Tax Day 2014

It’s April 15th — tax filing deadline day!  From where I sit, there are only a couple more hours left to file your federal income tax return.  Today I should be writing about (and you should be reading about) procrastination, how to file an extension, what to do if you owe taxes and can’t pay, or various IRS statistics like how many returns have been filed, how many refunds have been issued, how much the IRS has paid out in refunds, etc.  Before the age of electronic filing, we used to see the obligatory TV news story about which post offices were open late and which ones had the longest lines.  But gone are the days of such innocent tax day topics.  Today I’m mostly seeing warnings about those pervasive telephone tax scams.

For as long as I can remember, the IRS has warned taxpayers of phony IRS calls, but it seems like it used to be an annual warning that came out in the “Tax Tips” series.  And it always seemed more like a theoretical problem with some anecdotal evidence here and there.  Today, however, these phone scams have become commonplace.  It doesn’t seem to matter where you live either; I’ve seen reports of phone scams all across the country.  And I’ve handled my share of calls from local taxpayers who have been scared out of their minds by phony IRS calls.  In Sacramento, some victims are being told that they are going to be arrested for tax fraud.  These scam artists are apparently very convincing.  Sometimes people who don’t even owe (and know that they don’t owe) are tricked into believing that they are in trouble with the IRS.

The IRS is very clear about what type of contact they initiate with taxpayers, and if you become familiar with the standard IRS warnings, you’ll never be fooled by a tax scam.

 
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Supermodel Gisele Blames IRS Audit on her Forbes List Ranking

Are you not making the millions you planned to make?  Is your face not occupying magazine covers? Is your name nowhere to be found on any Forbes lists?  Well, the silver lining is that you are not subject to any extra scrutiny by the IRS.  Supermodel Gisele Bündchen was audited recently and believes that her 7-year stint at the top of Forbes’ “Highest Paid Supermodels” list was at least partly to blame.  Perhaps Gisele gets a double dose of said scrutiny, being married to football star Tom Brady, who also sits atop his respective Forbes highest paid list.  Maybe living life in relative anonymity isn’t such a bad thing after all.

Gisele’s beef with Forbes is that they don’t have the details of her accounting, they don’t have her bank statements, and their estimates are too high.  She obviously makes a lot of money, but nowhere near the $42 million that Forbes has her making.  Forbes countered by citing all the various sources of their income estimates: editorial shoots, independent licensing ventures, spokesperson gigs, and contracts from beauty and fashion companies.

For all we know, she may have been audited anyway.  There are many different factors (or “red flags”) that are considered when selecting cases for an IRS audit, but one of the biggest factors has to be an extremely high income.

Still, Gisele doesn’t think too highly of Forbes.  She says “[t]here should be a magazine to quantify knowledge, understanding and love for people: that is power.”  Not a bad idea for a magazine, and she better get on that quick before the government figures out a way to tax knowledge, understanding, and love too.

 
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Koskinen’s Press Club Speech

The IRS Commissioner typically speaks at a National Press Club luncheon once a year.  It is the perfect venue to learn about the Commissioner, his vision, and everything at the top of his to-do list.  Here are a few things that stood out to me from Koskinen’s Press Club remarks from April 2nd, 2014:

  • He enjoys college basketball, . . . or at least March Madness, . . . or at least Duke.  He made a pretty funny joke about Duke’s loss in the early rounds of the NCAA championship.
  • During the three months he has been serving as head of the IRS, he has visited 18 of the 25 largest IRS offices.  He has jumped right in and run around quite a bit for an old guy.
  • He likes to hear the opinions of the minions.  I really do respect this approach and hope that it is more than just words and becomes part of the culture at the IRS.
  • He is realistic; he does not pretend to be perfect and he doesn’t expect IRS employees to be perfect either. In fact, he said that his theory is “bad news is good news,” meaning that even negative reports have a silver lining because at least it signifies that the news is getting reported.  After all, a problem cannot be corrected unless and until it has been identified.  I see his point, but I’m not sure I would have taken it that far.
  • He is big on the whole idea of restoration of public trust and the notion that every taxpayer should be treated fairly.  He spent a large portion of his talk discussing the investigations into the IRS’ tax exempt application scandal.
  • He wraps up by commenting on the tax filing season, problems with voluntary compliance and tax fraud, FACTA, customer service (by phone and at local service centers), tax reform, and administration of applicable provisions of the Affordable Care Act.
  • The biggest problem, according to the Commissioner, is insufficient funding.  He basically needs another billion dollars, give or take.
 
