What’s wrong with the IRS?
In the old days of paper spreadsheets, tax returns, and publications, the Internal Revenue Service would provide guidance to tax preparers and taxpayers before the start of tax season, which would be used as guidance throughout the year. As a result of the digital age, the IRS has increased its capabilities, allowing them to streamline this guidance with their website. The website has provided substantial benefit, allowing taxpayers to track their refund, amended return, or even reviewing transcripts of what the IRS has on file. However, this streamlined process also allows the IRS to provide guidance and change guidance with the click of a mouse. This means that guidance for your return may differ if it was prepared in February versus if it were prepared in April. What the IRS does not understand is the cost to the taxpayers, as they are the ones that pay for these changes, whether it be from their preparer changing a completed return or a possible audit arising from inconsistency in the return. These costs can be substantial, and a prime example is the Form 3115 and tangible property regulations during this last tax season.
Many of you probably heard us warning everyone about the Form 3115 this tax season. In case you do not remember, the Form 3115 was an IRS initiative resulting from their final regulations with respect to tangible property. Around this time last year, the IRS released final regulations that changed the way taxpayers are allowed to expense certain items. More specifically, these new regulations changed what had to be capitalized (expensed over multiple years) and what could be written off in the year of purchase. The biggest challenge with the new regulations is that by adopting them, a taxpayer is changing his/her method of accounting. The only way to properly change a method of accounting with the IRS is by filing Form 3115. The IRS estimated that Form 3115 would take the average person approximately 24 hours to prepare after learning about the new laws. In order to better accommodate our clients, we quickly restructured our processes to provide this form for a fee. After enough research and development, we reduced the preparation time from the IRS estimated 24 hours to anywhere between a half hour to two hours, depending on the complexity.
The American Institute of Certified Public Accountants (AICPA) fought the IRS for several months on the additional requirement of filing Form 3115. Their advocacy started from the release of the final regulations in October 2014, and continued all the way through the middle of tax season, when the IRS finally agreed to relieve smaller businesses of the requirement to file Form 3115. On February 13, 2015, the IRS released Revenue Procedure 2015-20, which allowed smaller businesses to adopt the new regulations as of January 1, 2014 without having to file Form 3115. The decision provided major relief for many smaller taxpayers, but only at a cleverly hidden cost.
The biggest cost of Rev. Proc. 2015-20 is that taxpayers do not receive the audit protection for prior years that the Form 3115 offered. This means that the IRS can audit prior years and argue that a taxpayer did not comply with the new laws, even if the laws did not exist at the time. The only way to receive the benefit of the audit protection was by filing a Form 3115, which we strongly advised for many of our clients with substantial activity. In addition to informing everyone at the beginning of tax season through our newsletters and packets, we examined each client’s prior year depreciation schedules and tax returns on a case-by-case basis to determine if Form 3115 was essential for the audit protection.
Another major cost is that Revenue Procedure 2015-20 allows taxpayers to adopt the new regulations on a prospective basis as of January 1, 2014, but does not allow a taxpayer to go back for any prior year deductions. For this benefit, we also examined each client’s depreciation schedule to determine if there were any hidden deductions under the new law, and then weighed our fee for the form(s) versus the benefit of the deduction. If someone could receive $300 in tax savings, but would pay $600-$800 for multiple forms, we did not see the form as a cost savings to the client.
Lastly, Rev. Proc. 2015-20 did not allow the adoption of the new removal cost option, which allows the immediate deduction of removal costs during renovations, large repairs, improvements, etc. As with the other determinations, we examined past client records to determine if this change might be a major factor, or if the form was even necessary. The removal cost benefit might not even be necessary if there were not any apparent removal costs in past year returns, as a taxpayer cannot change a method of accounting that he/she has not yet implemented.
Overall, the Form 3115 was a large factor this year for both preparers and taxpayers. The AICPA finally convinced the IRS to provide some relief. After much negotiation with between the two parties, the resulting Revenue Procedure 2015-20 was not entirely a relief. With all of the costs and forgone benefits, we acted as duly diligent accountants and advised many of you of the consequences of these new laws.
We are pleased to announce that we have recently upgraded our phone system in order to better serve you.
