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.

IRS Claims Lerner's Emails are Unrecoverable

Posted by Wetenkamp on with 0 Comment

The IRS scandal involving the disparate treatment by the IRS of certain tax exempt organizations (or their applications for tax exempt status) still has life.  The government committees responsible for investigating the IRS “targeting scandal,” as it has come to be known, wanted to see Lois Lerner’s emails, and last week the IRS responded that they are unable to recover her emails, apparently due to the fact that her computer crashed in 2011 and the IRS did not make a practice of preserving all emails on their servers.

Experts find it hard to believe that the IRS lost the files innocently and that they cannot be recovered.  From a legal standpoint, it is common knowledge that you don’t delete emails anytime there is a potential for litigation; in fact, you do whatever you can to preserve them.  From a tech standpoint, it is difficult to believe that the emails could have simply disappeared, even if the IRS was not conscientiously backing up data at the time.  The idea that files are never really 100% gone when you delete them has some truth to it.

From a layperson point of view, it appears that we’re witnessing some sort of cover-up.  It just doesn’t pass the “smell test.”  I feel like my 10-year-old would be able to sit down at Lerner’s computer and at least find something.  But if not, in this day and age, computer geeks are a dime a dozen.  Why can’t we just hire the world’s smartest forensic geek at the FBI or CIA and be done with this?

However, as much as the experts and the general public do not believe the emails were lost inadvertently, I have to admit that the facts as we know them do not sound too far fetched to me.  From the viewpoint of a tax attorney who deals with the IRS every day, it seems plausible that the IRS really would not save or properly back-up the emails.  There’s no way the IRS could possibly save everything.  And as for Lerner’s computer crashing, well that kind of thing happens constantly at IRS service centers all around the country.  Sometimes when I’m talking with an IRS representative on the phone, I try to imagine the computer their working on and, in my mind, it usually has a 3.5″ floppy disc drive and a behemoth monitor that is twice as deep as it is wide.

New taxpayer Bill of Rights offers no new protections

Posted by Montgomery on with 0 Comment

This week the IRS adopted a “Taxpayer Bill of Rights”. Unfortunately, the IRS admitted that no new taxpayer rights or protections were created. The newly released taxpayer Bill of Rights simply organizes various policies from the tax code and groups them into 10 broad categories.

The thought is that highlighting these already existing protections will make them more visible and easier for taxpayers to understand.

Here are the 10 broad rights the IRS are going to publicize through this version of the taxpayer Bill of Rights:

  1. The Right to Be Informed
  2. The Right to Quality Service
  3. The Right to Pay No More than the Correct Amount of Tax
  4. The Right to Challenge the IRS’s Position and Be Heard
  5. The Right to Appeal an IRS Decision in an Independent Forum
  6. The Right to Finality
  7. The Right to Privacy
  8. The Right to Confidentiality
  9. The Right to Retain Representation
  10. The Right to a Fair and Just Tax System

 While poking a little bit of fun at the IRS, I believe this version would be more accurate:

  1. The Right to Be Informed (so long as you still open mail sent to the address you lived at years ago);
  2. The Right to Quality Service (similar to any other poorly structured organization);
  3. The Right to Pay No More than the Correct Amount of Tax (plus the penalties and interest that we will charge you to tell you that we don’t think you paid the correct amount of tax);
  4. The Right to Challenge the IRS’s Position and Be Heard (unless we disagree with your position);
  5. The Right to Appeal an IRS Decision in an Independent Forum (which is funded by the IRS);
  6. The Right to Finality (when you die);
  7. The Right to Privacy (unless you owe us money);
  8. The Right to Confidentiality (unless you owe us money);
  9. The Right to Retain Representation (which you will need);
  10. The Right to a Fair and Just Tax System (similar to the justice system).

The IRS plans on displaying their new Taxpayer Bill of Rights conspicuously throughout their offices. I’m debating whether I should post my version in our law firm’s offices.

Will the IRS Take Your Home?

Posted by Wetenkamp on with 0 Comment

The likelihood of the IRS resorting to collection of taxes through asset seizure — probably the most severe tax collection method — can only accurately be determined on a case-by-case basis*.  Certainly the IRS has authority to seize and sell assets in order to satisfy a tax debt, but it has to make sense for the Service to do so.  They want to be sure that the target asset (or assets) will raise enough money to cover all or most of what is owed.  They want to be sure that the profits from the seizure and sale will at least match the effort and preparation going into the procedure.

