MW Attorneys brings taxpayers the latest and most important tax news coming from the IRS. Stay up to date with all our IRS related posts.

Ivy League Audits

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image via educarelab.com

In this down economy the IRS is doing all it can to improve collection results, which is why it is targeting wealthy individuals, banks, corporations, . . . even universities.

Top Ivy League colleges are in the IRS crosshairs because they raise a lot of money, and not just in tuition & donations.  If you attend Harvard or if you dine there as a visitor, you probably expect more than tacos and fries, and brain food is expensive.  Harvard University Dining Services consists of 13 undergrad dining halls, a kosher kitchen, and 14 retail locations which offer an “unparalleled dining experience.”  And Harvard sports are very popular.  Wealthy Harvard alumni are often happy to pay for season tickets, whatever the price.

Even though nonprofit universities are tax-exempt, they must still pay taxes on any collateral income that is generated — any income that is unrelated to their academic objectives.  According to a recent Bloomberg article, both Cornell and Harvard Universities have been audited by the IRS to make sure they are paying taxes on revenue generated by university bookstores, restaurants, and sports arenas.  Cornell has “passed” its audit, but for Harvard, the jury is still out.

 

 

FATCA Marching on Despite Opposition

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The Foreign Account Tax Compliance Act (FATCA) is one of the ways the US plans on ramping up collection of taxes so everyone pays his/her fair share.  The IRS sees it as an important tool in combating tax evasion, but many financial firms and individuals see it as little more than a gateway to further tax problemsand complications.

Under the proposed rules, there are requirements for individuals and requirements for foreign banks.  US taxpayers with more than $50,000 in a foreign bank would be required to report certain information on a form (Form 8938) that must be attached to the annual Form 1040.  Foreign banks would be required to, among other things, report certain information about account holders directly to the IRS.  See the IRS website for additional information.

Most of the requirements will not kick in until next year, but many businesses are expressing strong opposition to FATCA and the burdens it would create.  If they are not successful in repealing it or amending it to make it more lenient, then they at least hope for some kind of postponement to give financial institutions time to prepare.

Blowing the Whistle on the Whistleblower Office

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The IRS Whistleblower Office, as we know it, was set in motion by legislation written by Senator Chuck Grassley, R-Iowa back in 2006.  Slow motion that is.  And Chuck is not happy.

Senator Grassley recently penned a stern letter to the Commish and Treasury Secretary Tim Geithner asking them to kindly fix whatever is broken at Whistleblower headquarters.  It’s the same story: they are taking too long to process these cases, and whistleblowers are patient, but they begin to lose faith in the system as the months and years pass on their claims without compensation.   If they don’t straighten things out over there, the IRS is going to miss out on a big opportunity to collect the tax debt of some of the biggest tax cheats in the country.  Whistleblowers will just stop coming forward.

According to reports, Grassley’s letter may have been prompted by recent intel that the director of the whistleblower program had spent time as a panelist at the Offshore Alert Conference — an errand seemingly outside the scope of his duties.  He can’t be abandoning his post for gigs like this given the current backlog of cases!  Of course, it probably doesn’t help his case knowing that the conference was held at the Ritz Carlton in Miami Beach!

IRS Updates Standard Expense Amounts

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If you incur a tax debt and are unable to pay back what you owe in one lump sum, you may need to disclose your financial information to the IRS to prove how much you can afford to pay on a monthly basis.  The same thing applies to the Offer in Compromise program.  Under no circumstances will the IRS agree to a settlement of your tax debt without first reviewing your financials in detail.  If you hire a tax attorney, he/she will present your financials in a light most favorable to you, the taxpayer, and will argue the finer points to help you get the best result possible.

What sort of financial information does the IRS request?  In the most general sense, they want to know about your income, expenses, and assets.  However, the questions often depend on the individual circumstances of each case: the amount owed, the type of resolution sought, the closeness of the Collection Statute Expiration Date, etc.  Sometimes the questions can be quite invasive.  But for some expenses, the IRS allows a set amount without questioning the actual amount spent by the taxpayer.  These are referred to as the “National Standards.”