Our front desk number has not changed, we may be reached at
770-920-2890 and 770-942-7180 for our office fax.
Other numbers previously used are no longer in service.
We will look forward to hearing from you soon.
There are only 10 days until the October 15 deadline for Individual Tax filing. If you fail to file by the deadline the IRS will impose late filing penalties and, if you owe, there are late payment penalties and interest that are added to the amount you owe. Do not delay!
T. Dennis Connally Consultant, PC, CPA awarded Douglas County Chamber of Commerce 2015 Small Business of Excellence
IMPORTANT TAX REMINDER FOR OUR CLIENTS
The September 15 deadline for Corporate Tax filing is quickly approaching. If we have not received all the information from you in order to complete your tax return, we must have it no later than August 3, 2015. We cannot guarantee that we will be able to complete your tax return if we do not have all of the information by August 3, 2015 .
Please send in the information no later than August 3, 2015 to avoid delays in preparation and filing.
Excerpts from the mid-year report to Congress from the Taxpayer Advocate Service
(Ever wonder why you cannot get through to the IRS?)
Below are excerpts from National Taxpayer Advocate Nina E. Olson’s mid-year report to Congress. As you read this you will understand why tax preparers and taxpayers have such a difficult time dealing with the Internal Revenue Service.
During the filing season, the IRS processed 126.1 million individual tax returns (compared with 125.6 million last year) and issued 91.8 million refunds (compared with 94.8 million last year). The average refund amount was $2,711 (compared with $2,686 last year).
· The IRS answered only 37 percent of taxpayer calls routed to customer service representatives overall, and the hold time for taxpayers who got through averaged 23 minutes. This level of service represents a sharp drop-off from the 2014 filing season, when the IRS answered 71 percent of its calls and hold times averaged about 14 minutes.
· The IRS answered only 39 percent of calls from taxpayers seeking assistance from TAS on the National Taxpayer Advocate (NTA) Toll-Free hotline, and hold times averaged 19 minutes. TAS serves as the IRS’s “safety net” for taxpayers who are experiencing a financial or systemic hardship as a result of IRS action or inaction.
· The IRS answered only 17 percent of calls from taxpayers who called after being notified that their tax returns had been blocked by the Taxpayer Protection Program (TPP) on suspicion of identity theft, and the hold times averaged about 28 minutes. In three consecutive weeks during the filing season, the IRS answered fewer than 10 percent of these calls.
· The IRS answered only 45 percent of calls from practitioners who called the IRS on the Practitioner Priority Service line, and hold times averaged 45 minutes.
· The number of “courtesy disconnects” received by taxpayers calling the IRS skyrocketed from about 544,000 in 2014 to about 8.8 million this filing season, an increase of more than 1,500 percent. The term “courtesy disconnect” is used when the IRS essentially hangs up on a taxpayer because its switchboard is overloaded and cannot handle additional calls.
· The decline in telephone performance can be attributed largely to three factors: The number of taxpayer calls routed to telephone assistors increased by 41 percent, the number of calls answered by telephone assistors decreased by 26 percent, and the average call duration increased by 10 percent.
· The IRS sharply restricted the availability of paper copies of forms and publications, imposing burden on taxpayers without Internet access or online literacy. The IRS’s own Taxpayer Assistance Centers (TACs) and its Tax Form Outlet Partners such as libraries and post offices did not receive forms until February 28, almost halfway through the filing season. Once a TAC ran out of forms or publications, it could not order more.
Olson wrote that the decline in taxpayer service imposes increased compliance burdens on taxpayers and may lead to erosion in taxpayer trust. “For a tax system that relies on voluntary self-assessment by its taxpayers, none of this bodes well,” she wrote. “In fact, there is a real risk that the inability of taxpayers to obtain assistance from the government, and their consequent frustration, will lead to less voluntary compliance and more enforced compliance.”
During the filing season alone, the IRS received about 1.6 million taxpayer calls on its Identity Protection Specialized Unit (IPSU) telephone line. The level of service was about 54 percent and the average hold time was about 25 minutes. It also received about 2.9 million taxpayer calls on its TPP telephone line. As noted above, the level of service was 17 percent for the TPP line, and the average hold time was about 28 minutes.
