The Taxpayer Advocate Has Spoken – Is Anybody Listening?

Today the Taxpayer Advocate Service (TAS) released its annual report to Congress and, once again, the tone of the report is one of alarm.

Nina Olson, head of TAS, is particularly concerned about the lack of funding at the IRS. Fewer employees are being asked to do more and more work, and services that should be handled by live bodies are often done by IRS automated systems. The result is that individuals can’t get their tax problems resolved. It’s a tax administration that may be on the brink of failure.

“We’ve had a number of years where the trending of taxpayer service funding has gone down and down in contrast to the increase of enforcement funding.  And then when you layer on the budget constraints, what you see is that taxpayer service is going to decline even more . . . I’m trying to give a warning to everybody, if we continue down this road, bad things are going to happen to taxpayers and it will be very difficult to reverse.

~ Nina Olson, National Taxpayer Advocate

The relationship between the TAS and the IRS is a strange one. The IRS posts the annual report on its website consistently every year and notifies interested parties by way of the IRS Newswire. But it seems obvious from the official IRS statements that the IRS is not happy with the strong comments from the TAS.

“While today’s report includes a number of helpful suggestions, the link described in the report between a challenging budget environment and alleged erosions in taxpayer rights is inaccurate and without basis in fact.

~ Michelle Eldridge, IRS spokesperson

The adversarial/independent nature of the IRS and the TAS perhaps should not be questioned these days. These certainly do not sound like unified voices.

IRS Offers Advice on Interacting with Tax Preparers

You can often avoid tax problems early on if you select a competent tax preparer. This post is based on “IRS Tax Tip 2012-06″ published by the IRS earlier today.

The title given by the IRS was “Ten Tips to Help You Choose a Tax Preparer,” but I think you will agree that this is not an accurate title. I think the author started off listing tax preparer selection tips, then ran out of suggestions by #8 or so, but really wanted to have a nice round 10 items on the list. Not that numbers 8-10 are bad suggestions, they just don’t exactly qualify as things you can do to help you choose a tax preparer. Numbers 8 and 9 will probably come into play only after a bad tax preparer has been hired. And number 10 has nothing to do with selecting a tax preparer other than the fact that you most likely would not select an abusive tax preparer two years in a row.

Here’s the list in abbreviated form:

  1. Check the tax preparer’s qualifications: PTIN, certifications, professional organizations, etc.
  2. Check the tax preparer’s history: get on the internet and poke around a little
  3. Find out as much information as you can about their fees
  4. Make sure they will file electronically
  5. Make sure the tax preparer is accessible
  6. Make sure the tax preparer asks you enough questions and asks for enough information/documentation to be able to legitimately prepare your return
  7. Never sign a blank return
  8. Review the return before you sign it (you are ultimately responsible for what is on the return, even if you get a professional to prepare it)
  9. Make sure the tax preparer signs the return and includes his/her PTIN
  10. Report abusive tax preparers to the IRS

The IRS Counts to Three: Opens up Another OVDI

If you have kids, do you count to three when you want to get a certain behavior out of them?  You know what I’m talking about: “Mikey, take your sister’s phone out of your mouth right now!  Don’t make me come over there!  One . . . Two . . .”  I’m not a big fan of counting to three.  The problem is I don’t know what happens after “three.”  And what if you don’t get the desired conduct?  Do you keep counting?  How high do you count before you dole out the consequence?

Today the IRS announced that it will be offering another Offshore Voluntary Disclosure Initiative (OVDI), this just months after we thought it was over for good.

“It’s unlikely the IRS will offer another program because that would undermine the agency’s credibility. When they say, ‘Now we really mean it,’ it’ll be like the boy who cried ‘wolf.’

~ Scott Michel, Caplin & Drysdale

The first OVDI was back in 2009, then the IRS reopened the program (with slight modifications) in 2011, giving a deadline of September 9th.  This time around there is no filing deadline, at least not one that we’re aware of yet.  The IRS says this time they reserve the right to change the terms at any time, such as when the program ends and what kinds of penalties apply.

I guess the IRS is trying to show it’s still in charge.

Newest Tax Gap Figures are Astounding

On Friday the IRS released its “tax gap” figures for tax year 2006. The previous measurement was five years earlier in 2001.

The tax gap is the difference between what taxpayers should be paying and what is actually paid.  And while the newest figures may make you choke, they are not too much worse than 2001.

The gross tax gap in 2006: $450 billion.

The gross tax gap in 2001: $345 billion.

What contributes to the tax gap is failing to file, failing to report all income, and simply failing to pay. The biggest contributing factor is the underreporting of income.

A comprehensive explanation of the 2006 tax gap can be found on the IRS website.

Ai Weiwei’s Tax Case up for Reconsideration

Our political activist / artist friend, Ai Weiwei, is in the news again today fighting for his own personal tax relief and the broader agenda of pursuing justice for his fellow countrymen.

The Beijing Local Taxation Bureau has agreed to hear his appeal of a $2.4 million tax bill and fine for alleged tax evasion. They informed him the process would take no more than two months.

