IRS and the DOMA Decision

On June 26th the Supreme Court overturned a portion of the Defense of Marriage Act (DOMA) in Windsor v. United States.  This opinion held that section 3 of DOMA is unconstitutional because it deprives same-sex married couples of equal treatment under the Fifth Amendment.  So what kind of tax consequences does this have for same-sex couples?  The IRS hasn’t officially weighed in on this yet other than providing this curt statement on their website:

We are reviewing the important June 26 Supreme Court decision on the Defense of Marriage Act. We will be working with the Department of Treasury and Department of Justice, and we will move swiftly to provide revised guidance in the near future.

In simplest terms, the federal government, including the IRS, must now treat same-sex  couples who are legally married the same as their heterosexual counterparts.  Therefore, married same-sex couples should now be allowed to file a joint tax return and take advantage of various estate planning provisions that have traditionally been available only to heterosexual couples.

It is impossible to determine how many same-sex married couples will file amended tax returns in hopes of getting a refund.  Not all people benefit from filing jointly, and not everybody wants to file jointly, even if there is some financial benefit.  According to IRS rules, those that do see a benefit may go back only three years seeking refunds.

There are still several unanswered questions:

  • What happens when couples marry in a state that recognizes same-sex marriage, but then move to a state that does not recognize it?
  • Will same-sex marriages be considered valid for federal tax purposes retroactively?
  • Will civil unions be treated as marriages for federal tax purposes?

 

IRS Appeals & Alternative Dispute Resolution

If you have an IRS tax debt and are unable to achieve a satisfactory resolution with the office originally assigned to handle your matter, you may need to call on the IRS Appeals Office to take a second look.  Last time I wrote about the procedures and steps leading up to Appeals.  Today I will discuss some of the options available to taxpayers already in Appeals.

Once the controversy has advanced to the stage of appeals the IRS offers a variety of “alternative dispute resolution” options designed to keep the matter out of court.

The mission of Appeals is to resolve tax controversies, without litigation, on a basis that is fair and impartial to both the Government and the taxpayer, and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.

~ IRS Pub 4167

Fast Track Mediation (FTM)

  • Intended for Small Business/Self Employed taxpayers
  • Case remains in SB/SE
  • Parties must agree to FTM using Form 13369
  • Taxpayer meets with IRS representative and third party Appeals personnel
  • Solution normally reached within 40 days
  • Solution is not binding (i.e., parties are not obligated to accept the outcome)
  • Automated Collection Service (ACS) cases excluded

Fast Track Settlement (FTS)

  • Available to most other taxpayers (not just SB/SE)
  • Must complete application, Form 14017
  • Decision normally reached with 60-120 days
  • Taxpayer may withdraw at any time and retains all traditional appeal rights

Arbitration

  • For factual issues only (no legal issues)
  • Outcome is binding
  • Most collection issues excluded

In need of an OIC Appeal?

Once in a while an Offer in Compromise (OIC) is accepted based only on the documents originally submitted, but this is extremely uncommon.  Normally the IRS will at least have some questions, and usually, they will have somewhat of a laundry list of questions and document requests.

Once the Offer Examiner has received all the information necessary to put together a complete analysis, she will send a “preliminary analysis letter.”  Most of the time the IRS will determine that the taxpayer is able to pay the tax liability in full and/or that acceptance of the offer is not “in the government’s best interest.”  Some of the language in this letter has a hint of finality to it and taxpayers tend to misjudge/misread it as a rejection letter.  But the offer can often be kept alive at this point by supplying additional information and by making the right arguments.

If taxpayer’s response does not convince the IRS to change its position, then the IRS will (after manager approval and independent review) submit a decision letter.  A decision letter could be any of the following:

  • Acceptance
  • Rejection (with OIC appeal rights)
  • Rejection with the option to increase
  • Return (no OIC appeal rights)

But even a rejection letter isn’t always the end of the road.  If there are legitimate issues, a taxpayer may want to file an appeal.  Filing an appeal puts the offer in front of an independent and fresh set of eyes.  The IRS Office of Appeals is “independent” in the sense that it is not connected with the office that decided to reject your OIC.  Don’t think that the Appeals Office is a completely independent government agency because it is not.

An Offer in Compromise must be filed on a specific form and within 30 days from the date of the rejection letter.  Taxpayers may substitute a letter instead of the appeal form, but the letter must contain all the same elements required by the form.  Once your appeal has been filed, be prepared to wait about the same length of time you waited for your OIC to be assigned.  Also, remember that the collection statute is tolled (extended) during the entirety of the appeals process just as it is during the OIC review.

July 22nd: Optional Work Day for IRS Employees

Tax attorneys and other tax professionals plan their work days around their interactions with the IRS.  So, when the IRS is closed on a weekday, they take note.

