IRS: The Raiders of Government Agencies

Usually when people are dressed in black surrounding a hole in a solemn ceremony, its a funeral.  But Tony Sparano, the interim head coach of the 0-4 Oakland Raiders, gathered the team for a special symbolic football burial this week.  He said that the football represented the first four games of the season.  The hope is that this little exercise will help the team to put it all behind them and move forward with a clean slate.

Maybe the IRS Commissioner, John Koskinen, should do something like this with his team.  I’m not sure what item(s) could be used to represent the past few years of missteps at the IRS, but to really drive the point home he would need to dig a hole the size of the Grand Canyon.  Actually, come to think of it, maybe they already did this exercise using Lois Lerner’s hard drive.  Nobody would ever consider that the IRS actually physically buried her emails in the ground.

Oakland Raiders vs. Internal Revenue Service.  Obviously the comparisons are unlimited given the fact that a Raider is actually a pirate, and a pirate is known for forcefully taking one’s hard-earned booty.  But I’ll leave this to your own imagination.

 
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IRS Audits and Public Perception

We know there is at least some rhyme or reason to who gets selected for an IRS audit.  If we knew all the criteria, we could position ourselves to avoid audits 100% of the time, but, for obvious reasons, the IRS hasn’t been so generous when it comes to publishing their audit selection criteria or algorithms.  One thing that we can be sure of is the IRS flags tax returns that possess certain risk factors because, if they’re going to spend resources auditing a certain number of returns each year, it might as well be those that are more likely to contain errors or “problems.”

So far, so good.  That much makes sense.  The IRS flags cases that it considers to be good audit material.  But, based on a news story that broke today, maybe the IRS should also be flagging cases that should not be audited.

Of all the “do not audit” entities out there, shouldn’t Logan Clements, the producer of “Sick and Sicker: ObamaCare Canadian Style,” be near the top of the list?  I haven’t seen this film, but I’m gonna guess that Clements is not a big fan of Obama, and not a big fan of the Affordable Care Act.  And I have absolutely no idea about the integrity of his taxes, but it just doesn’t look right for the IRS to audit somebody like this.  Meanwhile, Clements is using the media attention from the audit to catapult his film into the spotlight quite nicely.  I understand the IRS faces a catch 22 here: if they audit this guy, it looks very fishy, but if they let him go, it sets a weird precedent and makes a whole segment of society (notable conservatives) exempt from audits.  In fact, I think a strong case can be made that public perception should not even enter the equation.  But the IRS better hope they find something seriously wrong with this guys taxes.  Or if it turns out to be a “no changes” kind of audit, they had better close it quickly and hope this story fades away quietly.

 

 
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IRS Achieved Record Collections Despite Reduced Staff

Everybody thought that the IRS would be incapable of collecting as much tax revenue as years past with a reduced work force.  The loudest voices crying for a bigger tax collection budget came from within the IRS and from the Taxpayer Advocate.  The prevailing thought was that the IRS was just going to have to do more with less.  And apparently that’s just what they did.

According to a report released today by the Treasury Inspector General for Tax Administration (TIGTA), in 2013 the IRS increased total gross collections by 13 percent compared to 2012.  The IRS collected an unfathomable $2.9 trillion in fiscal year 2013, including $50.2 billion from enforced collections such as wage garnishments, bank levies, and seizures.  Interestingly these numbers were achieved with fewer examinations, fewer tax liens, and fewer levies & seizures.  It is difficult to tell what all this means.  Maybe the IRS is less likely to nail people for making mistakes on their taxes, filing late, and paying late.  But I think it is also safe to say that when they do catch you, they really sink their teeth in.  Maybe you think you’re safe because the IRS has bigger fish to fry, but if this report is any indication, I think the IRS is casting smaller nets and throwing fewer back.

 
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IRS Voluntary Classification Settlement Program is Broken

Sometimes employers misclassify their workers as independent contractors (self-employed) when, in fact, they are employees.  And when I say “sometimes” I mean millions of times.  It is very common.  I’m sure some of them do it unknowingly, but I am also certain that some employers do it because they don’t want the responsibility and costs associated with having actual employees.  The difference is that employers must withhold and/or pay a number of taxes when a worker is also an employee, including income taxes, Social Security, Medicare, and unemployment.

The IRS would love it if taxpayers (including employers) would fall in line with the IRS’ dreams of “voluntary compliance,” but one of the things they do when this doesn’t happen is they set up programs to entice them to come clean on their own.  The IRS doesn’t call it an amnesty program; I don’t think they particularly like that word.  In fact, I put the word “amnesty” in the search box of the IRS website and exactly two results came up, and both of them were in the context of a state amnesty program.  The word tends to have the connotation of getting out of paying taxes or making use of a legal loophole, and the IRS really doesn’t want to suggest that.

