An IRS Chiller Case of the Disappearing Dependents

October 2023
By Albert B. Crenshaw
February 14, 1991
 

More than 2 million American children have vanished -- vaporized, it seems, by the tax code.

It began in 1988 when Congress, as part of a welfare reform package, began requiring parents who take a special tax credit for child care expenses to identify their day care providers. There was widespread suspicion that many providers were not reporting the income they were getting for their services.

The identification requirement went into effect in 1989.

Now the Internal Revenue Service has found a dramatic decline in the number of tax returns claiming the tax credit. After years of fairly steady increases, peaking at 8.7 million in 1988, the number plunged to 6 million in 1989. The value of the credit to taxpayers dropped from $3.7 billion in 1988 to $2.5 billion in 1989.

At the same time, the number of child care providers skyrocketed from 262,000 in 1988 to 431,000 in 1989, a roughly 65 percent increase. The IRS has not calculated the revenue gain, but it is likely to be substantial.

The IRS has not finished studying the numbers, nor has it decided what to do about them. But a spokesman said that while there are legitimate explanations for part of the decline, the agency is assuming that at least some of the disappearing children were fictitious.

He noted that this is the second mass disappearance of dependents following a change in reporting rules. In 1987 -- when the law began demanding the Social Security number of anyone over age 5 (now it is age 2) claimed by a taxpayer as a dependent -- some 6 million "dependents" disappeared from the tax rolls.

That resulted in a revenue gain to the government of $2.8 billion in 1987 alone, the IRS spokesman said.

Besides fictitious children, the spokesman said, there are probably parents who decided to continue with an under-the-table arrangement -- in which the provider does not report the income -- and forget the tax credit.

"We will probably be taking a look at some of these areas, especially first-time {day care income} filers. . . ," the IRS official said. "We'll probably be contacting those individuals to see if they had income from child care in previous years or was this in fact their first year" in business.

And the agency will likely "be looking at returns where they stopped claiming the child care credit" to find out whether they might be using an off-the-books provider or conversely whether they were truly eligible for the benefit in the past.

Plainly, not all the children who have gone off the rolls did so because their parents or day care people were cheating.

Former IRS commissioner Lawrence Gibbs, asked about the numbers, said that while they suggest plenty of taxpayers "are making less than honest errors," others may well be genuinely confused by the system.

Gibbs noted that in a pilot program in Boston designed to increase the accuracy of IRS telephone advice, the agency was startled at how difficult it is to sort out the dependency rules.

Also, a number of children outgrow day care each year and in other cases their parents make different but perfectly legal arrangements, the IRS spokesman said.

On top of that, changes in the law have restricted eligibility for the tax credit while making the program less attractive to certain parents.

For example, until 1988, children up to age 15 could qualify; now the limit is 13.

At the same time, Congress eliminated the practice of piggybacking the tax credit on another child care benefit known as a dependent care account. Under the latter benefit, which is offered by employers, pre-tax money is deducted from a worker's pay and placed into an account that the worker can draw on to pay child care costs.

Not all employers offer this plan, but parents who have the choice usually find it a better deal and drop the tax credit.

 

Posted at 04:00 PM in IRS | | Comments (0)

IRS Dirty Dozen Campaign Warns Taxpayers To Avoid Offer In Compromise ‘Mills’

April 2023

Kelly Phillips Erb, Forbes Staff
Apr 3, 2023,03:55pm EDT

Owing taxes can be stressful. Unfortunately, the actions of some companies can make it worse. As part of its "Dirty Dozen" campaign, the IRS has renewed a warning about so-called Offer in Compromise "mills" that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar—while the companies collect excessive fees.

Dirty Dozen

The "Dirty Dozen" is an annual list of common scams taxpayers may encounter. Many of these schemes peak during tax filing season as people prepare their returns or hire someone to help with their taxes. The schemes put taxpayers and tax professionals at risk of losing money, personal information, data, and more.

(You can read about other schemes on the list this year—including aggressive ERC grabs here, phishing/smishing scams here and charitable ploys here.)

Tax Debt Resolution Schemes

"Too often, we see some unscrupulous promoters mislead taxpayers into thinking they can magically get rid of a tax debt," said IRS Commissioner Danny Werfel.

"This is a legitimate IRS program, but there are specific requirements for people to qualify. People desperate for help can make a costly mistake if they clearly don't qualify for the program. Before using an aggressive promoter, we encourage people to review readily available IRS resources to help resolve a tax debt on their own without facing hefty fees."

Offers In Compromise

Legitimate is a key word. Offers in Compromise are an important program to help people who can't pay to settle their federal tax debts. But, as the IRS notes, these "mills" can aggressively promote Offers in Compromise—OIC—in misleading ways to people who don't meet the qualifications, frequently costing taxpayers thousands of dollars.

An OIC allows you to resolve your tax obligations for less than the total amount you owe. You generally submit an OIC because you don't believe you owe the tax, you can't pay the tax, or
 exceptional circumstances exist.

Because of the nature of the OIC—and the dollars involved—the process can be time-consuming. It can also be confusing for taxpayers who may not have a complete grasp on their finances.

First, you must complete a detailed application, Form 656, Offer in Compromise. You must also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses, with supporting documentation (generally, bank and brokerage statements and proof of expenses).

You'll also need to submit a non-refundable fee of $205 and payment made in good faith. The payment is typically 20% of the offer amount for a lump sum cash offer or the first month's payment for those made over time. Generally, initial payments will not be returned but will be applied to your tax debt if your offer is not accepted. Payments and fees may be waived if the OIC is submitted based solely on the premise that you do not owe the tax or if your total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.

The IRS will examine your application and decide whether to accept it based on many things, including the total amount due and the time remaining to collect under the statute of limitations. The IRS will also review your income—including future earnings and accounts receivables—and your reasonable expenses, as determined by their formula. The IRS will also consider the amount of equity you have in assets that you own—this would include real property, personal property (like automobiles), and bank accounts.

