US government, primarily for horses that were lost in battle.  A cottage industry sprung up that provided representation in the filing of such claims.  Not surprisingly, once agents started filing loss claims for a fee, there was a spike in fraudulent claims, so the government began regulating them, giving only the ethical ones the title of “enrolled agent.”

That title still exists today.  Enrolled agents are tax preparers that also have authority to represent taxpayers before the IRS.  They often prepare tax returns, but they are also permitted to negotiate for tax relief as a representative of the taxpayer.  In the hierarchy of tax professionals, they fit somewhere between a regular tax preparer and a tax accountant.  The legal team opposing regulation points out that the key difference is that a tax preparer may not actually represent a taxpayer.  The IRS would have the court ignore this distinction and expand a 140-year-old statute.

I don’t know if it is fair to require that every tax preparer take tests, pay fees and maintain a license.  With so many people using tax software to file on their own, the mom-and-pop tax prep firms already struggle quite a bit these days.  Regulation of the entire tax preparation industry would hit some firms pretty hard.

IRS Launches New ACA Website

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The IRS’ new Affordable Care Act website is up and running.  Most of the new content is organized into three main parts: (1) Individuals & Families, (2) Employers, and (3) Other Organizations.

The Individuals & Families page is further broken down into two subtopics designed to educate the public on what they need to consider immediately (in 2013) and what they should look forward to in 2014.  Individuals should explore and begin planning for open enrollment in the Health Insurance Marketplace, which opens October 1, 2013.

The Employers page has a separate set of instructions for small employers (fewer than 50 full-time employees) and large employers (50 or more full-time employees).  It helps to educate employers on their specific coverage and reporting requirements and also explains what employer credits might be available.

Some organizations will be subject to special rules under the Affordable Care Act.  These “other organizations” include insurers, miscellaneous business types, non-profits, and government agencies.

The ACA website features a nifty news bar so we can always stay informed of new developments related to the Affordable Care Act.  It also very neatly lists all the various tax provisions, both in layman’s terms and in the form of news releases, notices, regulations, revenue procedures, revenue rulings, and Treasury decisions for the tax lawyer and studious type.  Lastly, the new ACA website includes links to related federal government websites like the Department of Health & Human Services, the Small Business Administration, and the Department of Labor.

Did Lerner Mishandle Official Emails?

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These days I think few employers would have a problem with their employees using a company email account for personal matters.  As long as they are not goofing off while on the clock, it doesn’t cost the employer anything.  Although I am sure it is often listed as a prohibited activity in employee handbooks, I do not imagine it to be the type of rule that is strictly enforced.

But using a personal email account for business purposes is a bigger problem.  It would be unprofessional to send an official email from a personal account or to accept business emails on a personal account.  Sending internal documents from work to your own personal email account is an even bigger problem.  The House Oversight and Government Reform Committee apparently has been informed that Lois Lerner did just this.

Lois Lerner is the lady at the center of the IRS Tea Party targeting scandal.  She was thrust into the spotlight back in May when she invoked her 5th Amendment rights, refusing to testify before Congress.  Presently, the Committee is asking Lerner to produce “all documents and communications housed in [her] msn.com account.”  She has until August 27th to comply, after which I would imagine she will be subpoenaed, after which I imagine her lawyers will dispute it as being overbroad.

What makes this behavior especially repugnant is that THIS IS THE IRS we’re talking about, not a private company!  This is a branch of the US Treasury that we trust will be able to play fairly and keep information safe and secure.  Let’s hope we find out that Lerner was actually only emailing herself an innocent meme or something…

IRS and the DOMA Decision

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On June 26th the Supreme Court overturned a portion of the Defense of Marriage Act (DOMA) in Windsor v. United States.  This opinion held that section 3 of DOMA is unconstitutional because it deprives same-sex married couples of equal treatment under the Fifth Amendment.  So what kind of tax consequences does this have for same-sex couples?  The IRS hasn’t officially weighed in on this yet other than providing this curt statement on their website:

We are reviewing the important June 26 Supreme Court decision on the Defense of Marriage Act. We will be working with the Department of Treasury and Department of Justice, and we will move swiftly to provide revised guidance in the near future.

In simplest terms, the federal government, including the IRS, must now treat same-sex  couples who are legally married the same as their heterosexual counterparts.  Therefore, married same-sex couples should now be allowed to file a joint tax return and take advantage of various estate planning provisions that have traditionally been available only to heterosexual couples.

