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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Supreme Court to Hear Case on IRS Summons Power

If the IRS, as part of a tax audit or examination, wants something from the taxpayer, they tend to ask nicely only once.

Sometimes it is difficult to hand over the books and every last financial detail to the IRS.  It can be somewhat like letting a stranger into your bedroom; even if you have nothing to hide, you don’t want them there.  Also, document requests can be quite burdensome.  Some items cannot be retrieved or compiled without expending inordinate amounts of time and money.  Lastly, the information sought by the IRS can sometimes appear to bear very little relevance to the issue(s) at hand.  But however difficult it may be to comply with a document request, or however ridiculous the request may seem, the IRS usually gets what it wants.

What if the taxpayer doesn’t comply to that initial polite request?  Maybe the IRS asks again with some emphasis, stronger words, or even a threat of summons.  Normally the IRS resorts to a summons only after the taxpayer has ignored a couple informal requests or after the taxpayer has openly refused to provide the information sought by the IRS.  When a taxpayer ignores a summons, the procedure is for the IRS to go to the Justice Department and request a court order to enforce the summons.  And courts have routinely rubber-stamped such requests.  A court-ordered summons is very serious and cannot be ignored without risk of civil or criminal contempt.

This week the US Supreme Court will decide whether or not a taxpayer should be granted an evidentiary hearing in which a judge would determine if a summons is proper and not simply intended to harass the taxpayer, over-complicate the issues, or delay the process.  This is a big case as it relates taxpayer rights.  The IRS should not be able to ask for anything and everything under the sun with no explanation as to its purpose and no procedural mechanism for the taxpayer to dispute it.

 
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Tax Day 2014

It’s April 15th — tax filing deadline day!  From where I sit, there are only a couple more hours left to file your federal income tax return.  Today I should be writing about (and you should be reading about) procrastination, how to file an extension, what to do if you owe taxes and can’t pay, or various IRS statistics like how many returns have been filed, how many refunds have been issued, how much the IRS has paid out in refunds, etc.  Before the age of electronic filing, we used to see the obligatory TV news story about which post offices were open late and which ones had the longest lines.  But gone are the days of such innocent tax day topics.  Today I’m mostly seeing warnings about those pervasive telephone tax scams.

For as long as I can remember, the IRS has warned taxpayers of phony IRS calls, but it seems like it used to be an annual warning that came out in the “Tax Tips” series.  And it always seemed more like a theoretical problem with some anecdotal evidence here and there.  Today, however, these phone scams have become commonplace.  It doesn’t seem to matter where you live either; I’ve seen reports of phone scams all across the country.  And I’ve handled my share of calls from local taxpayers who have been scared out of their minds by phony IRS calls.  In Sacramento, some victims are being told that they are going to be arrested for tax fraud.  These scam artists are apparently very convincing.  Sometimes people who don’t even owe (and know that they don’t owe) are tricked into believing that they are in trouble with the IRS.

The IRS is very clear about what type of contact they initiate with taxpayers, and if you become familiar with the standard IRS warnings, you’ll never be fooled by a tax scam.

 
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Supermodel Gisele Blames IRS Audit on her Forbes List Ranking

Are you not making the millions you planned to make?  Is your face not occupying magazine covers? Is your name nowhere to be found on any Forbes lists?  Well, the silver lining is that you are not subject to any extra scrutiny by the IRS.  Supermodel Gisele Bündchen was audited recently and believes that her 7-year stint at the top of Forbes’ “Highest Paid Supermodels” list was at least partly to blame.  Perhaps Gisele gets a double dose of said scrutiny, being married to football star Tom Brady, who also sits atop his respective Forbes highest paid list.  Maybe living life in relative anonymity isn’t such a bad thing after all.

Gisele’s beef with Forbes is that they don’t have the details of her accounting, they don’t have her bank statements, and their estimates are too high.  She obviously makes a lot of money, but nowhere near the $42 million that Forbes has her making.  Forbes countered by citing all the various sources of their income estimates: editorial shoots, independent licensing ventures, spokesperson gigs, and contracts from beauty and fashion companies.

For all we know, she may have been audited anyway.  There are many different factors (or “red flags”) that are considered when selecting cases for an IRS audit, but one of the biggest factors has to be an extremely high income.

Still, Gisele doesn’t think too highly of Forbes.  She says “[t]here should be a magazine to quantify knowledge, understanding and love for people: that is power.”  Not a bad idea for a magazine, and she better get on that quick before the government figures out a way to tax knowledge, understanding, and love too.