The report expresses concern that the IRS is not doing enough to assist identity theft victims and reiterates the National Taxpayer Advocate’s longstanding recommendation that the IRS assign a single employee to coordinate complex identity theft cases. “Without a single employee with whom to work, identity theft victims often have to call the IRS multiple times and talk with multiple employees about different aspects of their case,” the report says. “Equally important, no one employee is held accountable for the resolution of the case. Thus, affected taxpayers often feel like they are victimized a second time by the IRS’s processes.”
IRS Changes Identity Theft Policy
WASHINGTON, D.C. (JUNE 1, 2015)
BY MICHAEL COHN
The Internal Revenue Service has agreed to change its policy on identity theft and provide victims with copies of the fraudulent tax returns that have been filed under their names by scammers.
The move comes in response to a request from Sen. Kelly Ayotte, R-N.H., who wrote to IRS Commissioner John Koskinen last month urging the IRS to provide tax-related identity theft victims with copies of fraudulent returns, which the agency had refused to do, citing privacy concerns.
In response to Ayotte on Thursday, Koskinen wrote, “As a result of your letter, we have decided to change our policy regarding disclosure of fraudulent identity theft returns to victims whose name and SSN the fraudulent return was filed under…We will put together a procedure that will enable victims to receive, upon request, redacted copies of fraudulent returns filed in their name and SSN.”
Ayotte said she is pleased with the change in policy. “I’m glad that the IRS has agreed to my request to reverse its policy and provide identity theft victims with copies of fraudulent tax returns so they can take proper steps to secure their personal information,” she said in a statement last Friday. “Victims of identity theft face significant emotional and financial hardships, and they shouldn’t be left in the dark about the extent of the theft. This is a positive step that will help them protect themselves and their families.”
Ayotte said she became aware of the issue after hearing from New Hampshire victims of identity theft who told her that the IRS’s refusal to provide copies of fraudulent tax returns prevented them from knowing what information was stolen.
Last month, Ayotte helped introduce the Social Security Identity Defense Act of 2015, which would require the IRS to notify potential victims of identity theft, something the agency has failed to do in the past. It also requires that the IRS notify law enforcement and that the Social Security Administration notify employers who submit fraudulently used Social Security numbers. The bill adds civil penalties and extends jail time for those who fraudulently use an individual’s Social Security number.
The IRS revealed a massive data breach last week in which criminals managed to access approximately 104,000 tax returns by using the IRS’s online Get Transcript application (see IRS Detects Massive Data Breach in ‘Get Transcript’ Application ). Koskinen will be facing a hearing Tuesday before the Senate Finance Committee on Tuesday to explain the breach.
Top 10 Tips to Know if You Get a Letter from the IRS
The IRS mails millions of notices and letters to taxpayers each year. There are a variety of reasons why they might send you a notice.
Here are the top 10 tips to know in case you get one.
1. Don’t panic. You often can take care of a notice simply by responding to it.
2. An IRS notice typically will be about your federal tax return or tax account. It will be about a specific issue, such as changes to your account. It may ask you for more information. It could also explain that you owe tax and that you need to pay the amount that is due.
3. Each notice has specific instructions, so read it carefully. It will tell you what you need to do.
4. You may get a notice that states the IRS has made a change or correction to your tax return. If you do, review the information and compare it with your original return.
5. If you agree with the notice, you usually don’t need to reply unless it gives you other instructions or you need to make a payment.
6. If you do not agree with the notice, it’s important for you to respond. You should write a letter to explain why you disagree. Include any information and documents you want the IRS to consider. Mail your reply with the bottom tear-off portion of the notice. Send it to the address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
7. You will not need to call the IRS or visit an IRS office for most notices. If you do have questions, call the phone number in the upper right-hand corner of the notice. Have a copy of your tax return and the notice with you when you call. This will help the IRS answer your questions.
8. Always keep copies of any notices you receive with your other tax records.
9. Be alert for tax scams. The IRS sends letters and notices by mail. The IRS does not contact people by telephone, email or social media to ask for personal or financial information.
10. For more on this topic visit IRS.gov . Click on the link ‘ Responding to a Notice ’ at the bottom left of the home page.
