TaxMama® – Free Tax Advice Where Taxes Are Fun

It’s TaxQuips time from TaxMama.com® .

Dear Family,

When Congress granted the IRS about $80 billion dollars as part of the Inflation Reduction Act (IRA), I heard a lot of screaming and griping. Especially concerns about more aggressive collections and audit actions.

On the other hand, we have all had our complaints about how hard it is to reach the IRS; the IRS losing documents when you send them paper forms or responses; about how many tax forms could not be efiled; and how frustrating it is that you cannot simply respond to the IRS online.

There weren’t many objections from the public when Congress took back about $20 billion from the IRS ($10 billion from each of the next 2 years).

What taxpayers don’t really understand is – these funds are/were being used to make OUR lives easier.

An immediate example is this exciting announcement from the IRS about their paperless project initiative, effective 2024 and 2025 .

As we came to realize, rather forcefully, during the COVID19 shutdowns, the overwhelming mountain of paper tax returns and paper correspondence was choking the system. Even without COVID19 shutdowns, so many documents were either lost, misplaced, or never (MANUALLY) scanned or keyed into a taxpayer’s account.  Yes, they had to be scanned manually, or keyed in manually, so even in normal times, it could take 3 months for paper submissions to appear on a taxpayer’s transcript or in an account.

Many of us in the tax community have been begging the IRS, for years, to be able to submit responses to notices online (some of that finally starting happening last year); to submit disclosures and attachments electronically – so that they can be found in the transcripts and correspondence files; and to make it possible to file several more tax forms electronically.

Well, it’s finally happening. The current IRS Commissioner, Danny Werfel, is moving forward rapidly to bring about the technological improvements that might bring the IRS into the 20th century. (Perhaps we’re not quite ready for the 21st century?)

One of his targets is to make many more tasks accessible to taxpayers with mobile phones. He has become aware that, while most people seem to have mobile phones, they might not have access to a reliable (or any) Internet connection at home. Being able to access IRS log-ins, file tax returns, upload copies of documents, and more –  this would make it possible for more taxpayers to address some of their own basic filing, correspondence, and responses to simple notices.

The promise for 2024 is that Taxpayers will be able to digitally submit all correspondence, non-tax forms, and responses to notices; as a result, the IRS estimates more than 94% of individual taxpayers will no longer ever need to send mail to the IRS.

For 2025, expect  that half of paper-submitted correspondence, non-tax forms, and notice responses will be processed digitally. Achieving this milestone will enable up to 60 million paper documents to be processed digitally every year. All paper documents—correspondence, non-tax forms, and notice responses–will be processed digitally by filing season 2026.

And what about paper documents from the past? Up to 1 billion historical documents will be digitized, improving customer service, giving taxpayers access to their data, and ultimately saving IRS approximately $40 million in annual storage costs.

Always liking to look for the silver lining – I think this is fabulous news. Add this digitization to Chuck Rettig’s initiative to expand communications into many more languages – and fewer taxpayers will feel helpless when interacting with the IRS.

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

To make comments, please drop into the TaxQuips Forum.

It’s TaxQuips time from TaxMama.com® .  
Today TaxMama® wants to talk to you about your business.

Dear Family,

We are getting a lot of questions from tax pros and taxpayers about businesses that keep showing losses. Is the IRS going to look at them and disallow them as businesses – treating them like hobbies?

First let me explain why this is important from a tax reporting perspective.

OK, so what distinguishes a business that keeps losing money, from a hobby?

The Internal Revenue Code lists 8 primary characteristics of a real business in IRC §183.  https://www.law.cornell.edu/uscode/text/26/183

I could spend about 4-8 hours explaining the rules, nuances and ways to ensure your business is not a hobby (and often do teach that concept).

But here are some fundamentals:

As you can see, there are several instances where a business that keeps showing losses can survive IRS scrutiny. In all cases – it involves doing regular tax planning, business planning, and knowing when and how to reposition the business’ focus.

The first three chapters of Small Business Taxes Made Easy deal with this very concept.  https://yourbusinessbible.com/

Hobby loss audits happen to be one of my favorite areas of tax representation. In each case, I have been able to help my clients build convincing documentation to substantiate their honest-to-goodness business intent.