Earlier this year the IRS had announced a series of planned nationwide furlough days to help with its “bottom line,” one of them to take place on Monday, July 22nd.  Then a couple days ago the acting IRS Commissioner, Daniel Werfel, announced by way of internal memorandum that the agency would no longer be forcing its employees to take that day off.  The furlough scheduled for July 22nd was lifted.  However, realizing that many IRS personnel have already made plans for a three-day weekend, Werfel is allowing anyone to still take the day off if they want.

So what does this mean for tax professionals who need to contact the IRS on July 22nd?  What can we expect?

In my years of working in the field of tax controversy, I have come to realize the impossibility of trying to predict too much when it comes to the IRS.  But my guess is that Monday is not going to be the best day to call them.  Given the opportunity to take a 3-day weekend with pay, what IRS employee would come in and work (besides may the overzealous brown noser or somebody too dim to realize he doesn’t have to be there)?!  I think the IRS is going to be severely understaffed, probably to the point that it would be no different than a furlough day from taxpayers’ point of view.  And those that do go in to work on the 22nd are going to be stressed and unhelpful.  It’s probably best to wait until Wednesday or Thursday if you need to call the IRS next week.

I have noticed that one of the consequences of the furlough days thus far has been a sharp increase in hold times when trying to call into the IRS.  People that don’t get through on a furlough Monday tend to call back on Tuesday, and then Wednesday, etc.  The calls pile up just like all their other work.  These days it is not unusual to wait 45-60 minutes before the IRS picks up you call.

"Citizens United" Hopes to Abolish the IRS

There are many taxpaying citizens, and even a handful of lawmakers, who are fed up with the IRS’ mistakes and scandals and would like to see the 100-year-old agency simply disappear.  One such lawmaker is Senator Rand Paul.  He and the group Citizens United are hoping to completely and immediately abolish the IRS.

You can read their petition here.

They believe that a “streamlined and easy to understand tax code” would eliminate the need for the IRS.  That sounds great.  Who doesn’t want to simplify the tax laws these days?  But I don’t know that there is too much substance to the position of Citizens United, at least none that I can find on their website.  It just seems way too radical and hasty the way they propose to make this transition.  The problem is that they don’t really propose any kind of transition at all; they just want to be done with the IRS immediately.  In their words:

Be it now therefore resolved that we, the undersigned, demand the immediate abolishment of the Internal Revenue Service . . . [t]hat the Internal Revenue Service be abolished in its entirety by Congress without delay, excuses, or prevarication.

“Prevarication” basically means lies.  But Senator Paul is lying to himself if he thinks we can really just abolish the IRS right away without a plan in place for the aftermath.  Our nation has contemplated comprehensive tax reform for years now, but nothing has really been done about it.  I’m not sure total abolishment of the IRS is a good idea, but even if it were, it would not be something we could realistically do overnight.  This kind of change would be much like turning a giant ocean liner; it’s a slow, incremental change.

Lawmakers Seek to Punish IRS and Reward TIGTA

A House subcommittee led by Rep. Ander Crenshaw (R-Fla.) agreed on a spending measure that would cut the IRS’ budget by 24 percent in 2014.  And on the other side of the coin, the bill would mean a $5.5 million budget increase for TIGTA (Treasury Inspector General for Tax Administration), the agency that has brought to light so many of the recent IRS missteps.

The bill is meant to “crack down,” “clean house,” and otherwise encourage the agency to be more careful and responsible in its administration of the tax laws.  It would also specifically address most of the problems we have read about in the news these last several months:

  • political targeting
  • training videos
  • lavish conferences
  • employee bonuses

Basically it would withhold funding until the IRS implements TIGTA recommendations.  TIGTA’s primary responsibility is to keep an eye on the activities and procedures at the Internal Revenue Service.  They are continually conducting audits, reporting on their results, and offering “recommendations” to the IRS when it is shown that they have fallen short.  Well, lawmakers are now hoping to make certain recommendations mandatory — mandatory in the sense that if they don’t make the changes then they won’t get full funding.

But the bill still has a long ways to go: first to the full Appropriations Committee, then to the House floor, then on to the Democrat-controlled Senate where it will face plenty of opposition.

Another IRS Mistake: Thousands of Social Security Numbers Exposed on Internet

This time the IRS leaked thousands of social security numbers on its 527 “non-profit political groups” website.  The security lapse was brought to light by Public.Resource.org.

It is unclear how many SSNs were exposed and whether or not the SSNs were displayed alongside any other identifying information.  I think this would be an important detail.  I’m not sure what exactly is needed to perpetrate an identity theft or a financial crime using a SSN, but it seems to me that more would be needed than simply the SSN.  I would think that a criminal would need at least the name that goes with it too.

