IRS Role Model Dies at Age 94

I’m going to warn you: if you are prone to crying during movies like Forrest Gump or Old Yeller, you may want to skip this blog post.  If you don’t believe me, read on.  Read all the links too and you’ll probably agree that this story is up around 8 or 9 on the “feel-good” scale.

We lost a good man this week, and he used to work for the IRS.  I know, that sounds like an oxymoron these days.  Johnnie M. Walters, former IRS commissioner during Watergate, died on Tuesday at the age of 94.  In 1971 Nixon needed a “yes man” to fill the top post at the IRS, and after he fired the previous commissioner, Nixon made this statement about his replacement (recorded on White House tapes):

I want to be sure he is a ruthless son of a bitch, that he will do what he’s told, that every income-tax return I want to see I see, that he will go after our enemies and not go after our friends.

How easy it would be to find this kind of guy in 2014!  But in the early 1970s I guess there were people in positions of power who didn’t let it get to their heads.  There was still a little integrity and courage in the White House.  Needless to say, Walters did not measure up to Nixon’s prerequisites; not even close.  He refused to take action on Nixon’s “enemies list,” instead locking it up in a safe.

The story gets even a little sappier if you go back to Walters’ early years.  He grew up in humble circumstances on a farm in South Carolina.  He put himself through law school, served in the military and earned a Purple Heart.  He was married for 66 years to his wife and they had 4 children.  He seems like the kind of guy that everyone admired.  Walters wrote a memoir in 2011 called “Our Journey.”  Maybe this should be required reading for IRS employees…

 
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IRS Small Biz Webinar

For me, Small Business Week sort of came and went this year with little notice.  In fact, I just now got around to watching the IRS webinar that came out on May 15th called “Avoiding the Biggest Tax Mistakes.”  The video is now archived and available through the IRS video portal here.

This video may be useful for young entrepreneurs and teenagers who are interested in one day having their own business.  I say this because it just scratches the surface of business tax knowledge, and anyone who has already begun operating a business absolutely must understand these basic principles.  The entire video runs about 42 minutes in length; the first 15 minutes cover the bullet-point topics below, and the balance of the video is a live Q & A session:

  • Keep good records (three years is the general rule)
  • Report all taxable income (all income is generally reportable unless specifically excluded by law)
  • Keep business and personal expenses separate
  • Choose your tax preparer carefully (be skeptical of promises of outcomes that seem too good to be true)
  • Always review your tax return for accuracy
  • Consider e-file options
  • Do your homework
  • Don’t fall prey to tax scams

When asked what he thought should be the main “take-away” points from the webinar, the presenter emphasized the importance of the first three (keeping good records, reporting all income, and claiming only business expenses on Schedule C).

Another point that was mentioned is that too many small business owners rely on word of mouth when it comes to business “write-offs.”  Just because a buddy writes off a certain expense every year doesn’t mean it is legitimate.  One real-life example of this is the rumor that you can put your file cabinet in one room of your house, your desk in another, your printer in another, etc. and basically claim the entire square footage of your home as “business use.”  It doesn’t even make sense that the IRS would agree to this, and that should be the first indication that it is bogus.

Not everybody has a very good feel for what “seems” right or wrong, so that’s why it is critical to seek sound advice from a respected tax professional.  When it comes to running a small business and avoiding IRS scrutiny, it is never a good idea to “shoot from the hip.”

 
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IRS Claims Lerner’s Emails are Unrecoverable

The IRS scandal involving the disparate treatment by the IRS of certain tax exempt organizations (or their applications for tax exempt status) still has life.  The government committees responsible for investigating the IRS “targeting scandal,” as it has come to be known, wanted to see Lois Lerner’s emails, and last week the IRS responded that they are unable to recover her emails, apparently due to the fact that her computer crashed in 2011 and the IRS did not make a practice of preserving all emails on their servers.

Experts find it hard to believe that the IRS lost the files innocently and that they cannot be recovered.  From a legal standpoint, it is common knowledge that you don’t delete emails anytime there is a potential for litigation; in fact, you do whatever you can to preserve them.  From a tech standpoint, it is difficult to believe that the emails could have simply disappeared, even if the IRS was not conscientiously backing up data at the time.  The idea that files are never really 100% gone when you delete them has some truth to it.

