THE IRS IS TOTALLY FU-ED!

 

The disastrous fallout from the Internal Revenue Service’s decision to completely shut down for over 6 months in 2020 in reaction to the pandemic continues. 

* Taxpayers continue to be frustrated by erroneous notices from the IRS - including those saying the 2020 tax return they had timely and correctly filed with a full payment of the balance due have not been received, although the same notice acknowledges receipt of the payment.

* Letters sent out by the IRS identifying the amount of advance Child Tax Credit payments and economic stimulus payments issued in 2021 – information necessary for the proper preparation of 2021 income tax returns - contain errors.

* Correspondence in response to IRS notices related to alleged outstanding tax debts and other issues have been ignored.

* Many taxpayers are still waiting to receive refunds for timely filed 2020 federal tax returns.

The IRS is dealing with a backlog of millions of unprocessed 2020 income tax returns, amended returns and collection-related and other correspondence.  

Most state tax agencies, like the NJ Division of Taxation, also closed down their offices during 2020, but employees were able to competently process returns, issue refunds, and deal with correspondence during this time with minimal delays.  The problems exist only with the IRS.

I do sympathize with the current plight of honest and competent IRS employees, which I expect is the majority of employees.

What to do?  Unfortunately, the answer is to just be patient.  And do not let any tax year 2020 issues delay the preparation and filing of your 2021 federal and state income tax returns.  If the 2021 IRS Child Tax Credit and/or Economic Impact Payment letter(s) is/are wrong use the correct information from your financial records to reconcile these payments on your 2021 return.

What not to do - 

I need to continually say this – there is absolutely nothing whatsoever your tax preparer can do to expedite the processing of your 2020 return, amended return or correspondence, or the issuance of your 2020 refund.  And - your tax preparer had absolutely nothing to do with the delays to your return, correspondence or refund.  While you should send copies of any IRS or state tax correspondence you receive to your preparer DO NOT call or email him or her if your refund is late.  And, looking forward, DO NOT call or email your tax preparer to ask about your 2021 refund if that is late. 

It will take many, many, many months for the IRS to fully recover from its 2020 shutdown – if it ever does.

What the IRS needs to do is, as I have said from the beginning of this mucking fess, and as a coalition of tax preparer organizations have recently requested the Service to do, immediately cease all collection activities until it has completely processed the backlog of correspondence.

The Service also needs to develop a detailed strategic plan for dealing with office closures in the event, heaven forbid, something like COVID happens again in the future.

And, nothing new here, Congress needs to properly fund the Internal Revenue Service.

So, the bottom line – be patient with the IRS and do not bug your tax preparer.

TTFN

READ MY LIPS . . . . .

 

There is absolutely NOTHING I, or any tax professional, can do to expedite the processing of your 2020 federal or state income tax return or to find out why your anticipated federal or state refund has not been issued yet.
 
There is NOTHING I, or any tax professional, can do to find out the status of your 2020 federal or state tax return that you cannot do yourself – by going to http://www.irs.gov/refunds or the corresponding tool on your state tax agency’s website.
 
The IRS is backed up due to its offices being closed for too many months in 2020.  You need to be patient.
 
DO NOT call or email me, or your tax professional, to ask about your 2020 refund. 
 
Got it?
 
TTFN

GOOD ADVICE!

Some good advice from Kay Bell, the yellow rose of taxes, in “Don't fall for these 6 tax refund myths” at DON’T MESS WITH TAXES -

“Myth 1: Calling my tax professional or the Internal Revenue Service will get me my refund sooner.

There are lots of good reasons to use a tax professional rather than doing your taxes yourself. It is a myth, however, that bugging your tax preparer, or the IRS itself, will get your refund to you more quickly.

In fact, being a pest could backfire.

Your tax preparer has done his/her best job for you. If you continue to bother him/her after your return is in the IRS' hands, you're likely to get on the tax pro's troublesome client list. That doesn't mean the tax preparer will provide less than professional service. But it does mean your tax pro isn't likely to go beyond that to help. If you're a persistent post-filing pest, you might even find yourself being fired.

The IRS can't do anything for taxpayers who are simply waiting for refunds either. Once your Form 1040 is in the agency's system, it's just got to work its way through. 

The IRS says the best way to check the status of a refund is to use its online Where’s My Refund? tracking tool. If you're away from your laptop or PC, then use your digital device to check on your refund via the IRS2Go mobile app.

But don't go crazy with the checking. The IRS updates the status of refunds once a day, usually overnight. Checking either status option more than once a day will not produce new information.

And no, trying to connect with a real person at the IRS won't get you any additional info. Plus, you'll be on hold for a while until a representative answers. So, leave the IRS phone help line staff alone. Call only if the refund status tool or app instructs you to do so.”

