IRS Updates Standard Expense Amounts

If you incur a tax debt and are unable to pay back what you owe in one lump sum, you may need to disclose your financial information to the IRS to prove how much you can afford to pay on a monthly basis.  The same thing applies to the Offer in Compromise program.  Under no circumstances will the IRS agree to a settlement of your tax debt without first reviewing your financials in detail.  If you hire a tax attorney, he/she will present your financials in a light most favorable to you, the taxpayer, and will argue the finer points to help you get the best result possible.

What sort of financial information does the IRS request?  In the most general sense, they want to know about your income, expenses, and assets.  However, the questions often depend on the individual circumstances of each case: the amount owed, the type of resolution sought, the closeness of the Collection Statute Expiration Date, etc.  Sometimes the questions can be quite invasive.  But for some expenses, the IRS allows a set amount without questioning the actual amount spent by the taxpayer.  These are referred to as the “National Standards.”

The National Standards include an allotment for each of the following expense categories:

  • Food
  • Housekeeping supplies
  • Apparel & services
  • Personal care products & services
  • Miscellaneous

The current National Standard amount for all 5 categories combined is $565 for a household of one.  For purposes of determining how much you can pay under an Offer in Compromise or an Installment Agreement, the IRS will allow this full amount, even if you spend far less in reality.  The IRS allows $1,029 for a household of 2; $1,227 for 3; $1,450 for 4, and another $281 for each additional person beyond 4.  These are the new amounts based on updates done April 27, 2012 and effective retroactively from April 2, 2012.

The previous National Standard amount for a household of 1 was $534.  The National Standard amounts are based on data from the Bureau of Labor Statistics and are typically updated no more than once a year.

Supreme Court Rules in Favor of Taxpayer on Assessment Statute Question

How many years should we be concerned about the possibility of an IRS audit?  Most people realize they are in the clear for taxes they filed in the 1990s.  The IRS can’t come back and audit you a decade later because audits and additional assessments are time bound by a 3-year statute of limitations.  In most cases you are in the clear after 3 years from the time you file or from the due date of the return.  However, there is an exception that allows the IRS to double the statutory period in cases where the taxpayer understates gross income by 25% or more.  The whole concept of understating income by 25% can be fairly convoluted as evidenced by the wide variations in how appellate courts have decided the question over the years.

But the highest court in the nation has recently sided with the taxpayer in a case that was expected by many to go the other way.  It was a tax shelter case.  The IRS wanted 6 years, but the Supreme Court ruled that the standard 3-year rule applied.  Some see this as a big win for taxpayers.  Apparently the circumstances that would allow the IRS to stray from the 3-year rule are fairly narrow.

The “Common Cause” Whistleblower Case

You may have heard about the complaint filed by Common Cause against American Legislative Exchange Council (ALEC) asking the IRS to drop the organization’s tax-exempt status for engaging in lobbying activities.  What you may not know is this complaint was filed under the 145-year-old whistleblower provisions now codified in 26 USC 7623.

Has ALEC been exploiting the tax relief available to non-profits?

Common Cause is characterizing ALEC ‘s activities as an improper tax scheme and is asking the IRS to investigate and assess all taxes due.  If taxes are in fact collected from ALEC, it would seem that Dr. Robert W. Edgar, the president and CEO of Common Cause, stands to gain a large sum of money.  One of the requirements under the whistleblower statute is that the complaint be filed by an individual, and it appears to have been filed on behalf of Dr. Edgar.  Under the 2006 amendments to the whistleblower statute, the maximum award is 15% of the taxes and penalties collected (capped at $10 million).

So far ALEC has responded to the allegations by calling them a “harassment tactic.”

“[I]t’s clear to me that this is a tired campaign to abuse the legal system, distort the facts and tarnish the reputation of ideological foes….Without question, Common Cause is a partisan front group masquerading as an ethics watchdog.

~ Alan P. Dye, attorney for ALEC

IRS Summons

If you have IRS tax debt, you probably receive more IRS mail than you care to admit.  Some of our clients receive so many IRS notices and letters that it becomes difficult to keep up with them.  Obviously, it is very important to open and read every single correspondence you receive from the IRS.  But one type of notice ranks right up at the top in terms of priority: the IRS Summons (Form 2039).

The IRS uses the summons to secure documents and records from taxpayers, normally only after informal attempts have been made without success.  The IRS is typically trying to ascertain the accuracy of a tax return, to determine the liability of a taxpayer, or to collect back taxes.

One way or another, you must respond to your summons.  One of the reasons the summons is so important is if you fail to comply, the IRS employee who issued the summons may seek to enforce it in court.  If so, a judge could hold you in contempt of court, which means you could be fined and/or thrown in prison.

If you receive a summons, you should seriously consider hiring legal counsel to help you to respond and to protect your interests.

Tax Crimes in the Sunshine State

For whatever reason, sunny Florida is a hotbed of criminal tax activities.  Refund fraud is particularly rampant in Tampa, as described in a very interesting article appearing in the Tampa Bay Times over the weekend.  According to the author, Patty Ryan, the new generation of tax criminals either do not fear the IRS or do not believe what they are doing is all that bad when compared to other crimes like drug dealing.

“Frequently, when police find probable cause to search for drugs on a traffic stop, they find trappings of the tax refund trade.

A Nissan Xterra searched in a March 30 drug bust … in East Tampa turned up 48.7 grams of powder and rock cocaine, 100 grams of marijuana, digital scales, $14,957 in cash, four fraudulent tax return checks worth $32,165, and 67 TurboTax debit cards, along with ledgers of personal information for hundreds of people, police said.

