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.

Lavish Spending is Not Tax Evasion

A recent court decision took up the question of whether lavish spending alone, in the face of a tax debt, should be considered willful tax evasion.  Trip Hawkins, founder of Electronic Arts, is one of those super wealthy, elite class Americans who fell on hard times — a different sort of “hard times” than most people are familiar with, but hard times nonetheless.  He has IRS and FTB (California Franchise Tax Board) tax debts up to his eyeballs, something like $25 million, which he sought to have discharged in bankruptcy.

The government asked the bankruptcy court to exempt his tax debts from being discharged because he acted in a willful, tax evasive manner.  After acknowledging the tax debt, it was shown that he was spending up to $78,000 more each month than he was earning.  He was maintaining a $3.5 million home and a $2.6 million ocean-view condo.  He was buying $70,000 cars and cruising around in a private jet.  However, the court concluded that this sort of spending behavior, extravagant as it seems to regular folks, was not enough to prove willfulness.

I don’t imagine there are too many people living this lifestyle in valley towns like Modesto, Tracy, Turlock, or Oakdale, and its not simply for lack of ocean-view condos.  However, this issue does tend to crop up here in other contexts and on a much smaller scale.  For example, I have seen the California Board of Equalization (BOE) and FTB draw adverse conclusions on the grounds that a taxpayer was living too lavishly.  In the process of resolving a tax debt, these taxing entities look closely at bank statements to see how taxpayers are spending their money.  I have seen them raise an eyebrow at things like going out to much on weekends, eating out too much, taking too many trips, etc.  While this lifestyle is not going to land somebody in prison for tax evasion, it can sometimes make it more difficult to obtain an accepted installment agreement, or offer in compromise.

I’m not sure I really have to spell it out, but their thinking is “why should this taxpayer be allowed to live like this when he owes taxes; he needs to curb his spending so he can pay off his tax debt.”  This is just something to keep in mind when dealing with California taxing entities.  In my experience, the IRS is concerned with this kind of thing too, but to a lesser degree.

2015 Filing Season Won't be Pretty

Those who would know best are saying that we need to be prepared for one of the worst filing seasons on record during the first quarter of 2015. What makes one filing season worse than another?  It has to do with the level of service that the IRS can provide to taxpayers.  How fast can they answer the phone when taxpayers call?  How fast and accurately can the IRS respond to taxpayer correspondence?  How efficiently will the IRS be able to process tax returns and refunds?

The IRS had a goal of answering 80% of incoming calls last season, but only managed to answer 72%.  This filing season it is predicted that the IRS may only be able to pick up 53% of the time with a 34 minute average hold time.

The IRS Commissioner, John Koskinen has identified a few main reasons why things look so bleak:

  1. The IRS doesn’t have enough money to operate the way it should.  Funding levels are lower than they have been in years.
  2. The IRS has been tasked with administering new programs such as the Affordable Care Act and the Foreign Account Tax Compliance Act with no additional funding from Congress.
  3. Implementation of a new voluntary return preparer oversight program will also increase work load for IRS employees.
  4. There are 50 or so “tax extenders” — laws that Congress needs to vote on and determine if they will be extended or not.  The uncertainty could delay the start of the 2014 tax season.

National Taxpayer Advocate, Nina Olson, has a way of stating things in the plainest terms.  She has generated some great sound bites over the years.  Here’s her take on the upcoming tax season:

The filing season is going to be the worst filing season since I’ve been the National Taxpayer Advocate {in 2001}; I’d love to be proved wrong, but I think it will rival the 1985 filing season when returns disappeared.

I think these viewpoints have been colored by a recent TIGTA report that highlights “unfavorable trends” with the Automated Collection System (ACS).  Because the IRS does not have the resources to work cases properly, they have been “punting” many of them into Currently Not Collectible status or into the “queue” where cases can sit idle for months or years.  Consider yourself fortunate if you don’t have to interact with the IRS this tax season other than to file your return and wait for a refund check.

Direct Deposit Refund Rule: New for 2015

Nowadays almost everybody files their Federal Tax Returns electronically.  The IRS has encouraged e-filing for many years now.  It’s a win-win because the IRS can process electronic returns very rapidly and the filer is happy to avoid the delay and uncertainty of snail mail.  Similarly, most people who are due a refund elect to have that refund directly deposited into their bank account rather than having a paper check mailed to them.

