90 Days Means 90 Days

Let’s return to an IRS notice we have discussed in the past: the 90-Day letter or Notice of Deficiency. It is commonly referred to as a “NOD” or “SNOD.”

If you get one, you are neck-deep into IRS machinery. The IRS has already sent you a series of notices saying that you did not report this income or pay that tax, and they now want to formally transfer the matter to Collections. They do this by assessing the tax. Procedure however requires them (in most cases) to issue a SNOD before they can convert a “proposed” assessment to a “final” assessment.

It is not fun to deal with any unit or department at the IRS, but Collections is among the least fun. Those guys do not care whether you actually owe tax or have reasonable cause for abating a penalty. Granted, they might work with you on a payment plan or even interrupt collection activity for someone in severe distress, but they are unconcerned about the underlying story.

Unless you agree with the proposed IRS adjustment, you must respond to that SNOD.

That means you are in Tax Court.

Well, sort of.

The IRS will return the case to the IRS Appeals with instructions and the hope that both sides will work it out. The last thing the Tax Court wants is to hear your case.

This week I finally heard from Appeals concerning a filing back in March.

Here is a snip of the SNOD that triggered the filling.

Yeah, no. We are not getting rolled for almost $720 grand.

I mentioned above that this notice has several names, including 90-day letter.

Take the 90 days SERIOUSLY.

Let’s look at the Nutt case.

The IRS mailed the Nutts a SNOD on April 14, 2022 for their 2019 tax year. The 90 days were up July 18, 2022. The 18^th was a Monday, not a holiday in fantasy land or any of that. It was just a regular day.

The Nutts lived in Alabama.

They filed their Tax Court petition electronically at 11.05 p.m.

Alabama.

Central time.

90 days.

The Tax Court is in Washington, D.C.

The Tax Court received the electronic filing at 12.05 a.m. July 19^th.

Eastern time.

91 days.

The Tax Court bounced the petition. Since it had to be filed with the Tax Court - and the Tax Court is eastern time - the 90 days had expired.

A harsh result, but those are the rules.

Our case this time was Nutt v Commissioner, 160 T.C. No 10 (2023).

How Do You Really Know If You Filed A Tax Return?

Here is what caught my attention:

The Internal Revenue Service … determined a deficiency of $541,552 in petitioner’s 2012 Federal income tax and an accuracy-related penalty of $107,995.”

This is the Whitsett case. She is a doctor and specializes in blood transfusions. Way back in 1982 she and her husband bought 4,000 shares of Immucor, Inc stock for $11,000. She kept it after the divorce.

Fast forward to 2011 and someone agreed to acquire Immucor for $27 per share.

She had almost 20 years for the stock to split and split again; she now owned 63,594 shares.

By my math 63,594 times $27 = $1,717,038.

How I wish I had those problems.

Come tax time she takes the paperwork to her accountant, whom she had used for decades. She showed him paperwork accompanying her $1.17 million check, captioned “Corporate Action Advice.” It said that …

·      The “payment date” was August 19, 2011

·      The “tax year” was 2012

·      The sale was “processed” on January, 2012

I have no idea what this “action advice” was trying to say. As a tax CPA, I report someone’s financial life to the IRS one year at a time. It is critical to me to know whether this sale took place in 2011 or 2012. Whoever wrote this “advice” must have been crazed or did not command the language.

COMMENT: If I were the CPA, I would be on the phone to shareholder services. Or I would ask you to call. Either way, we are investigating.

QUESTION: There is one more thing that could help with determining the tax year. Can you guess what it is?

Dr W’s accountant takes a look at the paperwork and decides that 2011 is the proper year to report the gain.

The accountant was also under the impression that she had been reinvesting dividends. He does a calculation (totaling $628,437), adds it to $11,000 and determines that her “basis” in the stock was $639,437.

And her gain is $1,077,601 (1,717,038 – 639,437).

He extends her return and has her send an extension payment of $154,776.

The return was extended until October 15, 2012. For some reason, he did not finish it on time. Instead he finished it in February, 2013. He sent Dr W a copy of her return as well as a letter explaining that he had “filed the return electronically.”

Happens all the time.

COMMENT: Except that a step is missing. Do you know what it is?

There was $5,393 due, and the Dr sent a check.

All done, right?

Nope.

The Dr gets a Form 1099-B reporting the sale of the stock in 2012.

COMMENT: Now he has to amend her 2011 to remove the sale.

The accountant reviewed the paperwork and decided that nothing needed to be reported in 2012, as she had reported the sale the year before. As if to provide an exclamation point, he did not even show the sale on her 2012 return with zero gain, if only to avoid tripping the IRS computers. He was pretty certain about his game. 