To repeat what I have said here before - THERE IS ABSOLUTELY NOTHING YOUR TAX PREPARER CAN DO TO EXPEDITE THE RECEIPT OF A REFUND.

TTFN

ATTENTION TAXPAYERS

If your 2020 federal tax return included a “Recovery Rebate Credit” – claiming the portion of the first two economic stimulus payments that you were entitled to but did not receive

OR

If you (or your tax preparer) used your 2019 Earned Income in calculating your 2020 Earned Income Credit or Additional Child Tax Credit

AND

You are requesting a refund on your return -

Be advised that the IRS will take longer to process the return and your refund will be delayed.

So, don’t call or email your tax pro and complain that you haven’t received your refund.  

THERE IS ABSOLUTELY NOTHING YOUR TAX PREPARER CAN DO TO EXPEDITE THE RECEIPT OF A REFUND.

TTFN

READ MY LIPS!

I have said this before – but it appears that it needs repeating.

THERE IS ABSOLUTELY, POSITIVELY NOTHING YOUR TAX PREPARER CAN DO TO EXPEDITE THE PROCESSING OF YOUR 2019 FEDERAL INCOME TAX RETURN OR THE ISSUANCE OF YOUR 2019 FEDERAL REFUND.

PERIOD.

END OF STORY.

TTFN

HEY, DUDE, WHERE'S MY REFUND?

In the past I have told clients and readers whose federal tax refunds were late in arriving to check the IRS website “Where’s My Refund” tool.

Unfortunately, this will not work for manual 2019 Form 1040 (or Form 1040-SR) filers whose refunds have not yet arrived.  

The IRS offices have been closed since the end of March, and are only now re-opening.  While these offices were closed nobody was opening mail or processing manual returns.  So, the IRS system has no idea if a manually-filed return has been received.  If it was received it most certainly has not been processed yet.  And clearly no refunds have been issued.

There is absolutely nothing that a tax preparer can do to expedite the processing of a 2019 tax return or the issuance of a 2019 tax refund.  Period.  End of story.  DO NOT CONTACT YOUR TAX PREPARER TO ASK WHERE YOUR FEDERAL REFUND IS.

Again unfortunately, taxpayers expecting refunds need to be patient.  They will eventually come.

The IRS office closure also means that correspondence has not been opened and read and amended returns have not been processed.  In the best of times you need patience concerning IRS correspondence - you obviously need much more now.  And be aware that the IRS will most likely be paying interest, at a rate much higher than banks, on amended return refunds - so the longer it takes to process your 1040X the more interest you will earn.

TTFN

IS MY STATE TAX REFUND TAXABLE?

Taxpayers who itemize and receive a “tax benefit” from a specific deduction must report as taxable income any refund of the payment deducted you receive in a subsequent year to the extent that the refund provided a tax benefit on the previous return. 

This most frequently occurs when a taxpayer deducted the full amount of state income tax withheld in, for example, 2017 on their 2017 Schedule A and received a refund of some of the tax withheld in 2018.

What is a tax benefit? 

* You are married filing a joint return.  Your total allowed itemized deductions for 2017 was $15,000.  The Standard Deduction for a married couple filing jointly in 2017 was $12,700.  Your itemized deductions exceeded your Standard Deduction by $2,300 – so the tax benefit you received from itemizing for 2017 was $2,300.

* You deducted $3,000 for state income tax withheld on your 2017 Form 1040.  When you prepared your 2017 NJ-1040 you calculated you overpaid your state income taxes by $975.  In 2018 you received a check from NJ for $975.

* The $975 refund from NJ is less than the $2,300 overall tax benefit you received from itemizing.  If you had deducted the correct amount of your 2017 state tax liability, you would have only claimed $2,025 in state income tax and your total allowed itemized deduction for 2017 would have been $12,975.  This is still more than the $12,700 Standard Deduction. 

* You clearly received a tax benefit for the full amount of the $975 state income tax refund.  You must report as taxable income on your 2018 Form 1040 the $975 state tax refund.

States will issue a Form 1099-G for all state income tax refunds issued to a taxpayer during the calendar year.  Unfortunately, most, if not all, states, in an attempt to save money, do not mail this form to taxpayers.  Taxpayers MUST go online to the state tax department website to download and print their Form 1099-G. 