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IRS Stays Away from Churches

Do you know the difference between a non-profit religious organization and a church?  Perhaps the biggest difference is their tax obligations.  While it is true that neither  is required to pay taxes, a pastor, televangelist, or broadcasting company that is registered as a religious organization must file information returns (Form 990) with the IRS that disclose how their money is spent.  However, churches, for the most part, do not have to answer to anyone.

John Burnett, reporting for National Public Radio, writes about a Christian television network called “Daystar” that operates much like a wealthy corporation, except without the transparency.  Yet they call themselves a church and the IRS has never questioned it so far as anyone knows.  There is a 14-point test that the IRS may use (in theory) to determine if an entity qualifies as a church under the law, but the IRS doesn’t enforce it. And if these churchy executives decide they want to drive Bentleys and live in sprawling chateus, they do it.  If they want to spend donation money on their own pet causes, then they do it.  According to IRS insiders, the government just doesn’t audit churches anymore, for at least the past five years anyway.

As part of America’s commitment to religious freedom, anyone can start a church, start preaching and passing the collection plate. They are presumed to be a church by the IRS — no questions asked.

Quoting former Daystar employees and tax attorneys, Burnett makes it pretty clear that Daystar would never meet the criteria for church status if the IRS were to enforce its own rules.  We all know how good the IRS is about enforcing its own rules…

 
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1st Grade Tax Tips

Do you endorse the "shoe box" strategy of document storage?

This is usually the time of year when people start digging through their file, or shoe box as the case may be, in an effort to get started on their dreaded Form 1040.  If you wait until the eve of tax day, then you’ll find yourself furiously rifling through said shoe box.  And if you really use a shoe box to secure your important records, then chances are you not very organized, and you have other records scattered all throughout the house or in multiple files on your computer.

I know that nobody ever taught you about income taxes or finances in grade school; my kids haven’t had that class yet either.  But as they get older, I do intend to impart some wisdom on them, even if by force.  And for now, there are many habits I can help them develop that will hopefully carry over into their adult life and will make their future April 15ths that much more bearable.

1.  “Get started on your homework right after school.”    If you at least begin the process with a few weeks to spare, then when things come up that inevitably pull you away from the task at hand, you will still have time to put out those fires and get your return filed on time.  And, if due to your personal high principles, you refuse to pay Uncle Sam a nickle before the 15th, at least have it ready to go, then you can hit “send” at 11:59pm.

2.  “Keep everything in your backpack.”    It really doesn’t matter if you’re using a shoe box for your tax docs.  A shoe box works just fine if all your stuff fits in there.  One disorganized shoe box is way better than having multiple piles around the house.  The key is to keep everything together.

3.  “Once it has been graded, throw it out.”    Sometimes we want to save a particularly well-made craft or an A+ essay, but most of the stuff that comes home from school each day goes directly into the trash.  We couldn’t possibly save everything, nor would we want to.  Same with your tax records.  If you can access it online, then why keep a paper copy?  The “three-year rule” should generally suit you just fine.

 
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IRS Provides Guidance on Tax Treatment of Bitcoin

Its status has been up in the air for some time now, but today the IRS provided guidance on the tax treatment of online currency such as Bitcoin.  The official position is that virtual currency is not to be treated as legal-tender currency, but should be treated as property instead.  Bitcoins, therefore, should be reported and taxed as ordinary income, or as assets subject to capital gains, as the case may be.

[V]irtual currency is treated as property for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.

Therefore, in real world applications, employees who are paid in virtual currency must pay taxes on that income just as they would pay taxes on dollars.  And an employer would have to withhold taxes, report these wages on a W-2, and comply with payroll tax laws.  And, of course, a 1099 is required for the self-employed who are paid in Bitcoin.

Perhaps of greater concern to some Bitcoin users around the world is the impact this IRS notice will have on “miners” (computer geeks who compete to unlock new Bitcoin by cracking codes).  If they want to be 100% legit, they will have to go back and determine how much Bitcoin they mined throughout the year, its fair market value on the date it was mined, and include it in their income.

 
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First-time Penalty Abatement in California

What kills people when they have an IRS tax debt is the interest and penalties.  If you don’t file and pay your taxes when they become due, you can eventually find yourself owing much more than the original tax assessment.  It is possible to negotiate an abatement of penalties, but it isn’t always easy, especially for “repeat offenders.”

By “repeat offender” I mean those who have a history of non-compliance, (i.e., failure to file on time and/or failure to pay on time).  The IRS treats repeat offenders differently.  If you have no missing returns and no prior penalties for the preceding three (3) years, then you may qualify for “first-time abatement penalty relief.”  First-time abatement may be granted without consideration of individual circumstances and excuses.  However, if you do not meet the criteria for first-time abatement, then your only recourse would “reasonable cause penalty relief,” which can be very difficult to prove.  Chances are, what you consider a reasonable excuse for not filing on time or not paying on time will not be considered reasonable by the IRS.

