All posts by Tyler Hamelwright

IRS sends letters to 10,000+ cryptocurrency users urging them to pay taxes

The Internal Revenue Service has started sending letters to over 10,000 taxpayers who own virtual currencies, such as Bitcoin and Ethereum, advising them to pay back taxes on any income they failed to report.

The IRS announced on Friday that it began sending the educational letters to taxpayers last week. More than 10,000 taxpayers are expected to receive the letters by the end of August. The IRS obtained the names of the taxpayers through various ongoing compliance efforts. For example, the IRS filed a John Doe summons with Coinbase, one of the largest Bitcoin and Ethereum exchanges in the U.S., in 2016, to obtain the names of all its users, although it later limited the probe to those who engaged in transactions of $20,000 or more (see IRS scales back Coinbase investigation).

There are three different types of letter being sent to taxpayers, but all three versions aim to help taxpayers understand their tax and filing obligations and how to correct previous errors. The letters also tell taxpayers where they can find relevant information on the IRS website, including which forms and schedules to use and where to send them.

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS commissioner Chuck Rettig in a statement. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

Last year, the IRS announced a Virtual Currency Compliance campaign to deal with tax noncompliance related to virtual currency by doing more outreach and examinations of taxpayers. The IRS intends to stay actively engaged in addressing noncompliance related to crypto transactions through various efforts, ranging from taxpayer education to audits to criminal investigations. Virtual currency is also an ongoing focus area for the IRS Criminal Investigation unit.

Accountants and tax practitioners can help any cryptocurrency-using clients who have been contacted by the IRS. “The IRS and additional government authorities continue to focus on cryptocurrency transactions, and the tax reporting by investors engaged in such transactions,” said Tim Speiss, partner-in-charge of the Personal Wealth Advisors Group at EisnerAmper in New York. “Tax professionals have also been striving to assist investors with the proper federal and state tax reporting rules. The proper tax reporting of these transactions can be very complex. Therefore, assisting investors and taxpayers so they are in compliance with reporting rules is critical in assisting them to avoid potential penalties and interest attributable to non-reporting.”

Back in 2014, the IRS issued Notice 2014-21, which said that virtual currency is property for federal tax purposes and offered guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles, but the IRS has also been looking to update the guidance, as the cryptocurrency market has grown dramatically in recent years. The IRS plans to continue to consider and solicit feedback from both taxpayers and tax practitioners on its education efforts and future guidance.

The IRS said it anticipates issuing additional legal guidance in this area in the near future. In the meantime, taxpayers who don’t properly report the income tax consequences of digital currency transactions could be liable for tax, penalties and interest, and in some cases, may even be subject to criminal prosecution.

More information on virtual currencies can be found on IRS.gov.

IRS expands underpayment and under-withholding relief

By Michael Cohn

The Treasury Department and the Internal Revenue Service said Friday they are lowering the withholding underpayment threshold to 80 percent to give more taxpayers relief from tax penalties if they didn’t withhold enough taxes from their paychecks last year in the wake of the Tax Cuts and Jobs Act.

The change applies to taxpayers whose total withholding and estimated tax payments for 2018 are equal to or greater than 80 percent of their taxes owed. The usual threshold for avoiding a tax penalty is 90 percent, but earlier this year the Treasury agreed to reduce the threshold to 85 percent. The Treasury and the IRS came under pressure from lawmakers to either waive the tax penalty for under-withholding entirely this year or lower it to 80 percent.

“I appreciate the bipartisan interest from members of Congress on this issue and agree that further relief should be provided to taxpayers,” said Treasury Secretary Steven T. Mnuchin in a statement. “Treasury is exempting even more taxpayers from the usual underpayment penalties in an effort to help those who attempted in good faith to meet their withholding obligations.”

Last year, the Treasury and the IRS urged taxpayers to use an online withholding calculator and the updated W-4 form to help them figure the right amount to withhold from their paychecks, but the calculator was difficult to use and required a great deal of guesswork, so relatively few taxpayers actually used it. In cases where taxpayers have marginally miscalculated their 2019 withholdings, the extra waiver should help more taxpayers avoid a penalty for underpaying their taxes. Upcoming guidance and updated Form 2210 instructions will give taxpayers more guidance on this relief and filing for penalty abatement. The Treasury is still urging taxpayers to check their withholding at IRS.gov/withholding to make sure they are withholding enough this year and are getting the full benefits of the new tax law.