Just because the state issues you a Form 1099-G does not mean that any or all of the amount reported on that form is taxable income.  You only need to report a state income tax refund if –

1) you itemized deductions on Schedule A of the Form 1040 for the year to which the refund applies,

2) you did not deduct state and local sales tax on the applicable Schedule A instead of state and local income tax,

3) you deducted the total amount of state income tax withheld for the year on the applicable Schedule A, and

4) you were not subject to the dreaded Alternative Minimum Tax (AMT) for the applicable year (taxes of any kind, including state and local income tax, is not deductible in calculating the AMT – so you would have received no tax benefit from the deduction of state and local income tax, depending on the amount of AMT and the amount of the state income tax deduction).

The amount of the state income tax refund that is taxable is also limited to the amount that your Schedule A deduction for all state and local income taxes exceeds the amount of state and local sales tax you could have deducted.

You deducted $3,000 for state and local income tax withheld and $200 for state unemployment, disability or family leave taxes withheld (considered to be state and local income taxes for Schedule A purposes).  You could have deducted a total of $2,800 in state and local sales taxes (due to a used car purchase) instead – but that was less than $3,200.  So, you only received a tax benefit of $400 from the deduction for state income taxes.  The portion of the $975 state tax refund that must be included in taxable income for 2018 is only $400. 

This rule still exists.  However, the changes made by the GOP Tax Act substantially eliminated the need to claim state tax refunds as taxable income.  Most taxpayers who had consistently itemized in the past are no longer able to itemize.  And even if you can itemize, the deduction for all state and local taxes (state income taxes or state sales taxes, state and local personal property taxes and local property taxes combined) is limited to $10,000.

Let’s say you were able to itemize for 2018, your total property taxes for 2018 were $9,500, the total amount of state income tax withheld for 2018 was $3,200, and your actual 2018 state tax liability on your 2018 state income tax return was $2,300.  You could deduct only $10,000 in state and local (SALT) taxes on your 2018 Schedule A.  

Whether you claimed the $3,200 withheld or the $2,300 actual liability for state income taxes your 2018 itemized deduction for taxes would be only $10,000.  So, you received absolutely no tax deduction, or tax benefit, for the $900 excess withholding if you claimed the full $3,200.   No tax benefit – no taxable income.  None of the $900 in state income tax refund reported on your 2019 Form 1099G is taxable income - none of the $900 has to be reported on your 2019 Form 1040.

The $10,000 deduction is treated by the IRS as $9,500 in property taxes and $500 in state income taxes.  This has been verified by Internal Revenue Service Revenue Ruling 2019-11.

Taxpayers who were required to claim state income tax refunds as taxable income on their 2018 Form 1040 actually received a fortuitous tax savings as a result of the reduction in tax rates enacted by the GOP Tax Act.

In the original example of a tax benefit at the beginning of this post I showed that the taxpayers had to report $975 as taxable income on their 2018 Form 1040.  Let’s say their federal marginal tax rate for 2018 was 25% but was 22% for 2018.  When they filed their 2017 return the $975 deduction reduced their tax liability by $244 ($975 x 25%).  But the $975 in income reported in 2018 only cost them $215 in federal income tax ($975 x 22%).  So, the bottom line is that they actually saved $29 ($244 less $215).

Hey, better in the pocket of the taxpayer!

TTFN

HEY DUDE, WHERE'S MY REFUND?

 

If you haven’t received your federal or state refund check yet don’t call or email your tax preparer!  Once your tax pro has completed and sent you, or submitted electronically, your finished returns their fate is out of his or her hands - there is nothing he or she can do that you cannot do yourself.

 

FYI – the IRS and many state tax agencies are taking a little longer to process refunds this season in an attempt to avoid identity theft.

 

The first thing you should do is to look at your copy of the return to see if you requested direct deposit of the refund. If you did check your most recent bank account statement or access your account online to see if the refund was deposited.  You will not receive a written acknowledgement of the direct deposit from your “uncle(s)” or the bank – the money will just appear in your account.

 

If it has not been directly deposited, or elected to receive a check you can check the status of your federal income tax refund online.  Click here.  

You can also check the status of a NJ state income tax refund online.  Click here.  

 

And you can check the status of a NY state refund online here.  

For any other state you should go to the website of the appropriate state tax agency.  Click here to link to your state.

You must wait at least eight (8) weeks after mailing your return to check on its status.  Have your copy of the tax return in front of you when you check, as you will need information that is on the return.

Contact your tax preparer only if you are told that your return has not been received to request a duplicate copy.

If you are told that your refund has been issued but you have not received it, follow the instructions provided to request a new check.

 

TTFN

 

 

 

THE DFBs!

The clean version is “damned fool bureaucrats”.

Several clients have emailed me lately to complain about late refunds from manually, but timely, filed NJ-1040s.  More so than in past years.

