A School And Obamacare Penalties

 

How would you like to get the following notice in the mail?

 

Believe it or not, the IRS sent this to a public school system in Virginia. I am looking at the Tax Court petition as I write this.

This notice is for a Section 6721 penalty, assessed for failure to file certain information forms with the IRS. Common information forms include:

·      Form W-2 (Wage and Tax Statement)

·      Forms(s) 1099 (Interest, Dividends, and numerous others)

·      Form 8027 (Tip Income and Allocated Tips)

·      Forms(s) 1094 & 1095 (Health Insurance)

There is a virtually automatic companion to this penalty - Section 6722 – which assesses another penalty for failure to provide an information form to the recipient.

Combined we are talking over $2.2 million.

To a school?

Let’s go through this.

The school (Arlington) received the above notice dated June 13, 2022.

The second notice (for Section 6722 penalties) was dated June 27, 2022.

The IRS wanted payment by July 12, 2012.

COMMENT: Arlington had an issue. While they knew the IRS was assessing penalties for information returns, they had no idea which information forms the IRS was talking about.

The IRS Revenue Officer (RO) issued a Final Notice of Intent to Levy on July 12, 2022.

COMMENT: The same day?  I have been leaving messages with a Revenue Agent for over two weeks now concerning an individual tax audit, and this RO issued a FINAL on the same day stated in the notice?

COMMENT: There is also a procedural error here. The IRS must issue notices in a certain order, and the RO is not entitled to jump the line and go straight to that FINAL notice.

We learn that this specific RO had previously assessed penalties (without explanation) and filed liens (again, without explanation) on a middle school in the Arlington school system. These miraculously went away before an Appeals hearing could occur.

COMMENT: Sounds like something personal.

On August 10, 2022, Arlington requested a collection due process hearing on the June 13 and June 27 notices. It faced a formidable obstacle, however, as it did not know what the IRS was talking about.

The IRS sent a letter dated December 5, 2022, scheduling an Appeals conference on January 18, 2023. That letter also suggested that Arlington had not filed Forms 1042, which concerns withholding on payments to foreign persons.

COMMENT: Seems an odd one. I would have thought Forms W-2, if anything.

It turns out that the 1042 reference was mistaken.

COMMENT: Clown show.

Arlington (more specifically, Arlington’s attorneys) tried repeatedly to contact the Appeals Officer (AO). It appears that he inadvertently answered his phone one time, and the Appeals conference was moved to January 31, 2023. Arlington still wanted to know what form was costing them over $2.2 million.

The attorneys marched on. They contacted the IRS Practitioner Line, which told them that the penalties might relate to the Affordable Care Act (Obamacare). They also sent a written request to IRS Ogden for explanation and copies of any correspondence concerning the matter.

COMMENT: I’ve done the same. Low probability swing, in my experience.

The attorneys also contacted the Taxpayer Advocate.

Receiving nothing, the attorneys again requested to postpone the Appeals hearing. They learned that two additional penalties had been added. What were the two penalties about? Who knows.

The two late penalties were “abated” before the Appeals hearing on February 10, 2023.

The AO failed to show up to the Appeals hearing on February 10, 2023.

COMMENT: That sounds about right.

At the re-rescheduled hearing on February 24, 2023, the AO wanted to know what Arlington intended to do. Arlington replied that they were still trying to figure out what the penalties were for, and that a little help would be welcome.

That however would require the AO to – gasp – actually work, so he attempted to transfer the case to another AO. He was unsuccessful.

COMMENT: Fire the guy.

On June 30, 2023, the AO sent the attorneys re-generated IRS notices (not copies of originals) proposing $1,1113,000 in penalties for failure to send Forms 1094-C to the IRS and an additional $1,113,000 for failure to provide the same 1094-C to employees.

COMMENT: Finally, we learn the mystery form.

Arlington (really, its attorneys) learned that the IRS had listed a “Lang Street” address for correspondence. Lang Street was never Arlington’s address and was only one of the middle schools in the district. It was, however, the middle school which the RO had liened earlier in our story.

While talking to the AO on June 30, 2023, the attorneys requested additional time to submit a penalty abatement request.  The AO allowed 14 days.

COMMENT: Really? This is the school’s summer recess, no one is there, and you expect people to dig up years-old paperwork in 14 days?