Criteria

Before your offer can be considered, you must be compliant. That means you must have filed all your tax returns and paid off any liabilities not subject to the OIC. After you submit your offer, you must continue to timely file your tax returns, and pay all required tax, including estimated tax payments. If you don't, the IRS will return your offer.

Additionally, you cannot currently be in an open bankruptcy proceeding, and you must resolve any open audit or outstanding innocent spouse claim issues before you submit an offer.

Representation

You can probably tell—it's a lot to consider. You may want representation. A tax professional can help marshal you through the process and offer practical guidance, while communicating what fees could look like.

By contrast, according to the IRS, an OIC "mill" will usually make outlandish claims, frequently in radio and TV ads, about how they can settle a person's tax debt for cheap. Also telling: the fees tend to be significant in exchange for very little work.

Those mills also knowingly advise indebted taxpayers to file an OIC application even though the promoters know the person will not qualify, costing taxpayers money and time. You can check your eligibility for free using the IRS's Offer in Compromise Pre-Qualifier tool.

“Pennies On A Dollar”

What about those promises that taxpayers can routinely settle for pennies on a dollar? Not true. Generally, the IRS will not accept an offer if they believe you can pay your tax debt in full through an installment agreement or equity in assets, including your home. That's why the IRS tends to reject a majority of OICs that are submitted. The acceptance rate is less than 1 in 3, according to the 2021 Data Book.

The IRS will generally approve an OIC when the amount offered represents the best opportunity for the IRS to collect the debt. It’s true that there’s a formula that the IRS uses to figure out how much they think they can collect from you. But there is some wiggle room to account for special circumstances, including a loss of income or a medical condition. It’s worth noting those are the exceptions, not the rule.

Collections

While submitting an OIC may keep the IRS from calling you, it doesn't stop all collections activities—don’t believe companies that suggest that submitting an OIC will make your tax debt disappear. Penalties and interest will continue to accrue on your outstanding tax liability. Additionally, the IRS may keep your tax refund, including interest, through the date the IRS accepts your OIC.

You may also be liened. In most cases, the IRS will file a Notice of Federal Tax Lien to protect their interests, and the lien will generally stay in place until your tax obligation is satisfied.

Be Skeptical

An OIC is a serious effort to resolve tax debt and shouldn't be taken lightly. Be skeptical—if it sounds too good to be true, it likely is. If you're considering an OIC, hire a competent tax professional who understands the rules and is willing to level with you about your chances of being successful—including other options. Don’t fall into a trap that can make your situation worse.

 

Posted at 09:55 AM in IRS | | Comments (0)

No, that is not the IRS calling you

March 2023
Advice by 
Columnist
March 31, 2023 at 10:04 a.m. EDT
 

This is an updated column. It originally ran Aug. 12, 2016.

I knew the calls were a scam.

Like so many, I’ve been getting calls from people pretending to be from the IRS. A few times a week, I get an automated message telling me that I need to call back a number in reference to the money I owe.

I called the number once. A man identified himself as an IRS employee. Then he asked a question that was, I guess, meant to frighten me.

“Do you have a criminal defense attorney?”

“No, why?” I asked.

“This is an important matter with the IRS and you need an attorney,” he said.

I told the man I knew this was a scam. He immediately hung up on me.

Before I share my next would-be swindle story, I need to tell you that I sometimes call the number back because I want to see what the scammers are saying to get people to send money. Don’t do what I did. Don’t engage these criminals. If you get one of these calls, hang up immediately.
 

But there was the time I got a call that had me stunned by the brazen and bizarre way the guy tried to scam me.

The caller identified himself as Frank Cooper. I checked the caller ID, and the number came up “Jamaica 1-876-387-5721.” The man first claimed he was calling on behalf of Publishers Clearing House.

I had won $2.5 million, he said. Oh, and I would also be getting an S-Class Mercedes-Benz — “champagne white.”

In an effort to convince me that the prize was real, he even gave me a check number — 5122285365. He told me to repeat the number, which I did as I played along.

By the way, I could hear others in the background spinning a similar tale.

Anyway, I was told that a “licensed merchant banker” near my neighborhood was ready to hand me my check, which was in a locked briefcase. The caller gave me what he said was the combination code — 4981776. Again, he asked me to repeat the number.

And then came the con.

“But you can’t get the money unless you register with the IRS and pay a fee of $8,000,” he said.

“Wait, if this is a prize, why do I have to pay a fee?”

“Ma’am, do you want your money or not?” the man said, raising his voice with an indignant tone as if I were the fool. “How do you not know that you must register with the IRS?”

Then he switched his language to sound as if he were actually representing the IRS.

I was instructed to withdraw the cash from my bank account, split it into two bundles of $4,000 and put the money in envelopes that I should wrap in newspaper. Then I was supposed to make my way to the nearest FedEx Office parking lot and call when I got there to get the address to mail the money overnight express.

“That hardly seems safe,” I said. “What proof do I have that you have received the cash?”

“Get insurance on the mailing,” the guy said.

I clearly was asking too many questions, so Cooper put his “general manager Ray Kingston” on the line.

“Are you ready to send the money?” the supposed Kingston asked.

Tired of this foolishness and fraud, I said, “Now, you know this is a scam.”

The next thing I heard was a dial tone.

The sad thing is that lots of people are falling for schemes like these. In many cases, the scammers threaten people with arrests to try to scare them into paying. The IRS would never ask you to pay your taxes using a gift card. The IRS will not ask for debit or credit card numbers over the phone.

The losses stemming from IRS impersonation cases from October 2013 through March 2022 amount to $85 million, according to TIGTA. The scams involved almost 16,038 victims. Victims span across the United States, but California, New York, Texas, Florida and New Jersey are the top five states based on the number of victims. And those are just the reported cases.

