Bartering: IRS Gets Theirs Even When Cash is not Involved

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Today the IRS reminds us that the value of goods or services received through bartering is taxable (IRS Tax Tip 2013-29).

Bartering is simply trading one product or service for another product or service without an exchange of currency.  I was introduced to bartering in about 3rd grade where the hottest products being traded were Garbage Pail Kids cards and (this is going to make me seem really old) . . . marbles.  You know, little colorful glass spheres that you shoot with your thumb.  Ok, nevermind.  The point is, most people move on from bartering when they grow up and get a job that pays in currency for the work they perform.  But not everyone.

Some people barter informally with people they know, such as the plumber who fixes a leaky pipe for his dentist friend in exchange for dental work (this is the IRS Tax Tip example).  Others barter through organized “exchanges” like the one I found on the internet with a highly redundant name: “Barter Trade Exchange.”  Their home page explains how it works:

In times past people traded live stock, vegetables, grain etc. for  things they needed. It worked fine if you located who needed what you had and had what you needed. It was hard to find them, that’s why money was invented; Stones, Beads, Shells, Pearls, Coins, Silver, Gold and finally paper money.

In an Exchange, you deal with fellow members buying/selling goods and services using trade dollars, not cash. Offer what you have to earn trade dollars to spend. It is an easier way (not free) to acquire what you need without money.

I’m not sure how common bartering is; it is definitely not on my short list of typical tax problems.  And I’m not sure the IRS knows either because my hunch is it doesn’t get reported like it should.  That’s why the IRS came out today (a few weeks before the filing deadline) with a few important points they would like taxpayers to know about bartering.  Here they are:

  1. Barter exchanges must issue form 1099-B to their members
  2. Trade dollars (and the value of goods/services) received in barter must be reported as income
  3. Besides income taxes, there may also be self-employment, employment, or excise tax implications for those who barter
  4. Be sure you understand the specific reporting requirements that apply (for additional information, see the IRS’ Bartering Tax Center)

 

Automated OIC Appeal Review

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Did you know that if your Offer in Compromise (OIC) is rejected, there is a “self-help tool” on the IRS website that will walk you through a series of steps to help you determine if you should appeal it or not?

This is yet another example of the IRS’ attempt to automate everything they do.  I guess it does make sense to explore all available options for replacing the best and brightest who will be leaving the IRS when they retire.  And I guess it makes sense to try to find cheaper alternatives, given that the IRS is not going to get the kind of funding they need to hire live bodies.  This just seems to cross the line.

I know how complicated and frustrating the OIC process can be.  When an OIC has been rejected, what the appellant really needs is to speak with a good tax attorney.  Or, at a minimum, he needs to be able to talk with a live body at the IRS who will explain the IRS’ determination and who will really consider a taxpayer’s individual circumstances.

It does have some value, don’t get me wrong.  I have spent a little time with this tool and, from what I can tell, it is perfect for identifying errors and oversights made by offer examiners.

IRS Nails "Non-filers" Too

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Some of our tax relief clients are concerned about the criminal implications of their case.  They want to know how we plan on helping them dig their way out of their tax debt, but they also want to know if they are going to be able to avoid a criminal investigation or conviction.  Some people (for various reasons) have multiple years of unfiled tax returns, and these are the clients who typically worry the most.  The IRS calls these people “non-filers.”

Do non-filers have to be concerned about being prosecuted for tax crimes?  Yes, they do.

Most people think of tax crimes as falling into one of the following categories:

  • abusive tax schemes
  • identity theft
  • money laundering
  • tax refund fraud

These are the types of tax crimes that get the most publicity.  However, it is important to know that non-filers can go to prison too.  The threshhold for “tax evasion” is lower than you might think.  Of course the IRS does not have the resources nor the desire to prosecute every taxpayer who fails to file.  In fact, most of the time, the IRS simply resorts to the Substitute for Return program rather than involving Criminal Investigation.  But you can’t rule it out!  The rule of thumb is to file your return every year, even if you know you aren’t going to be able to pay.

It's always "hurry up and wait" with the IRS

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It’s always “hurry up and wait” with the IRS.