The National Standards include an allotment for each of the following expense categories:

  • Food
  • Housekeeping supplies
  • Apparel & services
  • Personal care products & services
  • Miscellaneous

The current National Standard amount for all 5 categories combined is $565 for a household of one.  For purposes of determining how much you can pay under an Offer in Compromise or an Installment Agreement, the IRS will allow this full amount, even if you spend far less in reality.  The IRS allows $1,029 for a household of 2; $1,227 for 3; $1,450 for 4, and another $281 for each additional person beyond 4.  These are the new amounts based on updates done April 27, 2012 and effective retroactively from April 2, 2012.

The previous National Standard amount for a household of 1 was $534.  The National Standard amounts are based on data from the Bureau of Labor Statistics and are typically updated no more than once a year.

IRS Blunders

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I knew it would be a mistake to call the IRS a couple of days before Tax Day, but I was already on the phone with the IRS and I really wanted to get some other things done.  One of my ancillary tasks that day was to request a 2011 tax return transcript for a client.  The first thing I noticed was the complete lack of urgency on the part of the IRS representative.  This is the busiest time of the year for the IRS, but I didn’t get a sense of that from this employee!  I spent nearly 30 minutes with this guy and all I wanted was a simple transcript.  I’ve had a bank levy released more quickly than that.

Eventually he informed me that the 2011 tax return had not been processed yet, so there was no transcript available for 2011 and he would be unable to process my request.  I thanked him for his help and ended the call.

Then, to my surprise, today I received the transcript in question via U.S. mail — it is a two-page letter.  The first page contains standard information about what a transcript is and is not.  The second page shows the taxpayer’s social security number as well as the tax form and tax period in question.   And where the details would normally go, there is the simple phrase: “No record of return filed.”

I didn’t ask for this.  We both agreed that the transcript was not available yet.  But somehow I received a completely unnecessary two-page letter.  That’s the IRS for you…

Some Refunds Delayed This Tax Season

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According to the latest TIGTA audit report, there were some serious delays with the issuing of refunds this tax season, but things have already improved.  TIGTA cites “programming problems” as the source of the delays.

Our report found that the IRS is catching and preventing more fraudulent refunds and screening more prisoner tax returns; however, programming problems associated with Modernized e-File delayed some refunds, which may have contributed to a doubling of visits to the  “Where’s My Refund” feature at IRS.gov over the previous year.

~ J. Russell George, Treasury Inspector General for Tax Administration

If you tried to use the tool early in the tax filing season, you may have suspected it was broken.  I used the “Where’s My Refund” tool and found that it worked just fine (both on the IRS website and using the mobile app IRS2Go) as long as you wait the requisite 72 hours after filing your return.  Of course this was after the kinks were worked out of  the refund process.  TIGTA says that the source of the delays was found and fixed by February 18th.  So I guess it paid to delay just a little this year…

Filing OIC? Take a Number.

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The IRS has done quite a bit to promote the Offer in Compromise program during the economic downturn of the last few years, and the message is coming across loud and clear.  That’s the good news.  The bad news is the IRS can’t seem to handle the onslaught of new offers.

The Offer in Compromise (OIC) is a program whereby the IRS accepts an amount that is less than the tax liability to forever settle what is owed.  The rationale behind the OIC program is this: if the taxpayer can prove that the amount offered is the absolute most he/she can pay and the IRS will most likely never be able to collect the full tax debt, it is better for the government to cut their losses and take it rather than expend any more resources trying to collect some unknown amount at some unknown time in the future.

According to a recent audit report by the Treasury Inspector General for Tax Administration (TIGTA), there are huge OIC backlogs at both the Memphis and the Brookhaven Offer Units, but Memphis is in worse shape than Brookhaven.  The IRS is in the process of transferring cases between sites to even things out, but precious time is lost in the transfer process, so who knows if that will truly reduce delays.

