New Commish, 2014 Tax Season, EITC

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A few noteworthy events caught my eye in the world of tax relief today.

First, the Senate approved Obama’s nomination of John Koskinen in a 59-36 vote, confirming him to fill the top position at the IRS; a position that has been vacant for over a year.  Commissioner Koskinen will take his post beginning next week and we’ll definitely keep a close eye on him to see if he will fulfill his promise of restoring public trust to the agency that has been fighting a dismal public perception for years.  Obviously, this is not something that he’ll be able to do overnight.

Second, the IRS announced that the opening of the 2014 tax season will be on January 31st.  This is when the IRS will begin accepting 2013 tax returns.  The IRS encourages taxpayers to file electronically.  If you are due a refund, this is definitely the quickest way to get it.  Also, the IRS reminds us that we always have the option of requesting an automatic six-month extension using Form 4868.  The IRS tends to encourage extensions because it spreads out the influx of tax returns so that things don’t get too bottlenecked.

And finally, TIGTA, the IRS watchdog, reported on increasing abuse of the Earned Income Tax Credit (EITC) by tax preparers.  The IRS has always had a problem with EITC abuse and fraud because it is a refundable tax credit that can mean money in the pocket of whoever claims it and qualifies (or appears to qualify).  TIGTA noted that too many tax preparers fail to do their due diligence by completing and attaching Form 8867, the Paid Preparer’s Earned Income Credit Checklist.

Criteria for an IRS Audit

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If you’ve ever been audited by the IRS then you would probably agree that it is one of the most stressful ordeals of your life.  Some people worry themselves sick about their potential for audit before they even hear from the IRS.  It is useful to understand some of the IRS audit selection criteria so you can deal with the things that are within your control and not worry about the things that aren’t.

The IRS tends to use the terms “exam,” “examination,” and “audit” interchangeably.  These are all terms they use for the process of examining, clarifying, and correcting errors on one or more tax returns.  As you can imagine, the IRS does not have the resources to carefully pick through each line of each return.  Instead, the IRS picks out certain returns with a high likelihood of containing errors, and these are some of the selection methods:

  • Computer Scoring:  The IRS’ Discriminant Function System (DIF) is a computer program that flags returns based on a numeric score.  A return that has a higher likelihood of problems (such as unreported income) gets a higher score.  Then the high-scoring returns are reviewed by human eyeballs and some of them are selected for audit.
  • Information Matching:  The IRS compares payer reports (1099s, W-2s, etc.) and public records to what is claimed on the tax return and may select returns for audit based on discrepancies.
  • Related Examinations:  If you are affiliated with people or entities that were selected for audit, your chances of being audited may be higher because when the IRS finds problems with one return, they have found that others may be lurking near.
  • Informants:  Some returns are selected for audit based on anonymous tips or are the result of extensive investigation into tax evasion schemes.
  • Large Corporations:  And finally, some large corporations must submit to routine examinations (often yearly) simply because they generate huge profits and the stakes are too high for the IRS to miss anything.

If you do get selected, you should know that the vast majority of audits are completed without ever meeting face-to-face with the IRS.  Here are the different types of audits:

  1. Service Center Examinations (very simple, few issues, math error or something of that nature)
  2. Office & Correspondence Exams
  3. Field Examinations (Revenue Agent goes to your home or place of business to physically inspect your books)

http://www.irs.gov/uac/The-Examination-(Audit)-Process

 

Vengeful Audit Paranoia

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People who get audited often feel like they have been unfairly targeted by the IRS.  Many of our clients have felt this way.  When the tax audit notice comes, they immediately review their past dealings with the IRS, trying to figure out why they have been audited and what they did to upset the IRS.  Some of the more paranoid audit victims will go back and mentally review all their dealings with any branch of the government, assuming that they were selected in an act of revenge.  I suppose it is human nature that causes them to wonder and question why they, of all people, were selected for audit.

Bill Elliot is a high-profile example of this “vengeful audit paranoia.”  He was audited after appearing on FOX News earlier this month where he criticized ObamaCare and told the nation about his health insurance policy being cancelled.  He couldn’t afford the new premiums offered in the federal health insurance marketplace and needs insurance probably more than the average person given that he is battling cancer.

We can’t know for sure whether Mr. Elliot was targeted by the IRS.  We know some of their audit selection criteria, and there are probably others that we don’t know.  People are also audited at least in part based on chance.  I don’t know of any confirmed “vengeful audits,” but maybe that’s the next IRS scandal…

IRS Quietly Rolls out FTS Program Nationwide

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Part of the problem with the IRS’ terrible reputation is that their scandals and mishaps get publicized in every way imaginable, and often for a few days longer than necessary.  But the good things the IRS is doing tend to go unnoticed.  I guess it’s just not as much fun to read about.