From a layperson point of view, it appears that we’re witnessing some sort of cover-up.  It just doesn’t pass the “smell test.”  I feel like my 10-year-old would be able to sit down at Lerner’s computer and at least find something.  But if not, in this day and age, computer geeks are a dime a dozen.  Why can’t we just hire the world’s smartest forensic geek at the FBI or CIA and be done with this?

However, as much as the experts and the general public do not believe the emails were lost inadvertently, I have to admit that the facts as we know them do not sound too far fetched to me.  From the viewpoint of a tax attorney who deals with the IRS every day, it seems plausible that the IRS really would not save or properly back-up the emails.  There’s no way the IRS could possibly save everything.  And as for Lerner’s computer crashing, well that kind of thing happens constantly at IRS service centers all around the country.  Sometimes when I’m talking with an IRS representative on the phone, I try to imagine the computer their working on and, in my mind, it usually has a 3.5″ floppy disc drive and a behemoth monitor that is twice as deep as it is wide.

 
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New taxpayer Bill of Rights offers no new protections

This week the IRS adopted a “Taxpayer Bill of Rights”. Unfortunately, the IRS admitted that no new taxpayer rights or protections were created. The newly released taxpayer Bill of Rights simply organizes various policies from the tax code and groups them into 10 broad categories.

The thought is that highlighting these already existing protections will make them more visible and easier for taxpayers to understand.

Here are the 10 broad rights the IRS are going to publicize through this version of the taxpayer Bill of Rights:

  1. The Right to Be Informed
  2. The Right to Quality Service
  3. The Right to Pay No More than the Correct Amount of Tax
  4. The Right to Challenge the IRS’s Position and Be Heard
  5. The Right to Appeal an IRS Decision in an Independent Forum
  6. The Right to Finality
  7. The Right to Privacy
  8. The Right to Confidentiality
  9. The Right to Retain Representation
  10. The Right to a Fair and Just Tax System

 While poking a little bit of fun at the IRS, I believe this version would be more accurate:

  1. The Right to Be Informed (so long as you still open mail sent to the address you lived at years ago);
  2. The Right to Quality Service (similar to any other poorly structured organization);
  3. The Right to Pay No More than the Correct Amount of Tax (plus the penalties and interest that we will charge you to tell you that we don’t think you paid the correct amount of tax);
  4. The Right to Challenge the IRS’s Position and Be Heard (unless we disagree with your position);
  5. The Right to Appeal an IRS Decision in an Independent Forum (which is funded by the IRS);
  6. The Right to Finality (when you die);
  7. The Right to Privacy (unless you owe us money);
  8. The Right to Confidentiality (unless you owe us money);
  9. The Right to Retain Representation (which you will need);
  10. The Right to a Fair and Just Tax System (similar to the justice system).

The IRS plans on displaying their new Taxpayer Bill of Rights conspicuously throughout their offices. I’m debating whether I should post my version in our law firm’s offices.

 
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Will the IRS Take Your Home?

The likelihood of the IRS resorting to collection of taxes through asset seizure — probably the most severe tax collection method — can only accurately be determined on a case-by-case basis*.  Certainly the IRS has authority to seize and sell assets in order to satisfy a tax debt, but it has to make sense for the Service to do so.  They want to be sure that the target asset (or assets) will raise enough money to cover all or most of what is owed.  They want to be sure that the profits from the seizure and sale will at least match the effort and preparation going into the procedure.

Furthermore, the IRS has internal guidelines dictating when and how they may proceed with asset seizures.  In other words, the IRS doesn’t normally go after granny’s little two bedroom farm house, but there are exceptions.  The IRS doesn’t like to boot people out of their primary residence; it’s not good public policy and not a great PR move.  And the IRS doesn’t normally resort to seizure at all if they can collect what is owed through other means.  Much more common is the wage garnishment, bank levy, and federal tax lien.  Of course the preferred method of tax collection is through voluntary payment, but not everybody pays their taxes so willingly.

But don’t be mistaken, the IRS can and will seize assets, primarily real property, vehicles, and valuable estate assets.  Local news outlets often advertise IRS public auction dates.  The IRS also posts details about asset sales on their dedicated auction website.  If you do attend an IRS auction, you should know that they don’t accept personal checks, and they don’t take American Express.