The IRS said it would waive the estimated tax penalty for any taxpayer who paid at least 80 percent of their total tax liability in 2018 via federal income tax withholding, quarterly estimated tax payments or a combination of the two. The revised waiver computation will be integrated into commercially available tax software and reflected in an upcoming revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. Taxpayers who have already filed for tax year 2018 but qualify for the expanded relief will be able to claim a refund by filing Form 843, Claim for Refund and Request for Abatement and include the statement “80% Waiver of estimated tax penalty” on Line 7. The form cannot be filed electronically.

In Notice 2019-25, the IRS officially expanded the waiver. “We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year,” said IRS Commissioner Chuck Rettig in a statement. “The expanded penalty waiver will help many taxpayers who didn’t have enough tax withheld. We continue to urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

Lawmakers praised the extra relief. Rep. Judy Chu, D-Calif., pointed out that she had received a commitment from Mnuchin to respond to her request for this relief during a House Ways and Means Committee hearing last week on the Treasury Department budget. She had made the same request in a letter last month with Rep. John Lewis, D-Ga., which followed a similar letter last July with 12 other Democratic members of the Ways and Means Committee asking the IRS to grant the relief. Chu also recently re-introduced legislation known as the Taxpayer Penalty Protection Act that would have lowered the penalty threshold to 80 percent had the Treasury not acted on the request. Senator Kirsten Gillibrand, D-N.Y., introduced similar legislation in the Senate earlier this year.

“Families depend on their tax refunds each year to pay down bills, make ends meet, and save for the future,” Chu said in a statement. “But this year, the reality for many is much different as they are shocked to discover they owe hundreds or thousands of dollars to the IRS through no fault of their own, and could even face penalties. I have been concerned about this issue since the passage of the Republican tax law. That’s why I introduced the Taxpayer Penalty Protection Act, to waive this penalty for more taxpayers. Even Nina Olsen, the National Taxpayer Advocate, confirmed to the House Ways and Means Committee that the confusion created by the new tax law could lead to many taxpayers facing a penalty and urged the government to act. As tax filing season is in full swing, Treasury’s action will relieve the financial anxiety facing worried taxpayers across the country. I am glad that Secretary Mnuchin responded to my request and acted in accordance with my legislation to make this change.”

Sen. Ron Wyden, D-Ore., the top Democrat on the Senate Finance Committee, also praised the announcement that taxpayers who paid at least 80 percent of their estimated taxes would not face penalties. “The Trump administration is taking a step to undo the harm the Republican tax law inflicted on millions of families whose taxes were under-withheld through no fault of their own,” he said in a statement. “Piling penalties on top of unexpectedly high tax bills while corporations and the wealthy reap a windfall would have been a slap in the face. It shouldn’t have taken nearly three months to provide additional relief to families facing financial anxiety, but I’m pleased the administration has taken the action we requested.”

Wyden noted that he first raised the issue of penalties for families whose taxes were under-withheld in a January letter to IRS Commissioner Charles Rettig. Wyden and Senate Minority Leader Chuck Schumer, D-N.Y., then led 39 Senate Democrats in a follow-up letter last month expressing concern that the 85 percent threshold wasn’t low enough.

Republicans also hailed the expanded relief. “I appreciate Commissioner Rettig’s consideration of bipartisan congressional feedback urging IRS to provide additional penalty relief to taxpayers for this tax-filing season,” Senate Finance Committee chairman Chuck Grassley, R-Iowa, said in a statement. “IRS has done a laudable job updating withholding tables to reflect the changes in tax law. But no withholding table will be 100 percent accurate for all taxpayers. Over the past year, the IRS implemented a campaign reminding Americans to check their withholding to ensure they’re paying the correct amount of tax throughout the year. This further relief for taxpayers is welcome news for taxpayers who weren’t fully prepared and may have been inadvertently under-withheld due to the significant changes made to the tax code following legislative reforms in the last Congress. The Tax Cuts and Jobs Act was the biggest change to the federal tax code in a generation. This is a reasonable approach in the first year after major reforms to allow taxpayers some flexibility to avoid paying unexpected penalties.”