If you get such a call or if you’ve fallen victim, go to tigta.gov. Click the button for “Report Waste, Fraud, Abuse.” Become more informed on IRS phone scams and other impostor scams by going to ftc.gov/imposters.

And if someone calls claiming to be from the IRS, hang up immediately unless you initiated contact on a matter you know is legit.

 

Posted at 04:04 AM in IRS | | Comments (0)

Why California taxpayers could get an unpleasant surprise if they file for this deduction

March 2023
Kathleen Pender
 

As short-term interest rates soar and banking fears rise, more investors are stashing their cash in short-term Treasury securities, either directly or through government money market funds.

Last month, yields on six-month Treasury bills topped 5% for the first time in 16 years only before a burst of panic buying in the wake of Silicon Valley Bank’s failure pushed yields below that threshold this week.

In addition to being backed by the U.S. government, the interest on Treasury securities is exempt from state (but not federal) income taxes. That’s a nice perk in California, where the top tax rate is 13.3%, highest in the nation.

If you buy Treasurys directly – through a brokerage account or the government website TreasuryDirect.gov – you’ll pay federal tax on the interest but can deduct it on your California tax return.

If you own shares in a government mutual fund, you generally can deduct on your state taxes the percentage of annual dividends that came from Treasurys and a small number of other government securities.

However, if you live in California, New York or Connecticut, which have a tougher rule for these dividends, you may get no state-tax deduction. 

This was especially true in 2022, as some California investors may discover when they prepare their tax returns. 

For example, T. Rowe Price has two government money funds: Government Money and U.S. Treasury. On their 2021 returns, shareholders everywhere could deduct 86% and 87% of their dividends, respectively. For 2022, shareholders in most states could deduct only 27% and 21%, respectively. But those in California, New York and Connecticut got zero state-tax exemption.

To understand why, it’s important to know what these funds invest in, their confusing nomenclature and California’s special rule.

Money market funds invest in short-term, high-quality securities. Although they’re not guaranteed, they’re generally considered a relatively safe place to put money you may need within a few years. They are sold by mutual fund companies and should not be confused with money market deposit accounts offered by banks, which are guaranteed, up to a limit, by the Federal Deposit Insurance Corp. 

There are three types of money market funds.

• “Prime” funds hold cash and securities issued by the government, government agencies, corporations and in certificates of deposit. Their dividends are largely taxable at the federal and state level. You won’t find government or Treasury in their names.

• “Municipal” or “tax-exempt” funds buy securities issued by state and local governments.  Their dividends are exempt from federal tax, and from state tax to the extent they came from securities issued in your home state.

• “Government” funds normally invest at least 99.5% of assets in cash, U.S. government securities and/or repurchase agreements that are fully collateralized by cash or government securities. 

Some of these U.S. government securities are exempt from state and local taxes, namely Treasurys and a limited number of government-agency securities. Other government securities, such as those issued by Fannie Mae and Freddie Mac, are not exempt from state and local tax.  Repurchase agreements are also not exempt. Nicknamed “repos,” these are essentially short-term – often overnight – lending agreements.

“Treasury” money market funds are a type of government fund that normally invest in cash, Treasurys and/or Treasury-backed repos, but not other government securities. Funds labeled “Treasury Only” or “100% Treasury” generally invest only in Treasurys, not repos.

Each year, fund companies issue a report showing the percentage of dividends that came from government securities eligible for a state-tax exemption, so shareholders can figure out how much of their federally taxed dividends they can deduct on their state return.

For example, if 80% of a fund’s dividends came from eligible securities (primarily Treasurys),  80% of dividends are generally exempt from state tax. 

California, however, only allows a state-tax exemption if at least 50% of the fund’s assets at the end of each calendar quarter were in these eligible government securities. (New York and Connecticut have this same rule.)

If the fund meets that 50% of assets test, then shareholders in these three states can deduct whatever percentage of dividends came from eligible securities, just like shareholders in other states.

But if the fund fails the 50% test, none of its dividends are exempt from state tax in the three states.

In 2022, many government money funds shifted a much larger percentage of assets from Treasurys (which are state-tax exempt) into repurchase agreements (which are not). 

As a result, shareholders in many government money funds got a much smaller state-tax deduction. And because of the 50% rule, many in California got zero deduction.

Let’s take a look at Vanguard’s Federal and Cash Reserves Federal money funds, which are the nation’s largest and third-largest government money funds, respectively, according to Crane Data.

In 2021, they each derived almost three-fourths of dividends from eligible government securities. And both met the 50% of assets test, so investors in all states could deduct nearly three-fourths of their dividends on their state-tax returns.

But in 2022, Vanguard Federal and Cash Reserves Federal got only 38% and 53% of dividends, respectively, from eligible securities. Both failed the 50% test, so shareholders in California, New York and Connecticut got no state-tax deduction, while investors in other states could deduct 38% of dividends and 53% of dividends, respectively.

Notice that a fund, like Cash Reserves, could get more than 50% of its dividends from Treasurys but still fail the 50% of assets test. 

Investors in the firm’s third government fund, Vanguard Treasury, could deduct 100% of dividends in 2021 and 2022.

So why did so many fund managers favor repos over Treasurys last year, which cut into state-tax deductions?

Money market funds can enter into repurchase agreements with the Federal Reserve Bank of New York as part of its program to maintain the target federal funds rate. These agreements are backed by the New York Fed’s Treasury holdings. Most other investors cannot access this program.

During the pandemic, “you had a ton of stimulus money coming into the system,” said Doug Spratley, a T. Rowe Price fund manager. Municipalities, corporate treasurers and individuals who had excess cash gobbled up short-term Treasurys. This “pushed yields on Treasury bills below overnight repos, sometimes by one-fourth of a percent or more,” he said. 