*You might argue that the most severe IRS collection tool is criminal prosecution and prison sentences; however, I don’t know if I would consider this a collection method, except to the extent that it encourages others to file and pay on time.

 
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Will the IRS Bring Back Private Debt Collections?

Somebody has sneaked some terrible legislation into a provision of the EXPIRE Act which, if approved, would require the IRS to hire outside private debt collection (PDC) firms to collect past due taxes.  If this sounds familiar it is because the IRS has already tried this a couple times with very little success.  These are just some of the problems that tax practitioners have identified with hiring private debt collectors to collect income taxes:

  • The IRS must hand over sensitive taxpayer information (like social security numbers) which raises concerns about privacy and identity theft.  Just like a juicy bit of gossip, the more people you tell, the greater the risk of the information spreading to the wrong people or groups.  No amount of training can ensure this won’t happen.
  • If private collection agencies are hired on a contingency basis, their motivation to collect may be higher than your average IRS employee who is paid the same regardless of how much revenue is collected.
  • Although private collection agencies would be given access to some key pieces of information, not all tax account information would be available.  This means that the taxpayer would be required to go back to the IRS anyway, to confirm what the PDC firm has done and tie up any loose ends.

I definitely saw this in my practice during the second trial run of this program 6-7 years ago.  The PDC firms were not given authority to enter into certain installment agreements, so we would have to get cases transferred back to the IRS in most cases.  Using private collection firms only complicates things at the IRS and creates bottlenecks at an agency that is already known for being a little slow.  The good thing is that many, if not most, stakeholders and authorities oppose this legislation, including the National Conference of CPA Practitioners (NCCPAP), the Taxpayer Advocate, the IRS Oversight Board, and the Commissioner himself.

Only federal employees, who have been screened and vetted through the Internal Revenue Service, should be permitted to represent the federal government in matters pertaining to individual taxes.

~ Steven Mankowski, NCCPAP Tax Policy Committee chair

 
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Friday Night Recap

There have been several interesting IRS-themed stories in the news this week.

For one, the IRS recently missed its deadline to appeal an adverse federal District Court decision that denied them the authority to regulate all tax preparers under the Registered Tax Return Preparer program.  This is a big win for tax preparers specifically and a win for small businesses in general.   Perhaps the IRS is going to turn to some kind of voluntary scheme instead.

And if you pay any attention at all to financial news, you wouldn’t have been able to avoid all the press about the IRS paying out something like $15 billion in improper claims for the Earned Income Tax Credit.  Anything that shows how the IRS is wasting our tax dollars or is staffed with incompetent boobs is usually going to remain in the news a few days longer than necessary.  However, this time it really is a big deal.  The IRS admits that about 25% of all EITC payments are issued to people who should not qualify!  What’s worse is the IRS has made little progress on fixing this over the past 4 years.

The last thing I noticed today is not something that everyone will find incredibly captivating, but it caught my eye.  Anytime I see the words “compliance initiative program” it makes me uneasy.  The IRS is going to begin a CIP that will last approximately 12 months and will focus on IRC Section 409A which governs deferred compensation plans.  Thomas Scholz, an IRS executive speaking at an ABA meeting, indicated how many people would be selected for this audit program (less than 50), from what group of taxpayers they would be selected (from an existing pool of employment law cases), and how the IRS will begin the process (through document information requests).  Although stated in off-the-record comments, the IRS revealed some specifics about this CIP that I would love to see them give in ordinary audit situations.

 
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Tax debt case is the next frontier for free speech regulation

According to recent news reports, across the pond in Europe, the European Union’s highest court has ruled that people have the right to be forgotten, even on the internet. The case at issue stems from a tax debt once allegedly owed by Attorney Costeja González who wanted the world to forget an article published by La Vanguardia about tax collection efforts taken against him. The tax enforcement efforts included the seizure of his home and resulted in a 1998 Spanish news blurb that was 36 words long specifying that his home was being repossessed to pay off debts. His legal efforts to obtain anonymity have resulted in infamy.

