Lots of Whistles Being Blown in Wake of Birkenfeld Payout

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IRS paid fat stacks to Bradley Birkenfeld for blowing the whistle on UBS. Image courtesy of checkngold.com.

As predicted, the recent $104 million IRS whistleblower payout awarded to Bradley Birkenfeld has resulted in an uptick in new whistleblower claims.  So say the tax attorneys who handle these sorts of cases.

And why would you need an attorney to help you “blow the whistle”?  That’s a very good question.  Often times the whistleblower is not 100% fault free himself, as was the case for Mr. Birkenfeld, who spent time in prison for his misdeeds before the IRS made him rich.  Also there’s the fact that the IRS has a reputation for not making good on its promises of remuneration, or taking an inordinate amount of time to do so.  A whistleblower attorney can help cut through red tape almost as effectively as a tax relief attorney can help you resolve tax debt.  The IRS is trying to change its image, however, and the Birkenfeld case has been a public relations “grand slam.”

Apparently these new whistleblower inquiries are not garbage either.  According to one lawyer, people are coming forward with some high-quality information.

IRS Whistleblower Form 3949-A: Reporting Tax Fraud and Filing a Complaint to the IRS

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Maybe it’s because of the recent unprecedented IRS whistleblower payout, but people seem to be eager to turn others in for tax law violations these days.  Nevermind their own tax problems.  Of course most of the inquiries I see come from the estranged spouse or the “friend” seeking revenge.

The best way to report IRS problems involving fraud and other tax law violations is by completing and filing IRS Whistleblower Form 3949-A.  But according to TIGTA, Form 3949-A is too complicated for most taxpayers to be able to complete thoroughly and accurately.  And many are also using the form for something other than its intended purpose.

TIGTA studied a sampling of 530 whistleblower forms 3949-A and identified some serious problems:

  • 27 percent could not be processed because they didn’t provide sufficient details (not surprising since the form asks for things like the social security number and birth date of the person you are reporting)
  • 21 percent were incorrectly used to report identity theft (some IRS service centers were actually instructing taxpayers to use this form for ID theft when, in fact, they should be filing Form14039, the ID Theft Affidavit)
  • Forms that reported “other issues” not covered by F3949-A were often shredded by IRS personnel instead of being forwarded to the appropriate IRS function

 

Can We Trust the IRS with Guns?

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"desk pop" from the movie The Other Guys

TIGTA recently audited and reported on the firearm policies of the Criminal Investigation (CI) division of the IRS and found them to be somewhat lacking.  Usually I like to focus on tax relief, but this has got to be the strangest TIGTA report I have ever seen.  I couldn’t pass it up.

CI special agents are a unique breed, to say the least.  They are like the offspring of two completely opposite carreers: one’s tools are a pocket protector and calculator, and the other’s are a bullet proof vest and concealed handgun.  These are probably guys who really wanted to be FBI or CIA but ended up at the IRS instead.  And, let’s face it, a tax attorney probably sees as much action as they do.  They aren’t chasing down drug dealers; they are apprehending people who cheated on their taxes or who are running from a massive tax debt.  They definitely aren’t firing their weapons on a regular basis, so it’s no huge surprise to me that the firearm policies are subpar.

Their firearms qualification passage rate is pretty high; that’s not the problem.  TIGTA’s report has more to do with CI putting in place consistent policies and consequences.  The scenario that really stood out to me was what to do when a CI special agent accidentally discharges his firearm!  The report states that this is not a common occurence, but according to the report, there are more accidental discharges than intentional discharges!

During fiscal years 2009-2011, there were a total of 19 reported discharge incidents in all of CI; 8 intentional and 11 accidental.  Is is just me or does this report make CI agents look like a bunch of clowns?

Right to Representation Threatened by IRS Carelessness

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Didn’t I just write about taxpayer rights?  Didn’t I say something about how the IRS is not interested in protecting taxpayer rights?  The Treasury Inspector General for Tax Administration (TIGTA) released a report today that exposes IRS’ disgregard for taxpayers’ right to representation.  I usually like being right, but not when it’s something like this that threatens access to tax relief.