Beginning in January 2015, there will be new direct deposit limits that the tax refund folks should keep in mind.  The IRS is limiting the number of electronic / direct deposit refunds that can be deposited into a single account.  The magic number is three.  The reason the IRS is limiting directly deposited refunds to three per account is to hopefully curtain fraudulent refunds which tend to come flooding into a thief’s account one after another.

Two refunds deposited into the same account is probably fairly common: I am imagining a married couple who file separately but share a bank account.  A little odd maybe, but not suspicious either.  Three refunds deposited into the same account is somewhat less common, I am sure.  But some families with adult children may fall into this category.  The IRS has drawn the line at three because it is hard to imagine a scenario where there would be too many more than three people who would chose to receive separate refunds in the same bank account.

The IRS says that the fourth refund in a scenario such as this would be sent as a paper check, and those wishing to avoid this result would need to use a different account.

IRS Audits and Public Perception

We know there is at least some rhyme or reason to who gets selected for an IRS audits.  If we knew all the criteria, we could position ourselves to avoid audits 100% of the time, but, for obvious reasons, the IRS hasn’t been so generous when it comes to publishing their audit selection criteria or algorithms.  One thing that we can be sure of is the IRS flags tax returns that possess certain risk factors because, if they’re going to spend resources auditing a certain number of returns each year, it might as well be those that are more likely to contain errors or “problems.”

So far, so good.  That much makes sense.  The IRS flags cases that it considers to be good audit material.  But, based on a news story that broke today, maybe the IRS should also be flagging cases that should not be audited.

Of all the “do not audit” entities out there, shouldn’t Logan Clements, the producer of “Sick and Sicker: ObamaCare Canadian Style,” be near the top of the list?  I haven’t seen this film, but I’m gonna guess that Clements is not a big fan of Obama, and not a big fan of the Affordable Care Act.  And I have absolutely no idea about the integrity of his taxes, but it just doesn’t look right for the IRS to audit somebody like this.  Meanwhile, Clements is using the media attention from the audit to catapult his film into the spotlight quite nicely.  I understand the IRS faces a catch 22 here: if they audit this guy, it looks very fishy, but if they let him go, it sets a weird precedent and makes a whole segment of society (notable conservatives) exempt from audits.  In fact, I think a strong case can be made that public perception should not even enter the equation.  But the IRS better hope they find something seriously wrong with this guys taxes.  Or if it turns out to be a “no changes” kind of audit, they had better close it quickly and hope this story fades away quietly.

 

IRS Voluntary Classification Settlement Program is Broken

Sometimes employers misclassify their workers as independent contractors (self-employed) when, in fact, they are employees.  And when I say “sometimes” I mean millions of times.  It is very common.  I’m sure some of them do it unknowingly, but I am also certain that some employers do it because they don’t want the responsibility and costs associated with having actual employees.  The difference is that employers must withhold and/or pay a number of taxes when a worker is also an employee, including income taxes, Social Security, Medicare, and unemployment.

The IRS would love it if taxpayers (including employers) would fall in line with the IRS’ dreams of “voluntary compliance,” but one of the things they do when this doesn’t happen is they set up programs to entice them to come clean on their own.  The IRS doesn’t call it an amnesty program; I don’t think they particularly like that word.  In fact, I put the word “amnesty” in the search box of the IRS website and exactly two results came up, and both of them were in the context of a state amnesty program.  The word tends to have the connotation of getting out of paying taxes or making use of a legal loophole, and the IRS really doesn’t want to suggest that.

But I can use it.  I like the word.  The IRS has an amnesty program for reporting offshore accounts called the Offshore Voluntary Disclosure Program.  And the IRS has an amnesty program for coming clean on worker classification issues called the Voluntary Classification Settlement Program.  But the VCSP has been very poorly administered over the years.  It appears that just about every aspect of the program has some kind of flaw.  Even the most basic things are not working, like correctly determining eligibility for the program, monitoring compliance with the program, and analyzing program performance.  If you want to read about how screwed up VCSP is, be my guest.  Full report here.

IA Eligibility Requirements

Who is eligible to pay back taxes to the California Franchise Tax Board via an installment agreement?  It can be a little complicated.

It’s difficult not to compare FTB and IRS collection tactics.  Both almost always first demand/request payment in full.  The collection notices are worded in a way that if you don’t read beyond the first sentence, it will appear that full payment is your only option.  And when you call them up, that’s the first thing out of their mouth.  IRS will usually say “Do you have the ability to pay your tax bill in full?” If you cannot write them a check, then the discussion typically shifts to what is required for an installment agreement.  However, the FTB will often (at least at first) demand full payment without regard for your ability to pay and then very reluctantly tiptoe around the option of paying back your taxes in installments.