So money funds piled into the New York Fed’s repurchase program.

Also, when interest rates are rising, investors want to be in short-term securities, so when their investments mature, they can reinvest at higher rates. Overnight repos are the shortest term possible.

The New York Fed program “is the single biggest holding in money funds now,” said Peter Crane, publisher of Money Fund Intelligence.

Buying a “Treasury” money fund doesn’t guarantee a tax exemption in California because many of these funds can invest in repos.

California investors who want a guaranteed state-tax deduction should look for money funds that invest in Treasurys only, not repos. Sometimes you can tell by their names (such as 100% Treasury or Treasury Only), but not always.

For example, the Schwab Treasury Obligations Money Fund invests in repurchase agreements while the Schwab U.S. Treasury Money Fund does not, Schwab spokesman Mike Peterson said via email.

Investors should also compare the yields on Treasury-only funds to other government and prime funds. 

Normally, yields on Treasury-only funds lag yields on funds that can buy repos and other government securities, but they could still be higher on an after-tax basis. Today, their yields are very close.

As of Monday, the average seven-day yield for retail money funds was 4.33% for prime funds, 4.06% for government funds and 4.12% for Treasury funds (including Treasury-only funds), according to Crane Data.

Investors can also guarantee themselves a state-tax deduction by buying Treasurys directly, but they’ll have to take charge of reinvesting the proceeds as they mature, unless they set up automatic reinvestment.

Normally, a Treasury-only money market fund would be considered one of the safest bets out there. But because of the looming fight in Congress over the federal debt ceiling, there are some concerns.

Treasury-only money funds “have higher relative risk to a U.S. government default than prime and government (money funds) that can diversify investments into other instruments,” Fitch Rating said in a report.  (Fitch is owned by Hearst, which also owns The Chronicle.)

Since Jan. 19, when the U.S. government hit its debt limit, the U.S. Treasury has been using extraordinary measures to meet its obligations. At some point, called the X date, it will exhaust those and could conceivably default on some obligations, including Treasury securities.

The X date is likely between July and September, but could hit as early as June.

Treasury-only funds “could face increased volatility in the Treasury market and heightened investor redemptions as the debt ceiling deadline approaches,” Fitch wrote.

To reduce this risk, fund managers would likely cut back on Treasurys maturing around the expected X date, Fitch said. It currently expects the ceiling will be raised or suspended to avoid a default, although that opinion could change.

Pete Gargiulo, a director with Fitch, said he can’t give investment advice, but “if you are buying Treasury bills directly,” the debt ceiling “is a consideration. The timing can be very challenging.” He said “fund managers have been through debt-ceiling standoffs before. They have navigated these waters. That’s one benefit of being in a Treasury-only money market fund.”

But Crane said he doesn’t think the “state-tax bonus” of being in a Treasury-only fund is worth the risk. “Wait until after the debt ceiling is raised, or better yet, buy a California municipal money market fund,” he said.

Posted at 03:54 PM in IRS | | Comments (0)

California extends deadline to file 2022 income taxes to match IRS decision

March 2023
Kathleen Pender
 

California announced Thursday that it will follow the lead of the Internal Revenue Service and extend tax filing deadlines to Oct. 16 for almost all people and businesses in the state.

Those taxpayers will have until Oct. 16 to file their 2022 federal and state income tax returns and pay any taxes due without penalty. The new deadline also applies to other tax payments this year.

In January, the IRS postponed tax deadlines until May 15 for residents and businesses in most of California and parts of Georgia and Alabama that were declared federal disaster areas because of winter storms. The California Franchise Tax board went along with the May 15 postponement.

On Friday, the IRS went further and extended tax deadlines for these areas until Oct. 16.  The state has now conformed to those deadlines.

The disaster declarations include 51 of California’s 58 counties (including all nine in the Bay Area) and cover storms in December and January, which caused flooding, landslides and mudslides.

“The state is aligning with the Biden Administration and extending the tax filing deadline in addition to the tax relief announced earlier this year,” Gov. Gavin Newsom said in a press release.

The Oct. 16 extension applies to tax deadlines falling between Jan. 8 and Oct. 15. It includes:

  • Individuals whose tax returns and payments are due on April 18.

  • Quarterly estimated tax payments due on Jan. 17, April 18, June 15 and September 15.

  • Business entities whose tax returns are normally due on March 15 and April 18.

  • Elective tax payments for pass-through-entities due on June 15.

In an updated winter storm page on its website, the FTB says, “If your principal residence or place of business is in one of the counties that are part of the declared disaster area, you are an affected taxpayer and entitled to relief. No supporting documentation is required.” 

Individuals and businesses who suffer an uninsured or unreimbursed loss in a federally declared disaster can take a deduction for it on their federal and state tax returns. They can claim the loss on either the return for the year the loss occurred or the return for the prior year, the IRS and FTB both say. 

California taxpayers claiming a disaster-loss deduction should write the name of the disaster in blue or black ink at the top of their tax return to alert FTB. If filing electronically, they should follow the software instructions. If a taxpayer receives a late filing or payment penalty notice related to the postponement, they should call the number on the notice to have the penalty abated, it said.

The California counties covered by the disaster declarations include: 

Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Inyo, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Nevada, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Ventura, Yolo and Yuba.

“If you are not in a covered disaster area but your tax records necessary to meet a filing or payment tax deadline are located with your tax practitioner in a covered disaster area, you still qualify for the disaster relief,” the FTB says.

 

Posted at 11:18 AM in IRS | | Comments (0)

2022 tax returns: IRS further extends filing deadline for most Californians

February 2023
Jessica Flores
 

The Internal Revenue Service has further extended its tax filing deadline for Californians affected by the winter storms pounding the state — which means the entire Bay Area and most of the rest of the state have until the fall to file and pay their federal taxes. 