Incidentally, since this is National Small Business Week, the IRS website has outlined some really useful tools for you relating to the life cycle of a business.
https://www.irs.gov/newsroom/national-small-business-week-irsgov-offers-a-z-resources-for-small-businesses

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

[1] Often attributed to Albert Einstein – but, apparently, the source is mystery novelist Rita Mae Brown.
https://www.businessinsider.com/misattributed-quotes-2013-10

Dear Family,

Well, we’ve survived the April 18th deadline! Many of us are taking a breather. But there is still a lot more work to do. Aside from getting your more complex information to your tax professional, since your return is on extension – perhaps it’s also time to schedule a Tax Planning appointment. We’ll talk about why in just moment by showing the costs to people who acted first – and asked later. [Note: States in Disaster Areas have lots more time – some all the way to October 16th.]

Meanwhile – let me remind everyone, tax pros and taxpayers alike, that if you want to be able to access your IRS accounts, including e-services, you must set up your ID.me account.  The deadline to update your to id.me account is May 15, 2023. After that, your older, more familiar logins will no longer work. The good news is, this one login is meant to connect you to all your IRS accounts – your personal accounts and if you’re a tax pro, your professional accounts. Remember, if you are regularly pulling transcripts, I am pretty sure that this must be updated for your transcript services to continue to work. Here are the links:

Why You Need to ASK First

I know we discussed asking first before acting, last month. But..more questions keep coming in and issues arising that make me cringe at the bad news I have to give.

(Names and locations have been changed for obvious reasons.)

Question 1 – Alice asked TaxMama® about taking substantial deductions for her nursing-related travel. She lived in Virginia. Her nursing agency sent her to a temporary job in Texas for six months. During that time, she paid rent, food and mileage.  Alice wanted to know how to take a deduction for those costs.

After the fact – Answer 1 – Really bad news for Alice! As an employee, not a dime is deductible during 2018 – 2025. (You can thank the Tax Cuts and Jobs Act of 2017 for this.)

Consulting Answer 1 – If Alice had consulted her tax professional, her tax pro would have helped her determine her expected out-of-pocket costs for those six months. Then, comparing it to the compensation she was being offered she would have been able to do one of two things:

Either way, there would have been nothing to report on her tax return (reimbursements are not taxable) – but her net cash flow for the year would have been thousands of dollars higher.

Question 2 – Albert owns a home and several rental properties. He refinanced 3 properties last year and pulled out about $500,000 in cash overall. Although he used some of that money to pay off debts, he plans to use most of the money to make repairs or improvements on the property. As of April, the funds for improvements are still sitting in the bank account.

After the fact – Answer 2 – Why is this a problem? You may only deduct the interest on loans used to buy or improve your real estate. That’s called acquisition debt. So none of the interest on the loan amounts in excess of that balance before refinancing is deductible. On any of the properties. So interest at 5.5% on $500,000 (about $27,500) might not be deductible anywhere.

Consulting Answer 2 – If Albert had consulted his tax pro first he would have learned about this issue. This non-deductible interest problem could have been handled one of two ways:

Yes, there are some other considerations and potential strategies. That’s why sitting down with your tax pro can preserve your interest expense deductions and decrease your taxes. 

Issue 3 – This is a very common question that arises. People getting their W-2s and suddenly finding out that they didn’t have withholding for the IRS or state. Or that their withholding was far too low. Suddenly, there are balances due and underpayment penalties.

After the fact – Answer 3 – You’re going to hate this answer.

Consulting Answer 3 – Consider sitting down with your tax pro, at least halfway through the year to review your income, withholding, job-related tax benefits for which you might qualify. It’s easier to correct these errors during the year, when you can spread out the cost over several months.  

There are so many more instances where people come to me after they have taken action. It breaks my heart. You can read about them in TaxMama® Forum  – http://iTaxMama.com/AskQuestion . Or ask your own questions.

I know that sometimes it feels like a consultation is a little expensive. But, believe me, the value you get far exceeds the price you pay. In the first two cases I outlined, a one-two hour consultation would have saved each of them thousands of dollars.