COMMENT: This is not done. Even if I was absolutely convinced that the 1099 was in error, I would report it on your return and then find a way to back it out. The IRS simply matches A to B; in the event of a mismatch, the IRS computers send out an automatic notice. The notice does not pass human eyeballs until you respond (or eventually, should you fail to respond).

Late in 2013 the IRS sent the Dr a notice asking where her 2011 return was. They were showing a credit of $165,562 but no return.

For some reason the Dr sent another check for $5,393. Why? Who knows.

She asked him about that 2011 return. He assured her that he filed it electronically.

COMMENT: If the IRS is asking, you did not file. You may have thought you did, but you are not going to win this fight. Send them a copy. Some practitioners even include a legend such as “Information Only – Previously Filed.” You can attach a note to this effect. No one is going to read the note and – more likely than not – you will receive a notice for late filing, but there is no harm.

Her accountant was so sure, however, that he sent the IRS nothing. Not a letter. Not a call. Nothing. What could possibly go wrong?

By October, 2014 the IRS sent the Dr a notice for big-time taxes due for 2012. Remember that - according to the IRS - she sold that stock in 2012.

In February 2015, the accountant backed down and admitted that the sale should have been reported in 2012. He also blew the calculation of her stock basis by adding $628,437 for reinvestments. Turns out that she had not reinvested. He promised to amend the 2011 and 2012 returns.

He amended nothing.

Finally – and fed up – she hired an attorney.

On April 10, 2015, the attorney amended the 2011 return, removing the sale of stock. 

QUESTION: Do you recognize the significance of the date: April 10, 2015?

Without the stock sale, she had a gigantic overpayment for 2011, which the attorney applied to 2012 and the stock sale.

The case, by the way, was not about the story we have just told. No sir. The case was because the IRS wanted gigantic penalties from Dr W.

Huh?

From their perspective, she refused to file a 2011 return, even after being reminded.

And – on top of that – she left out a big stock sale on her 2012 return.

If that was all you knew, she would look pretty bad.

From her side, the IRS looks like a bully. She reported the stock gain and paid the tax A YEAR EARLY.

Granted, the paperwork was a disaster, but the money was there before its time. If anything, the IRS should pay interest for banking her money.

The Tax Court fortunately reversed the penalties against Dr W. They felt she had acted with “reasonable cause” and “in good faith.” She relied on a long-standing tax advisor. He went off the rails, but how was she to know?

Remember that the penalty was over a hundred grand.

Back to our questions:

(1) The accountant should have questioned why he did not have a Form 1099-B for 2011. Anything can happen and paperwork gets lost, but the lack of one made me curious immediately.

(2) The accountant is not allowed to release her return without written permission from Dr W. Why? Because it not his return, that is why. He should have requested her to sign an authorization and mail it back to him before filing anything.

(3) The significance of the date is the statute of limitations. The original due date for a 2011 return was April 15, 2012. Add three years and make it April 15, 2015. If she wanted to get her 2011 refund (and she did), she had to get her amended return in by April 15, 2015. She made it by 5 days.

I am not sure what happened with the accountant. Was there a foul-up with his software? Did he attempt to electronically file but not recognize that the attempt failed? Why did he ignore a Form 1099, knowing that those things are chum-in-the-water for the IRS? Why did he not recognize that the statute of limitations was closing on a hundred-and-fifty grand?

And why not just send another copy of the return to the IRS and be done with it?

An Interim Report On Tax Season

I was speaking with a colleague earlier this week who wants to set up a tax storefront. That means a place that prepares taxes, probably only individual taxes and only for a few months a year. Think H&R Block, but without a franchise involved. I suspect he would be successful, but like any business start-up the cash drain is difficult to pull off.

And he asked me if tax seasons are getting “harder.” Yes, he is younger than me. I am getting to that age.

I hesitated on his question, as my long-standing position is that the accounting firm determines the difficulty of the season for its employees. Some firms do a good job, and other firms simply do not care. It is one of the reasons that the average career of an accountant in a CPA firm is little more than that of an NFL player.

Bet you did not know that.

Still, there are issues for tax practitioners that did not exist a few years ago – or even last year.

I was speaking this week with a good friend about whether it was safe for him to prepare his personal tax return on TurboTax. Depending upon the year and other factors, he prepares a draft return and I review it for him. Last year he changed jobs and states, so I expect I will review his return this year.

Why TurboTax? It turns out that a number of states experienced suspicious electronic filing activity this year and, upon investigation, in many cases the electronic return was filed using TurboTax.

Let’s be fair, though. That does not mean that the information came from TurboTax. There have enough recent breeches of data security that the information may have come from elsewhere.