The agency set Oct. 16 as the new deadline for eligible individuals to file their 2022 federal individual and business tax returns and to make tax payments, the IRS announced Friday. Residents, households and business owners in 44 California counties listed in a federal emergency declaration earlier this year are eligible for the extension. All nine Bay Area counties are on the list, along with the rest of the state's major population centers.

The new deadline replaces the May 15 extension granted in early January after deadly “atmospheric river” storms devastated large swaths of the state. The original deadline was April 18.

California officials are reviewing the IRS announcement and will provide information on the Franchise Tax Board website “soon” on whether they also plan to extend the deadline for state tax returns and payments, said Andrew LePage, a spokesperson for the Franchise Tax Board, on Monday.

The Franchise Tax Board followed suit when the IRS announced its first deadline extension earlier this year.

Here are key details about the new federal extension: 

What is the IRS extension, and what does it affect?

The new extension postpones until Oct. 16 most tax filing and payment deadlines for individual and business returns for the 2022 calendar year. 

For eligible taxpayers, the Oct. 16 deadline applies to:

• Individual income tax returns, originally due on April 18; various business returns, normally due March 15 and April 18; and returns of tax-exempt organizations, normally due May 15.

• Contributions to IRAs and health savings accounts.

• Returns and payment of any taxes due by farmers who do not make estimated tax payments and normally file their returns by March 1.

• Estimated tax payment for the fourth quarter of 2022, originally due on Jan. 17, 2023.  Taxpayers can skip that payment and include it with the 2022 return they file on or before Oct. 16.

• 2023 estimated tax payments, normally due on April 18, June 15 and Sept. 15. 

• Quarterly payroll and excise tax returns normally due on Jan. 31, April 30 and July 31.

How do I know if I qualify for the IRS extension?

Everyone who lives in or has a business in one of the 44 California counties listed by the IRS qualifies for the deadline extension.

The counties are: Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Inyo, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Nevada, Placer, Sacramento, San Benito, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, San Diego, San Francisco, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Ventura and Yolo.

Do I have to request the extension?

If your address on record with the IRS is within the disaster area, you do not have to make a request — the extension is automatic.

If you qualify but receive a notice of late filing or late payment penalty, the IRS says you should call the number listed on the notice to have the penalty removed.

Posted at 10:20 AM in IRS | | Comments (0)

IRS tech is so ‘archaic’ the agency struggles to find people to work it

February 2023

Perspective by
February 24, 2023 at 6:00 a.m. EST

The Internal Revenue Service, which funds nearly everything the federal government does, uses information technology that is creaking with old age. Some of its computer systems are so antiquated, a federal watchdog complains, that it’s difficult to find people who know how to work them.

In one example, a Government Accountability Office report released this month notes the tax agency’s use of an “obsolete programming language” called COBOL, which could lead to “difficulty finding employees with such knowledge,” adding that this “shortage of expert personnel available to maintain a critical system creates significant risk to an agency’s mission.”

That means, the report continues, the “IRS will face mounting challenges in continuing to rely on a system that has software written in an archaic language.”

GAO deemed 33 percent of IRS applications, 23 percent of software and 8 percent of hardware as “outdated but still critical to day-to-day operations.” This includes applications 25 to 64 years old and software up to 15 versions behind. “These legacy assets will continue to contribute to security risks, unmet mission needs, staffing issues, and increased costs,” GAO declared.

“A private company with tens of millions of customers would go belly up if their information technology was older than the CEO’s parents,” said Tony Reardon, president of the National Treasury Employees Union, which represents IRS employees. “Yet that is what the IRS deals with every day.”

The use of obsolete systems, he added, “most certainly discourages people trained in cutting-edge computer technology from pursuing a career at the IRS.”

Aggravating this old-age drama is the tax agency’s recent suspension of six modernization projects, which the GAO said includes operations “essential to replacing the 60-year-old Individual Master File (IMF),” described as “the authoritative data source” for individual tax accounts. The IRS had been trying to replace the master file for more than a decade but then decided to reassign employees to other work.

“As a result, the schedule for these initiatives is now undetermined,” GAO said. The target completion date, announced last year as 2030, “is now unknown. This will lead to mounting challenges in continuing to rely on a critical system with software written in an archaic language requiring specialized skills.”

All this makes trouble for taxpayers, who paid $4.1 trillion in taxes and were refunded $1.1 trillion in fiscal 2021.

The IRS’s “Where’s My Refund” application is in high demand, but on a GAO podcast accompanying the report, David B. Hinchman, the watchdog’s director of IT & cybersecurity, said the program “isn’t capable of accessing detailed information on an individual’s tax return status,” leaving many disappointed. Compounding the problem, Hinchman said taxpayers then call the IRS’s toll-free numbers, “which due to IRS staffing shortages might, at best, have insanely long waits to talk to someone, at worst might actually go unanswered.”

Money for modernization apparently isn’t the problem. The IRS reported spending almost $7 billion on IT in fiscal 2021 and 2022 combined, according to GAO. Nearly $80 billion for the IRS in the Inflation Reduction Act, approved in August, included almost $4.8 billion for business systems modernization and more than $25.3 billion for operations support, which includes operating and maintaining its IT systems.

The IRS has long been a Republican target and last month, in one of the first actions after the party won control of the House, it voted to rescind the $80 billion boost, on a straight party-line vote. A House Ways and Means Committee statement claimed Democrats had “supercharged” the IRS and “have long used the IRS and the tax code as a political weapon.” A committee staffer said the rescission would not hit business systems modernization and taxpayer services. The House bill has little chance of passing the Senate.

Rep. Gerald E. Connolly (D-Va.), who requested the GAO report, complained that Republicans previously were “starving the agency,” leaving it “understaffed and under-resourced,” adding that “the IRS does not even have its arms around its legacy IT problem.”

