IRS Reimbursable Service Agreements

The IRS is often called upon to assist other branches of the Federal Government.  Even though the IRS is normally willing to “do them a solid,” those agencies that contract with the IRS through reimbursable work agreements are not paying the IRS fairly.  The IRS is not always getting fully reimbursed for services rendered.  But according to the latest TIGTA audit report, nobody deserves more blame for this than the IRS itself.

To give an idea of how common these service agreements are, TIGTA identified 89 such agreements in 2011 alone.  They selected just 6 agreements for audit and found that 50% of them were not reimbursed properly.  These are some of the problems TIGTA found:

  • IRS is not consistently including overhead in the calculation of the reimbursable service costs
  • IRS is not consistently documenting the costs associated with service agreements so they can be independently verified
  • IRS is not consistently involving the CFO Office of Cost Accounting in the calculation of overhead

These are multi-million dollar errors that result in less money to spend on frustrating the tax relief efforts of ordinary taxpayers and their attorneys.  Further proof that the IRS needs to do better with what they’ve got before we can in good conscience allocate to them any more funding.

Ex-UBS Client Sentenced For Tax Crimes

In 2009 Zurich-based UBS avoided federal prosecution by paying $780 million, admitting it helped thousands of United States citizens evade federal taxes and turned over the names of 250 clients to U.S. authorities. U.S. prosecutors have since charged about 50 Americans with tax crimes

One such former client, Luis Quintero, from Florida, was recently sentenced to four months in federal prison for failing to disclose $4 million in Swiss bank accounts. Quintero, a 64-year-old wholesale perfume importer, pleaded guilty in April and agreed to pay a $2 million fine for failing to file a Report of Foreign Bank and Financial Accounts for the calendar year 2006, according to court records. Read the full article by Susannah Nesmith here.

 

Too Broke to Pay Taxes

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As much as I can, I try to read the classic literature that somehow eluded me while in high school.  I have been reading The Grapes of Wrath, by John Steinbeck and thinking about the migrant farm workers picking fruit and cotton in California during the Great Depression.  Did any of these people pay income taxes?  I’m confident the answer is “NO.”

The Grapes of Wrath, although a book of fiction, is historically very accurate, right down to the wage rates.  Cotton farmers paid about $1.00 per 100lbs of cotton picked, and wages dropped as the number of unemployed workers multiplied and as the country moved deeper into depression.  A healthy male picker could make up to $3.00 per day.  Almost everything they made was spent on food, and it was barely enough to survive.

I found some scholarly writings from the University of California stating that a vast majority of the farm owners at the time were deeply in debt and way behind on their taxes, so there is little doubt whether the laborers were paying taxes if the owners weren’t.  Furthermore, the migrant workers had no permanent homes; it would have been difficult for the government to track them down.

Many families find themselves in similar circumstances today: making barely enough to get by even on their pre-tax income and desperately seeking tax relief in one form or another for debts that are already on the books.

May be Too Late to Score Some Young Buck Swag

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If you are following the news stories concerning the financial woes of Rapper Young Buck, you probably know that his IRS situation has escalated to the point that his property is being sold at auction . . . right now.  The auction was to begin today at 10:00am in Nashville.

When a tax debt is not immediately paid, the IRS moves pretty quickly through its arsenal of ordinary collection tools like the wage garnishment and bank levy.  But when it comes to seizure and sale of personal property, the IRS wants to be absolutely sure it has tried every other less-intrusive alternative.  So in the case of Young Buck, and any other property seizure case, we can be fairly certain that the IRS has already tried, perhaps over the course of months or years, to collect what is owed “the nice way.”

The IRS provided a list of everything being sold at today’s auction and even pictures of most of the stuff.  It might be fun to take a look because I can assure you that all your stereotypes and assumptions about what might be sold at an IRS / rap star auction will be . . . well . . . confirmed.

The Discriminant Index Function

Any tax relief attorney would love to know exactly how the IRS selects returns for audit, but the IRS only gives hints here and there, leaving us to piece it all together ourselves.  A recent TIGTA audit report offers some insight into the process:

image via freepik.com

The IRS developed a variety of sources to select returns for audit. The IRS strives to select for audit those returns for which its examiners are likely to find areas of noncompliance and recommend changes to one or more items reported on the return. One audit source is the Discriminant Index Function (DIF) system, which the IRS has relied on over the years to help decide how to best allocate its audit resources. The system uses mathematical formulas to calculate and assign a score to returns based on their audit potential. The higher the score, the greater the chance an audit will result in recommended changes to the return.

~ TIGTA Report No. 2012-30-062 (June 21, 2012)

So, we know there are mathematical formulas involved.  We know the IRS is looking for returns with errors or “areas of noncompliance.”  And we know that one of the resources the IRS turns to for determining which returns to select for audit is the DIF.  There appear to be multiple formulas and multiple systems involved in the audit selection process. Continue reading “The Discriminant Index Function”

IRS Art Valuation Questioned

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I assure you I don’t purposely set out looking for stories that make the IRS look ridiculous.  And I don’t purposely look for evidence that the IRS is a blood-thirsty machine set on crushing any hope of tax relief.  These kinds of stories just happen to be much more prevalent than ones that make the IRS look competent and organized.