Intuit, the parent of TurboTax, responded aggressively to this development, as you would imagine. A number of states, including Kentucky and Minnesota, temporarily halted the processing of electronically filed returns.  Meanwhile TurboTax encouraged its customers to log-in and review their accounts. They instructed their customers to review their direct-deposit information specifically.

Makes sense.

Why the states? In the past, fraudsters have targeted the IRS rather heavily. The IRS responded with stricter identity measures, including lockdowns on any tax refunds and the required use of security passwords. Florida was so hard-hit, for example, that one can request a federal security PIN number under a pilot program – even if one was not the victim of identity theft.

It may be that the fraudsters saw easier picking elsewhere.

Then we have the information documents to prepare a tax return.

I am reading that the federal health insurance marketplace has sent out approximately 800,000 erroneous Forms 1095-A. This is not insignificant and represents approximately one-in-five people using the marketplace. These forms are new and are issued by the exchanges to individuals who purchased insurance there. They include information on any government subsidy, so they are an important tax document.  For example, even if you are not otherwise required to file a tax return, you must file if you received a subsidy.

The error concerns the “benchmark plan” premium and doesn’t concern the amount of subsidy itself. The “benchmark plan”” is the second lowest cost silver plan for where one lives, and it is part of the arithmetic to settle-up whether one received too much or too little subsidy. As you know, if you received too much subsidy you have to pay it back.

Taxpayers who received Forms 1095-A are encouraged to wait until March before filing their individual tax returns. Not a problem. Surely these are people who do even meet with their tax advisors until March.

Meanwhile, it has finally dawned on some politicians that people may not realize the effect of ObamaCare on them until they file their 2014 taxes. There will be rude surprises for those who did not acquire insurance and now have to pay the penalty. Perhaps they acquired insurance but were over-subsidized, and now they have to repay the excess subsidy.

Wait until they learn that the penalty will go up every year.

Then there is a problem with the timing of obtaining health insurance. ObamaCare requires everyone to have insurance in place by February 15 – which of course is two months earlier than April 15, when taxes are due. That may be the first time people understand this Rube Goldberg contraption foisted 50-shades-of-grey style upon society. What happens then? Well, in addition to owing the penalty for 2014 it would appear that one would also owe a penalty for some part of 2015 – at least until one can acquire health insurance. The penalty goes month by month.

Many politicos – not the brightest class emerging from natural selection – are now up in arms, demanding that deadlines be changed, penalties ameliorated and so on. I suppose there is a nuance there, but it escapes me. 

Somewhat on cue, on February 20 the Center for Medicare and Medicaid Services declaimed that the enrollment period shall reopen from March 15 to April 30.

To which I have two questions:

1. What happened to the period from February 15 to March 15?
2. Why is the Center for Medicare and Medicaid Services changing the law?

On February 13 - which seems a lifetime ago at this point - the IRS finally provided some guidance on how to comply with the new repair Regulations effective with the 2014 tax returns. Considering that their first pass at the Regulations required almost everyone with real estate or other depreciable property to file for a change in accounting method - a change which the IRS mandated, by the way - the IRS then had the temerity to say that we also had to formally ask them for permission to change. I had and have a stack of real estate partnership returns in my office waiting on their guidance. Forests have been felled by tax practitioners divining for weeks and months what the IRS wanted from us this year in order to comply with their new Regulations. 

Do you ever wonder if our government is suffocating under the weight of people who - having accomplished little more than going to a name school or playing at politics - think they now have the chops to bludgeon those of us who actually accomplish something every day? 

Back to our initial question though: are tax seasons getting “harder?”

I don’t think “harder” is the word I would use for for it.

What Happens When Hacking Concerns Conflict With A State Electronic Payment Mandate?

Let’s travel to the Bay State for a taxpayer requesting reasonable cause against the imposition of penalties.  

The amount in dispute is $100.

Yes, you read that correctly.

Our protagonist is Jonathan Haar, and he lives in Massachusetts. On April 15, 2011 he had the audacity to file a paper extension and include a $19,517 check for his tax year 2010 state return. The paper extension and payment

“… did not comply with the requirements set forth in Technical Information Release (“TIR”) 04-30 (“TIR 04-30”), which states that if a payment accompanying an extension application equals $5,000 or more, such extension application and payment must be submitted electronically.”

Got it. The state says that it is less expensive to process electronic than paper tax filings and payments. Seems reasonable. How do we get people to follow along, however? One way is to make whatever the state wants mandatory.

Our protagonist unfortunately had travelled this path before, and he had been warned for tax year 2005 and penalized for year 2006.  Massachusetts had a tax recidivist! They assessed the above-mentioned $100 penalty on our ne-er-do-well.

