My all-time favorite and most ambiguous IRS letter is the 2645C. The Internal Revenue Manual refers to them as “interim letters” (IRM 4.19.23), which is a nice label given to a letter that is simply saying the IRS has received something from the taxpayer but has not acted on it yet. And when I say the IRS has received “something,” I literally mean anything — it is up to the taxpayer to figure out what that might be based on the receipt date in the letter that is often inaccurate. The letter does give a few options as if to jog one’s memory:
- Telephone inquiry
- Response to our inquiry or notice
- Penalty abatement request
- Installment agreement
Yes, it says “other.” This list is taken directly from the form letter 2645C. It goes on to say that the IRS hasn’t resolved the matter because they haven’t completed all the processing necessary for a complete response. This letter is completely baffling to me, and I am always wary of those times I am told that the IRS hasn’t “finished processing” something. What that usually means is they haven’t even looked at it. If they had looked at it, then would it really be that difficult to specify if this something is a payment, a phone call, penalty abatement, or “other”?
Probably the most perplexing option in the list above is “payment” because what kind of processing is really necessary when a payment is received? Yes, a determination needs to be made as to where to apply the payment (what tax year or period), but what else? It seems to me that the processing of a payment is the one thing that the IRS would not put off for later.
Next this letter states that the IRS will contact the taxpayer within a specified time frame (usually 45 days). The letter ends with a friendly reminder about how to make installment payments, including how to annotate your check. In other words, we’re not sure what you sent us, and we won’t get to it for 45 days, but in the meantime be sure you don’t miss a payment. Sincerely, IRS.
You know the statistic about what percentage of your life is spent sleeping? Does it shock you just a little bit and make you want to sleep less? That’s the way I feel when I think about what percentage of my life is spent talking (or waiting on hold) with the IRS. I could probably figure it out, but I would rather remain ignorant of those details. Well, even after having logged hundreds or thousands of hours with them, I can honestly say that I have never been asked to support any particular political candidate.
Recently an IRS call center employee was suspended for 100 days after the US Office of Special Counsel (OSC) determined that he/she had violated the Hatch Act by engaging in partisan political activity while on the clock. This particular worker encouraged callers to vote for Obama on taxpayers’ dime. This “encouragement” came in the form of some kind of chant based on the spelling of the employee’s last name. I would love to know what this sounded like, but exact details were not given. In fact, IF ANYBODY CAN PRODUCE AUDIO OF THE IRS EMPLOYEE WHO PROMOTED OBAMA’S CANDIDACY BY RECITING A CUTE LITTLE CHANT AT THE END OF EACH CALL, PLEASE CONTACT ME IMMEDIATELY.
There have been plenty of times when I thought that the IRS representative was getting a bit too chummy with me. I really don’t mind that; I like to see that they are enjoying their job. But I wouldn’t want to see them get in trouble. The worst I’ve heard is when they start bashing the IRS and complaining about their job, their equipment, other IRS departments, their flawed internal processes. That actually happens fairly regularly. As far as I know there is nothing illegal about this kind of behavior, but I don’t imagine a supervisor would appreciate hearing it.
The real controversy in this story is that the OSC investigation actually resulted in the termination of a postal worker who violated the Hatch Act, whereas the IRS worker was only suspended. There are significant differences in the facts of each case. You be the judge and read about those differences here.
A question came up recently about whether or not a taxpayer must submit his or her Offer in Compromise fees in the form of a cashier’s check or money order as opposed to a personal check.
Just a little background first. When filing an Offer in Compromise, you must submit two payments: one is the $186 application fee, and the other is the 20% deposit or initial offer payment. That’s 20% for “cash offers” or the first of 24 payments for “periodic payment” offers (the difference between these two types is not relevant here and could be the subject of a completely different blog entry). If either of these payments are missing or insufficient, the offer is almost certainly going to be returned and you’ll have to start all over again.
First of all, the IRS does not require cashier’s checks or money orders. In fact, the instructions in the Form 656 Booklet specifically state that a taxpayer may send a “personal check, cashier’s check, or money order.” However, what is required is that the money be available in your personal checking account when the personal check is cashed by the IRS. Since a cashier’s check or money order is already paid for, there is no risk of insufficient funds. Therefore, if your tax attorney asks for a cashier’s check or a money order, he is not being a jerk, he is being cautious.
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…
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.”
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.
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:
- The Right to Be Informed
- The Right to Quality Service
- The Right to Pay No More than the Correct Amount of Tax
- The Right to Challenge the IRS’s Position and Be Heard
- The Right to Appeal an IRS Decision in an Independent Forum
- The Right to Finality
- The Right to Privacy
- The Right to Confidentiality
- The Right to Retain Representation
- 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:
- The Right to Be Informed (so long as you still open mail sent to the address you lived at years ago);
- The Right to Quality Service (similar to any other poorly structured organization);
- 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);
- The Right to Challenge the IRS’s Position and Be Heard (unless we disagree with your position);
- The Right to Appeal an IRS Decision in an Independent Forum (which is funded by the IRS);
- The Right to Finality (when you die);
- The Right to Privacy (unless you owe us money);
- The Right to Confidentiality (unless you owe us money);
- The Right to Retain Representation (which you will need);
- 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.
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.
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
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.