The eligibility requirements for an FTB installment agreement are more stringent than the IRS requirements.  First and foremost, it is very difficult to obtain an installment agreement with FTB if you have an active earnings withholding order (EWO).  An EWO is just another word for “wage garnishment” or “wage levy.”  Once the FTB has brandished this collection tool, and they have a steady stream of payments coming in, it is very difficult to convince them that they should trade these “guaranteed” payments for a promise to pay from the taxpayer.

Like the IRS, the FTB does require that all back tax returns have been filed so there is no question as to how much is owed.  Also, like the IRS, FTB requires that the entire tax debt be paid off within a specified time frame.  They give as much as 60 months for some tax debts, but only 36 months for others.  The IRS will allow a full 72 months for tax debts under $50,000.

Both FTB and IRS recognize certain events that will cause an installment agreement to default.  Some of these events include (a) failure to make timely payments, (b) failure to timely file a future tax return, and (c) incurring a new tax debt.

Whether you owe FTB or IRS (or both) it would be a mistake to think that you can always just request an installment agreement to avoid enforced collection action.  It’s not always that simple.

IRS Phone Scam Complaints top 90,000

The IRS has long warned taxpayers to be on the look-out for deceptive phone calls from criminals posing as IRS agents.  These scams were once thought to target the elderly, those within specific socioeconomic groups, or those who recently immigrated to the United States.  However, based on the anecdotal evidence I have gathered over the past several years, I don’t think these criminals go through the trouble of targeting specific groups.  Perhaps they did at one time, but now they appear to be just “shooting from the hip” hoping to deceive even a small fraction of the taxpayers that they contact each day.

I have seen how prevalent these phone scams have been in Sacramento, and now with our new office location, I can see that the scams are no less of an issue in the Central Valley towns of Modesto, Ceres, and Turlock.  I was recently privileged to hear a recording of one of these calls and, I must say, the caller’s voice was very confident and convincing.  Of course, the content of what he was saying was laughable, but the tone of the call was professional and authoritative.  I say that about the content because I know what the IRS will and will not say in a phone message.  First of all, the IRS is reluctant to provide details of anyone’s confidential tax account in a voice mail message unless you have previously given them permission to do so.  Second, the IRS does not, in their first contact with a taxpayer, jump right into statements about criminal liability, subpoenas, and arrest warrants.  And the IRS never asks for payments to be made immediately over the phone.  Furthermore, if you do have a tax problem of some kind, such as owing back taxes or missing tax returns, the first contact from the IRS will be by way of a letter, not a phone call.

My anecdotal evidence seems to confirm what the IRS is reporting about phone scams: 90,000 complaints and growing. The best way to report one of these phone calls is to complete an online scam reporting form which is accessible from TIGTA’s website.

IRS Doesn’t Hire 20-year-olds Because They’re Used to Stuff that Works

One of the most hilarious things for IT people is to hear non-IT people try to talk about computers and technology.  By no stretch of the imagination am I an IT person, but I do see the humor in that sort of thing as well.  Here is 75-year-old John Koskinen in a recent interview with Tax Analysts’ William Hoffman:

[W]e have a huge turnover in people under 30 because we’re not hiring that many. But when we’re hiring them, we’re obviously not keeping them at the rate that we would like….Part of that is because our technology is so abysmal. You take people, young people coming in at 23, 25, 27, and they’re used to….stuff that works. You know, they’re at the high end and they Twitter and they do all of that stuff. When you come into an organization still moving people onto Windows 7 from Windows XP, that’s not exactly a cutting-edge technological group….Now, on the other hand, we’ve proved technological, technology people because we are doing great things. We don’t have enough resources, and we’re way behind what we’d like to do. But, you know, the apps we’re doing — Where’s My Refund, Get Transcript, and that — so we’re pushing various state-of-the-art stuff, which is why I refer to our IT as a Model T with a great GPS and wonderful sound system….And so that’s some extent, so we’ve got some state-of-the-art apps and, you know, really ancient — you know the average age of our IT equipment is 15 years. So we have to be the only serious large organization of a financial institution running with average equipment age of 15 years. So our computers are too old, our servers are too old. You know, we still got stuff in COBOL programming….So that’s the problem at the front end.

