IRS Getting Push-back on Return Preparer Regs

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Most people are pleased with the IRS’ new tax return preparer regulations and are hopeful that they will help to purge the system of incompetent preparers.  But Elmer Kilian, an 80-year-old tax preparer from Eagle, WI, doesn’t want the government meddling in his business.  He and two other return preparers are filing a lawsuit seeking an injunction that bars the regulation from taking effect.  The lawsuit is being filed by the Institute of Justice in Arlington, Virginia.

The return preparer regulations include registration, testing, and continuing education elements — each element, of course, includes some costs that must be born by the preparer.  However, most of what I’m seeing in opposition to these regs has less to do with the costs than it does with pride and independence.  Some people just don’t want the IRS influencing their private businesses choices; they don’t like what they think is excessive government regulation.  Some folks have been preparing returns the old-fashioned way (maybe even with a quill pen) for decades without any egregious errors, and they would rather close up shop than change their ways.

Kilian and others also like to gripe about the injustice of exempting the CPA and tax attorney from testing and continuing education requirements.  I don’t know about CPAs but, trust me, if attorneys were subject to any more regulation they wouldn’t be able to get dressed in the morning without some regulatory authority telling them which tie they have to wear.

IRS Whistleblower Payouts Often Take Seven Years

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Deciding to expose the criminal activities of your colleagues is not easy.  Whistleblowers probably grapple with the pros and cons over a period of weeks or months.  Will I lose all respect in my community?  Will I get fired?  Will they deny it?  Will it completely ruin my career?  Will I be implicated if I don’t speak up?  How could I live with myself if I were to keep quiet.

In 2006, Congress passed a law which allows the IRS to reward whistleblowers who expose tax cheats.  Therefore, in the context of tax fraud and tax crimes, there is another layer of questions to consider: will the reward help to offset the negative consequences?  Six years later many whistleblowers are still waiting for an answer to this question because of the IRS’ inaction.  I suppose it should come as no surprise that the IRS is really good at collecting money, but very bad at paying it out.

Such is the case of Joseph Insigna, former executive at Rabobank Group, who exposed his employer for helping several U.S. companies avoid paying taxes.  Insigna filed his whistleblower claim in 2007 and to this date there is still no word from the IRS about whether or not he has a compensable claim.  His patience has finally run thin and he has, with the help of a tax attorney, filed a lawsuit against the IRS to see if he can finally get a determination.

Tax Gap Widening in California

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I’m posting this video partly for the rare glimpse inside the California Franchise Tax Board.  Can somebody who works at FTB help me to understand what all those aqua colored contraptions are for?  It looks like they may be used to sort mail, but for all I know, they are the machines that actually assist in processing our state returns.

The actual story reported in this video clip is that more and more Californians are not paying their taxes and that this impacts all residents of the state either directly or indirectly.  The tax gap in California has nearly doubled in the past few years, according to the report.  Jerome Horton, spokesperson for FTB, is quoted saying that the state sees people who fail to pay their taxes as criminals.  The report naively lumps honest taxpayers with unpaid tax debt into the same category as tax evaders.  I would like to say that this the reporter’s error, but it definitely appears that Horton shares this view.

“Fresh Start”: Installment Agreements

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Those with a tax debt are often reluctant to disclose their individual financial information to the IRS, and rightly so. The financial information that is normally required includes details about one’s income, expenses, assets, and accounts. The IRS often uses employment and bank information as levy sources; it’s the first place they go when taking enforced collection actions.

The IRS allows taxpayers to enter into installment agreements without disclosure of financial information as long as the balance due to the IRS is below a certain threshold. Previously that threshold was $25,000, excluding accrued interest and penalties. But the IRS announced yesterday that the threshold has been doubled — now $50,000. Also, instead of a 60-month payoff period, the IRS will now allow payments to be spread over a maximum of 72 months. The only catch is that the taxpayer must agree to a direct debit payment arrangement whereby the IRS is automatically wired payments each month from the taxpayer’s bank account. Those who owe $25,000 or less may still make payments by other methods, including manually writing a check and sending it in each month.

Yesterday’s announcement shouldn’t have been a huge surprise given the new Form 9465-FS that was released in December 2011, although with little fanfare.

For additional information, visit the IRS Newsroom.

“Fresh Start”: Penalty Relief

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Today the IRS announced it will be offering additional tax relief to struggling taxpayers under its Fresh Start initiative. One of the ways the IRS plans to help out taxpayers is by granting penalty relief for the unemployed.  Another way is by expanding the Streamlined Installment Agreement (SIA) program.  Today I will describe the penalty relief provisions and tomorrow I will discuss the changes to the SIA criteria.