Once again, the AO refused to answer numerous calls and faxes.

The attorneys – frustrated – contacted the AO’s manager. The manager gave them additional time.

On August 21, 2023, Arlington received a mysterious IRS letter about a claim filed on or about February 23, 2023. Problem: Arlington had not filed any such thing.

The attorneys sent a copy of the mystery notice to the AO.

On September 13, 2023, the AO told the attorneys that he had closed the case and issued a Notice of Determination.

COMMENT: This is the “90-day letter” and one’s entrance ticket to the Tax Court.

The attorneys asked why the NOD. The AO explained that he could not provide a penalty abatement while the underlying Obamacare forms remained unfiled.

Uh huh.

By the way, while the AO verbally communicated that a NOD had been issued, Arlington never received it. It appears - best I can tell – that the NOD is stuck at a processing facility.

COMMENT: Fits the rest of the story.

So, what happened with those forms?

It turns out that Arlington sent employees their copies of the Obamacare forms on or about February 28, 2020.

COMMENT: Well, there goes one of the two penalties.

Arlington was going to send the IRS copies on March 16, 2020.

What happened at this point in 2020?

The Governor of Virginia closed all schools for two weeks over COVID-19.

He then closed the schools through the rest of the school year.

On March 30, 2020, Arlington requested an extension of time to file those Obamacare forms with the IRS.

Virtually no one was at the school. People were working remotely, if possible. The school was trying to figure out how to even pay its employees when everyone was remote.

Yeah, I suspect those forms were never sent.

Heck of a reasonable cause, I would say.

And fire the guy.

State Tax Refunds And Debit Cards

I have noticed that more and more states are increasingly requiring individual income tax refunds to be electronically deposited or received on a debit card.

What got me thinking about this is Virginia’s decision to require electronic refunds, beginning with the 2013 tax season.  One can have his/her refund electronically deposited or loaded onto a debit card. There will be no physical checks.

Virginia is joining Louisiana and Oklahoma with its electronic refund/debit card policy.

I find myself recalling IRS issues with identity theft and debit cards this past filing season. The IRS has estimated that more than $5 billion was refunded to identity thieves in 2011.   A majority of these cases used direct deposits, including debit cards. Thieves prefer debit cards to a paper check, which may require a photo ID matching the taxpayer’s name to cash it. Makes sense.

So what does the identity thief need? He needs a name and social security number, preferably from someone who will not be filing a tax return. An address would also be nice. Find a foreclosed house. Maybe put a new mailbox on it. The thief fills out a tax return, making up the wages, withholdings and so on. As long as he is the first person using the identity for the tax year, it is – as one U.S. Attorney phrased it – a “remarkably simple crime to commit.” Couple this with a hard-to-trace debit card, and the IRS is almost sending cash through the mail.

Do you find yourself wondering how it is cheaper for a state to issue debit cards rather than a physical check? Say that Kentucky issues 1,200,000 refunds using physical checks. Kentucky has the cost of the checks, plus equipment, personnel costs and postage. If Kentucky associates with a debit-card-issuing institution (I am thinking the to-be-formed Hamilton Bank of the Bluegrass, as an example), they instead send one transfer to The Hamilton Bank, as well as a data base of the individual refunds. No mess, no fuss. One can see the savings to Kentucky.

I would – I mean The Hamilton Bank of the Bluegrass would – issue the debit cards. How does The Hamilton Bank make money? First, there would be the float while the debit cards carry balances. Second, there could be merchant fees upon use of the card. Third, The Hamilton Bank would allow one to withdraw cash, but only at conveniently-located-Hamilton-Bank-ATM locations in greater Cincinnati, northern Kentucky and the Bluegrass. Any other ATM’s would trigger a fee. Fourth, The Hamilton Bank would charge fees for inactivity, replacement cards and etc.  I am thinking this could be a sweet deal for me, er… I mean The Hamilton Bank of the Bluegrass.

Kidding aside, I do understand the states’ interest in moving tax administration to an all-electronic format. Practitioners have already seen some of the advantages of electronic processing: verification of receipt and filing, record of filings and payments, transcript deliveries and etc. Electronic refunds fit into this structure. However, the government cannot electronically refund to someone who does not have a bank account, which is how we wind up talking about preloaded debit cards.