If you were my client, I would have told you to pay the $100 and move on. Mr. Haar is not my client, and he refused to pay. He instead filed an appeal, which appeal went to the Massachusetts Appellate Tax Board.

His argument?

“Mr. Haar maintained that the Commissioner’s electronic payment mandate is a ‘serious invasion of both [his] privacy and [his] personal business practices,’ as it exposes his finances to risk of cyber attack.”

 “I intentionally do no electronic banking nor direct bill paying, I have none of my credit cards linked to my bank accounts directly and I think anyone who does any of the above is exposing themselves to multiple risks of cybercrime and identity theft.”

Mr. Haar further expressed doubts as to the security of the computer systems used by the Department of Revenue (“DOR”), noting that "if the Pentagon can be hacked," he had little confidence that DOR could protect his – or anyone’s – personal data from theft.

Massachusetts argued that it had the authority to mandate electronic filing and payment, as well as assess penalties if a taxpayer failed to comply with their filing and payment mandates. Massachusetts does recognize exceptions for reasonable cause, but its own Administrative Procedure 633 (“AP 633”) provides that

… the fact that a taxpayer does not own a computer or is uncomfortable with electronic data or funds transfer will not support a claim for reasonable cause.”

COMMENT: Call me quaint, but I would say that someone not having a computer is prima facie reasonable cause for not being able to file an electronic return or transfer funds electronically. The issue I see with AP 633 is its absolutism: the language “will not support” leaves no room. Why not say instead “generally will not support,” if only to allow space for unexpected fact patterns? 

In support of its position, the DOR trotted out two officials: the first was Robert Allard, a tax auditor. He pointed out that Mr. Haar filed an electronic return, presumably through a professional preparer. I suppose that Mr. Allard felt that if one could electronically file then one should be able to electronically pay. 

The second was Theresa O’Brien-Horan, a 26-year employee and Deputy Commissioner, who testified that

… the mandate at issue in this appeal – requiring individual taxpayers who apply for an extension with an accompanying payment of $5,000 or more to file and pay electronically – is helpful to DOR because it maximized up-front revenue intake.”

… the $5,000 threshold was chosen because it would ‘impact 17% of the taxpayers, but … get the money banked for 84% of the revenue.”

You can virtually feel the customer service vapor emanating from Ms O’Brien- Horan.

When asked whether reasonable cause was the Massachusetts equivalent of an ”opt out,” Ms. O’Brien-Horan answered “yes.”

OBSERVATION: The IRS, for example, prefers that one file an electronic return. The IRS however did not put the burden on the taxpayer; rather it put the burden on the preparer. If a preparer prepares more than a minimal number of returns annually, the preparer is required to file the returns electronically. This is awkward, as the return belongs to the taxpayer and not to the preparer. The preparer is not allowed to release any return – even to the IRS – without the taxpayer’s approval. What does the preparer do if the taxpayer does not grant approval? The preparer includes yet-another-form with the return indicating that the taxpayer has “opted out.” This prevents the IRS from penalizing the preparer for not filing electronically.

If Mr. Haar’s position was reasonable, then Mr. Haar could “opt out,” irrespective of any self-serving Massachusetts Administrative Procedure.

Ms. O’Brien-Horan just didn’t think that Mr. Haar was being reasonable.

But the Board did.

“Given his reference to the hacking of the Pentagon’s computer system, and in light of the many well-publicized instances of large-scale thefts of financial information following computer breaches at businesses and other institutions, and the appellant’s consistent practice of avoiding electronic payment of all his bills, including his tax obligations, the Board found that the appellant’s failure to utilize the Commissioner’s mandated electronic tax payment to be reasonable.”

Two things strike me immediately.

The first is the cause for concern comprising Mr. Haar’s argument. It had not occurred to me to off-grid all of one’s banking transactions, but he gives one pause. I recently read the following on www.marketwatch.com, for example:

A Russian gang has stolen 1.2 billion user names and their passwords as well as more than 500 million email addresses, the New York Times reports.

The information came from more than 400,000 websites, according to the Times, which says researchers at Milwaukee-based Hold Security discovered the cyber heist.

Mr. Haar is highly cautious. His position is somewhat eccentric but not unfounded. A reasonable tax collection agency would have granted him this one and moved on.  

The second is the inanity of Massachusetts DOR. Rather than abate a $100 penalty, it preferred to pursue the matter, at who knows what cost to state and citizens. We know that cost would include Mr. Allard and Ms O’Brien-Horan’s payroll, not to mention that of their superiors, legal counsel and who-knows-what else. I can understand not wanting to set a precedent, but … really? My take is that the DOR is too well-funded if they have the time and money to pursue nonsense like this. Perhaps DOR budgets cutbacks are in order for Massachusetts.