It is impossible to determine how many same-sex married couples will file amended tax returns in hopes of getting a refund.  Not all people benefit from filing jointly, and not everybody wants to file jointly, even if there is some financial benefit.  According to IRS rules, those that do see a benefit may go back only three years seeking refunds.

There are still several unanswered questions:

  • What happens when couples marry in a state that recognizes same-sex marriage, but then move to a state that does not recognize it?
  • Will same-sex marriages be considered valid for federal tax purposes retroactively?
  • Will civil unions be treated as marriages for federal tax purposes?

 

The Taxpayers' Rights Advocate's Big Announcement

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You’ve probably heard of the National Taxpayer Advocate Service (TAS) — this is the quasi-independent agency charged with looking out for the rights of taxpayers across the nation.  They like to say that they’re “your voice at the IRS.”  The head of TAS is Nina Olson and she has made her way into this blog on several occasions.  And if you live in California, you may know that we have a state counterpart to TAS called the Taxpayers’ Rights Advocate’s Office, the top advocate being Steve Sims.

These advocate groups, on both the national and the state level, love to point out what they have done to fight for the average taxpayer in the name of tax relief.  So I wasn’t surprised to see a self-congratulatory statement from Sims in the July 2013 edition of the FTB Tax News newsletter.  And I wasn’t surprised that the statement had to do with increasing the lien filing threshold for Californians with state tax debts.  The IRS did this too some time back as a way to help those who struggle with heavy tax burdens in a down economy.

A tax lien is a collection tool used by both the IRS and FTB to protect their interest when taxes are owed.  When a notice of tax lien is filed, it puts other creditors on notice and acts as a smudge on that person’s credit.  Increasing the threshold for lien filings is a good thing for both taxpayers and the taxing entity; it has been shown that they are one of the least effective tax collection tools anyway.

So, what was surprising then?  Well, Steve Sims announced that FTB “increased the general guideline amount for filing a lien from $1,000 to $2,000 beginning in July 2013.”  What a miserable little success that was for him and his staff!  Hardly worth bragging about in my humble opinion.

How to Expedite Non-profit Status

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One study related to the IRS scandal showed that non-profit groups with legal representation were subjected to fewer probing questions and experienced fewer obstacles during the non-profit application process than groups without legal representation.  Interestingly, many groups that began the application process without an attorney noticed that their applications were quickly approved right after hiring an attorney.

This is probably not all that surprising to attorneys.  We, of all people, believe that our services are valuable.  One can typically expect a better result and smoother legal process by hiring a lawyer, although not everyone is convinced of this.

In this day and age it is easy to obtain information about any legal topic.  Many people feel that as long as they are well informed and educated about their specific legal predicament then they can handle the issue on their own.  In a down economy it is even more common for individuals to try resolving legal problems on their own, thinking they can save a buck.

The answer to the question, “Do I really need an attorney for this?” is almost always “no.”  But knowing the law is only half the battle, and an attorney can bring so much more to the table than just information:

  • ability to strategize
  • ability to organize information
  • ability to present information (verbally and in writing) in a logical fashion
  • superior persuasion skills
  • ability to apply the law to a specific set of facts
  • real life experience

It’s one thing to know rules in the abstract, but it’s quite another to have seen how the rules play out in practice.  This is particularly true in the world of Federal Tax Resolution where the IRS is inconsistent and unpredictable in the application of the rules.  It is the difference between book smarts and street smarts, and tax lawyers typically have both.

Yes, of course you need to do your own research.  And, yes, you need to be careful and thorough in the process of hiring an attorney.  But you should also be well aware of what you may be giving up by representing yourself in an important legal dispute.

National Small Business Week 2013

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There are so many elements involved in operating a successful business, only some of which are controllable by the owner.  You need a good business plan, adequate capital investment, not to mention an excellent product or service.  You also need to figure out how you’re going to market that product or service.  Of course, it helps if you have a head for business; some people just seem to “get it.”  But even these measures do not ensure success because so much depends on timing and luck.

One element that people tend to overlook when they start a business is the tax consequences and requirements.  No luck involved here.  And, thankfully, you don’t really need to have a knack for numbers or a specialized knowledge of tax laws to make sure the tax aspects of your business are in order.  What you do need is a basic understanding of what tax requirements apply to your business and where to go for answers.