As a point of information – NJ filers can now check on the status of their NJ state tax refund online at the website of the NJ Division of Taxation (NJDOT).  You can click here to begin the process.

The clients whose refunds have been delayed were all expecting paper checks.  This is because NJ taxpayers cannot request direct deposit on manually-filed returns – even though a directly deposited refund is cheaper to process than a paper check.  In order to request direct deposit a NJ taxpayer must file electronically.  To be honest, this makes absolutely no sense.

Since I cannot submit my client returns electronically as I do not, and at this point will not, use flawed and expensive tax preparation software, whenever possible, and when the client does not specifically “opt-out”, I file my client NJ-1040s “electronically” via NJWebFile.  Unlike federal returns, I can submit NJ-1040s for full-year resident taxpayers directly to the NJDOT online via NJWebFile.  Unfortunately, there are many unnecessary limitations on the returns that can be submitted via NJWebFile, and I am forced to manually file a lot of NJ-1040s due to these limitations. 

For example, the software for the NJWebFile program has never been updated to provide for excess Family Leave Insurance employee contributions – NJ taxpayers with two or more employers must file manually in order to get a refund of excess FLI insurance withholding.

The State of New York purposely delays the issuance of paper refund checks.  NY wants taxpayers to request direct deposit of refunds – which can be done on manually filed returns.  But New York has clearly told us that this will happen.  I am not aware of any announced NJDOT policy of purposefully delaying paper refund checks. 

NJDOT has never been known for its competence, or even its honesty.  While the IRS will contact taxpayers, or issue refunds, almost immediately after receiving an overpayment, double payment, or payment that it cannot properly identify – NJDOT, I believe purposely, remains silent, hoping that the taxpayer will not discover the over or double payment and the State can keep the money.

The fairly new Director of the NJDOT, Michael J. Bryan, has proven to be a big disappointment.  Nothing has changed under his leadership.  He did create a NJ version of the IRS Taxpayer Advocate Service, but my correspondence to the NJ Taxpayer Advocate on the systemic problem identified above, and a specific example thereof, has been totally ignored.

 

Have any of the NJ tax pros reading this also experienced excessive delays in the issuance of client paper refund checks?

 

TTFN

UNDELIVERED REFUNDS

The IRS has issued its annual notice about undelivered tax refund checks. In all, 99,123 taxpayers are due $153.3 million in refund check that could not be delivered because of mailing address errors.

The average returned refund check is $1,547 this year.

Taxpayers who believe their refund check is among the undelivered should use the “Where’s My Refund?” tool on the IRS website. The tool will provide the status of their refund and, in some cases, instructions on how to resolve delivery problems.

A telephone version of “Where’s My Refund?” is also available by calling 1-800-829-1954.

The IRS correctly advises –

“While only a small percentage of checks mailed out by the IRS are returned as undelivered, taxpayers can put an end to lost, stolen or undelivered checks by choosing direct deposit when they file either paper or electronic returns.”

I recommend direct deposit to all my 1040 clients.  By using this method taxpayers will receive their refunds at least a week earlier.

The Service also issued a timely reminder (highlight is mine) -

“The public should be aware that the IRS does not contact taxpayers by e-mail to alert them of pending refunds and does not ask for personal or financial information through email.  Such messages are common phishing scams.  The agency urges taxpayers receiving such messages not to release any personal information, reply, open any attachments or click on any links to avoid malicious code that can infect their computers.”    

TTFN

THIS JUST IN

From the IRS –

The Internal Revenue Service is looking for taxpayers who are due to receive a combined $123.5 million in the form of 107,831 refund checks that were returned to the IRS by the U.S. Postal Service due to mailing address errors.

“We are eager to get this money into the hands of taxpayers, so don’t delay if you think you are missing a refund,” said IRS Commissioner Doug Shulman. “The sooner you update your address information, the quicker you can get your refund.”

All a taxpayer has to do is update his or her address once. The IRS will then send out all checks due. Undeliverable refund checks average $1,148 this year, compared to $990 last year. Some taxpayers are due more than one check.

Average undeliverable refunds rose by 16 percent this year, which is in line with the 16 percent rise in average refunds for all tax returns in the latest filing season. Several changes in tax law likely played a role in boosting refunds, including the First-Time Homebuyer’s Credit and the Recovery Rebate Credit, among others.

The vast majority of checks mailed out by the IRS each year reach their rightful owner. Only a very small percent are returned by the U.S. Postal Service as undeliverable.

If a refund check is returned to the IRS as undeliverable, taxpayers can generally update their addresses with the “Where’s My Refund?” tool on IRS.gov. The tool enables taxpayers to check the status of their refunds. A taxpayer must submit his or her social security number, filing status and amount of refund shown on their 2008 return. The tool will provide the status of their refund and in some cases provide instructions on how to resolve delivery problems.