I’m not 27 any more and I feel like I am used to stuff that works too.  It would absolutely drive me crazy to work with 15-year-old computer equipment.  I couldn’t work there for 1,000 other reasons, but that would be a big one.

This quote is so full of awesome lines I don’t even know where to start.  My favorite line: “You know, they’re at the high end and they Twitter and they do all of that stuff.”  It is funny to me that the head guy at the IRS says things like this.  I mean, it’s fine, we don’t need a spry young kid at the high end who Twitters or anything.  As long as he can manager other high end people who Twitter, things should be fine.  The IRS definitely has proved technology people and they’re doing apps and pushing various state-of-the-art stuff.  Oh boy, don’t even get me started on the IRS apps, Mr. Koskinen.  They aren’t that good.  After all, it doesn’t make much sense to put a GPS in a Model T if the Model T can’t go 99.99% of the places shown on the GPS.

IRS Worker Suspended for Violation of Hatch Act

You know the statistic about what percentage of your life is spent sleeping?  Does it shock you just a little bit and make you want to sleep less?  That’s the way I feel when I think about what percentage of my life is spent talking (or waiting on hold) with the IRS.  I could probably figure it out, but I would rather remain ignorant of those details.  Well, even after having logged hundreds or thousands of hours with them, I can honestly say that I have never been asked to support any particular political candidate.

Recently an IRS call center employee was suspended for 100 days after the US Office of Special Counsel (OSC) determined that he/she had violated the Hatch Act by engaging in partisan political activity while on the clock.  This particular worker encouraged callers to vote for Obama on taxpayers’ dime.  This “encouragement” came in the form of some kind of chant based on the spelling of the employee’s last name.  I would love to know what this sounded like, but exact details were not given.  In fact, IF ANYBODY CAN PRODUCE AUDIO OF THE IRS EMPLOYEE WHO PROMOTED OBAMA’S CANDIDACY BY RECITING A CUTE LITTLE CHANT AT THE END OF EACH CALL, PLEASE CONTACT ME IMMEDIATELY.

There have been plenty of times when I thought that the IRS representative was getting a bit too chummy with me.  I really don’t mind that; I like to see that they are enjoying their job.  But I wouldn’t want to see them get in trouble.  The worst I’ve heard is when they start bashing the IRS and complaining about their job, their equipment, other IRS departments, their flawed internal processes.  That actually happens fairly regularly.  As far as I know there is nothing illegal about this kind of behavior, but I don’t imagine a supervisor would appreciate hearing it.

The real controversy in this story is that the OSC investigation actually resulted in the termination of a postal worker who violated the Hatch Act, whereas the IRS worker was only suspended.  There are significant differences in the facts of each case.  You be the judge and read about those differences here.

IRS Small Biz Webinar

For me, Small Business Week sort of came and went this year with little notice.  In fact, I just now got around to watching the IRS webinar that came out on May 15th called “Avoiding the Biggest Tax Mistakes.”  The video is now archived and available through the IRS video portal here.

This video may be useful for young entrepreneurs and teenagers who are interested in one day having their own business.  I say this because it just scratches the surface of business tax knowledge, and anyone who has already begun operating a business absolutely must understand these basic principles.  The entire video runs about 42 minutes in length; the first 15 minutes cover the bullet-point topics below, and the balance of the video is a live Q & A session:

  • Keep good records (three years is the general rule)
  • Report all taxable income (all income is generally reportable unless specifically excluded by law)
  • Keep business and personal expenses separate
  • Choose your tax preparer carefully (be skeptical of promises of outcomes that seem too good to be true)
  • Always review your tax return for accuracy
  • Consider e-file options
  • Do your homework
  • Don’t fall prey to tax scams

When asked what he thought should be the main “take-away” points from the webinar, the presenter emphasized the importance of the first three (keeping good records, reporting all income, and claiming only business expenses on Schedule C).

Another point that was mentioned is that too many small business owners rely on word of mouth when it comes to business “write-offs.”  Just because a buddy writes off a certain expense every year doesn’t mean it is legitimate.  One real-life example of this is the rumor that you can put your file cabinet in one room of your house, your desk in another, your printer in another, etc. and basically claim the entire square footage of your home as “business use.”  It doesn’t even make sense that the IRS would agree to this, and that should be the first indication that it is bogus.

Not everybody has a very good feel for what “seems” right or wrong, so that’s why it is critical to seek sound advice from a respected tax professional.  When it comes to running a small business and avoiding IRS scrutiny, it is never a good idea to “shoot from the hip.”