Yet, the IRS had 21 IT modernization initiatives in August 2022, GAO reported, but more than a quarter of them did not have time frames for addressing antiquated systems. Without that, “IRS lacks accountability for completing this key element,” GAO said.

“At the end of the day, IRS relies extensively on information technology to perform mission-critical functions,” Hinchman said. “IT is literally the vehicle on which our taxes are processed. However, this vital technology relies on the heavy use of outdated and expensive legacy systems.”

Those ancient systems are a main reason “taxpayer service has been awful the last few years,” said Erin M. Collins, the IRS’s national taxpayer advocate. “Historically, the IRS has been light-years behind private financial institutions in its technology and service.” Millions of paper tax returns “are still keystroked digit-by-digit into IRS systems,” she said, because the agency doesn’t scan the paperwork.

But even beginning this tax season with a backlog millions of returns long, Collins said the IRS, having recently hired 5,000 additional customer service representatives, is “in a better position” now than that previous two years.

The IRS’s response included in the report acknowledged the GAO audit “is a generally accurate description of the agency’s operating environment” and agreed with the watchdog’s nine recommendations, including setting time frames to complete modernization plans. The IRS said it recognizes maintaining old systems “contributes to the rising costs of operations and maintenance; this trajectory remains a significant risk …”

“We have taken a series of actions to address these important issues,” the IRS continued, but added that even the antiquated systems “that use older programming languages, remain secure and stable.”

Fully addressing those issues can’t happen quickly enough for Connolly.

“We all know that customer experience should be a top priority for an agency with a nearly ubiquitous public footprint,” he said. “Our tax system is complicated enough. IRS IT should be solving, not contributing to, the problem.”

 

Posted at 11:00 PM in IRS | | Comments (0)

Opinion The IRS should not be running on 60-year-old technology

February 2023
By the 
February 22, 2023 at 3:14 p.m. EST
 

Sixty-four years old. That’s the age of the technology that parts of the Internal Revenue Service currently rely upon to process tax returns. It’s time to retire it.

As the IRS has lurched from crisis to crisis in recent years, many of its woes have become well known: It answered only 13 percent of calls last year. It has a paperwork backlog that includes millions of unprocessed returns. It is beset by ongoing staffing shortages, notably the fewest auditors since World War II. There’s been some improvement. The IRS has hired 5,000 more workers to answer calls and significantly reduced the backlog, but huge challenges remain.

Its outdated technology has yet to be addressed. A new Government Accountability Office (GAO) report highlights just how dire the IT situation is. Not only are the applications and hardware ancient, but some of the software it uses are up to 15 versions behind the current one. “These legacy assets will continue to contribute to security risks, unmet mission needs, staffing issues, and increased costs,” the GAO concludes.

A key problem is the “Individual Master File” that has been in use since 1970, when Richard M. Nixon was president and the Chevrolet Chevelle was a hot car. They both are long gone, but the Individual Master File is still the main database to collect and store taxpayer information. It was built with antiquated programming languages COBOL and Assembly. The IRS says it finally updated some code last year, but COBOL remains in use. Until the master file is fully modernized, it will remain a colossal task to get real-time information on refunds and processing status to taxpayers, not to mention assure the latest safety and fraud precautions. The target date to entirely replace the master file is now 2030, but the GAO warns it’s unlikely the IRS will meet that deadline. (The IRS declined to provide a new date to The Post.)

This is unacceptable. Democrats passed the Inflation Reduction Act last year, giving the IRS almost $80 billion to improve operations. Half that money is for more auditors to pursue corporate and high-earning tax cheats, but about $30 billion is for improving basic services, including IT and staffing. These upgrades are urgently needed. House Republicans are wrong to attempt to strip away this funding, but lawmakers in both parties should press for faster results.

Tax filing season is underway and there have already been problems. The IRS told people to wait to file their returns if they lived in about 22 states that sent out some type of inflation relief payment last year. This is because the IRS was deliberating on the question of whether these payments count as income on federal tax returns. That’s a valid issue, but one the IRS should not have waited until after tax season began to decide. (It finally said on Feb. 10 that the payments would not be taxed.)

Amid stumbles such as that one, it might be all too easy to put IT upgrades on the back burner again. But for an agency that has lost so much of the public’s confidence, those upgrades would represent a badly needed step forward — into the 21st century.

 

Posted at 08:14 AM in IRS | | Comments (0)

IRS warns taxpayers to hold off filing returns in 20 states as it checks if it can tax special refunds

February 2023
Susan Tompor
USA TODAY
February 10, 2023 
 

Well, so much for early promises by the IRS that taxpayers could expect to "experience improvements" as they file their 2022 returns this year.

Taxpayers in more than 20 states were to hold off filing their tax returns for now until the IRS irons out how the taxpayers in those specific states should report, if at all, money received from their states through special tax refunds or payments in 2022.

We're looking at one mind-boggling blunder that puts tens of millions of taxpayers on the hook in states that include California, Massachusetts and Virginia.

Taxpayer advocate blog blames IRS

The National Taxpayer Advocate issued a highly critical blog Thursday that questioned why the IRS waited so long to address whether special tax refunds or payments will be treated as taxable income on a federal income tax return. The same blog also stated that the IRS failed to provide timely guidance involving a change in reporting of payments of more than $600 on platforms, like Venmo and PayPal.

Wait to file: IRS says hold off if you received an inflation relief checks in 2022

Free filing options: Your 2023 guide to free tax prep services

The ongoing uncertainty about how to report one's special tax refund immediately touches the lives of taxpayers in several states.

And I'd suggest that down the road it could add to the paper backlog at the IRS if people in several states aren't clear on how to correctly report their taxes soon.

"This was a known issue," wrote advocate Erin Collins, who is the "voice of the taxpayer" within the IRS.