There are procedures in place that are supposed to ensure that the tax attorney, or other representative, is kept in the loop with regard to certain key actions.  For example, an IRS Revenue Officer is not supposed to contact the taxpayer directly when there is a Power of Attorney on file, and a Revenue Officer is supposed to send copies of correspondence to the authorized representative.  However, the procedures are not being followed by some revenue officers and the procedures are not being enforced by some key management personnel.

I realize this is not a direct denial of the right to representation, but any action (or inaction) that would weaken the benefits associated with this right is troubling and should be viewed as a significant threat.  TIGTA’s report mentions that nobody complained about the infringements on their right to representation in any of the sample cases in it’s study, and I find this equally troubling.

Corporations on FTB's Top 500

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In a couple weeks the Franchise Tax Board (FTB) will be submitting its “Top 500” list to state licensing agencies, including the DMV.  The FTB Top 500, if you recall, is a list of California taxpayers with the most serious state tax debts.  If you make the list then you could lose your drivers license, occupational license, professional license.  You may also be precluded from entering into contracts with the state.

The Top 500 now lists applicable licensing agencies, license statuses (i.e., active, canceled, disbarred) and license numbers.  A good chunk of these delinquencies are for corporate taxes, and the corporate income tax chart lists officers by name.

The list is meant to increase voluntary compliance in hopes of closing California’s $10 billion tax gap.  This may be an effective deterrent for individuals concerned with their image and their integrity, but how effective is the public shaming of a defunct corporation?  I suspect that many of the corporate tax debts are associated with corporations that are no longer operating, and who knows how much the FTB will be able to collect on a bunch of closed corporations.

IRS is Soft on Federal Agencies

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Private businesses that do not file and/or pay their employment taxes are subject to a variety of enforcement actions:

  • assessment of penalties and interest
  • filing of a federal tax lien
  • final notice of intent to levy
  • assessment of a Trust Fund Recovery Penalty (TFRP)
  • seizure of property

But what happens when a federal agency owes taxes?  According to the Treasury Inspector General for Tax Administration (TIGTA), not enough.  Back in 2007 TIGTA made some recommendations that might improve oversight of these special tax accounts and improve compliance.  TIGTA basically recommended that the IRS figure out why this is happening and how to make it stop.

It’s 5 years later and the IRS still does not have an adequate process for resolving aged federal agency tax cases.  As of December 31, 2011 there were 70 federal agencies with delinquent tax accounts totalling $14 million in unpaid taxes.  What’s worse is that 34 of these accounts were placed in Currently Not Collectible status because they could not pay.  But the IRS has been known to actually shut down private businesses that demonstrate an inability to pay employment taxes.  TIGTA admits to this double standard in its latest audit report.

Know Your Taxpayer Rights

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Taxpayer rights are listed in Publication 1 as follows:

  1. Privacy and Confidentiality
  2. Professional and Courteous Service
  3. Representation
  4. Payment of Only the Correct Amount of Tax
  5. Help with Unresolved Tax Problems
  6. Appeals and Judicial Review
  7. Relief from Certain Penalties and Interest

There are actually 8 taxpayer rights, but the first one is a complete farce.  The first is entitled “Protection of Your Rights” in Pub 1, and it is described as follows:

IRS employees will explain and protect your rights as a taxpayer throughout your contact with us.

If that were really true then you would not need right #3 — you would never need a tax attorney — because the IRS would have your back every step of the way.  You wouldn’t need right #5 because there would be no unresolved tax problems.  And you wouldn’t need rights #6 or #7 because the IRS would always get it right the first time.

The truth is the IRS’ top priority is to collect 100% of the tax due, not protect your rights.   And they will make this abundantly clear throughout your contact with them.  That’s why the most important right is to have professional representation — just as tax relief is not automatic, your taxpayer rights are not self-enforcing.