Taxpayers checking on a refund over the phone will be given instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

The IRS encourages taxpayers to choose direct deposit when they file their returns because it puts an end to lost, stolen or undeliverable checks. Taxpayers can receive refunds directly into personal checking or savings accounts. Direct deposit is available for filers of both paper and electronic returns.

IS IT REALLY BETTER TO GIVE THAN TO RECEIVE?

Let’s face it – everyone loves, and wants, a tax refund!

And as a tax preparer, very few things give me more pleasure, at least during the tax filing season, then writing in the explanatory email or memo that precedes or accompanies a finished return, “Your Uncle Sam owes you tons of money this year!”

It is certainly better than beginning with “Oi vey!” or “Now don’t shoot the messenger”.

If everyone loves a refund it only follows that everyone hates paying their “uncles”.

For some the hatred is more deep seated than others. Some of my clients really hate to pay additional taxes with a passion. In their mind they paid more than enough during the year. They would rather get a refund of $1.00 than pay anything to Sam or Jon or Dave (over the years I have on occasion had a return with a refund of only $1.00 – in the old days of the NYC payroll tax if your refund was $1.00 you had to write a letter to the City and request they send you the $1.00).

However, from a strictly financial point of view, when it comes to taxes it is truly “better to give than to receive”. A tax refund means that you have made an interest-free loan to the federal, or state, government.

If you owe Sam, or your state, a balance due on your return that, by way of the various “safe harbor” rules, avoids a penalty assessment for “underpayment of estimated tax” it is you who have received an interest-free loan from the government. You have had full use of your money during the year!

Quite a few of my clients receive rather substantial refunds on purpose, and have been doing so for years. It is a form or “forced savings” - somewhat like a vacation club. They plan to use the refund to pay for their annual family vacation, or to make needed home improvements, or pay for college, or pay off credit card debt.

I, and they, know full well that if they had an extra $100-$200 in their pockets each week they would spend it – and not necessarily wisely.

And, considering today’s interest rates on temporary investments, just what would they earn on the money if they invested it each paycheck instead of giving it to Sam or Jon or Dave for “safekeeping”?

.

$10,000 invested at 1½% evenly throughout the year would earn about $75.00 in interest. As I said when reacting to BO’s $10-$13 per week in Making Work Pay Credit advance – “big whoop”! Even at 2% or 2½ % the earnings are certainly not impressive.

Back in “the day” when ordinary passbook savings accounts paid 5.25%, and short-term CDs paid more, the earnings was worthwhile – and I would recommend to clients that they have the excess withholding automatically deposited in a credit union account so it would not pass through their hands.

And during the Carter years, when interest rates even on money market accounts were double-digit, a refund was truly a sin.

But today this lost interest is a small price to pay for removing the temptation of having the money available for drawing upon during the year.

.

Wait - here’s a thought. Have you accumulated excessive high-interest credit card debt? Using the $100-$200 per week to pay down such debt is like getting a double-digit return on your money and certainly worthwhile. But, just like with using home equity borrowing to pay down credit card debt, this idea only pays if you do not turn around and build the credit card debt back up again.

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So while I do, on occasion, point out that a large refund = making an interest free loan to the government, I do fully understand why clients choose to do so, and even encourage the practice.

TTFN

HEY DUDE, WHERE’S MY CHECK?

Haven’t received your 2007 federal income tax refund yet.

Don’t call your tax preparer (I can't do anything). Go to www.irs.gov and click on Where's My Refund?.

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You should have your copy of the 2007 return in front of you when checking on the status of your refund. You will need to enter your Social Security Number, Filing Status (i.e. Single, Head of Household, Married Filing Joint) and the exact amount of the refund as claimed on the return.

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You can check on the status of your refund seven days after electronic filing a return. For a paper return you should wait four to six weeks after mailing the return.

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The system will advise you if a check has been mailed or if the refund was directly deposited.

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You should know that if your refund is directly deposited you will not receive a confirmation from either the IRS or your bank. You must check the bank activity or balance online, or check out a bank statement, to see if the refund was received.

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If the system tells you that your return has not been received then you should contact your tax preparer to obtain a duplicate return.

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To check on the status of a state income tax refund you should go to the website of the state’s appropriate Finance, Revenue or Taxation department. You can start by going to, for example, www.state.nj.us or www.state.ma.us. Just substitute the "nj" or "ma" with your state's initials.

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I expect that once the first round of “stimulus” rebate checks have been mailed out there will be a similar method to check on the status of these checks at www.irs.gov.

TTFN