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

Dear Family,

Last week the IRS released their 150 page strategic plan on how to use their $80 billion allocation over the next 10 years. The plan has 5 objectives:

Naturally, some people will not be happy with the more aggressive focus on catching higher income tax evaders, non-payers and those who under-report their income. Using “Big Data” and more intensive training for IRS enforcement staff, the IRS will be better able to audit complex businesses with multiple layers of ownership, which are potentially designed to thwart scrutiny.

The good news is that there will not be an increased focus on taxpayers with under $400,000 in income. Their audit rates will not rise above historical levels.

There is a great deal of emphasis on improving and updating computer systems and apps, improving customer service, and providing more online, self-help tools. This will reduce the long waits on telephone calls – and will increase taxpayers’ ability to access data, upload responses, set up payment plans, and more. Some of these tools are already available and growing. Others, we have been begging the IRS to make available for years.

You may notice in this IRS graphic, that they are talking about having an IRS agent call people back.

When it comes to IRS notices, their plan is to start by issuing “soft” notices providing tools for taxpayers to respond and “self-correct.” Using electronic communications to reduce the need for audits.

The good news about these calls and electronic notices is that, properly handled, they will make our lives easier.

The bad news is – taxpayers are already getting phishing emails and calls. So how will we be able to determine which ones really are from the IRS – and which are identity thieves?

They are also investing about $15 million in trying to create a way for taxpayers to file their tax returns directly with the IRS. As you can imagine that faces strong resistance from the major tax software houses – and perhaps tax professionals.

But when it comes to tax professionals, EAs, CPAs and Attorneys have long been aware that the need for our services by clients with simple tax returns (like only W-2s and interest and dividends) is phasing out, as taxpayers get more familiar with tax software.

Overall, taxpayers of the future would be wise to join the “app” age. We’re going to need to get more familiar with online tools, apps for phones and tablets, and how to scan documents, create PDFs and upload and download data – in order to use the IRS self-help tools most effectively. In addition, the IRS is expanding the way we will be able to pay online, via bank accounts, credit card, debit card, and NEW – digital wallets.

Incidentally, the IRS is hiring – all over the country. You may want to consider applying!

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

To make comments, please drop into the TaxQuips Forum.

It’s TaxQuips time from TaxMama.com® .

Dear Family,

My goodness, it’s already Spring!

The first day, here in Southern California is mostly gray, threatening to rain…but not quite making good on the threat beyond a few sprinkles. Tomorrow, expect the deluge. I hope your spring is starting out with blooms and blossoms and wonderful scents (and no hay fever).

I will admit, if I knew how to use my [blasted] “smart” phone, which keeps running out of capacity in the blink of an eye, you would be seeing pictures of our amazing rose “tree.” Yes, it looks like the roses are growing on the tree.

Back to taxes. Let’s look at recent problems people have raised.

Several people moved to another state during the year, staying with the same employer. They complained that they were surprised when they got their W-2 and their company was still taking withholding for their previous state.

Anytime you move, or make a change in your withholding, take the time to read your paystub carefully. Make sure the withholding is for the correct state. Make sure there is enough withheld for the IRS. If you can’t really read or understand your paystub (or you don’t get one), contact the payroll department and ask them. Please don’t be embarrassed. You don’t want to have to deal with underpayment penalties at the end of the year.

Often, when you simply set up an LLC with a single member, and there is no activity, you can enter that tax ID on the Schedule C and show no activity except the set up fee.

When you make an S corporation election, you absolutely must file a tax return – and that means by March 15th of the year – or file for an extension using Form 7004. Even if there is no activity, the Form 1120S and related Schedule K-1 are due on time. Even without activity, there are late filing penalties for the Form 1120S ($220 per month, or part of a month, times the number of shareholders, for up to 12 months); and penalties for the Schedule K-1 ($290 per shareholder). So if you missed the filing deadline on March 15th, file the return and Schedule K-1, before the end of the month. (You might be able to talk the IRS out of the penalties, though.)

Note: The same S corp rules apply when the LLC is owned by more than one member – then it’s a partnership, with the same filing deadlines and penalties.

We get this kind of question often – from people doing their own tax returns; and from tax professionals who just picked up a new client where the previous preparer just ignored depreciation.