The Offer in Compromise (OIC) process is a perfect illustration of this point. If a taxpayer finds himself with a tax debt that he cannot pay, one of his options is to file an Offer in Compromise by which he offers to settle with the IRS for less than what he owes. But the IRS will require that the OIC be filed as soon as possible; in fact, the IRS collections department will be poised to levy income sources if the offer is not filed (or some other resolution entered into). It is important to inform Collections of your intention to file an OIC, but they will most likely give you a short due date by which to submit the paperwork.

Once the OIC has been filed, then the waiting begins. It commonly takes several months just for the IRS to assign an offer to be reviewed. Offer examiners have to keep an eye on their caseloads because once a case enters their inventory, they are required to move it along promptly.

When an offer examiner or offer specialist has finished reviewing the offer, things pick back up and the taxpayer has to stay on his toes. Once again, deadlines are given that, if missed, could mean the end of the road. During this period of review the deadlines are typically attached to the submission documents that are required to substantiate details in the personal financial statement.

Once all the information is in and a determination has been made, there is usually additional waiting. The case normally must be submitted to a manager for further review, and that can take some time.

With the coming sequestration and IRS staff furloughs on the horizon, it is likely that the contrast between the hurrying and the waiting will be more pronounced. The IRS has said that furloughs will not begin until after tax season — that’s when we can expect longer-than-normal waiting periods at all levels of the IRS as there will be fewer IRS employees on duty to help.

IRS Tax Cheat Poll

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A recent IRS poll shows that 87% of American taxpayers believe it is NEVER ok to cheat on their income taxes.

In my experience as a tax attorney, I can’t help but think this little statistic is overly-optimistic.  It is obvious that the IRS is trying to spread optimism about the integrity of the tax system at a time when many Americans are making decisions about what (and what not) to report.  I just don’t think this statistic paints an accurate picture.  Here’s why:

  • The poll consisted of 1,500 randomly chosen adults; that’s a pretty small sample size.
  • The participants were questioned over the phone.  I’m gonna go out on a limb and say that tax cheats are more the type to screen their calls and not participate in polls.
  • There appear to have been some follow-up questions such as “What is your reason for honest and accurate reporting?” (to which 95 percent cited “personal integrity”), but what about asking “Do you (or have you) cheated on your taxes?”  I think this is an important question because, while many people believe it is wrong to fudge numbers, I think fewer people tend to strictly follow their own advice/beliefs.
  • It is unclear to me whether or not the IRS actually defined “cheating.”  For example, if the IRS had included in its definition of cheating “providing an estimate when an exact amount is readily available,” then I think we would be looking at something less than 87 percent.  Just keeping it real.

I would be interested in seeing more details about this poll.  If anybody finds anything, let me know!

It’s Who You Know

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Federal tax refund fraud is a growing problem that has the IRS on its toes.  Over the past few years the IRS has intensifyied its efforts to combat refund fraud, but it has been a challenge for the IRS to keep pace.

Some tax criminals are unsophisticated, inexperienced solo operations that are just not very good at what they do.  These are the people we end up reading about in the news after IRS Criminal Investigation nails them.  The more successful tax fraud schemes involve multiple moving parts, or so they think.  For example, when the unsophisticated, inexperienced individual fraudster is well-connected — if he has the right kind of friends — he believes that his potential for swindling the government will increase exponentially.

And if one of his connections happens to be a banker, then he thinks he’s golden.  Hilda Josephine Hernandez-McMullen, a former employee of Wells Fargo Bank, pleaded guilty to seven felony counts of bank fraud.  She admitted to assisting members of an identity theft and tax fraud ring that had sought $25 million in false refunds.  She opened bank accounts for people knowing the information provided to her was inaccurate and she cashed fraudulent checks totalling about $38,000.

Ten members of the fraud ring were charged, and Hernandez-McMullen herself is looking at 30 years in prison for each count of bank fraud if she receives the maximum sentence.  Not so golden afterall…

Wal-Mart and the EITC

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The Earned Income Tax Credit (EITC) is a refundable federal income tax credit that was first offered to taxpayers back in 1975 to help prevent low income families from slipping into poverty.  EITC can mean tax relief (lower taxes) for some and a tax refund (cash in pocket) for others.  When EITC exceeds the amount of tax owed, it results in a tax refund for those who qualify.  As you can imagine, the EITC is one of the tax provisions that is most susceptible to fraud.