U.S. tax refunds up 17% in latest data set, Mnuchin says

By Saleha Mohsin
Bloomberg News

 

Tax refunds in the U.S. jumped 17 percent week over week, Treasury Secretary Steven Mnuchin said.

Mnuchin didn’t provide further data or clarify which week he was speaking about, though IRS figures announced last Friday showed a 17 percent drop in the amount of the average tax refund during the week ended Feb. 15 versus the same period a year earlier.

“That basically gets us to the same level as last year,” Mnuchin said during a CNBC interview in London. “I would just emphasize that even if people have perfectly done their withholding, people really should be focused on paying lower taxes and those lower taxes are money back into the economy and that’s why we have the economic growth that we do.”

A Treasury spokeswoman said Mnuchin was referring to a rise in the average size of tax refunds for the week ended Feb. 15. An IRS spokesman didn’t immediately respond.

The IRS’s full weekly tax filing data is scheduled to be released Friday in Washington.

Mnuchin has tried to explain early data and anecdotal evidence that refunds over the first weeks of the tax filing season are lower. Less wealthy people — whose taxes are less complicated and are more eager for a refund — tend to file the earliest tax returns.

The drop in the number and amount of refunds so far has irritated taxpayers and triggered new Democratic complaints about President Donald Trump’s new tax law.

Data for the seven days through Feb. 15 showed that direct-deposit refunds dropped for the third week in a row this filing season to $2,703, from $3,256 a year earlier. The total number of refunds was down 26.5 percent to 23.5 million, the IRS said last week.

— With assistance from Laura Davison

Treasury Department says fewer refunds better for U.S. taxpayers

By Laura Davison

Bloomberg News
February 14, 2019

The U.S. Treasury Department is defending the declining numbers of tax refunds being issued so far this year, saying that taxpayers already saw the benefits of the new tax law in their paychecks.

The number of tax refunds issued so far fell nearly 16 percent to 11.4 million, compared with 13.5 million at the same point in the tax filing season last year, according to Treasury data published on Thursday. The average amount of those refunds dropped to $1,949, compared with $2,135 in 2018.

“Most people are seeing the benefits of the tax cut in larger paychecks throughout the year, instead of tax refunds that are the result of people overpaying the government,” the Treasury said in a statement. “Smaller refunds mean that people are withholding appropriately based on their tax liability, which is positive news for taxpayers.”

The data, which reflects the first two weeks of the filing season, has been a sore point for some taxpayers who discovered that their refund is smaller than last year as a result of the late-2017 tax overhaul, which altered available deductions and credits and revised withholding tables.

In some cases, taxpayers who were counting on a refund found they owed the government instead.

The IRS has been off to a slow start this filing season after a 35-day government shutdown left the agency with a fraction of its staff just before the filing season launched Jan. 28.

Taxpayers, too, have been slower to file this year. The IRS has received about 7 percent fewer returns at this point in the filing season compared with a year ago.

The IRS is urging taxpayers who unexpectedly owe money to pay what they can if they can’t cover the whole liability at once. The agency has payment plan options for people in that situation. The IRS has also waived some penalties for those who didn’t have enough withheld out of their paycheck during the year.

Fear of filing? Some taxpayers finding tax bills, not refunds

Published February 11, 2019

 

Adam Oleson has enjoyed a tax refund every year for the past couple of decades. He normally counts on it to make an extra house payment, reduce student-loan debts or pay down the credit cards.

But this year, no such luck. Not only won’t Oleson get a refund, he said he owes the Internal Revenue Service $1,500.

A 40-year-old electrician, Oleson lives in Omaha, Nebraska, with his wife and three children. His is the kind of middle-class family that supporters of the 2017 tax overhaul said they were trying to help. But Oleson said the loss of deductions for union dues, tool purchases and continuing education costs have actually made him worse off.

He is one of an estimated 5 million taxpayers who used to rely on a refund every spring. But because of lower rates, the loss of some deductions and the addition of new tax breaks in the overhaul, those taxpayers are not seeing the refunds they’re used to.