You’re in luck. There is no need to file amended returns for all those years. Which is really good news, since you can only amend the last three years. This limit would cost taxpayers 7 years or more of lost depreciation. Since this happens often, the IRS set up a procedure that they automatically approve. It involves using a Form 3115. It’s a bit complicated, but basically boils down to this.

How do you fill out the Form 3115? Ideally, take all this to a tax professional (an experienced Enrolled Agent, CPA or Tax Attorney). Or try it yourself by watching this detailed webinar by Lisa Ihm, EA of BrassTax.

That’s enough for now. Keep an eye on the IRS Critical Functions page to see the status of their tax return processing, and more.

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

To make comments, please drop into the TaxQuips Forum.

It’s TaxQuips time from TaxMama.com® .

Dear Family,

Let’s start with the big thing this weekend – changing the clocks to Daylight Savings Time. Remember the old adage “Fall back; spring forward.” So that means we set the clocks forward one hour in order to get more daylight at the end of the day. A few US states and territories don’t participate – just to confuse and confound the rest of us –  I think.

Good news (sort of) from the IRS. They are opening their Taxpayer Assistance Centers (TAC) to walk-ins tomorrow, Saturday March 11th. This includes TACs all over the country. The instructions are in this IRS announcement. Go very early to secure your place in line. Wrap yourself in something warm and bring a thermos with your favorite hot beverage.

Deadline – Tax returns for partnerships and S corporations are due on March 15th.  Use Form 7004 to file the extensions. https://www.irs.gov/forms-pubs/about-form-7004  Folks in the counties with disaster areas in California, Alabama and Georgia are not required to file extensions. You have until October 16th to file the returns (and to pay certain taxes without penalty). Note: Georgia is still showing May 18th as their deadline.

The Heart of the Matter – Ask First; Act Later

This month, I have had several TaxMama® Forum questions from people wanting to minimize their taxes – after they took some significant financial actions.

Actually, there were several other times in which I had to say, you’re breaking my heart. I wish you had asked first. I just can’t remember them al.

But the message is the same. Please, Please, before spending a lot of money – on just about anything unusual, before withdrawing money from IRAs or retirement accounts, before making gifts, transferring title, or starting businesses, please, please, invest the time and money to meet with a tax professional who is experienced in the area of expertise that you need. It costs so much more to fix problems, than to avoid them in the first place.

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

To make comments, please drop into the TaxQuips Forum.

 —-

It’s time for Everything!

People are still asking so many questions about the 2023-2024 EA exam. So we will hold our first annual (complimentary) webinar – please clear some time on your calendar if you are interested in taking the IRS Exams this year.

If you are not currently a tax preparer but think this might be a worthwhile career to explore – DO come and join us. You would be so welcome, too.

Everything You Wanted to Know About the EA Exam,

Date: Tuesday, March 21, 2023

REGISTER NOW – LIMITED SPACE IS AVAILABLE

Incidentally, we are bribing you to join us. Anyone who stays for the entire presentation will get a $100 coupon off the price of the Premium class.

(If you have already signed up for the Premium class in 2023 – AND you sit through the entire presentation – we will send you a $100 refund.)

Listen to the podcast here

Dear Family,

As you understand so well, since COVID19, it’s gotten harder than ever to reach a live person at the IRS. And especially someone who has enough training and experience to give you useful information.

(Those of you like to enjoy pain and who appreciate statistics, read Erin Collins’ Taxpayer Advocate’s Report to Congress.)

As I told you last time, the IS working to use that new influx of funds to do more than just increase audits and collections. They are adding more self-service tools – and opening more in-person opportunities.

So What’s New and Improved?

Last week, the IRS announced that people who file their amended returns (Form 1040X) electronically can now receive  their refunds via direct deposit to their bank accounts. Yippee!

What they don’t tell you is – that this is likely to apply to “superseded returns” (for those that know how to take advantage of them) that are filed before the filing deadline, including the extension.

The IRS is opening their in-person Taxpayer Assistance Centers (TAC) (otherwise known as IRS offices) to the public on several Saturdays, once a month from February through May.   You can locate one near you in most (or all) states and Puerto Rico at this URL – https://www.irs.gov/help/irs-face-to-face-saturday-help  . Read the instructions to know what to bring. The staff will be able to help with balances due, audit questions and other issues. The Taxpayer Advocate Service staff will be available. And language interpretation services will also be available.