Some small business owners consult with a tax accountant or a tax attorney in the opening and operating of their business.  But if you’re not in a position to hire a tax professional, there are still excellent resources at the IRS, especially this week.

It is National Small Business Week 2013 and the IRS is offering two free webinars, one on June 18th and one on June 20th.  The June 18th webinar is entitled “Small Business Owners: Get All the Tax Benefits You Deserve” and the June 20th webinar will cover the topic of “common mistakes.”  If you don’t have a chance to register and watch live, the IRS will be archiving both webinars on the IRS Video Portal.

Interested in hearing President Obama’s self-congratulatory introduction to National Small Business Week?  In a minute and a half he lists everything his administration is doing to help small businesses succeed.  Me neither.  But here’s the link anyways:

http://www.whitehouse.gov/blog/2013/06/17/50-years-national-small-business-week

The IRS has a new misstep every day – what scandal is next?

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During congressional hearings on the Internal Revenue Service (IRS) scandal, Congressman Hal Rogers (Republican – Kentucky) said, “It seems we have a new misstep every day at the IRS.” This is on the heels of news of lavish spending on conferences by the IRS. This of course was expected after new broke in March about the ridiculous Star Trek Parody Videos.

A report released Tuesday by the Treasury Inspector General for Tax Administration (TIGTA) details frivolous spending by the IRS which included $27,000 on an innovation expert, $10,000 on diversity and inclusion expert, $11,000 on a happiness expert, and $17,000 for something called leadership through art.  Given the overall demeanor of the IRS employees I’ve had the pleasure of dealing with as a tax attorney; I don’t necessarily disagree with the IRS trying to improve their happiness.

TIGTA conducted its audit to identify the IRS’s spending on conferences during fiscal years 2010 through 2012.  The audit’s primary focus was on the IRS Small Business and Self-Employed division’s 2010 conference in Anaheim where it spent $4.1 million for planning trips, outside speakers, video productions, and promotional items and gifts for IRS employees.

“Excessive spending by federal agencies on management conferences has been highlighted by recent Inspectors General reports and in congressional hearings,” said TIGTA Inspector General J. Russell George. “Effective cost management is especially important given the current economic environment and focus on Government efficiency. Certain of the IRS’s expenses associated with the Anaheim conference do not appear to be a good use of taxpayer funds.”

In watching the recent hearings, it seems like members of Congress are out of touch with their constituents and surprised as to the frustrations the public has to endure while dealing with the IRS every day. The surface is just being scratched as to inappropriateness at the IRS as the issues under scrutiny have not even (yet) dealt with IRS collection and audit issues. However, there may be pressure to not bring such issues to light as I suspect the IRS collection and audit practices may scare the public, and as Congressman Mike Kelly (Republican – Pennsylvania) repeatedly lectured during Tuesday’s hearings, “do not be afraid of this government.”

Tax Reform: Is this the Year?

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Lawmakers have, for years now, talked about simplifying the tax code — an enormous project that nobody seems to be committed to tackling.  It would be a difficult task even if lawmakers could agree on the changes, but partisan differences further complicate the task.  Maybe it takes some kind of tragic event to kick them into gear and make it a priority.  Maybe the recent IRS scandal is just the thing.

Two lawmakers hope that’s the case.  David Camp, a Michigan Republican, and Max Baucus, a Democrat from Montana, believe that the IRS scandal puts the complexity of the tax code on center stage once again.  Here’s how:

The complexity of the law didn’t require the IRS to target people for their political beliefs [but] I think giving the IRS less discretion is going to be important, and that’s what a simplified code would do.

~ David Camp, Chairman of the House Ways and Means Committee

Well, first I’m not sure a simplified code would really give the IRS less discretion.  And second, I’m not sure less discretion is always best.  I suppose if we take enough out of the tax code to effectively reduce and minimize the role of the IRS, then that could result in less discretion.  But if a simplification results in less detail where detail is needed, then it may have the opposite effect.  Generally speaking, I think the wordier the law, the less opportunity for discretion.

In my experience with IRS collections and tax relief cases, I would prefer more discretion as long as it is coupled with better training and more highly qualified personnel.  It is that inability to think outside the box and make common sense decisions that gives the IRS a bad name and creates so much frustration on the part of taxpayers and their representatives.