Taxpayers who meet the criteria for Fresh Start penalty relief will be given a 6-month grace period on the failure-to-pay penalties for 2011 taxes.  So, what are the criteria?  There are several:

  • You must have been unemployed at least 30 consecutive days sometime during the period January 1, 2011 to April 17, 2012.
  • Self-employed taxpayers must have experienced a 25% or greater reduction in income compared to 2010 due to the economic downturn
  • Your adjusted gross income must be less than $100,000 (or less than $200,000 if married filing jointly)
  • The balance due on your 2011 tax return must be $50,000 or less.
  • You must pay the entire tax debt (including any tax, interest, and other applicable penalties) by the end of the grace period, which is October 15, 2012, otherwise a failure-to-pay penalty will be imposed and calculated from the original payment due date, April 15, 2012
  • You must complete a Form 1127A to request this type of penalty relief

See article in the IRS Newsroom for more details.

As I read through the terms and conditions of the new Form 1127A, I couldn’t help but notice that struggling self-employeds are held to a slightly different standard than the unemployed. What’s worse, earning 25% less for an entire year, or being completely unemployed for 30 days or more?  Clearly if its only 30 or 60 days of unemployment, then its worse to earn 25% less; therefore, the self-employed standard would appear to be higher.  Furthermore, the 25% reduction must be due to the economic downturn, but there is no similar requirement that the 30+ day period of unemployment also be due to the economy.  It appears that it may be easier for the unemployed to obtain 1127A penalty relief than for the self-employed, even though a self-employed who experiences a 25% reduction in income might find himself in worse shape financially.

Notice of Federal Tax Lien

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Most people who come see us for tax relief want to pay their taxes, but do not have the money. Some ask, “What happens if I don’t pay the IRS?”  One of the consequences of failing to pay your taxes is the filing of a Notice of Federal Tax Lien.  It is a relatively simple document showing the type of tax that is owed, tax form number, tax period, the unpaid balance(s), and the following rather blunt language:

“[W]e are giving a notice that taxes (including interest and penalties) have been assessed against the following-name taxpayer. We have made a demand for payment of this liability, but it remains unpaid. Therefore, there is a lien in favor of the United States on all property and rights to property belonging to this taxpayer for the amount of these taxes, and additional penalties, interest, and costs that may accrue.  [IRS Form 668(Y)(c)]

In case there is any question as to what “all property” means, the following explanation can be found on the reverse of the form:

“This Notice of Federal Tax Lien gives public notice that the government has a lien on all your property (such as your house or car), all your rights to property (such as money owed to you) and to property you acquire after this lien is filed.

Two Milwaukee Women Sentenced in Refund Fraud Scheme

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Who? – Roshunda Smith, 34, and Linda Fay Townsend, 46

What? – Filed more than 170 fraudulent returns for family and friends seeking approximately $1.5 million in federal income tax refunds.

How? – The filings listed false employment, income, dependents, tax withholding and estimated tax payments.

The Sentences? – Smith got 46 moths and $450,000 restitution charge; Townsend got 24 months / $70,000.

It is unbelievable to me that these schemes are still cropping up so much this tax season. For somebody who pays attention to IRS press releases and IRS news, I see that they are hot on the trail of any who would dare to perpetrate tax fraud, especially when the criminal is preying on the elderly and uneducated.  But maybe that’s the problem.  Maybe the average person does not see how the IRS has turned things up a notch.  The IRS should probably do a better job of publicizing each time they nail somebody, not only when that somebody is a celebrity.

The Commish on “Risk and Uncertainty”

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One attribute of our tax system that adds uncertainty is its impermanence.  Short term provisions, that sunset but are then often extended, have an unsettling effect on both clarity and stability.

In 2010, the Joint Committee on Taxation identified more than 130 tax provisions that were set to expire at the end of 2010, with approximately another 70 to sunset at the end of 2011. And 40 more tax provisions are set to expire at the end of 2012. This year, we actually had a tax provision that was set to expire in two months.

 A perfect example of uncertainty for business taxpayers caused by expiring provisions is the Research and Experimentation tax credit. Its purpose is to foster innovation and technological development while spurring economic growth and competitiveness.

However, for the past 30 years, it has been extended 14 times, many of those retroactively, for periods ranging from six months to five years. Such persistent uncertainty about the future availability of the R&E credit diminishes its incentive effect as taxpayers often do not know if they can depend on the credit when making decisions on future investments in research and development.

~ IRS Commissioner Douglas Shulman, February 15, 2012

How Will the IRS Spend its $12.8 Billion Proposed Budget?

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The IRS is asking for $12.8 billion for 2013 — that’s over $944 million more than their 2012 budget.  And $404 million of that will be spent on enforcement.  There will be more audits and more aggressive collection efforts in the near future.  Tax relief will be harder to come by and I don’t imagine that stacking tax debts will not be tolerated.

The only way the government can justify spending so much on the IRS is if they can expect a healthy return on the investment, and the IRS believes it can deliver.  In fact, the IRS’s crystal ball shows it will collect $1.48 billion with the increased funding.

How else will the money be spent?  Here are the IRS’ priorities:

  • increased scrutiny of offshore accounts and foreign financial transactions
  • crack down on fraudulent returns and identity theft
  • enhancing compliance and professionalism of return preparers
  • improvement of IT programs

Things are going to be very difficult for taxpayers who have fallen on hard times and can’t pay.  And to make matters worse, according to Fox Business writer Bonnie Lee, there’s no funding left over for improving customer service.