In 1959 a prominent artist named Robert Rauschenberg created a masterpiece called “Canyon.”  While Rauschenberg was known for incorporating found objects and junk into his art, in “Canyon” he upgraded to an actual stuffed bald eagle that once belonged to Theodore Roosevelt.  Through the years, Rauschenberg’s art attracted the attention of collectors, including New York art dealer, Ileana Sonnabend.  I don’t suppose he ever considered that his imagination would attract the attention of the IRS.

When Sonnabend died, her heirs inherited some very high-end art, including “Canyon,” and were hit with a fat estate tax bill.  Not fat enough for the IRS.  The new owners of “Canyon” valued the piece at $0 based on appraisals from world renowned auction houses.  The piece cannot be sold because of the bald eagle — it would violate federal wildlife protection laws.  But the IRS has billed the heirs for another $29 million based on its own $65 million appraisal of the piece.  The IRS Art Advisory Panel acknowledges that “Canyon” cannot legally be sold, but they “just cringed at the idea of saying that this had zero value. It just didn’t make any sense.”

The Multi-Talented Chinese Tax Authority

photo via blog.pgi.com

We think the IRS has been tasked with more than it can handle now that it will have to enforce the new health care law, but it takes just one look at the Chinese taxing authority to rethink how bad it really is here.

Chinese tax collectors take multitasking to a whole new level.  The case of Chinese artist/political activist Ai Weiwei shows how their duties go far beyond collection of revenue.  In between their bean counting sessions, they somehow found time to detain and interrogate Ai in a secret location for 81 days last year.  All in a day’s work for the Chinese tax authority.

The Chinese Government insists that it is only interested in Ai paying his tax debt, but it is clear that what they really want from Ai is silence.  This story is back in the news now because Ai recently lost his appeal.  A Chinese appellate court rejected his argument that the tax authority had violated its own procedures by temporarily robbing him of his freedom last year.  And still Ai refuses to hold his peace when it comes to important Chinese social & political issues.  See full story here.

Berlin's 540-Year-Old Debt

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Apparently really old debts, . . . extremely old debts, . . . ridiculously old pre-Shakespearean debts can be “laughed off” and do not need to be paid.  Our clients would be thrilled if the IRS treated their tax debt this way.

In 1562 the city of Berlin borrowed 400 gilders from a little village called Mittenwalde and never repaid the debt.  Here we are 540 years later and the debt has grown into the trillions when accounting for interest and inflation.

Officials from Berlin recently met with officials from Mittenwalde and presented them with a symbolic 1539 gilder.  I think this was Berlin’s way of saying, “We’re never going to pay you.”  Maybe if they hadn’t lost the loan documentation the debt would have been repaid in a timely manner.  Also, checking in with Berlin only every 50 years doesn’t exactly adhere to the squeeky-wheel-gets-the-grease theory.

 

 

IRS Needs to Revamp Visitation Project

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Sometimes I think IRS management has a vision of what it wants to accomplish, but no clear roadmap showing their employees how to get there.  I can certainly appreciate the desire to take the first step and get the ball rolling on a project; at some point the planning and preparing must give way to action.  But it seems the IRS was underprepared for what they call the Return Preparer Visitation Project (RPVP).  While the latest TIGTA report puts a positive spin on the RPVP, if you read between the lines, its was obviously a waste of time and money.

The IRS badly wants to partner with paid return preparers because they see how important their role is in voluntary compliance.  Or so they say.  But the fact of the matter is, paid return preparers just want to be left alone to do their job; they don’t want the IRS checking up on them.  As part of the RPVP, IRS revenue agents were sent out to make in-person visits to thousands of return preparers around the country (nearly 2,500 visits in 2011 alone), and enrolled agents, CPAs, and tax attorneys were not excluded.

However, according to TIGTA, the criteria used to determine which return preparers would get a visit were found to be lacking.  In other words, the competent and ethical return preparers had to stay after school and clean erasers for something the naughty returns preparers did.  Because the visitations were not properly targeted, there is resentment stewing among some preparers who feel they didn’t need an IRS agent popping in to tell them something they already knew.

I’m sure the revenue agents didn’t mind leaving their cubicles for these little field trips, but next time the IRS needs to have a better plan to ensure they are productive.

The Tax Code is the Tip of the Iceberg

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As if the Tax Code weren’t enough, tax attorneys also need to be well-versed in the various sources of “IRS guidance.”  IRS guidance can be broken down into about seven main categories.  It is common for government agencies to provide formal interpretations of code (i.e., guidance), but it is not normal for there to be so many different types of guidance.  However, in the case of the IRS, it is definitely needed, given the length and complexity of our modern Tax Code.

These are the seven most common categories of guidance as described by the IRS:

  1. Regulation
  2. Revenue Ruling
  3. Revenue Procedure
  4. Private Letter Ruling
  5. Technical Advice Memorandum
  6. Notice
  7. Announcement

These are listed in relative order of importance, or authoritative rank.  In other words, one can rely fairly heavily on a regulation or revenue ruling to support his/her position, but an IRS announcement carries less authoritative weight.  A description of each form of IRS guidance can be found on the IRS website.

A possible 8th form of guidance is information found on the IRS website in various formats, such as the FAQ.