The Taxpayers' Rights Advocate's Big Announcement

You’ve probably heard of the National Taxpayer Advocate Service (TAS) — this is the quasi-independent agency charged with looking out for the rights of taxpayers across the nation.  They like to say that they’re “your voice at the IRS.”  The head of TAS is Nina Olson and she has made her way into this blog on several occasions.  And if you live in California, you may know that we have a state counterpart to TAS called the Taxpayers’ Rights Advocate’s Office, the top advocate being Steve Sims.

These advocate groups, on both the national and the state level, love to point out what they have done to fight for the average taxpayer in the name of tax relief.  So I wasn’t surprised to see a self-congratulatory statement from Sims in the July 2013 edition of the FTB Tax News newsletter.  And I wasn’t surprised that the statement had to do with increasing the lien filing threshold for Californians with state tax debts.  The IRS did this too some time back as a way to help those who struggle with heavy tax burdens in a down economy.

A tax lien is a collection tool used by both the IRS and FTB to protect their interest when taxes are owed.  When a notice of tax lien is filed, it puts other creditors on notice and acts as a smudge on that person’s credit.  Increasing the threshold for lien filings is a good thing for both taxpayers and the taxing entity; it has been shown that they are one of the least effective tax collection tools anyway.

So, what was surprising then?  Well, Steve Sims announced that FTB “increased the general guideline amount for filing a lien from $1,000 to $2,000 beginning in July 2013.”  What a miserable little success that was for him and his staff!  Hardly worth bragging about in my humble opinion.

IRS Funding: Seems Adequate to Me

Some say the biggest problem at the IRS is that they are not allocated enough money to be able to administer the tax laws fairly and competently.  Even Nina Olson, the National Taxpayer Advocate, has bought into this theory:

Today, the IRS is an institution in crisis. In my view, however, the real crisis is not the one generating headlines. The real crisis facing the IRS — and therefore taxpayers — is a radically transformed mission coupled with inadequate funding to accomplish that mission. As a consequence of this crisis, the IRS gives limited consideration to taxpayer rights or fundamental tax administration principles as it struggles to get its job done.

~ Nina Olson, in her mid-year report to Congress

What’s ironic about this quote is it was released today along side juicy headlines about IRS employees using government credit cards to make some highly questionable purchases of alcohol, expensive meals, party supplies, and even porn.  Of course many of these purchases were made on cards that were reported stolen.  I’m sure that’s true because there is no way any IRS employee would abuse his card privileges.

I don’t know Nina, I usually agree with your opinions, but it seems to me that the crisis is fairly well summarized by the headlines.  Why downplay the high-profile mistakes that are so very telling of what’s going on at the IRS?  And how is it that the IRS’ mission has been “radically transformed”?  Regardless of any official mission statements, their mission has always been, and always will be, to collect as much revenue as possible without too much regard to fairness, tax relief, and taxpayer rights.

So if the “real crisis” is inadequate funding, then why should we turn a blind eye to outrageous spending abuse?  There is no way in this world we should increase funding to the IRS until they clean house.

How to Expedite Non-profit Status

One study related to the IRS scandal showed that non-profit groups with legal representation were subjected to fewer probing questions and experienced fewer obstacles during the non-profit application process than groups without legal representation.  Interestingly, many groups that began the application process without an attorney noticed that their applications were quickly approved right after hiring an attorney.

This is probably not all that surprising to attorneys.  We, of all people, believe that our services are valuable.  One can typically expect a better result and smoother legal process by hiring a lawyer, although not everyone is convinced of this.

In this day and age it is easy to obtain information about any legal topic.  Many people feel that as long as they are well informed and educated about their specific legal predicament then they can handle the issue on their own.  In a down economy it is even more common for individuals to try resolving legal problems on their own, thinking they can save a buck.

The answer to the question, “Do I really need an attorney for this?” is almost always “no.”  But knowing the law is only half the battle, and an attorney can bring so much more to the table than just information:

  • ability to strategize
  • ability to organize information
  • ability to present information (verbally and in writing) in a logical fashion
  • superior persuasion skills
  • ability to apply the law to a specific set of facts
  • real life experience

It’s one thing to know rules in the abstract, but it’s quite another to have seen how the rules play out in practice.  This is particularly true in the world of Federal Tax Resolution where the IRS is inconsistent and unpredictable in the application of the rules.  It is the difference between book smarts and street smarts, and tax lawyers typically have both.

Yes, of course you need to do your own research.  And, yes, you need to be careful and thorough in the process of hiring an attorney.  But you should also be well aware of what you may be giving up by representing yourself in an important legal dispute.

How long should you keep your tax records?

It’s now summertime, officially, and you still haven’t finished your spring cleaning. So, what tax records do you need to keep while catching up on your spring cleaning this summer? You need to give some thought before throwing out those old tax records.

What tax records should I keep?

This question requires an analysis of why you would need any of your tax records, other than shoe box filler of course. If you’re “lucky” enough to have your tax returns audited by the government, the burden of proof will be yours to substantiate the entries, deductions, and statements on your tax return. This is the primary reason for keeping your tax records. Therefore, the records you need to hang on to are the documents that you used, or should have used, to prepare your tax returns. This often includes, among other things, receipts, cancelled checks, bank statements, income statements, repair statements, mileage logs, withdrawal statements, and property transfer closing paperwork.