Offers with the following characteristics can expect the longest delays:

  • taxpayer is self-employed
  • taxpayer earns over $100,000 per year
  • taxpayer owes over $50,000 in back taxes
  • taxpayer lives in a state handled by the Memphis OIC Unit (AK, AL, AZ, CA, CO, HI, ID, KY, LA, MS, MT, NV, NM, OR, TN, TX, UT, WA, WI, WY)

IRS Uses 40-Year-Old Data Processing System

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The Commish recently addressed the National Press Club to discuss some of the IRS’ major deficiencies and how the agency is overcoming them by never being satisfied with the status quo:

[T]he germination of any idea…the cultivation of a concept…is only the beginning. Then, begins the real work of teasing it into life, and growing it. And that process never ends. It’s one of continuous improvement.

~IRS Commissioner, Douglas H. Shulman

The speech is long, and my attention span is not.  If you want to read the whole thing, here is the link.  But there was at least one interesting point that I want to share having to do with technology.  In my experience, small tax problems can become bigger when IRS technology is not up to par.  I have always said that the IRS has been behind the curve when it comes to technology.  Even the strides that have been made recently to appear tech savvy seem to have been more for show than anything.  I’m referring to changes that have been made to the IRS website and their entry into YouTube and social media.

Well, it turns out I’m even more correct than I thought.  Shulman says that the IRS uses the same basic data processing system that was used in the 1960s.  Here’s why (according to the Commish) the IRS has not made a comprehensive technology upgrade:

  • The IRS believes in the philosophy “if it ain’t broke, don’t fix it.”
  • The IRS relies on a complicated hodgepodge of new and old computer systems (so it’s not ALL old)
  • The IRS hasn’t been able to get the funding they need to make a comprehensive upgrade

So, which is it?  Is it because they don’t get enough funding, or is it because they are satisfied with the way the 40-year-old technology works?  I suppose it’s both.  The amount of funding is never quite enough to do any kind of comprehensive technological overhaul, and when they do get some money, they (quite correctly) spend it on whatever is broken regardless of how old or new it is.

The IRS Book of Numbers

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Nowhere else will you ever see as many “millions,” “billions,” and “trillions” than in the Annual IRS Data Book.  The 2011 IRS Data Book was released this week and, once again, it is teeming with large, almost incomprehensible numbers; just the kind of thing that makes a tax attorney smile.

The Data Book is the number one source for statistics related to return filing, refunds, revenue collected, enforcement, taxpayer assistance, IRS budget, and IRS workforce.  Here is a small sampling of some of the huge numbers reported in the 2011 Data Book:

  • IRS collected $2.4 trillion in 2011
  • IRS processed over 234 million tax returns
  • Taxpayers filed more than 133 million returns electronically (77% of all individual returns)
  • IRS paid almost $338 billion in refunds
  • IRS examined 1.1 percent of all individual income tax returns
  • IRS examined 1.5 percent of all corporate income tax returns
  • 319 million visits to irs.gov for taxpayer assistance
  • 83 million walk-ins and phone calls for taxpayer assistance

If you’ve never seen the annual data book, it may be worth your time to take a look.  It is interesting to see the progression of total revenue collected year-by-year beginning in 1960, or compare revenue collected by state or by type of tax.  Just don’t inadvertently hit your print button because everything about the publication is huge, including the page count — 74

IRS Audit Rates

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Tax relief for the wealthy does not have much popular support these days.  And apparently the IRS feels the same.  The IRS recently reported that audit rates for individual taxpayers earning over $10 million has nearly tripled since 2009.  If you’re one of the .01 percent who makes that kind of money, then you have a 29.93 percent chance of being audited.

I know how some people are going to read this headline.  Some people are going to think that they are safe because they earn a lot less than $10 million per year.  If the IRS is focusing its efforts and manpower on examinations of the ultra wealthy, then that means audits of returns filed by the average Joe are decreasing, right?

Wrong.  The overall audit rate remains constant at 1.11 percent.  Maybe you like those odds.  Well, before you do anything you’ll regret later, be aware that income is only one factor that the IRS looks at when determining who to audit.  Furthermore, I’m not certain that these statistics include the so-called correspondence audits, which are becoming more and more common these days.