Furthermore, the IRS has internal guidelines dictating when and how they may proceed with asset seizures.  In other words, the IRS doesn’t normally go after granny’s little two bedroom farm house, but there are exceptions.  The IRS doesn’t like to boot people out of their primary residence; it’s not good public policy and not a great PR move.  And the IRS doesn’t normally resort to seizure at all if they can collect what is owed through other means.  Much more common is the wage garnishment, bank levy, and federal tax lien.  Of course the preferred method of tax collection is through voluntary payment, but not everybody pays their taxes so willingly.

But don’t be mistaken, the IRS can and will seize assets, primarily real property, vehicles, and valuable estate assets.  Local news outlets often advertise public auction dates.  The IRS also posts details about asset sales on their dedicated IRS auction website.  If you do attend an IRS auction, you should know that they don’t accept personal checks, and they don’t take American Express.

*You might argue that the most severe IRS collection tool is criminal prosecution and prison sentences; however, I don’t know if I would consider this a collection method, except to the extent that it encourages others to file and pay on time.

Will the IRS Bring Back Private Debt Collections?

Posted by Wetenkamp on with 0 Comment

Somebody has sneaked some terrible legislation into a provision of the EXPIRE Act which, if approved, would require the IRS to hire outside private debt collection (PDC) firms to collect past due taxes.  If this sounds familiar it is because the IRS has already tried this a couple times with very little success.  These are just some of the problems that tax practitioners have identified with hiring private debt collectors to collect income taxes:

  • The IRS must hand over sensitive taxpayer information (like social security numbers) which raises concerns about privacy and identity theft.  Just like a juicy bit of gossip, the more people you tell, the greater the risk of the information spreading to the wrong people or groups.  No amount of training can ensure this won’t happen.
  • If private collection agencies are hired on a contingency basis, their motivation to collect may be higher than your average IRS employee who is paid the same regardless of how much revenue is collected.
  • Although private collection agencies would be given access to some key pieces of information, not all tax account information would be available.  This means that the taxpayer would be required to go back to the IRS anyway, to confirm what the PDC firm has done and tie up any loose ends.

I definitely saw this in my practice during the second trial run of this program 6-7 years ago.  The PDC firms were not given authority to enter into certain installment agreements, so we would have to get cases transferred back to the IRS in most cases.  Using private collection firms only complicates things at the IRS and creates bottlenecks at an agency that is already known for being a little slow.  The good thing is that many, if not most, stakeholders and authorities oppose this legislation, including the National Conference of CPA Practitioners (NCCPAP), the Taxpayer Advocate, the IRS Oversight Board, and the Commissioner himself.

Only federal employees, who have been screened and vetted through the Internal Revenue Service, should be permitted to represent the federal government in matters pertaining to individual taxes.

~ Steven Mankowski, NCCPAP Tax Policy Committee chair

Friday Night Recap

Posted by Wetenkamp on with 0 Comment

There have been several interesting IRS-themed stories in the news this week.

For one, the IRS recently missed its deadline to appeal an adverse federal District Court decision that denied them the authority to regulate all tax preparers under the Registered Tax Return Preparer program.  This is a big win for tax preparers specifically and a win for small businesses in general.   Perhaps the IRS is going to turn to some kind of voluntary scheme instead.

And if you pay any attention at all to financial news, you wouldn’t have been able to avoid all the press about the IRS paying out something like $15 billion in improper claims for the Earned Income Tax Credit.  Anything that shows how the IRS is wasting our tax dollars or is staffed with incompetent boobs is usually going to remain in the news a few days longer than necessary.  However, this time it really is a big deal.  The IRS admits that about 25% of all EITC payments are issued to people who should not qualify!  What’s worse is the IRS has made little progress on fixing this over the past 4 years.

The last thing I noticed today is not something that everyone will find incredibly captivating, but it caught my eye.  Anytime I see the words “compliance initiative program” it makes me uneasy.  The IRS is going to begin a CIP that will last approximately 12 months and will focus on IRC Section 409A which governs deferred compensation plans.  Thomas Scholz, an IRS executive speaking at an ABA meeting, indicated how many people would be selected for this audit program (less than 50), from what group of taxpayers they would be selected (from an existing pool of employment law cases), and how the IRS will begin the process (through document information requests).  Although stated in off-the-record comments, the IRS revealed some specifics about this CIP that I would love to see them give in ordinary audit situations.

Supreme Court to Hear Case on IRS Summons Power

Posted by Wetenkamp on with 0 Comment

If the IRS, as part of a tax audit or examination, wants something from the taxpayer, they tend to ask nicely only once.