"The failure to have identified and resolved this issue before the filing season suggests that someone, or everyone, was asleep at the switch," Collins wrote.

When waiting to file a return is recommended

Taxpayers are stuck in a filing season ditch. If they're depending on getting a decent size federal income tax refund early in the season, forget it. They need to delay filing a return as the IRS works out what experts say could be fairly complex guidance. The IRS is expected to issue some word in the coming days.

If these taxpayers file early anyway, they risk doing their taxes wrong.

Tax software companies and tax professionals are waiting to see what move the IRS takes next, too.

Collins wrote that the impact of this type of delay is "hard to overstate." She said the IRS has known for months that there is uncertainty about the tax treatment of special state refunds or payments, which were handled in a variety of ways in different states.

Some tax software companies, she wrote, have concluded that some state tax payments are not taxable and have programmed their software so the payments are not reported.

Tax professionals told me that there likely isn't a one-size-fits-all answer here that can apply to every state. But general guidelines and tax rules will be taken into account to address how states paid out the money.

Car prices may fall but insurance won't: Here's why.

Collins concluded that there is ample reason to "believe that many of these payments are not taxable for federal income tax purposes — either if the taxpayer did not receive a tax benefit in an earlier year or under the 'general welfare exclusion.' "

Virginia provided a one-time tax rebate, for example, she noted, and the state's department of taxation's website states that taxpayers who itemized deductions may be required to report the rebate as income received on their federal income tax returns. Virginia says it will send a 1099-G in the mail, the same as if someone received a state tax refund.

Roughly 9 out of 10 taxpayers take the standard deduction; the rest itemize deductions on a federal income tax return.

Payment apps could confuse some ahead

Collins also addressed some confusion on the 1099-K issue involving payment platforms.

Taxpayers across the country will wait and see again how the IRS handles a new reporting requirement involving third-party payments. Payment apps, like Venmo and PayPal, are used for personal reasons — like sending a child birthday money — and business reasons, like money paid to freelancers and others for goods and services.

You'd pay taxes on money received in a gig job or business — not the kid's birthday cash. But users need to know how to distinguish and separate such payments. You don't want to be in a situation where you have to dispute a 1099-K and say it is erroneous and ask a payment provider to issue a corrected 1099-K.

Congress wants to make sure that taxable income is taxed and upped the paperwork requirements for when 1099-K forms are issued as part of the American Rescue Plan Act of 2021. New reporting was to apply to transactions made in 2022 and after.

Collins said the IRS made the right decision to pull the plug and delay implementing the new 1099-K threshold until the 2024 filing season. But she said the IRS could have done more by working early on with the tax industry and others to implement the legal requirement. The IRS did issue guidance on Dec. 28 that will be useful ahead.

 

Posted at 02:36 AM in IRS | | Comments (0)

Why the IRS says Californians may want to hold off on filing tax returns

February 2023
Kathleen Pender in the San Francisco Chronicle on 
 

The IRS still has yet to answer the question of whether the California middle-class tax refund is taxable on federal returns — but it has finally acknowledged the issue and could provide guidance this week.

Without the IRS’ formal guidance, confusion has set in over how to handle these payments as tax season begins in earnest. Some major tax-preparation companies have been treating it as not taxable, while other tax professionals believe it is.

“Based on currently available information, and our own expertise, our understanding is that these payments are not taxable at the federal or California state level,” Lisa Greene-Lewis, a spokesperson TurboTax, said via email. “We are providing guidance to our customers and are hopeful for additional clarification in the near future.” TurboTax is the nation’s best-selling tax preparation software.

The Franchise Tax Board began sending these one-time payments, which range from $200 to $1,050, to state residents in late October. To qualify, people had to have filed a 2020 state tax return with no more than $250,000 in income for singles or $500,000 for married couples. The payments, designed to offset inflation, arrived via direct deposit or prepaid Visa debit card.

The bill that authorized the payments exempted them from state income tax. Although the bill called them refunds, it also said they “shall not be a refund of an overpayment of income taxes.”

“The problem here is the language that says it’s not a tax refund,” said Annette Nellen, a San Jose State University professor and director of its graduate tax program.

State income tax refunds are generally reported to the recipient and to the IRS on Form 1099-G, for government payments. The tax treatment is pretty clear: Taxpayers do not have to report the refund as income on their federal tax return if they didn’t itemize deductions on their return for the year that generated the refund, the IRS says.

If they did itemize deductions that year, and got a benefit from the state-tax deduction, then they would have to include some or all of the refund on their tax return for the year it was received. (Most people do not itemize deductions.)

The Franchise Tax Board surprised tax pros in November when it said it would send a different form — 1099-MISC for miscellaneous income — to anyone who received a payment of $600 or more because it “may be taxable income for federal purposes.” The board isn’t providing much help — instead of saying outright whether the payment is taxable, it instructs people to consult their tax professional or IRS Publication 525. But that publication doesn’t say what to do about a state tax refund that’s not a refund.

The IRS said in a statement on Feb. 3 that “there are a variety of state programs that distributed these payments in 2022 and the rules surrounding them are complex. We expect to provide additional clarity for as many states and taxpayers as possible next week.” It recommended that people wait for clarification on state payments before filing and not amend a previously filed 2022 return.

Generally, the IRS says that in most cases, income from any source “is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but isn’t taxable.” Income that is taxable is supposed to be reported whether you receive a 1099 form or not.

Tax professionals have been debating whether the payment would qualify for any federal tax exemption. One possible exemption is the “general welfare exclusion.”

The IRS describes it like this: “Payments made under social benefit programs for promotion of general welfare are excludable from gross income under a concept known as the general welfare doctrine. This applies only to governmental payments out of a welfare fund based upon the recipient’s need, and not as compensation for services.”