The IRS has identified Tampa as an ideal location for a pilot program that would enlist the cooperation of local law enforcement in cracking down on tax cheats.  It’s easy to see why they chose Tampa.

Renunciation of Citizenship on the Rise

California is a beautiful place to visit.  The variety of landscapes and weather patterns and people attract visitors from all over the world.  Many love it so much that they decide to stay in California and call it home.  However, I have lived in California all my life, and for every one person outside of California longing to relocate to the Golden State, there are 10 people here in this state hoping to move out.  This statement does not reflect the results of an official survey or study, just an observation.

Why are so many Californians looking to set up their residence elsewhere?  It’s the same reason a number of Americans are renouncing their citizenship.  TAXES.  The people just want tax relief.

It is expensive to live in California and it’s expensive and burdensome to pay US taxes while living abroad.  Escaping California taxes is not so difficult — you just move to a different state.  But if you wish to legally escape your US federal tax responsibilities, you must renounce your citizenship.  Last year at least 1,788 people formally renounced their citizenship.  According to IRS numbers, that’s more than in 2007, 2008, and 2009 combined.

“The complexity of international tax law, combined with the administrative burden placed on these taxpayers, creates an environment where taxpayers who are trying their best to comply simply cannot, … For some U.S taxpayers abroad, the tax requirements are so confusing and the compliance burden so great that they give up their U.S. citizenship.

~ Nina Olson, National Taxpayer Advocate

IRS Blunders

I knew it would be a mistake to call the IRS a couple of days before Tax Day, but I was already on the phone with the IRS and I really wanted to get some other things done.  One of my ancillary tasks that day was to request a 2011 tax return transcript for a client.  The first thing I noticed was the complete lack of urgency on the part of the IRS representative.  This is the busiest time of the year for the IRS, but I didn’t get a sense of that from this employee!  I spent nearly 30 minutes with this guy and all I wanted was a simple transcript.  I’ve had a bank levy released more quickly than that.

Eventually he informed me that the 2011 tax return had not been processed yet, so there was no transcript available for 2011 and he would be unable to process my request.  I thanked him for his help and ended the call.

Then, to my surprise, today I received the transcript in question via U.S. mail — it is a two-page letter.  The first page contains standard information about what a transcript is and is not.  The second page shows the taxpayer’s social security number as well as the tax form and tax period in question.   And where the details would normally go, there is the simple phrase: “No record of return filed.”

I didn’t ask for this.  We both agreed that the transcript was not available yet.  But somehow I received a completely unnecessary two-page letter.  That’s the IRS for you…

Some Refunds Delayed This Tax Season

According to the latest TIGTA audit report, there were some serious delays with the issuing of refunds this tax season, but things have already improved.  TIGTA cites “programming problems” as the source of the delays.

Our report found that the IRS is catching and preventing more fraudulent refunds and screening more prisoner tax returns; however, programming problems associated with Modernized e-File delayed some refunds, which may have contributed to a doubling of visits to the  “Where’s My Refund” feature at over the previous year.

~ J. Russell George, Treasury Inspector General for Tax Administration

If you tried to use the tool early in the tax filing season, you may have suspected it was broken.  I used the “Where’s My Refund” tool and found that it worked just fine (both on the IRS website and using the mobile app IRS2Go) as long as you wait the requisite 72 hours after filing your return.  Of course this was after the kinks were worked out of  the refund process.  TIGTA says that the source of the delays was found and fixed by February 18th.  So I guess it paid to delay just a little this year…

IRS Secrets

In-N-Out has its secret sauce and its secret menu.  Google has its secret search algorithms.  Well, guess what?  The IRS has its secrets too.

For example, everybody dreads the IRS audit, but nobody can tell for sure how to avoid them.  Sure, there are risk factors.  For example, high income taxpayers are more likely to be audited, self-employed’s are more likely to be audited than w-2 employees, and returns that have been amended are more likely to be closely examined than other returns.  However, IRS audit risk analysis is an imperfect science.  Even though it is very common for taxpayers to ask their tax attorney about their individual chances of being audited, tax professionals are understandably reluctant to give a straight answer . . . because they just don’t know.

Robert Wood is a prominent San Francisco tax attorney — one of the leading authorities in his field.  He writes a tax column for Forbes.  In one of his recent articles, he talks about whether or not the risk of audit increases when a taxpayer files an extension.  He thinks it does not, although he points out that other tax professionals disagree.  Interestingly, Mr. Wood does not cite any Revenue Code section, IRM section, or anything.  This is just his opinion based on his 30+ years of experience.

Even if there is a secret IRS audit formula, I’m sure it’s updated regularly to keep people on their toes.

Bullet Point Friday

I definitely don’t want to be responsible for pulling anyone away from their taxes this weekend with a riveting and lengthy blog post.  So this one will be short and non-riveting.  The long-winded tax attorney is just gonna use bullet points today:

  • Obama released his 2011 tax return.  He paid $162,074 on income of $789,674 (20.5 percent rate).  When Romney was asked to disclose his return too, he responded by saying he’s filing for an extension.  See full story here.
  • If you’re interested in free Tax Day noshing at Panda Express, Chevy’s, P.F. Chang’s, etc., you may benefit from a perusal of this story.
  • The Giants shut out the Pirates 5-0 today in their first home game of the season.  Matt Cain threw a one-hit complete game.
  • Axl Rose declined Rock and Roll Hall of Fame induction like a little baby.  Part of his letter reads like his lawyer wrote it for him:
I strongly request that I not be inducted in absentia and please know that no one is authorized nor may anyone be permitted to accept any induction for me or speak on my behalf. Neither former members, label representatives nor the Rock And Roll Hall Of Fame should imply whether directly, indirectly or by omission that I am included in any purported induction of “Guns N’ Roses.”