How long do I need to keep my tax records?

This is really a question of, how long is the government allowed to pester you for verification of the representations on your tax returns. If you file a federal income tax return, you will you need to keep your tax records for three years from the date the tax return was due, or the date the tax return was filed, whichever is later. However some states, such as California for example, may audit your records longer than the IRS can; so you will need to check your state’s rules to verify how much longer you need to keep your records depending on which state tax return(s) you file.

There are exceptions to the IRS’ three year rule that require you to keep records for longer than the three year period. These exceptions include when you don’t file a tax return, when you understate your income, or when you file a fraudulent return. Ironically, if you fall into one of these categories, you likely don’t have accurate records to begin with; so the government truly has you on the hook for a serious tax problem longer than taxpayers who keep accurate records. It’s also generally a good idea to keep tax returns and supporting documentation for the tax years when you acquire or transfer property that may be used to calculate gains or losses on a future tax return. And of course, there may be non-tax reasons to keep documentation accessible longer than the government’s need for evidence.

These days, converting files to an electronic format is pretty accessible to anyone with a scanner or near a print shop. So, if you’re not sure whether to dispose the document after the appropriate time has elapsed, at least scan and save the documentation to give you peace of mind. Lastly, when disposing of old tax records and supporting documents, be smart, securely shred the documents … your trash may be a thief’s treasure.

Contacting the IRS: Third Party Contacts

The IRS has the right to contact third parties in an attempt to collect your taxes, penalties, and/or missing tax returns.  A third party is someone other than yourself (besides your tax relief attorney or duly authorized representative) who may have information that would assist the IRS in their investigation.  But it is important to know that there are certain restrictions on this right so that we don’t allow the IRS to take advantage.

Notice Requirements

The IRS must first give you notice that they are going to be contacting third parties.  Notice typically comes in the form of a very simple letter (Letter 3164).  There are three versions of this letter:

  • 3164-A: for Trust Fund Recovery Penalty investigations
  • 3164-B: for balance due investigations
  • 3164-C: for delinquent return investigations

The IRS revenue officer must wait 10 days after mailing the letter before initiating any third party contact.  In cases where the taxpayer was provided with a Publication 1 Your Rights as a Taxpayer, which is a majority of cases, the 3164 letter is usually not required because the third party contact language is included in Pub 1.  There are also some blanket exceptions to the notice requirement, such as where there are pending criminal investigations, where a third party contact may jeopardize collection of the tax, and where the taxpayer authorizes third party contact.

Providing Third Party Lists

The IRS is required to provide the taxpayer with a list of all third party contacts periodically, and whenever requested by the taxpayer.  Revenue officers must carefully maintain a list of all third party contacts, which should be updated after each contact in order to keep it current.  As you can see, the language (“periodically”) is just vague enough to allow the IRS to only send the list a couple times a year unless the taxpayer requests to see it more frequently.

National Small Business Week 2013

There are so many elements involved in operating a successful business, only some of which are controllable by the owner.  You need a good business plan, adequate capital investment, not to mention an excellent product or service.  You also need to figure out how you’re going to market that product or service.  Of course, it helps if you have a head for business; some people just seem to “get it.”  But even these measures do not ensure success because so much depends on timing and luck.

One element that people tend to overlook when they start a business is the tax consequences and requirements.  No luck involved here.  And, thankfully, you don’t really need to have a knack for numbers or a specialized knowledge of tax laws to make sure the tax aspects of your business are in order.  What you do need is a basic understanding of what tax requirements apply to your business and where to go for answers.

Some small business owners consult with a tax accountant or a tax attorney in the opening and operating of their business.  But if you’re not in a position to hire a tax professional, there are still excellent resources at the IRS, especially this week.

It is National Small Business Week 2013 and the IRS is offering two free webinars, one on June 18th and one on June 20th.  The June 18th webinar is entitled “Small Business Owners: Get All the Tax Benefits You Deserve” and the June 20th webinar will cover the topic of “common mistakes.”  If you don’t have a chance to register and watch live, the IRS will be archiving both webinars on the IRS Video Portal.

Interested in hearing President Obama’s self-congratulatory introduction to National Small Business Week?  In a minute and a half he lists everything his administration is doing to help small businesses succeed.  Me neither.  But here’s the link anyways:

http://www.whitehouse.gov/blog/2013/06/17/50-years-national-small-business-week

Miller and Lerner Received Credible Threats

There are many reasons why you should never threaten an IRS worker besides the fact that it is just not nice.  You could be blacklisted by the IRS or placed on their Potentially Dangerous Taxpayer (PDT) list.  Or, if the threat is serious enough, you could be prosecuted for an “attempt” crime like the Alaskan, Lonnie Vernon, who was recently sentenced to over 25 years imprisonment for conspiracy to kill an IRS Revenue Officer.