Self-Service Tools

In addition to being able to check on your refund status, the IRS has several online tools you can use on your own to access your taxpayer account (– or that tax your tax professional can use  on your behalf). You can pull your own transcripts, set up your own payment plans…and more.

Incidentally, in case you didn’t know, the IRS has an Interactive Assistant that might be able to answer some questions for you https://www.irs.gov/help/tax-law-questions

The Scary Meetings

Audits and Appeals meetings can potentially be held online. The online submission of documents isn’t as easy as we would hope yet (for security reasons) – but we’re getting there.

A Hidden Treasure

Although this site isn’t really a secret, I have discovered that most people are not aware of this IRS “Treasure Chest” of resources. (That’s what I call it.) For anyone who wants to do tax research about anything, this is a great place to start.  https://www.irs.gov/privacy-disclosure/foia-library

And More…

There are new capabilities being released all the time. The IRS understands how much less it can cost them if taxpayers can do things on their own, vs paying staff to handle routine tasks. See what’s happening here:

Tax Education

As usual, I will be teaching a session at this year’s CSTC 2023 Tax Symposium in June.

Please come and meet me in Las Vegas. If you tell me you’re coming, you’re invited to TaxMama’s® annual dinner on Monday night.

It’s time for Everything!

People are still asking so many questions about the 2023-2024 EA exam. So we will hold our first annual (complimentary) webinar – please clear some time on your calendar if you are interested in taking the IRS Exams this year.

If you are not currently a tax preparer but think this might be a worthwhile career to explore – DO come and join us. You would be so welcome, too.

Everything You Wanted to Know About the EA Exam,

Date: Thursday, March 2, 2023

Incidentally, we are bribing you to join us. Anyone who stays for the entire presentation will get a $100 coupon off the price of the Premium class.

(If you have already signed up for the Premium class in 2023 – AND you sit through the entire presentation – we will send you a $100 refund.)

—

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

To make comments, please drop into the TaxQuips Forum.

It’s TaxQuips time from TaxMama.com® .  
Today TaxMama® wants to alert you to issues that will affect your tax return filing, and perhaps tax planning, during 2023  

Dear Family,

Where does the time go?!

Sorry to be posting so late – but the days just seem to flash by. Are you feeling the same sensation?

One reason each day is so full, is there are constant updates that I have to read, or learn about, several meetings with the IRS about systemic problems, and the IRS plans for this coming year, and, of course, answering your questions in the TaxMama® Forum.  http://iTaxMama.com/AskQuestion . Remember, this is a totally complimentary resource for your benefit.

Tax Education

It’s time for Everything!

We have been getting a flood of questions about the 2023-2024 EA exam. So we will hold our first annual (complimentary) webinar – please clear some time on your calendar if you are interested in taking the IRS Exams this year.

Everything You Wanted to Know About the EA Exam,
but didn’t know who to ask:

Date: Thursday, March 2, 2023
Time: 10:00 am Pacific
For more information and no-charge sign-up:
https://iTaxMama.com/KickStart-TM

Incidentally, we are bribing you to join us. Anyone who stays for the entire presentation will get a $100 coupon off the price of the Premium class.

(If you have already signed up for the Premium class in 2023 – AND you sit through the entire presentation – we will send you a $100 refund.)

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

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We are starting another EA Exam testing year on May 1, 2023.

With all the IRS office closures, unopened mail and with IRS phone lines having super long waits, the skills of an Enrolled Agent are more valuable than EVER!  This is a great time to improve your tax and representation skills and become an enrolled agent!

Everything You Want to Know About the EA Exam –

This will be replaced by our updates after we hold the

Becoming a knowledgeable tax professional isn’t easy. It takes a lot of dedication, math skills, and the flexibility to keep up with the myriad of tax law changes that take place each year.   But it can be done. It’s fun! And oh so lucrative.

TaxMama’s® EA Exam Review Course  is the best way to get a well-rounded tax education.
Becoming an Enrolled Agent (EA) is the fastest way to establish yourself in the field of taxation.

All those questions and more are answered in our free Webinar.