I found an example of this today.  The IRS is expanding a pilot program that it began in select locations in 2006 that allowed small businesses to opt for alternative dispute resolution rather than the standard formal appeals process (and then potential litigation) when disputing an audit.  The program is called Fast Track Settlement (FTS).  It is a smart and attractive option, since the IRS claims that disputes can be resolved in 60 days when they go through FTS, and taxpayers maintain their appeals rights through the process.  The only problem I see is that the mediator in a FTS proceeding is an IRS appeals officer rather than a neutral third party.  Yes, appeals is a separate arm of the IRS, but it’s still the IRS as far as I’m concerned.

I’m not sure why it took seven years for the IRS to make FTS available nationwide, but besides that, it seems like another opportunity lost for those in charge of the IRS’ public perception.  The IRS is at least partly to blame for this phenomenon.  In times like these, the IRS needs to be doing everything it can to leverage their good PR, and that means making sure the public knows about every single time-saving and money-saving measure, otherwise we will only remember the Star Trek parody video and similar headlines.

Veterans Groups Resist IRS Audits

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The IRS does a fairly good job taking care of American military families, but what about our veterans?

Some think the IRS is picking on the American Legion and other non-profit veteran organizations.  The American Legion is a veterans organization that was incorporated by Congress in 1919.  They are “the nation’s largest wartime veterans service organization, committed to mentoring youth and sponsorship of wholesome programs in our communities, advocating patriotism and honor, promoting strong national security, and continued devotion to our fellow servicemembers and veterans.”  They are also highly enthusiastic about baseball and that’s good enough for me.

Jerry Moran, a Senator from Kansas, is unhappy about audits that the IRS has undertaken of certain American Legion posts.  Apparently the IRS requires that they maintain dates of service and character of service records for all its members or face $1,000 per day penalties.  American Legion officials are claiming that they have never heard of this requirement.

Really this requirement is not unreasonable, given the fact that it is the IRS’ job to make sure all tax-exempt organizations are meeting the requirements for tax-exempt status.  But veteran groups are claiming that they have never been informed of the record-keeping obligations.  Moran wants to know when this requirement came about, under whose watch, and by what authority.  These are valid questions since the audits are being conducted pursuant to mere IRS “guidelines” found in the Internal Revenue Manual.  Moran is asking the IRS to point to the actual legal authority that grants them the right to conduct these audits and levy tax penalties for non-compliance.

Accounting Today asked about these audits.  The IRS’ response:

  • There is no special enforcement effort underway; just routine compliance activity
  • Authority for these audits is granted by Internal Revenue Code Section 501(c)(19)
  • The IRS HAS made efforts to inform veteran organizations of their obligations by way of outreach programs and special publications, so if they didn’t know, they should have known

IRS Violating Software License Terms

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The IRS is using some computer software that it hasn’t paid for, and is paying for other programs its employees aren’t even using, according to a new TIGTA audit released Tuesday that said the tax agency could be violating copyright laws.

The Treasury Inspector General for Tax Administration found serious problems with IRS software license management practices, many of which could be remedied if they would simply keep better records.  Read the full report here.

Software licenses are typically written in such a way that the software may be shared only on a certain number of computers.  The IRS appears to be doing what so many other private parties tend to do: sharing software on more systems than is allowed by a license.  And then they have also been doing what few people in their right mind would do: paying for licenses that they aren’t using.  This is a signature IRS move if I have ever seen one!

The IRS Agent with a Weakness for Shrimp

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photo via farm4.static.flickr.com

TIGTA (Treasury Inspector General for Tax Administration) often includes in its semiannual report to Congress highlights of the past 6 months and high profile cases that the agency has resolved.  The most recent semiannual report tells of the bribery of an IRS Revenue Agent by the owner of a seafood company in Louisiana.

An unnamed IRS agent paid a visit to Vihn Q. Tran, the owner of St. Vincent Seafood Co. in Louisiana, back in August 2007 with the intent to schedule an in-person audit of his books.  At that first encounter Tran offered to take the agent to lunch and also dropped a hint that he was hoping for some special treatment when he told the agent, “I’ll take good care of you.”  The IRS agent declined these initial offers, but then in subsequent meetings accepted 75 pounds of jumbo shrimp and $6,000 cash.  In April 2011 Tran confessed to the crime.  In January 2012 he pled guilty to bribery of a public official, and he was sentenced to three-years’ probation this past March.

TIGTA’s report does not specify, but it appears to me that the IRS agent was culpable at least for violating the guidelines set forth in the Internal Revenue Manual (IRM).  According to IRM section 4.2.4.2.3, IRS employees are required to do the following when presented with a bribe:

  • Avoid any statement or implication that you will or will not accept the bribe.
  • Attempt to hold the matter in abeyance.
  • Report the matter immediately to the Inspector General Special Agent.
  • Avoid any unnecessary discussions of the matter with anyone.

