Stopping Interest on Proposed Liabilities

You may not know this unless you’ve been through it, but when the IRS makes proposed adjustments to your taxes, interest begins to accrue beginning on the tax return due date.  And it is an even lesser known fact that one can completely stop interest from accruing on proposed tax balances by making what is called a “remittance.”  There’s a special term for it because we’re talking about proposed liabilities (before anything has officially been assessed).  After taxes are assessed, it is simply called a payment.

Why would anyone want to make a remittance?  The primary reason for making a remittance is that the taxpayer plans on disputing the adjustment, which could take a long time (especially if taken through the appeals process), and the taxpayer could potentially be on the hook for quite a bit of interest.  Paying a remittance sufficient to cover the total tax, penalties, and accrued interest will stop interest from running on the date it is received.  And if the taxpayer is successful in getting the liability reduced, the IRS will either return the excess or apply it to other tax liabilities.

There are two types of remittances: a deposit and an advance payment.  If you clearly designate your payment as a deposit, the IRS must return it to you, upon request, unless the IRS has already applied it against an assessed liability.  You may even qualify for interest being paid to you for the time that the IRS held your funds.  To qualify, you must provide a written statement that includes the tax type, tax year, and a copy of the 30-day letter.  An advance payment, on the other hand, is treated just like a regular tax payment and will only be refunded to you if you make a valid claim for a refund.

This is all fully explained in IRS Notice 1016 (Feb. 2006) which is often included as an insert in various IRS correspondence.  Be careful not to confuse this process with the cessation of interest on assessed tax liabilities.  The procedures above apply to proposed liabilities only.  Who knows how many of my clients have received this insert and read the title only (“How to Stop Interest on Your Account”) and assumed there is a way to stop interest on their assessed liabilities without paying in full.  The IRS should probably modify the title of this insert so that it is absolutely clear.

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IRS Makes Plans with Private Sector to Curb Future Cyber Attacks

John Koskinen, Commissioner of the IRS, announced yesterday in a press conference that his agency is making plans to join forces with states and the entire private tax industry to combat cyber tax criminals like the ones who recently accessed taxpayer data through the “Get Transcript” application of the IRS website.  It’s the whole “it takes a village” concept applied to the ongoing battle to protect sensitive information on the internet. Government and industry plan to share information in ways they have never done before.

As a tax relief attorney, I don’t know a lot about computers and information technology.  If the top level guys at the IRS are IT ninjas, I’m probably a yellow belt noodle maker.  But commingling of IRS and private sector data makes me nervous, if that’s what they’re talking about doing.  I understand the desire to cooperate on this monumental task of stopping international cyber-criminal syndicates, but I feel like a little separation between public and private sector computer systems is healthy.  It seems to my naive mind that the more connected they are, in the event of a large-scale hack, the more likely we all go down together.

Here are a few nice words from Koskinen’s press conference:

[A]ny organization in the public or private sectors with IT systems and sensitive data faces a battle that seems to grow every day. The nation’s tax system is no different….No single organization can go it alone….None of us has a silver bullet to defeat this enemy….Working together we can achieve results that none of us, working alone, could accomplish.

Such an American thing to do, don’t you think?  Everyone joining forces and working together to defeat a common enemy and prevent a crisis.  I hope this is a step in the right direction and not just the IRS telling us what we want to hear.  The upside to all this for the IRS is that the next time their systems are compromised, maybe they can share the blame with businesses and states.

Could the Latest IRS Data Breach have been Prevented?

The head of the Treasury Inspector General for Tax Administration (TIGTA), J. Russell George, testified before Congress today concerning the latest data breach at the IRS involving the “Get Transcript” application.  At this point we have some preliminary estimates on the damage done by this cyberattack: $39 million in fraudulent refunds.  And while George stopped short of saying that it all could have been prevented, he clearly did place some blame on the IRS.  Every year for the past several years, TIGTA has identified weaknesses in IRS security systems and makes “recommendations” for improving them.  As of March 2015, there were around 50 problem areas that still required attention.

The problem is that most of the time these “recommendations” are simply acknowledged by the IRS and taken into consideration, and nothing further.  In other words, the IRS will agree with the recommendation but not take the additional steps necessary to correct the problems.  I have been frustrated by this pattern for years and wished TIGTA somehow had the authority to require action, rather than kindly make recommendations.

IRS Commissioner, John Koskinen, was also present during George’s Congressional testimony and you can probably guess his response: budget cuts have hampered the IRS’ ability to combat cyber criminals and has kept the IRS from upgrading their computers and cybersecurity technology.  But after realizing that he had painted himself into a corner, he quickly tempered his remarks:

Not every problem is a budget problem, so I don’t want to wander around town every time we have a challenge saying, “Ah, if we had more money, we’d fix it,” … [t]his is a technology issue, not a budget [issue]…

The other part of his response was that implementing TIGTA’s recommendations would not have prevented this particular cyberattack.  It’s apples and oranges.  There was apparently something different about this data breach; it was very sophisticated and was orchestrated by multiple groups located in foreign countries.  According to Koskinen, it was a “sophisticated international syndicate” that was responsible for this latest data breach.  In other words, this was a tricky group of criminals and nothing could have stopped them.

Don’t believe it.  We know the IRS’ track record and they make a lot of mistakes.  There is a reason why they immediately took that part of their website down following last week’s announcement.  I am also very skeptical of the statement I keep seeing that the main IRS computer systems were not compromised in this cyberattack.  Remember when top IRS officials were certain that Lois Lerner’s emails were not recoverable?  There are times (and I see this on a daily basis in my communications with IRS rank & file) when the IRS does not appear to be all that familiar with its own systems.  We’ll have to keep a close eye on this story.  I would not be surprised if more information is discovered in the coming weeks that calls into question this statement about IRS’s main computer system.  I hope I am wrong.