IRS Delays Tax Refunds: Congress to Hold Hearings

Before the 2012 tax filing season the IRS released the 2012 Refund Cycle Chart showing that taxpayers could receive their refunds in as fast as 5 business days this year.  Unfortunately, the IRS has not lived up to this schedule.   In fact, in almost every instance this year that I’m aware of, the IRS has deposited refunds late.  I’m not aware of a single instance where any taxpayer actually received their refund in 5 business days.

Why such delays this year?  Well, they haven’t really said for sure.  They’ve said things like new “anti-fraud techniques” or “computer glitch”.    They also came out with the standard statement “most taxpayers are receiving their refunds within 10-21 days, which is consistent with historical time frames”.  What?  People don’t care about historical time frames.  If you say you’re going to deposit the money on a certain day, do it!  If you don’t, provide a valid reason to the taxpayer why you didn’t!  And, what is it?  Is it a “computer glitch”, “anti-fraud techniques” or is it just okay because people are getting their refunds within 10-21 days?

But, now Congress has scheduled a hearing to investigate why refunds have been delayed this year.  Hopefully they will get to the bottom of this.  Unfortunately, many taxpayers blame tax preparers when their refunds don’t get deposited on time.  This has led to some tax preparers being threatened.  It is also especially frustrating to taxpayers when the IRS’ “Where’s My Refund” tool also produces errors.  This gives the impression that maybe the tax preparer didn’t even file the return at all, which is not usually the case.

So, if the IRS doesn’t give you your money back on time they just make excuses, but, pay your tax bill late or file a business return late and you get hit with penalties and interest.

IRS Direct Deposit Refunds Will Be Getting Faster

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The IRS is working toward a real-time filing system.  They announced today that they are hosting a Second Real-Time Tax System Meeting.  This real-time system will allow instant matching on returns which should result in 24 hour refunds.

In my opinion this is long overdue, at least the refund part.  Under the current system you can receive your refund in 5-10 business days.  This is without any type of document matching.  Employers don’t have to file W-3′s  and W-2′s with the IRS and SSA until Feb. 28th so any matching that is done is way after-the-fact.  In fact, the IRS admits that “It is not uncommon for a taxpayer to receive a notice 12 to 18 months after a tax return is filed.  This after-the-fact compliance approach can create problems and frustrations for both taxpayers and the IRS.”  So, my question to the IRS now is, what happens in the 5-10 business days that people currently have to wait?  Why is there even a wait time at all if there is currently no matching done?

When I e-file a client’s return I get an almost immediate response from the IRS that the return has been accepted.  In a matter of minutes their computers have matched up the taxpayer’s name, SS#, spouses name, SS#, all W-2 company names with Tax ID#’s and some other various information.  Of course, they cannot match up any W-2 payroll information because they either haven’t received the information from the employer or they have and it hasn’t been processed (it will be 12-18 months later).  Then, they wait 5-10 business days before they directly deposit the money?  Why?  What happens in that 5-10 days?  It appears, nothing.  There should already be 24 hour refunds.  They don’t need a perfect matching system in order to implement that.

This real-time system should be done in two phases:

1) Start refunding taxpayers money immediately upon them filing.  This would be simple to implement under the current system.  Anything larger than $15,000 should require additional approval (or matching) to prevent extremely large fraudulent refunds.

2) Start improving the matching system.

A real-time system is great, but, the big question for me is, how much “matching” is going to be done up front?  All of it?  And, will it cause even greater delays for many taxpayers in getting their refunds?  Employers aren’t perfect either.  Many times the information that they file with the IRS is inaccurate.  Under the current system taxpayers receive letters 12-18 months later.  Then they have to either agree with the changes to the return or disagree and state the reasons why they disagree.  Sometimes it turns out the the employers filed inaccurate information.

I’m for a real-time system.  But, in what form?  I think it would be great if the IRS would match things up faster so that taxpayers aren’t accruing interest and penalties for 12-18 months before they find out that their return is wrong.  But, the IRS already receives the info by Feb. 28th, 30 days after the taxpayer’s receive their tax documents.  Why does it take so long to match things up?  If they can’t match things up within a few weeks after receiving the info how are they going to operate a “real-time” system?