The IRS should take note of this.  Chinese tax authorities gave themselves a deadline, a very reasonable deadline!  Ok, but let’s not get overly excited about this.  Will they follow through on this self-imposed deadline?  And even if they do act quickly, is a speedy & oppressive ruling any better than the slow churning of the IRS?  In other words, is this case being reviewed just to appease Ai and other government opposition?

Everyone will be watching closely for any missteps in the process.  Ai for himself definitely sees his appeal as something grand and symbolic:

How they handle this relates to issues of China’s rule of law and the safety of its people. It has very broad implications. If they can’t resolve this issue very fairly and carefully, it will bring harm to this society’s justice system.

IRS Procedure Gives Consideration to Spousal Abuse

The IRS released a proposed revenue procedure (Notice 2012-8) that would loosen up some of the rules related to Innocent Spouse relief under Revenue Code section 6015(f).

Normally if a married couple files a return jointly then they are both equally liable (jointly and severally) for any outstanding balance on that tax year. However, if one spouse can show that he/she had no knowledge and had no reason to know that the other spouse was underreporting income or that the funds intended for payment of the tax were taken by the other spouse, then the IRS may impart tax relief to the innocent spouse.

One of the most significant changes has to do with the criteria that the IRS considers when reviewing an Innocent Spouse case. The IRS will now take into consideration all the facts and circumstances in Innocent Spouse cases, with no one factor or majority of factors necessarily controlling their determination. Also, some factors may weigh against the requesting spouse and some factors may weigh in his/her favor. But if the requesting spouse can prove marital abuse or lack of financial control, then it may, under the proposed procedures, mitigate those otherwise negative factors.

In layman’s terms:

Somebody in an abusive relationship does not need tax problems heaped on top of everything else going on in their life. If the requesting spouse was abused or prevented from participating in family finances, then Innocent Spouse relief may still be granted even if the requesting spouse had actual knowledge that there were problems with the tax return or that the taxes were going to go unpaid.

Interestingly, because the new revenue procedure expands equitable relief available to innocent spouses, it will be applied by the IRS immediately even before it is finalized.

California Tax News

Today the California Franchise Tax Board (FTB) announced that it is now accepting 2011 state tax returns.

California is falling in line with the federal government as far as the 2012 filing deadline. You must have your tax return postmarked no later than Tuesday, April 17th for it to be considered timely.  The standard filing deadline is April 15th, but that falls on a Sunday this year. And Monday, April 16th is Emancipation Day, A District of Columbia holiday, which has the same effect as a national holiday when it comes to tax deadlines.  But even though the April filing deadline is the 17th, the extension deadline will still be October 15th for federal tax returns.

  • The top individual tax rate in California decreased from 9.55 percent to 9.3 percent.
  • The standard deduction increased from $3,670 to 3,769 (increase from $7,340 to $7,538 for joint filers)
  • The dependent exemption credit increased from $99 to $315 per dependent (personal exemption increased from $99 to $102 and from $198 to $204 for joint or surviving spouses)
  • Child and dependent care expense credit is worth up to $1,125 for those who qualify

TIGTA – Office of Investigations

If you are familiar with this blog then you know that one of the roles of the Treasury Inspector General for Tax Administration (TIGTA) is to audit IRS programs and operations to ensure they are functioning properly.  And while it is certainly not their objective to extend tax relief to the masses, they must administer taxes fairly and competently.

Most of my TIGTA blog posts have to do with the TIGTA Office of Audit and their dreadfully boring reports.  But did you know that there is a separate Office within TIGTA — the Office of Investigations — that investigates and reports on much juicier topics?

According to the Office of Investigations (OI), their role is to address “threats arising from (1) lapses in IRS employee integrity, (2) violence directed against the IRS, and (3) external attempts to corruptly interfere with federal tax administration.”  In other words, the OI is responsible for nailing obstinate or potentially dangerous taxpayers and corrupt IRS employees.

Every week the OI highlights a couple new investigations complete with names, dates, dollar amounts, and all the gory details.  They keep an archive of investigation highlights going back to 2004, and updates are available by email so you can be the first to know.

Your Tax Preparer Might be an Inmate

It’s 10:00pm; do you know where your children are right now?  What about your tax preparer?

According to a recent TIGTA audit, the IRS approved 331 tax preparer identification numbers to individuals serving prison terms.

  • How did they do it?  In most cases the prisoners lied on their applications by not disclosing their convictions.
  • Why do they do it?  To try to defraud the IRS.  They use false or fraudulent tax returns in hopes of obtaining refunds.  Prisoners have a history of trying to defraud the government, particularly the IRS.  They have enough time on their hands and not much to lose if their scheme is unproductive.
  • What is the IRS doing about it?  The IRS has vowed to suspend tax preparer identification numbers already issued to prisoners and deny any future applications from inmates.

Chances are that these inmate preparers are not actually preparing returns for the average American consumer.  Maybe they’re doing returns for their fellow inmates.  Maybe their laying the groundwork for after their prison terms are over.  Or, even more likely, they are just seeing where this new credential will take them.  Whatever the case may be, it is usually a good idea to actually meet your tax preparer in a face-to-face meeting . . . even if just to confirm they’re working out of an office and not a prison cell.