The California Legislature is currently considering adoption of a bill that would provide a first-time abatement option for California taxpayers.  Under AB 1777, the Franchise Tax Board would give preference to non-repeat offenders like the IRS.  The requirements would be as follows:

  1. No prior timeliness penalties imposed for current year and four (4) prior years;
  2. The taxpayer has paid all current tax due, or is in a valid installment agreement;
  3. The taxpayer is otherwise compliant with FTB filing requirements

As you can see, the California version of first-time abatement, as proposed, would be more restrictive than the Federal version, as it requires a slightly longer history of compliance.  It seems like California looks to the IRS for guidance in administration of its tax laws, and then tries to figure out how it can make things just a little bit tougher for California taxpayer.

 
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IRS Employee Breaks Protocol and it’s Still Considered News

Today the IRS released a statement addressing a situation involving improper use of confidential information by an IRS employee.  One rogue employee took home an unencrypted flash drive containing “employee-related information” that dates back to 2007.  Typically this type of problem would be discovered by the Treasury Inspector General for Tax Administration (TIGTA) and released in one of their famous audit reports.  However, this particular incident was identified by the IRS which preemptively released its statement via their own “newsroom” today.

One news source cited the commissioner as saying that the incident did not involve any taxpayer information.  This would have been a humorous gaff, had he actually said this.  Humorous because even if the information that was put at risk belonged to former or present IRS employees, wouldn’t it also be taxpayer information?  The last time I checked, IRS employees have to pay taxes too.  But I think this was a bad job of paraphrasing.  Put back into context, the statement reads a little differently.  According to the prepared statement, the information “included IRS employee-related information and not general taxpayer information or records.”  Even though the difference in wording is very slight, it makes quite a difference in meaning.

According to the statement, this was an “isolated instance,” and inappropriate use of this information “could not occur in today’s environment.”  Mmm-Hmmm…

 
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One month left until tax day; who should prepare your tax return?

There’s about one month left to file your 2013 taxes. You may notice that there are lots of places soliciting to prepare your taxes these days. Every time you pass a strip-mall you likely see some type of gimmick, from air dancers, flags, and a person dancing on the corner with a sign. These gimmicks were formally found at a used car lot to attract your attention, but competition can be tough these days. Just like buying a car, you want to make sure you don’t get a lemon when it comes to choosing a tax preparer.

These strip mall tax centers are virtually everywhere. Just because they are everywhere, does not necessarily make them better. The quality and expertise of these types of tax preparers rests entirely on who specifically within the pop-up shop prepares your tax return. There really is a spectrum in the quality and experience you may encounter at one of these shops because these companies are often so big and/or individually owned and franchised.

On the one hand, you may be trusting your taxes with a seasoned tax preparer who’s a licensed accountant, really knows what they are doing, and will work closely with you to ensure your returns are accurate. On the other hand, you may be risking doom with someone using the franchise’s own do it yourself software, who’s simply answering the Turbo Tax type questions for you. So the key when trusting your returns with these types of tax preparation shops is to consider the complexity of your tax returns and to ask about the experience and qualifications of the specific person who is actually going to prepare your tax return.

 
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TAP Now Accepting Volunteer Applications

Do you live in Alaska and have a spare 200 to 300 hours per year to donate to a good cause?  You may want to think about volunteering as a member of the Taxpayer Advocacy Panel (TAP).

TAP is “a federal advisory committee that listens to taxpayers, identifies major taxpayer concerns, and makes recommendations for improving IRS services.”  As a TAS committee member, one of your primary responsibilities will be to put together an annual report (containing said recommendations) for the Taxpayer Advocate Service (TAS), the Treasury Department Secretary, and the IRS Commissioner.

The IRS is actually seeking TAP committee members in several states (19 to be exact), not just Alaska.  They want alternates in a handful of states as well.  And they need one member to represent international taxpayers.  If you’re interested in the international position, don’t worry too much about travel; it looks like the IRS is not requiring any in-person meetings from the international member.

The great thing about this service opportunity is you don’t have to be a tax preparer, accountant, tax attorney, or any kind of tax professional to join the panel.  You have to be accepted to the panel, but you don’t need to have any special connection to the IRS or the tax community at all.  Federal advisory committees in general are required to seek out people from a variety of backgrounds and viewpoints.  The “underrepresented groups” sought by TAP include U.S. taxpayers living abroad and Native Americans.

April 11th is the deadline to apply to become a member of the panel.

 
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