But that doesn’t necessarily mean they didn’t benefit from the law. Some tax experts say the benefits are just coming in a different form, such as lower withholding, which translates into a bigger paycheck instead of one refund in the spring.

‘Wrong Metric”

“Most people don’t know how much they pay in taxes,” said Bob Kerr, who leads the National Association of Enrolled Agents, a trade group for tax preparers. “But the refund is the wrong metric to measure it.”

Right or wrong, the drop in expected refunds is creating fear and anger in accountants’ waiting rooms.

“Every single person” who walks in is dreading how much they’re going to owe the IRS, said CPA Gail Rosen, who heads the Martinsville, New Jersey, office of WilkinGuttenplan. “They come in and they worry.”

But telling people they paid fewer taxes throughout the year doesn’t help the sticker shock felt by filers who’ve become accustomed to getting a check, not writing one.

Only about 5 percent of taxpayers — about 7.8 million people — are expected to pay more under the new law. But about 5 million, according to the Government Accountability Office, will find their typical tax refund replaced by a tax liability.

“A lot of people are going to be surprised,” Rosen said.

Refunds Decline

The IRS estimates it will ultimately issue about 2.3 percent fewer tax refunds this year. In the first week of the filing season, the number issued fell about 24 percent, though much of that is likely tied to the government shutdown that left the IRS understaffed as it was preparing for filing season.

So far, the average refund is less than at the same point in 2018, averaging $1,865 compared with $2,035 last year, according to IRS statistics from the first week of the filing season. The Treasury Department downplayed its own data in a tweet Monday, saying the dip is based on a “small initial sample from only a few days.” A few minutes later, Treasury also tweeted a link to the IRS’s withholding calculator, encouraging taxpayers to look up how much they should be having taken out of their paychecks.

The confusion partly stems from the IRS changing the guidelines that helped employers determine how much to withhold from workers’ paychecks. The new withholding formulas put in place last year were more generous, but are a blunt instrument that doesn’t reflect the new law’s other changes, like the SALT cap as well as an end to the deduction of unreimbursed employee expenses such as home offices and union dues.

For the affluent taxpayers currently preoccupied with SALT limits, the new tax law also frees them from the alternative minimum tax, or AMT, and creates a much more generous credit for children under 17.

Big Surprise

Put it all together and the amount withheld from a paycheck in 2018 could be very different from what a taxpayer will owe the IRS by April 15.

The only way to have prevented a big surprise was to adjust withholding last year. Few people actually did that and it’s difficult without professional advice, because so many factors are at play.

“It’s a moving target,” said Arnold Berman, a CPA at ABD Associates in Valhalla, New York. “Your situation is going to be different from someone else with your income.”

The IRS is still encouraging people to check their withholding to make sure their refund expectations align with reality. Tax professionals also say withholding should be adjusted at major life events: marriage, the birth of a child, a significant raise or when changing how much of a salary is allocated to a retirement account.

Child Credit

Middle-class families with simple situations seem most likely to get pleasant news, thanks to the new $2,000 child tax credit. For more affluent taxpayers, their refund will depend on the complex interplay of lower rates, the easing of the AMT and new deduction limits.

The SALT cap has gotten the most attention from taxpayers in states like New York and California with high income and property taxes, but their angst will be offset by changes to the AMT, which prevented many of them from deducting their full state and local tax burden anyway.

The IRS is trying to soften the blow of all the refund confusion. This year, the IRS will waive the penalties for those who paid at least 85 percent of their tax liability, down from the usual 90 percent.

Taxpayers fearful of how much they owe are better off to file and not pay immediately than not to submit a return at all.

“The failure-to-file penalties are the worst,” said Harvey Bezozi, a CPA in Boca Raton, Florida.

Middle-Class Woes

The confusion is likely to do little to sway public opinion in favor of the new law. Republicans acknowledged in an internal poll before the 2018 midterms that they’d lost the messaging battle on tax cuts. The law has consistently struggled to poll above 50 percent approval.

Representative Peter King, a New York Republican who broke from his party and voted against the 2017 tax law, said he has already heard from constituents complaining that they’re paying more this year.