Proof that a tax debt will follow you, the news blurb at issue was a google search result when completing a google search for Mr. González. Apparently microfiche no longer exists in Europe and google lost its battle that search results containing links to the article regarding Mr. González’s tax problems violated his right to privacy and that people have the right to be forgotten. Hopefully the floodgates have not been opened too far to extend to a complete shutdown of the internet. If it does, I’m not shocked to learn that a taxing authority was to blame.  

 
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The Internal Structure of TIGTA

Most of the time the Treasury Inspector General for Tax Administration (TIGTA) is described as a government watchdog; an entity charged with keeping tabs on the Internal Revenue Service.  The Honorable J. Russell George, the guy in charge at TIGTA, describes TIGTA’s role as follows:

[W]e provide the American taxpayer with assurance that the approximately 95,000 IRS employees who collected over $2.9 trillion in tax revenue, processed over 241 million tax returns, and issued $364 billion in tax refunds during FY 2013, do so in an effective and efficient manner while minimizing the risks of waste, fraud, or abuse.

~ J. Russell George’s testimony before the Senate Appropriations Committee on April 30, 2014

Besides providing a neat little collection of IRS statistics, this description very succinctly describes TIGTA’s role in U.S. tax administration.  But the organizational structure of this “watchdog” is more complex than would appear in this description.  There are three offices within TIGTA, each with different, but overlapping, responsibilities.

TIGTA Office of Audit (OA)

OA recommends improvements to IRS systems and operations, with an emphasis on detection and prevention of waste, abuse, and fraud.  OA is also charged with ensuring that the IRS strikes a balance between aggressive tax collection on the one hand, and the fair & equitable treatment of taxpayers on the other.

TIGTA Office of Investigations (OI)

OI has two primary responsibilities.  One is to investigate allegations of IRS employee misconduct (including extortion, theft, taxpayer abuses, false statements, financial fraud, and identity theft), which poses a significant threat to the idea of voluntary compliance and trust in the US government.  The other is to investigate and (in cooperation with the Department of Justice) put a stop to harassment and threats levied against IRS personnel by disgruntled taxpayers and tax protestors.

TIGTA Office of Inspections and Evaluations (I&E)

There is definitely some overlap in the functions of I&E  compared to the functions of the two primary offices (Audits & Investigations) described above.  However, I&E can be seen as a “lower-level”  investigative arm of TIGTA that provides in-depth reviews and assessments so both TIGTA and the IRS have a better idea of how specific programs and functions are progressing.

You may not think TIGTA has much to do with you as an individual taxpayer, but I’m not sure how much the IRS would care about customer service and average hold times if TIGTA wasn’t monitoring and auditing that and a thousand other daily functions.

 
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It’s Tax Day in Canada

Today is “Tax Day” in Canada, sort of.  The income tax filing deadline in Canada is usually April 30th.  They get a couple weeks more than we get here in the United States. Self-employed taxpayers have until June 16th to file, although they must pay any tax due by April 30th or else they are hit with penalties and interest on their tax debt.

This year, however, Canadians have until May 5th to file their income taxes.  There was a 5-day service interruption earlier this month caused by the Heartbleed bug, so authorities have granted taxpayers a corresponding 5-day deadline extension.

The Canada Revenue Agency (CRA) strongly encourages taxpayers to file electronically, but there are still the 17% of paper-filing holdouts.  Similar to US rules, Canadians must have their tax returns postmarked by April 30th (or May 5th this year) in order for the return to be considered timely.  And just like in the United States, a Canadian tax return does not need to be mailed with any special insurance, tracking, or certification.  It doesn’t have to be shipped via any special priority method either.  A simple first class postage (or equivalent) will suffice.  But paper filing creates unique problems (at least anecdotally) in Canada where the state-run postal service is not considered to be very trustworthy.

Check out these complaints that were undoubtedly written by grumpy Canadians on the eve of their tax filing deadline who are beginning to formulate excuses for filing late:

Assuming Canada Post even picks up mail from the mail boxes. Even so, I think majority of the post simply ends up collecting dust somewhere or even into the shredders.                                     ~ CKHY

I received NO MAIL in the last 9 days. No junk mail, no bills I am waiting for. I never receive mail on a Monday or Friday. How can we trust Post Canada to send tax returns ?                     ~ Bob_The_Bear

 
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