Saturday, October 1, 2011

Strange Things Are Happ'nin' to Me (or What in The Heck is Going on With IRS)

My grandson Andrew loves to watch the Disney classic "Toy Story." I really enjoy watching it with him and re-listening to this Randy Newman song. Recently some strange things have gone on with IRS that are a concern to me. On the other hand, some good things are happening with IRS and that is worth a comment also.

IRS likes to audit smaller returns using computer technology. That is certainly nothing new. However, these applications are becoming more and more prolific and error prone. The computer model is implicitly based on the presumption that the information returns IRS tries to match up to tax returns are accurately prepared. If the W-2s, 1099s, etc. have been prepared contrary to the way IRS expects them to be prepared, the computer will not be able to match them up with your tax return and you will receive an annoying letter most likely accompanied by an assessment that will make you crap your pants.

I recently had a small corporate client with a problem such as this. The IRS computers had adjusted the return and disallowed a special deduction we had claimed. The adjustment wiped out a claim for refund we had claimed. Not only did IRS fail to notify the taxpayer of the adjustment, the IRS had calculated a small balance due on the return and inexplicably marked the account paid in full and that was that. We will be working on this to try to correct and I don't know what to really expect yet.

The good news is that there is a way to monitor what IRS is doing with your account so that situations like this can be investigated and corrected without hours of time on the telephone lines. IRS has a service for professionals it calls "E-services." If your tax professional is not registered with E-services, they should be. By filing a Power of Attorney your tax representative can access your account through E-services and see the status of your account, a transcript of your return, and all wage and income returns (W-2s, 1099s, K-1s, etc.) filed by payors reporting income to IRS under your SSN.

E-services is a great tool for the tax preparer to have in the toolbox because you can find out things without speaking directly with anyone at IRS. You are communicating directly with the computer that causes the problems, so to speak.

This recommendation may be helpful to those who sell on E-Bay. Why, you ask and rightly so. The answer is in new requirements this year that have been imposed on PSEs (Payment Settlement Entities) such as Pay-Pal. The PSEs will be required to report to IRS the total of all payments settled for each customer for the year. So if you sell on E-Bay and have Pay-Pal settle your payments, beware. IRS will know how much you sold on E-Bay. If the total looks like you may be running a business, you should expect IRS to try to match up this total with your tax return.

But it doesn't stop there. There are many such PSEs other than Pay-Pal. Anyone who processes credit card payments and settles the payments for their customers will be required to report them. This might include banks, savings and loans, and other merchant services providers. Most any business will likely have some of this.

The payments will be reported on Form 1099-K. The instructions for this form are not very helpful and so there will be many who try to fill this thing out without having a clue about what they are supposed to be reporting.

I'm really not looking forward to next summer. That's when the IRS computers will be sending out letters.

No comments:

Post a Comment