Interesting IRS Stats

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image via grabstats.com

Let’s look back on some of the statistics compiled by the IRS for Fiscal Year 2011 and try to determine what will be reported for FY 2012.  Will we see any new tax relief trends?  My source is the Statistics of Income tax stats found in the “IRS Data Book.”

  • Number of new deliquent tax accounts in FY 2011: 8,011,000 (17,000 more than 2010)
  • Number of untimely filed returns by end of FY 2011: 3,862,000 (162,000 more than 2010)
  • Number of Offers in Compromise filed: 59,000 (2,000 more than 2010)
  • Number of Offers in Compromise accepted: 20,000 (6,000 more than 2010)
  • Number of Federal Tax Liens filed: 1,042,230 (54,146 less than 2010)
  • Number of levy notices served on 3rd parties: 3,748,884 (142,066 more than 2010)
  • Number of seizures: 776 (171 more than 2010)

The only stat that appears to be on a downward trend is the filing of Federal Tax Liens.  This is good news for taxpayers.  For several years now advocacy groups have been questioning the efficacy of tax liens as a collections tool; maybe the IRS is finally listening.

More and more taxpayers continue to file and pay late, and incur tax debt.  And the IRS tries to keep pace by increasing active collection activities.

What about the Offer in Compromise acceptance rate?  You see a lot of percentages thrown around by tax attorneys and tax resolution firms.  But according to IRS’ figures, they accepted 25% in 2010 and 34% in 2011.  This is probably the most encouraging data of all. Let’s hope this trend continues and the IRS accepts event more offers in compromise when the statistics are available for FY 2012.

Do I Need an EIN?

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Most people, including some IRS personnel, call it an EIN number.  But the “N” in the acronym stands for “Number,” so it should be referred to simply as an “EIN,” unless you mean to say “Employer Identification Number Number,” which is just silly.

The EIN is a federal tax identification number used by the IRS to identify most businesses.  An EIN number is generally tied to a social security number so that if a tax debt is incurred, the IRS can track down a “responsible party” for payment.  If your business is not considered a separate entity for tax purposes and you will only be required to file an individual 1040 tax return, such as in the case of a sole proprietorship, you do not need an EIN.  However, if any of the following factors apply to you, then an EIN is needed:

  • You have employees
  • Your business is a partnership or corporation
  • You are required to file employment tax returns
  • You are required to file excise tax returns
  • You are required to file alcohol, tobacco and firearms returns
  • You withhold taxes on income, other than wages, paid to a non-resident alien
  • You have a Keogh plan
  • You are involved with any type of organization listed here

You do not need a tax attorney to help you apply for an EIN — it is easy and free.  The best way to obtain an EIN is to apply online.  But you may also apply by fax, phone, or mail if you insist on doing it the hard way.

Postal Workers Assisted in Tax Refund Fraud Scheme

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image via imageshack.us

A multimillion dollar tax refund fraud scheme was dismantled by authorities recently, but not after the IRS paid out over $5 million in refunds based on claims made using stolen identities from citizens of Puerto Rico.  “Operation Mass Mail” finally resulted in a Complaint naming five defendants which was unsealed earlier this week.  IRS Criminal Investigation (IRS-CI) is normally assisted by other federal agencies in tax fraud investigations; this time the US Attorney and the US Postal Inspection Service.

The scheme operated more or less in this manner (allegedly):

  1. Jose Angel Quilestorres got things started from his apartment in the Bronx, filing false returns using stolen taxpayer information
  2. Refunds were received at multiple locations; some were intercepted by US Postal Service workers who accepted bribes to assist in the fraud
  3. The refund checks then changed hands again and were cashed by the other four defendants named in the Complaint

The leader of this operation, Quilestorres, faces a maximum of 32 years behind bars.

The tax problems of the Average Joe pale in comparison.  How can the IRS find time to pursue criminal charges against people who simply fail to file tax returns (even if they pile up a big tax debt) when things like this are going on around us?  Sure, they do find time on occasion, but they have bigger fish to fry.