This post was originally published on Forbes Feb 5th, 2015
I’m hoping that John Koskinen the IRS Commissioner will take notice of this. I have some hope because I have the impression that Tax Girl and the Commish are buds. If he can act quickly he still has a chance to prevent this tax season from being even more hellish than it has to be thanks to ACA and budget cuts. Right now the more respectable contingent of the Only Mr. Koskinen can save those trees.
Form 3115
It is about Form 3115. Many able tax professionals can spend their entire career without ever dealing with this form. There are probably ways that you can cut it way down, but it is worth noting that according to the Paperwork Reduction Act notice on the form, it can average 80 hours to get the sucker done. The purpose of the
Form 3115 is to tell the IRS that you are changing your accounting method.
Since according to OMB, it takes almost 20 hours to learn about the law and the form, I’m not going to explain much about it here. Here are some key points. If from year to year you could willy nilly go from one accounting method to another, you could seriously manipulate your taxable income. In year one let’s be on the cash basis and not have much income. In year two we’ll go on the accrual basis and not recognize as income the collections for work we billed in year one.
Let’s expense our fixed asset acquisitions in year one and start claiming depreciation deductions on them in year two. You can’t do that. You have to stick with your method. That rule is so strong that you have to stick with a wrong method. You need permission to change. And you have to do a computation and either pick up income or take a deduction to even things out. Lot’s of oversimplification there.
Make Sure There Is A Simon Says
Sometimes you need to get permission in advance. Other times the permission will be granted automatically and Form 3115 can be filed when you file your return. Here is a little bit of a complication. And it is what should have Mr. Koskinen concerned. Form 3115 is attached to your return. It also has to be filed separately either to the National Office or the service center in Ogden, UT. As far as I have been able to discern, the latter has to be a paper filing. Maybe I’m missing something.
If It’s Broke And You Have A Write Off
Which brings us to the tangible property regulations or as those in the know like to call them the repair regs. Whether an item gets treated as a repair and expensed in the year it is incurred or capitalized and recovered over a long period through depreciation deductions is a long running controversy between taxpayers and the IRS. Accountants, and remember revenue agents are trained as accountants, tend to figure you have to capitalize the bigger bills and can expense the littler ones, but the courts, staffed by lawyers, have taken a more nuanced view. At any rate, the IRS is trying to get things straightened out by issuing new regulations i.e. the repair regs. I’ve written about them some.
The Anal And The Intimidated
Here is the crisis. Some very smart people with a lot of influence in the tax industry are telling all the rest of us the following story. You know those new regulations are telling you to change your accounting methods. Even if you look at what you’ve done over the years and decide that there is no income or expense to be picked up it is still an accounting method change. Given all the new concepts you could not possibly have been using those methods. So if your client has any sort of a trade or business, there are one or more Forms 3115 that have to be filed. Now maybe you are thinking. Yeah right and I should floss more regularly too, but wait-
One of my confidential informants sent me the slides for a CPE training he or she had taken just recently. The early slides were pretty much warnings, dire warnings, of what will happen to taxpayers who let this pass them by and the even worse things that will happen to CPAs and EAs, who support them in their irresponsibility.
Consider a taxpayer who in 2011 spent $10,000 on an HVAC unit, one of ten in that particular building. Under the new regs you would expense that. That’s cool. And maybe it would be worth getting a write-off of about $9,200 in 2014 rather than $256 per year for the next 35 years. But you know what, he has a lot of passive activity loss carryovers and doesn’t want to bother with it. When he replaces an HVAC in 2016, he’ll expense it and he’ll just keep writing the other one off. No big deal? Let him do it.
Oh My God! Why don’t you just shoot yourself and save your family the devastation you will wreak on them when you are hauled before the IRS to have your ticket pulled and sued by your client for allowing him to make such a foolish move and forever lose the ability to write that cost off. It is enough to make Spock cry.
The IRS Is Expecting What?!
But what is the most overwhelmingly compelling reason that the It is a potential increase in audit risk because THE IRS IS EXPECTING Forms 3115 for every taxpayer with depreciable property, repairs and maintenance costs or material and supplies. I call them the three triggers.
You know what. Maybe the guys who wrote the regs are expecting that and don’t care, because it is not their problem, but think about it. Now not every business return is going to have one of the three triggers, but most will. To be conservative about how big a deal this is, let’s say it is half. I dug up some
statistics from 2011. In 2011 there were 5.8 million corporate returns filed and 3.0 million partnerships. About 23 million individual returns had Schedule C. 1.9 million had Schedule F. I’m not even going to consider the almost 17 million that had Schedule E, since many of those would only have page 2. So keep in mind that I am leaving out all your small time landlords who don’t have partners. Of course some of the corporations and partnerships don’t have trades or businesses of their own, but the ones that do are more likely than a Schedule C to have one of the three triggers. So lets go with the 50% which is probably low. What the people with the dire warning are saying is that the Ogden Utah Service Center is expecting over 15 million paper forms.
The Only Hope To Stop The Paper Tsunami
At this point I think Mr. Koskinen is our only hope. He will have to act quickly and the way the IRS operates it may be impossible for him to do what I want him to do, but here it is. I want them to issue an announcement or a notice. It will have to be worded in IRS speak, but this should be what it really says.
Hey guys. We know we just told you to change everybody’s accounting method. We know that you are all good doobies and want your clients to be in compliance, so just account for the stuff that we told you about the way we told you to on a go forward basis. We’re giving you an extra special advance permission this year. Don’t cut down a couple of forests and ship them to Ogden Utah. If you want to do it retroactive, that’s cool. Knock yourself out and do a From 3115. Just don’t be chazzer, because we might be able to actually look at a few of them. Hope you get some big fees out of those. We rarely mention this but much of the whole deal is a kind of white collar jobs program to transfer some wealth from the ultra wealthy to the upper middle class. This repair reg thing has been great for that purpose. So all you big time partners go out and get bigger houses and it will trickle down some more. It would really be nice if you let some Americans do the actual work, but we’ll let it be your call. We don’t want to terrorize the little people though, so they don’t have to file all these forms and neither do you unless you can get a good fee out of it. We promise not to come in five years from now and disallow depreciation deductions because somebody could have written the stuff off in a 481 adjustment on their 2014 return. We promise not to pull anybody’s ticket or assess preparer penalties or accuracy penalties to anybody for not filing a Form 3115 for 2014. Have a nice tax season.
Your pals at the IRS.
I did a short survey to an extremely small unscientific sample of tax preparers asking if they expected to do one of more Forms 3115 for virtually every trade or business client. It’s running about half. As it stands now, I’m leaning toward the tree killing side, but I don’t have many returns to do and they almost all extend, so I can pretty much wait and see. I suspect that the people who are saying this is overblown will turn out to be right. It will be like those blurbs we put on our emails that we thought were required by Circular 230, but why take the risk. So realistically, if the IRS does not take action to stem the flow Ogden will only be hit with 5 or 6 million pointless forms, since there are people more courageous than me who will not be intimidated and people more clueless than me, who will miss the whole drama.
Still, it would be nice to save the trees and there is still a little time.
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