Furthermore, it looks like this information probably did not fall into the hands of any criminals.  The data remained up on the site for less than 24 hours, and during that time (if I understand the geek speak) there were only 8 total clicks on the page in question and no actual privacy complaints.

Still, as with all the other recent IRS blunders, what bothers most taxpayers is the fact that the mistake was made, not the end result or the damage that was done.  Think of how many visitors irs.gov gets each day.  Popularity-wise we don’t like it, but traffic-wise, it is one of the most visited websites in the country.  It just so happened that the SSNs were exposed in a little obscure corner of a massive, content-rich IRS website.  It is easy to see how this was a close call and could have been a much more serious mistake.  When it comes to our personal identifying information and our financial information, we don’t like close calls.  A close call just means that there could easily be a “next time” and next time we might not be so lucky.

Fixing the IRS: Where do we Start?

It’s no secret that the IRS makes mistakes, sometimes serious mistakes.  It may have been secret before (at least for the average taxpaying citizen) regardless of the Treasury Inspector General for Tax Administration (TIGTA) reports that highlight the agency’s deficiencies.  But in recent months the IRS has been under intense media scrutiny, bringing these reports out into the open in mainstream media outlets.

The problems at the IRS are the result of:

  • ineffective training
  • weak leadership
  • poor judgment
  • inexperienced employees
  • an overly-complex tax code
  • simple human error
  • insufficient funding

This is by no means a comprehensive list.  And it’s easy to lump them all together and imagine one comprehensive solution.  There are some who think all the problems can be fixed by increasing funding to the IRS.  They see this as the root of all employee development, training, and managerial issues.  This is perhaps the primary argument of IRS sympathizers; however, I’m not so sure there is an all-in-one solution for cleaning up at the IRS.

To use a recent example, why don’t IRS Revenue Officers (RO) always follow legal guidelines when seizing taxpayer property to cover unpaid taxes?  This is probably the most serious collection action that the IRS can take.  And besides going to prison, this is what taxpayers fear more than anything.  So, why do they get it wrong sometimes?  We can probably rule out “complex tax code” because the procedures for seizure of property are clearly laid out in the Internal Revenue Manual (IRM) so an RO has only to follow the steps.  But any of the other listed reasons could realistically apply.

Although I think it is impossible to narrow it down to one root problem, it is clear that there is quite a bit of overlap.  For example, an inexperienced employee is more likely to make simple human errors and use poor judgment in his work.  And lack of/ineffective training is a symptom of poor leadership.  This overlap is a good thing when contemplating solutions because it means that addressing one issue will automatically improve another.  It also means that once we get started on the task of fixing the IRS, we’ll already be closer to our goal than we think.

Would you rob the IRS to fund your “before I die” fund?

Reading between the lines, it appears that Frank F. Frink of Washington lost his gamble that the government wouldn’t catch up with his tax crimes until after he left this world on a high note and a pocket full of cash.

Although the IRS is usually slow to pick up on tax evasion and other tax crimes, they do eventually usually catch up to criminal and civil tax shenanigans … it’s just a matter of time. Mr. Frink doesn’t have to report to prison until September for his tax crimes, allowing him time to seek treatment for undisclosed medical issues. If he’s still around in September, he will have to serve a one year prison term for his tax crimes.

My assumption that he wanted to leave this world with a pocket full of cash is based on the referenced medical problems and absurdly bold manner in which he robbed the IRS. Frink plead guilty to filing a false, fictitious and fraudulent tax claim on his 2008 tax return and was sentenced earlier this week. According to the U.S. Attorney’s Office, Frink hired a tax preparer to prepare his 2008 return and calculated he was owed a refund of $7,413. This is a pretty substantial refund for most households these days. However, for Frink, it was not enough. So he sought the help of a witless tax preparer to fund his final days; he went to H&R Block.

After his first tax preparer determine that he was owed a federal tax refund of $7,413, Frink went to an H & R Block branch with bogus tax forms showing that more than $1 million had been withheld in taxes. H & R Block then calculated he was therefore owed a tax refund of $827,117. The IRS issued Frink this windfall and didn’t catch the fraud for some time as he wasn’t criminally charged until September 2012, approximately three years later. Even when the IRS began to investigate Frink’s tax crimes, he continued to spend his generous tax refund.

While Frink may be living on borrowed time and took advantage of the IRS, most taxpayers want to resolve their tax headache without the specter of prison time. If you’re fighting the IRS, and don’t have Frink’s exit strategy, our tax law firm offers a free consultation so you may determine if we’re the right tax attorneys to fight the IRS for you.