Unless some key facts are being left out of this report, it does not appear that the agent complied with these rules.  By accepting the cash and the shrimp, the agent violated the first two rules, and although the agent must have reported the bribes at some point, it does not appear that he did so immediately.

As for Mr. Tran, I would guess that he has since gone out of business.  It looks like his tax problems were just one of a variety of issues he had been dealing with as a business owner.  The US Food and Drug Administration (FDA) sent him a letter in 2002 pointing out some “serious deviations” from federal seafood regulations, one of which had to do with, not surprisingly, record-keeping.

You’re not paranoid if you think you’re being targeted by the IRS for tax purposes.

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According to CBS and Reuters, the Treasury Inspector General for Tax Administration (TIGTA) is expected to publish an investigative report this week detailing that Internal Revenue Service (IRS) agents specifically targeted conservative groups for review and consideration of their tax exempt status.

According to Reuters, director of exempt organizations for the IRS, Lois Lerner apologized Friday for what she called the “inappropriate” targeting of conservative groups for closer scrutiny, something the agency had long denied. She said the screening practice was confined to an IRS office in Cincinnati; that it was “absolutely not” influenced by the Obama administration; and that none of the targeted groups were denied tax-free status.

The TIGTA findings detail that the names and purposes of groups were used to scrutinize applications. Name scrutiny included organizations such as Tea Party, Patriot, and 9/12. Scrutiny was also being improperly given to references to government spending, government debt, taxes, education of the public via advocacy/lobbying to make America a better place to live; and statements that criticize how the country is being run.

IRS employees are presently prohibited from targeting anyone for their political or religious beliefs. However, under current law such conduct would only be grounds for termination. Wasting no time to ride the coattails of a juicy scandal, Congressman Mike Turner of Ohio already unveiled a bill to make such actions a felony. Considering that nobody seems to know anything in these types of cases, and that the portions of the report available so far appears to be no different, it will be interesting if anyone is ever prosecuted criminally if the bill were to pass.

Is There a "Tax Cheat" Demographic?

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A recent study by the National Taxpayer Advocate Service (TAS) might help you figure out your chances of getting audited.  Or at least it could help you decide if you’re a high audit risk or low audit risk.  The new TAS report attempts to define the “tax cheat” demographic.

The highest concentration of “tax cheats” (and, therefore, the highest concentration of IRS auditors) are found in the Los Angeles, San Francisco, Atlanta, Houston, and Washington D.C.  metropolitan areas.  And there are some communities in California that seem to be especially attractive to the IRS, namely, Beverly Hills and Newport Beach.

TAS also confirmed what we have known for a long time: self-employed taxpayers are more likely to be targeted in a tax audit than wage earners.  There are even certain industries that tend to be audited more, like construction and real estate rental.

Finally, according to the TAS report, tax cheats tend to congregate in groups.  Apparently they are a social animal.  A tax cheat is often a member of one or more of the following groups:

  • civic leagues
  • fraternal societies & clubs
  • trade associations
  • labor unions

I guess if you are a self-employed Shriner with rental properties in Newport Beach, you’re pretty much screwed.

IRS Getting Geekier

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As if the IRS weren’t geeky enough already, according to a US News Money story, they are really stepping up their game with regard to tracking taxpayers’ digital activities.  I sometimes lovingly refer to IRS employees as bean counters, and I similarly use the term geek here with all due respect.

The IRS has new advanced digital tracking technology similar to “cookies,” — but more powerful than cookies because the IRS also has access to social security numbers and other confidential information unavailable to the private sector.  It isn’t clear exactly how the IRS will use this new technology, but it appears they will have access to pretty much anything you do online whether it be posting on Facebook, making a purchase with your credit card, or anything in between.

Understandably so, the IRS isn’t rolling out this technology with much fanfare or noise.  The less the public knows about what triggers an IRS audit or what information is used to identify suspicious activity, the better, as far as the IRS is concerned.  But industry experts and scholars are very concerned about what all this could mean for individual privacy rights.  One thing that is clear is the IRS can’t continue to operate under procedures and safeguards that were designed when everything, including tax returns, was recorded on paper.

So, exactly how much can the IRS find out about you?  The answer to this question is quickly approaching “everything” if at one time it was somewhere in cyberspace.

And finally, some interesting geeky statistics:

  • An entire year of tax returns occupies 15 terabytes (only 1.5% of total IRS storage)
  • Total IRS storage is 1.2 petabytes (one quadrillion bits of information)
  • IRS has expanded its data capacity  by 1,000 percent in the past six years