Some tax pros have questioned whether payments made to joint filers making up to $500,000 would qualify for the exclusion based on need, especially when some lower-income people — mainly seniors with no income other than Social Security or disability — did not get payments because they didn’t need to file a tax return.

“I interpret the payments as income that doesn’t meet any exclusion under federal law,” Nellen said.

But absent guidance from the IRS (which began accepting and processing 2022 returns on Jan. 23), some are figuring they do qualify for the general welfare exclusion.

Tom Cluster, who lives in Placer County, said that when he used TurboTax software to do his 2022 taxes, he entered his payment into the 1099-MISC section. On a page for “uncommon tax situations” he checked a circle that said, “This was a California Middle Class Tax Refund (MCTR).” At the bottom of that page the following appeared: “The California Middle Class Tax Refund (MCTR) will not be taxable on your California or Federal returns.”

So how did this show up on his federal return? It appeared on Schedule 1, line 8z. Under the words “other income” it said “CA Payment 700.” Immediately under that line it said “CA payment - general welfare exclusion (minus) 700. The amount entered in the box on line 8z was zero.

“I think that’s a very reasonable approach,” said John Sensiba, managing partner of Bay Area accounting firm Sensiba San Filippo. He doesn’t think people would even need to give a reason for subtracting the refund.

“I don’t believe it’s taxable because it’s not compensation for services, it doesn’t fit any of the income categories,” Sensiba said. “I think the best argument the federal government could make for it being taxable is that it is a tax refund, despite what California says.”

In that case, the refund would only be taxable if the person benefited from a state income tax deduction in the previous year. Sensiba said most people in the Bay Area don’t benefit, or benefit fully, from a state tax deduction because they don’t itemize deductions on their federal return, or they do itemize but their state and local taxes combined (including income and property tax) exceed the $10,000 limit.

H&R Block is the second-largest seller of tax-prep software and prepares taxes for clients at storefront locations.

“Without clear IRS guidance currently, there is a reasonable basis to claim the payments are not taxable at the federal level,” Andy Phillips, director at The Tax Institute at H&R Block, said via email. “Our guidance is to report the income on the federal return (Schedule 1), and clearly indicate the payment is for the California Middle Class Tax Refund. Clearly reporting the payment should help make it clear to the IRS how the taxpayer is treating the payment and prevent possible IRS notices.”

Phillips declined to say how, if the payment is not federally taxable, it should be reported on the return. “We have a process for our own clients, but would not want to be responsible for providing that same guidance to others if the IRS were to take a different position,” he wrote.

The IRS did not respond to a question asking how its Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs, which offer free basic tax return preparation to low-income and other eligible clients, are treating the California payments.

California Sens. Dianne Feinstein and Alex Padilla on Tuesday asked the Biden administration “to clarify” that the middle class tax refunds are not subject to federal income tax.

“We believe that the state’s refunds clearly fulfill the three requirements of the general welfare exclusion from federal income tax liability, including that they are 1) a legislatively provided program; 2) for social benefit; and 3) not in compensation for services,” they wrote in a letter to Acting IRS Commissioner Douglas O’Donnell.

“The legislation that authorized the payments specifically referred to them as ‘economic relief’ and Sec. 10 of the law notes that the payments it authorized ‘serve the public purpose of providing financial relief for Californians who may have been adversely impacted by these economic disruptions.’ ”

At least 10 other states issued one-time payments to eligible residents last year to offset inflation or return part of their budget surpluses, according to the Tax Foundation.

But most did it in a more straightforward way.

Georgia, Virginia and South Carolina, for example, issued direct deposits or paper checks — not debit cards — to residents who had a state income tax liability in 2020 or 2021, depending on the state. (California did not require a 2020 tax liability to get a refund.)

“Most of the other state payments represent a state income tax refund,” H&R Block’s Phillips said. “If the taxpayer took the standard deduction and did not deduct state taxes on their prior federal tax return, they do not need to pay federal tax on their tax refund. However, if the taxpayer itemized and deducted state taxes, a portion of the payment may be taxable.”

Another complication: Some Californians might receive a Form 1099-MISC for a payment they never received or for a payment they got on a debit card that was depleted by online thieves after they activated it.

In the first case, “Individuals who received a 1099-MISC for MCTR, but did not receive a MCTR payment, should dial 800-852-5711 and press 1,” the Franchise Tax Board said in an email.

And what about people who received a card but discovered the funds had been stolen by online thieves?

That happened to Elena Njemanze, a kindergarten teacher who lives in Emeryville. When she tried to use the debit card to buy baby formula at the Berkeley Bowl on Dec. 19, it was rejected for insufficient funds. She later discovered someone had used the $480 remaining on her $700 card to make purchases at Kay Jewelers and GameStop in Victorville (San Bernardino County) at 2 a.m.

She reported it to Money Network, the company hired to issue the debit cards, and after waiting on hold for 40 minutes, was told it would take 45 to 90 days to investigate. Now she’s wondering what to do about the 1099-MISC for the $700 she received.

The Franchise Tax Board said it and Money Network will work to reissue a stolen payment if the recipient promptly reports it.

Asked what they should do about taxes, the Franchise Tax Board would offer only this complicated explanation by email: “With respect to federal taxability, a taxpayer is ‘generally taxed on income that is available to [them], regardless of whether it is actually in (their) possession,’” it said, quoting IRS publication 525. “Therefore, if your MCTR payment was not received by you in 2022, it may not be considered taxable income for the 2022 tax year. If the recipient receives the reissued MCTR payment in 2023, the MCTR payment may be considered taxable income for the tax year 2023 because the payment was available to the recipient in 2023.”

It said it would not issue a corrected 1099-MISC for 2022 to theft victims.

Due to the “complexity,” it recommended they consult the IRS publication or their tax professional.

Let’s hope the IRS weighs in soon with an answer.

Posted at 08:53 PM in IRS | | Comments (0)

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