Most people who file early expect a tax refund, often due to EITC claims.  Apparently Wal-Mart stores possess a key indicator of how many EITC claims are being made each tax season.  So far this year Walmart’s numbers are low.  Wal-Mart stores have cashed a mere $1.7 billion in refund checks so far this year compared to $3 billion this time last year.

The reason why Wal-Mart’s numbers are off is actually two-fold.  First, the start of tax season was delayed this year, and a whole week’s worth of tax refund checks could add up to at least another $1 billion or so.  Second, and more importantly, the IRS is reviewing as many EITC claims as possible this year to try to identify fraudulent claims.  However, according to the IRS no more than 5 percent of EITC claims are being delayed.

Help the IRS Reduce America's Tax Burden

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You’ve probably never heard of the Taxpayer Burden Reduction (TBR) division of the IRS; few people have. TBR is led by senior advisor, Laurie Tuzynski, who recently explained her role in an official IRS video. Taxpayer Burden is defined as the time and money taxpayers spend to comply with their federal tax obligations. Here’s a perfect example: the Treasury Inspector General for Tax Administration (TIGTA) recently stated that individuals and businesses spend an estimated 6.1 billion hours per year complying with tax filing requirements.

And that’s just prepping and filing taxes!  What about the time spent by taxpayers, tax attorneys, and other practitioners in resolving tax problems?

You can help TBR identify forms, procedures, and rules that are wasteful and overly-burdensome so they can go to work trying to simplify. And the procedure for doing so is fairly simple: you just need to fill out a Form 13285-A “Reducing Tax Burden on America’s Taxpayers.” This form asks you to explain the problem, identify the stakeholders (who it is that the problem affects), and propose your solution. However, if you feel that the “Reducing Tax Burden” form itself is overly-burdensome, there is a procedure for that too! And I quote:

If you have suggestions for making this form simpler, we would be happy to hear from you. You can e-mail us at *taxforms@irs.gov.  Please put “Forms Comment” on the subject line.  Or you can write to [Tax Products Coordinating Committee].

 

The Neglected Government-Issued BlackBerry

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Most people wouldn’t pay for internet service if they didn’t have a computer.  And most people wouldn’t keep the car insurance current on a rusted bucket of bolts that isn’t being driven.  But the IRS isn’t “most people.”  The latest report from the Treasury Inspector General for Tax Administration (TIGTA) reveals waste within the IRS that rivals situations like these.

According to TIGTA, the IRS has been wasting millions of dollars on BlackBerrys and aircards (which supply mobile internet access).  In 2011 the IRS spent about $8.5 million on 35,000 aircards and $2.9 million on 4,400 BlackBerrys.

The audit found that some of these devices were left completely unused for months.  It’s kind of inconvenient to have to carry around two phones all the time; I get that.  I imagine IRS employees discarding their BlackBerrys for their own phones (probably much cooler iPhones) because they are not allowed to use their government issue phone for anything other than business purposes.

The audit also revealed that some smart phones and aircards were given without obtaining proper permission/approval.  Besides managers and field officers, I just don’t see that there are too many IRS employees who would need these devices.  I can understand why a revenue officer may need mobile internet access and a smart phone.  For example, they do need to see when they’re getting a call about a wage garnishment, even if they’re on the road (and even if they’re not going to actually answer).  But most IRS employees are bean counters and the job of a bean counter is fairly sedentary.

Facebook’s Tax Refund

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News that Facebook would be receiving a $429 million tax refund was of course misinterpreted by the general public.  The consensus among those who just don’t understand the complete story is that a company as profitable as Facebook should never be able to get out of paying taxes — not with so many ordinary folks who are up to their necks in tax debt, and not in this economic climate.

But Facebook did pay taxes.  According to its 2012 annual earnings report, Facebook says it paid some $2.86 billion in taxes.  So let’s get our facts straight before we go around defriending anyone.  See full story here.