If you are unsure as to what to do contact either a CPA (Certified Public Accountant) or an EA (Enrolled Agent) to assist you.
Avoid These Common Tax Mistakes
Nobody’s perfect. Mistakes happen. But if you make a mistake on your tax return, it will likely take the IRS longer to process it. That could delay your refund. The best way to avoid errors is to use IRS e-file. Paper filers are about 20 times more likely to make a mistake than e-filers. IRS e-file is the most accurate way to file your tax return.
Here are eight common tax-filing errors to avoid:
1. Wrong or missing Social Security numbers. Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.
2. Wrong names. Be sure you spell the names of everyone on your tax return exactly as they are on their Social Security cards.
3. Filing status errors. Some people use the wrong filing status, such as Head of Household instead of Single. The Interactive Tax Assistant on IRS.gov can help you choose the right status. If you e-file, the tax software helps you choose.
4. Math mistakes. Double-check your math. For example, be careful when you add or subtract or figure items on a form or worksheet. Tax preparation software does all the math for e-filers.
5. Errors in figuring credits or deductions. Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit, and the standard deduction. If you’re not e-filing, follow the instructions carefully when figuring credits and deductions. For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.
6. Wrong bank account numbers. You should choose to get your refund by direct deposit. Be sure to use the right routing and account numbers on your return. The fastest and safest way to get your tax refund is to combine e-file with direct deposit.
7. Forms not signed. An unsigned tax return is like an unsigned check – it’s not valid. Both spouses must sign a joint return.
8. Electronic filing PIN errors. When you e-file, you sign your return electronically with a Personal Identification Number. If you know last year’s e-file PIN, you can use that. If you don’t know it, enter the Adjusted Gross Income from the 2013 tax return that you originally filed with the IRS. Do not use the AGI amount from an amended return or a return that the IRS corrected.
If you found this Tax Tip helpful, please share it through your social media platforms. A great way to get tax information is to use IRS Social Media. You can also subscribe to IRS Tax Tips or any of our e-news subscriptions.
Form 3115–A must before you can file your Tax Returns
In plain language….as composed by Donna Cox, EA of T. Dennis Connally’s office.
In 2006 the IRS first proposed the so-called repair regulations. It is unlikely that the IRS would have spent nearly a decade focused on this area without the expectation that Form 3115 Application for Change in Accounting Method would be filed in a number of scenarios. These regulations were finalized September 2014. The IRS has stated outright that the final regulations affect all taxpayers that acquire, produce, or improve tangible property.
Once a business or rental property uses a method of depreciation, capitalization of assets, expensing of materials and supplies, and accounting for repairs and maintenance (old rules) it has adopted a method of accounting. September 2014 the IRS finalized new rules for what and how tangible assets you own and dispose of (computers, cars, and real estate) must be treated. In order to CHANGE YOUR METHOD OF ACCOUNTING from the old rules to the new rules, you MUST request permission from the Commissioner of the Internal Revenue Service by filing a Form 3115.
Whenever a business or rental property changes the method of accounting to arrive at the reportable income for tax purposes it is REQUIRED to seek consent from the Commissioner of the Internal Revenue Service. The user fee due to the IRS for this consent is $7,000.00. This fee has been waived for companies filing Form 3115 by the due date, including extensions, of their 2014 tax return through a pre-approved method referred to as: automatic consent.
Andrew Keyso, Jr. IRS Associate Chief Counsel (Income Tax and Accounting), stated on November 5, 2014 that barring a situation in which the taxpayer has taken aggressive positions in the past or has in no way applied a proper capitalization method, the IRS is unlikely to have much interest in examining a taxpayer’s zero Section 481(a) adjustment, but is most interested in ensuring that taxpayers are applying the regulations correctly from now on.
It has been noted that all companies that file a 2014 return, other than an initial return, and do not have a Form 3115 attached, will be audited.
Practitioners who prepare returns for clients that have not implemented the repair Regulations (e.g., filing Form 3115 or including certain election statements) may not willingly sign tax returns. Furthermore, failure to comply with Circular 230 could subject these tax practitioners to censure, suspension, or disbarment of practice before the IRS.