But I can use it.  I like the word.  The IRS has an amnesty program for reporting offshore accounts called the Offshore Voluntary Disclosure Program.  And the IRS has an amnesty program for coming clean on worker classification issues called the Voluntary Classification Settlement Program.  But the VCSP has been very poorly administered over the years.  It appears that just about every aspect of the program has some kind of flaw.  Even the most basic things are not working, like correctly determining eligibility for the program, monitoring compliance with the program, and analyzing program performance.  If you want to read about how screwed up VCSP is, be my guest.  Full report here.

 
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Audit Resistant Partnerships on the Rise

The IRS generally can include returns filed within the last three years in a tax audit.  There are exceptions, but the IRS normally does not go back further than three years.  What you may not know is that the IRS has the same amount of time to audit large partnerships.  According to a recent report from the Government Accountability Office (GAO), it takes the IRS about 18 months of preparation and fact finding before they can even begin this type of audit.  GAO considers a partnership large if it has more than 100 partners and $100 million or more in assets.

The GAO report underscores the necessity of tax reform.  There are some 20-year old provisions, such as this one, that don’t make sense anymore.  Large partnerships can be very complex, with multiple tiers of partners, making it very difficult to determine where to start.  Many of today’s large partnerships are finance and insurance firms, and it’s great for them, but the IRS really hasn’t been able to effectively audit them.

This problem has become more acute in the past 10 years or so since the number of pass-through entities such as partnerships has been on the rise and the number of corporations has been declining.  Very interesting statistics from GAO:

The number of large partnerships has more than tripled to 10,099 from tax year 2002 to 2011. Almost two-thirds of large partnerships had more than 1,000 direct and indirect partners, had six or more tiers and/or self reported being in the finance and insurance sector, with many being investment funds.

 
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IA Eligibility Requirements

Who is eligible to pay back taxes to the California Franchise Tax Board via an installment agreement?  It can be a little complicated.

It’s difficult not to compare FTB and IRS collection tactics.  Both almost always first demand/request payment in full.  The collection notices are worded in a way that if you don’t read beyond the first sentence, it will appear that full payment is your only option.  And when you call them up, that’s the first thing out of their mouth.  IRS will usually say “Do you have the ability to pay your tax bill in full?” If you cannot write them a check, then the discussion typically shifts to what is required for an installment agreement.  However, the FTB will often (at least at first) demand full payment without regard for your ability to pay and then very reluctantly tiptoe around the option of paying back your taxes in installments.

The eligibility requirements for an FTB installment agreement are more stringent than the IRS requirements.  First and foremost, it is very difficult to obtain an installment agreement with FTB if you have an active earnings withholding order (EWO).  An EWO is just another word for “wage garnishment” or “wage levy.”  Once the FTB has brandished this collection tool, and they have a steady stream of payments coming in, it is very difficult to convince them that they should trade these “guaranteed” payments for a promise to pay from the taxpayer.

Like the IRS, the FTB does require that all back tax returns have been filed so there is no question as to how much is owed.  Also, like the IRS, FTB requires that the entire tax debt be paid off within a specified time frame.  They give as much as 60 months for some tax debts, but only 36 months for others.  The IRS will allow a full 72 months for tax debts under $50,000.

Both FTB and IRS recognize certain events that will cause an installment agreement to default.  Some of these events include (a) failure to make timely payments, (b) failure to timely file a future tax return, and (c) incurring a new tax debt.

Whether you owe FTB or IRS (or both) it would be a mistake to think that you can always just request an installment agreement to avoid enforced collection action.  It’s not always that simple.

 
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OPR: The Standard-Bearer for Integrity?

We know the IRS has a habit of making outrageously stupid decisions from time to time.  But moral decay over the past few decades is swiftly converting into a full-blown moral nosedive.   The debacle this week in the Office of Professional Responsibility (OPR) is ridiculous enough to cause poor Johnnie Walters to turn over in his grave.

You have to understand the role of OPR in order to appreciate the irony of what has happened.  OPR is a department within the IRS responsible for regulation of tax practitioners.  They enforce the rules of practice before the IRS, investigate misconduct, and discipline those who have violated the rules.  The top executive at OPR is Director, Karen L. Hawkins.  She sent Takisha McGee, knowing that McGee’s law license was suspended and that she was in the middle of disbarment proceedings, to give a speech to Florida tax attorneys.  The topic of her speech?  Oh, just “When your license to practice before the IRS is on the line” that’s all.

Even the best fiction writers couldn’t make this stuff up.  I haven’t seen so much irony since 9th grade English Lit class.  McGee is also part of OPR Management and is listed 5 spaces below Hawkins on the very first page of OPR’s website in case you care to look her up.  And while you’re there, you might notice OPR’s vision:

To be the standard-bearer for integrity in tax practice.