The IRS is abundantly aware of the risk involved in collecting taxes, especially when enforced collection actions, such as bank levies and wage garnishments, are employed.  IRS personnel have protocol for handling potentially dangerous situations and there are procedures (many carried out by TIGTA) in place to help protect IRS employees who have to work in these conditions.  Most often, the IRS employees who are subject to threats and dangerous situations are the Revenue Officers who work on the front lines and have direct personal contact with taxpayers.  However, we are currently hearing about threats directed at high-level IRS officials based on their supposed responsibility for the shortcomings associated with the IRS scandal.

Both Steven Miller (former acting IRS Commissioner who was fired by President Obama on May 15th) and Lois Lerner (head of the IRS tax exempt unit who has placed the blame on folks in Cincinnati) have been intimidated by threats of physical violence according to their attorneys and others who are close to them.  This is not normal.  Even the person holding the top job at the IRS, the Commissioner, typically has required very little by way of security over the years.  Maybe this will have to change.

The IRS Agent with a Weakness for Shrimp

photo via farm4.static.flickr.com

TIGTA (Treasury Inspector General for Tax Administration) often includes in its semiannual report to Congress highlights of the past 6 months and high profile cases that the agency has resolved.  The most recent semiannual report tells of the bribery of an IRS Revenue Agent by the owner of a seafood company in Louisiana.

An unnamed IRS agent paid a visit to Vihn Q. Tran, the owner of St. Vincent Seafood Co. in Louisiana, back in August 2007 with the intent to schedule an in-person audit of his books.  At that first encounter Tran offered to take the agent to lunch and also dropped a hint that he was hoping for some special treatment when he told the agent, “I’ll take good care of you.”  The IRS agent declined these initial offers, but then in subsequent meetings accepted 75 pounds of jumbo shrimp and $6,000 cash.  In April 2011 Tran confessed to the crime.  In January 2012 he pled guilty to bribery of a public official, and he was sentenced to three-years’ probation this past March.

TIGTA’s report does not specify, but it appears to me that the IRS agent was culpable at least for violating the guidelines set forth in the Internal Revenue Manual (IRM).  According to IRM section 4.2.4.2.3, IRS employees are required to do the following when presented with a bribe:

  • Avoid any statement or implication that you will or will not accept the bribe.
  • Attempt to hold the matter in abeyance.
  • Report the matter immediately to the Inspector General Special Agent.
  • Avoid any unnecessary discussions of the matter with anyone.

Unless some key facts are being left out of this report, it does not appear that the agent complied with these rules.  By accepting the cash and the shrimp, the agent violated the first two rules, and although the agent must have reported the bribes at some point, it does not appear that he did so immediately.

As for Mr. Tran, I would guess that he has since gone out of business.  It looks like his tax problems were just one of a variety of issues he had been dealing with as a business owner.  The US Food and Drug Administration (FDA) sent him a letter in 2002 pointing out some “serious deviations” from federal seafood regulations, one of which had to do with, not surprisingly, record-keeping.

Is IRS Ready for Obamacare Amid Turmoil?

The IRS was selected as one of the main agencies to implement President Obama’s new health care law.  Many of the provisions will go into effect next year.  But it is difficult to see how the IRS will be able to get all its ducks in a row amid the tax exempt applications scandal, congressional scrutiny of overspending, and various leadership changes.  All this turmoil seems to have come at a time when the IRS will be needed most.

There were more than 40 tax code changes associated with the Affordable Care Act, many of which are still being hammered out.  Here are some of the tasks that the IRS faces in the coming months:

  • collect tax penalties from individuals who fail to obtain insurance and employers who fail to provide it
  • define key terms in the law such as “minimum value,” and “minimum essential coverage”
  • issue guidance on new forms

Will the IRS be ready, or will they try to request an extension?

IRS to Cancel Tax Relief Programs?

Is the IRS really warning that emergency tax relief will no longer be allowed? I doubt it. Last week, the IRS issued a warning to taxpayers to safeguard and anticipate information needed for various tax issues in the event of an emergency during this year’s hurricane season. Typically, the IRS offers tax relief to victims and affected areas of natural disasters and other crises, such as the Oklahoma tornados and the Boston marathon bombing.

While the IRS has many many many faults, some of which are just finally being made public, I don’t think even the IRS would disallow emergency tax relief in the event of a hurricane disaster, and then point to their May 29, 2013, news release as warning taxpayers that they should have been more prepared during hurricane season. The warning may be filed under “preventative education”.

The preventative education provided by the IRS are reminders of some of the safeguards that we all know we need to take to keep our financial affairs in order, but will also allow you to maintain tax compliant in the event of an emergency.  This includes:

  • Creating an electronic backup of your records that can be accessed via the internet or other electronic format. Additionally, non-internet backup records should be stored in a secondary location;
  • A photo and video record can help prove the market value of real property and tangible items for insurance and casualty loss claims. Photos should be stored with a friend or family member who lives outside the area. However, these days photos and videos can also be easily uploaded and downloaded online.
  • Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.

These precautions may help you be prepared tax-wise in the event of an emergency. While emergency tax relief will likely be offered as emergencies arise, a consultation with a tax relief attorney will ensure that your tax rights are protected even when there isn’t a natural disaster.