 
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Koskinen’s Press Club Speech

The IRS Commissioner typically speaks at a National Press Club luncheon once a year.  It is the perfect venue to learn about the Commissioner, his vision, and everything at the top of his to-do list.  Here are a few things that stood out to me from Koskinen’s Press Club remarks from April 2nd, 2014:

  • He enjoys college basketball, . . . or at least March Madness, . . . or at least Duke.  He made a pretty funny joke about Duke’s loss in the early rounds of the NCAA championship.
  • During the three months he has been serving as head of the IRS, he has visited 18 of the 25 largest IRS offices.  He has jumped right in and run around quite a bit for an old guy.
  • He likes to hear the opinions of the minions.  I really do respect this approach and hope that it is more than just words and becomes part of the culture at the IRS.
  • He is realistic; he does not pretend to be perfect and he doesn’t expect IRS employees to be perfect either. In fact, he said that his theory is “bad news is good news,” meaning that even negative reports have a silver lining because at least it signifies that the news is getting reported.  After all, a problem cannot be corrected unless and until it has been identified.  I see his point, but I’m not sure I would have taken it that far.
  • He is big on the whole idea of restoration of public trust and the notion that every taxpayer should be treated fairly.  He spent a large portion of his talk discussing the investigations into the IRS’ tax exempt application scandal.
  • He wraps up by commenting on the tax filing season, problems with voluntary compliance and tax fraud, FACTA, customer service (by phone and at local service centers), tax reform, and administration of applicable provisions of the Affordable Care Act.
  • The biggest problem, according to the Commissioner, is insufficient funding.  He basically needs another billion dollars, give or take.
 
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IRS Stays Away from Churches

Do you know the difference between a non-profit religious organization and a church?  Perhaps the biggest difference is their tax obligations.  While it is true that neither  is required to pay taxes, a pastor, televangelist, or broadcasting company that is registered as a religious organization must file information returns (Form 990) with the IRS that disclose how their money is spent.  However, churches, for the most part, do not have to answer to anyone.

John Burnett, reporting for National Public Radio, writes about a Christian television network called “Daystar” that operates much like a wealthy corporation, except without the transparency.  Yet they call themselves a church and the IRS has never questioned it so far as anyone knows.  There is a 14-point test that the IRS may use (in theory) to determine if an entity qualifies as a church under the law, but the IRS doesn’t enforce it. And if these churchy executives decide they want to drive Bentleys and live in sprawling chateus, they do it.  If they want to spend donation money on their own pet causes, then they do it.  According to IRS insiders, the government just doesn’t audit churches anymore, for at least the past five years anyway.

As part of America’s commitment to religious freedom, anyone can start a church, start preaching and passing the collection plate. They are presumed to be a church by the IRS — no questions asked.

Quoting former Daystar employees and tax attorneys, Burnett makes it pretty clear that Daystar would never meet the criteria for church status if the IRS were to enforce its own rules.  We all know how good the IRS is about enforcing its own rules…

 
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1st Grade Tax Tips

Do you endorse the "shoe box" strategy of document storage?

This is usually the time of year when people start digging through their file, or shoe box as the case may be, in an effort to get started on their dreaded Form 1040.  If you wait until the eve of tax day, then you’ll find yourself furiously rifling through said shoe box.  And if you really use a shoe box to secure your important records, then chances are you not very organized, and you have other records scattered all throughout the house or in multiple files on your computer.

I know that nobody ever taught you about income taxes or finances in grade school; my kids haven’t had that class yet either.  But as they get older, I do intend to impart some wisdom on them, even if by force.  And for now, there are many habits I can help them develop that will hopefully carry over into their adult life and will make their future April 15ths that much more bearable.

1.  “Get started on your homework right after school.”    If you at least begin the process with a few weeks to spare, then when things come up that inevitably pull you away from the task at hand, you will still have time to put out those fires and get your return filed on time.  And, if due to your personal high principles, you refuse to pay Uncle Sam a nickle before the 15th, at least have it ready to go, then you can hit “send” at 11:59pm.

2.  “Keep everything in your backpack.”    It really doesn’t matter if you’re using a shoe box for your tax docs.  A shoe box works just fine if all your stuff fits in there.  One disorganized shoe box is way better than having multiple piles around the house.  The key is to keep everything together.

3.  “Once it has been graded, throw it out.”    Sometimes we want to save a particularly well-made craft or an A+ essay, but most of the stuff that comes home from school each day goes directly into the trash.  We couldn’t possibly save everything, nor would we want to.  Same with your tax records.  If you can access it online, then why keep a paper copy?  The “three-year rule” should generally suit you just fine.

 
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