And OPR’s mission statement:

Interpret and apply the standards of practice for tax professionals in a fair and equitable manner.

Oh, and Hawkins is also on the record for similar hypocrisy of her own:

I expect nothing but absolute integrity out of both myself and my staff because I just don’t see how you can justify disciplining others for lack of integrity if you aren’t demonstrating integrity-plus on your own behalf.

What a joke.  There’s not much integrity left in government, particularly the IRS.  No, McGee hasn’t officially been disbarred, and yes she is appealing the disbarment recommendation.  But even if we assume she wins in the end, she is still suspended right now!  Any attorney will tell you how unethical it is to practice law with a suspended license; if you got caught, you would certainly be disbarred.  And maybe OPR can make an argument that lecturing other attorneys does not constitute the practice of law, but they had to consider how this might look and how it might be completely contrary to their office’s “vision.”  They had to consider the fact that state bar disciplinary decisions are public information.  Anybody can look up Ms. McGee on the D.C. Bar website (as long as they can figure out that her maiden name is Brown) and see that her membership status is indeed “suspended.”  Were they never concerned that one of those Florida attorneys would think to do that?

To top it all off, McGee seems to think that her own ethical challenges give her some kind of advantage when it comes to empathizing with tax professionals who are being investigated by her office.  That’s assuming she’ll be keeping her job, which is doubtful.  Whatever personal lesson she has learned, I don’t think it is appropriate to learn at the expense of every taxpayer in the country who relies on the IRS and all its departments to administer taxes in a fair an honest manner.

 
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Rolling Stone on Taxes

I read a lot of tax-related articles and they come from a variety of sources, but it is not every day that I find one in Rolling Stone.  I have to say that the article entitled “The Biggest Tax Scam Ever” by Tim Dickinson is very good; a very detailed scholarly piece about big corporations avoiding billions of dollars in taxes right under our noses.  I enjoyed the story, but I didn’t love that it came out of Rolling Stone.

I can tell I’m feeling the urge to do one of those “When I was a kid…” rants, but I’ll try to refrain.  I know that Rolling Stone has always published political-type “news” stories.  In fact, some would probably say its political writers are more skilled at what they do than their music staff is at picking the best music (here I refer specifically to the fact that Rolling Stone did not initially give Led Zeppelin favorable reviews — obviously a serious mistake, and one that cannot really be forgiven, even after all these years).  However, when I used to read Rolling Stone (in the 1980s) I seem to remember it being mostly a music and pop culture magazine with serious topics scattered here and there.  These days the publication looks like it is being written for an audience that is well, MY AGE!  *facepalm*

I tend to think of it this way.  When a Burger King employee gets off work and goes out to dinner, the last thing that person wants to eat is Burger King.  And the last thing I want to read about when I pick up a music magazine after work is taxes.  Am I the only one!?

 
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Manteca Tax Cheat Files Lien Against IRS Commissioner

There was a story I saw in the Modesto Bee recently about a Manteca woman who pleaded guilty to defrauding the IRS out of about $313,000.  It is not really your typical refund fraud case in the sense that the more popular strategy involves preparing a series of false refund returns claiming smaller amounts.  All the returns together may add up to a small fortune, but no single refund claim appears right away to be anything out of the ordinary.  The Manteca woman wasn’t patient enough for the “slow drip” method apparently; she went all in.  And she lost big time.

Esther Robertson, 57, faces up to 5 years in federal prison and a fine of $250,000.  It is not mentioned in the Modesto Bee story, but typically the fine is in addition to the restitution aspect of the sentencing, which involves the taxpayer paying back what was stolen.  Robertson will have a lot of time to stress about the possible outcome since her sentencing is not expected until September 2015.

Court papers also indicate that, in February 2009, after the IRS was onto her, they issued a bank levy to try to recoup at least some of what was taken.  Then Robertson did something that I’m not sure I quite understand.  Presumably in an act of retaliation, she filed a lien against the property of the IRS Commissioner!  This certainly shows her contempt for the IRS, or the federal government, or both.

There are a number of questionable websites and online sources that claim to cite legal authority for filing a criminal suit against the IRS for taking one’s property.  I won’t link to any of these sites because I don’t really have a beef with them but, trust me, there are hundreds of them.  These are the same sites that are managed by tax protestors who believe taxation is illegal and the IRS has no legal authority to collect taxes.  My guess is that Robertson found  something online about filing a lien against the Commissioner of the IRS and she thought she would give it a try.  She probably didn’t have much to loose at that point either, knowing that the IRS had discovered her foul play and it was only a matter of time before she would be getting a visit from Criminal Investigations.  For Robertson’s sake, I hope this doesn’t count against her during sentencing.

 
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