Can You File Your Tax Return Using Your Last Pay Stub?

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One question tax preparers frequently get asked is “Can I file my return using my last pay stub?”

There are really two questions here:  1) Can an individual file their own return using a pay stub instead of a w-2?  And, 2) Can a paid tax preparer prepare and file a return based on a pay stub instead of a W-2?

First, let me deal with the issue of paid preparers.  The IRS states that it is “against e-file rules” for preparers to file with a pay stub instead of a W-2.  This is on their web-site here.  When they say “against e-file rules” I’m not sure exactly what rules they are talking about or if they are specifically referring to paid preparers or individuals filing their own return.  I’ve read through the entire Handbook for Authorized e-file Providers and the only mention of preparing returns from a pay stub is on page 48 where it talks about advertising.   But, on page 30 it states that paid preparers must retain “Copies of Form W-2, W-2G and 1099-R”.  How can you retain a copy of it if you never saw the W-2 in the first place?  Do you really think that the client is going to bring back the W-2 later just so that you can keep a copy?  I don’t think so.  Paid preparers need the W-2 up front in order to protect themselves.  In addition, one of the questions that must be answered in all professional tax software when e-filing is “Check if this is hand written, altered or appears not to be a true W-2″.  So, how would you know if you haven’t seen it?

Now, the issue of an individual filing their own return.  I cannot find any specific rules against this.  However, here are a couple of things to keep in mind:

1. Not all information is on the pay stub.  The Employer EIN, for example, isn’t.  Got it on last year’s W-2?  Not so fast.  Sometimes employers change their EIN.  Also, the categorization of retirement contributions isn’t clear on the last paystub.  For example on the W-2 in Box 12A, 12B, 12C or 12D it usually has the letters A,B,C,D, etc. denoting what kind of retirement contribution it is.  There are other items as well that might appear on the W-2 that are not on the last pay stub.

2. Your YTD info on your pay stub might be wrong.  This could be for a variety reasons, like your employer changing software or payroll services during the year.  Sure, they should have reconciled everything and made it accurate but they may not have done that yet when you got the last pay stub.  Some payroll preparers double check all the numbers before sending out W-2′s and if they find an error and then correct it on the W-2 it would be different from the last pay stub.

In summary, paid preparers definitely need to see the actual W-2 and taxpayers filing their own return would be best served to wait for it as well.

Santa’s Year End Business Tax Tips

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It’s that time of year again.  Time for Santa Claus to start thinking about his tax return for the new year.  Here are some items to help Santa minimize his tax bill for 2012.

IRS Speeds Up Direct Deposit Refunds

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Beginning in 2012, filers receiving a refund will be able to get it in as fast as 5 business days.  In prior years the fastest you could get a refund was 6 business days.

Direct Deposit refunds will also be deposited on Wednesdays instead of Fridays as it has been done in the past.  It is unclear why the IRS has chosen Wednesday instead of Friday.  But, of course, it is unclear why the IRS

How To Really Stimulate the Economy

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What motivates people?  Well, money, for one thing.  If you’re familiar with the book “Carrots and Sticks”, or the web-site StickK.com, you’ve probably noticed that money motivates people to do something more than just about anything else.  So, how do you stimulate the $14 Trillion mammoth economy of the United States?

Tax Reform, Much Ado About Nothing

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Tax Reform has now become the major topic of debate for this election cycle.  Of course, this happens every few years.  They will probably make a few small changes that are suppose to make the tax code simpler but it always has the opposite effect.

I’m not exactly sure why Republicans are pounding this drum so loudly.  Especially when focusing on government spending worked so well in 2010.  I thought the problem was spending?

S-Corp Reasonable Salary

There isn’t a clear cut answer to what a “reasonable salary” is. However, the IRS has come out with some guidance on the matter.

The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.”