Sometimes it is difficult to hand over the books and every last financial detail to the IRS.  It can be somewhat like letting a stranger into your bedroom; even if you have nothing to hide, you don’t want them there.  Also, document requests can be quite burdensome.  Some items cannot be retrieved or compiled without expending inordinate amounts of time and money.  Lastly, the information sought by the IRS can sometimes appear to bear very little relevance to the issue(s) at hand.  But however difficult it may be to comply with a document request, or however ridiculous the request may seem, the IRS usually gets what it wants.

What if the taxpayer doesn’t comply to that initial polite request?  Maybe the IRS asks again with some emphasis, stronger words, or even a threat of summons.  Normally the IRS resorts to a summons only after the taxpayer has ignored a couple informal requests or after the taxpayer has openly refused to provide the information sought by the IRS.  When a taxpayer ignores a summons, the procedure is for the IRS to go to the Justice Department and request a court order to enforce the summons.  And courts have routinely rubber-stamped such requests.  A court-ordered summons is very serious and cannot be ignored without risk of civil or criminal contempt.

This week the US Supreme Court will decide whether or not a taxpayer should be granted an evidentiary hearing in which a judge would determine if a summons is proper and not simply intended to harass the taxpayer, over-complicate the issues, or delay the process.  This is a big case as it relates taxpayer rights.  The IRS should not be able to ask for anything and everything under the sun with no explanation as to its purpose and no procedural mechanism for the taxpayer to dispute it.

Tax Day 2014

Posted by Wetenkamp on with 0 Comment

It’s April 15th — tax filing deadline day!  From where I sit, there are only a couple more hours left to file your federal income tax return.  Today I should be writing about (and you should be reading about) procrastination, how to file an extension, what to do if you owe taxes and can’t pay, or various IRS statistics like how many returns have been filed, how many refunds have been issued, how much the IRS has paid out in refunds, etc.  Before the age of electronic filing, we used to see the obligatory TV news story about which post offices were open late and which ones had the longest lines.  But gone are the days of such innocent tax day topics.  Today I’m mostly seeing warnings about those pervasive telephone tax scams.

For as long as I can remember, the IRS has warned taxpayers of phony IRS calls, but it seems like it used to be an annual warning that came out in the “Tax Tips” series.  And it always seemed more like a theoretical problem with some anecdotal evidence here and there.  Today, however, these phone scams have become commonplace.  It doesn’t seem to matter where you live either; I’ve seen reports of phone scams all across the country.  And I’ve handled my share of calls from local taxpayers who have been scared out of their minds by phony IRS calls.  In Sacramento, some victims are being told that they are going to be arrested for tax fraud.  These scam artists are apparently very convincing.  Sometimes people who don’t even owe (and know that they don’t owe) are tricked into believing that they are in trouble with the IRS.

The IRS is very clear about what type of contact they initiate with taxpayers, and if you become familiar with the standard IRS warnings, you’ll never be fooled by a tax scam.

Koskinen's Press Club Speech

Posted by Wetenkamp on with 0 Comment

The IRS Commissioner typically speaks at a National Press Club luncheon once a year.  It is the perfect venue to learn about the Commissioner, his vision, and everything at the top of his to-do list.  Here are a few things that stood out to me from Koskinen’s Press Club remarks from April 2nd, 2014:

  • He enjoys college basketball, . . . or at least March Madness, . . . or at least Duke.  He made a pretty funny joke about Duke’s loss in the early rounds of the NCAA championship.
  • During the three months he has been serving as head of the IRS, he has visited 18 of the 25 largest IRS offices.  He has jumped right in and run around quite a bit for an old guy.
  • He likes to hear the opinions of the minions.  I really do respect this approach and hope that it is more than just words and becomes part of the culture at the IRS.
  • He is realistic; he does not pretend to be perfect and he doesn’t expect IRS employees to be perfect either. In fact, he said that his theory is “bad news is good news,” meaning that even negative reports have a silver lining because at least it signifies that the news is getting reported.  After all, a problem cannot be corrected unless and until it has been identified.  I see his point, but I’m not sure I would have taken it that far.
  • He is big on the whole idea of restoration of public trust and the notion that every taxpayer should be treated fairly.  He spent a large portion of his talk discussing the investigations into the IRS’ tax exempt application scandal.
  • He wraps up by commenting on the tax filing season, problems with voluntary compliance and tax fraud, FACTA, customer service (by phone and at local service centers), tax reform, and administration of applicable provisions of the Affordable Care Act.
  • The biggest problem, according to the Commissioner, is insufficient funding.  He basically needs another billion dollars, give or take.

IRS Stays Away from Churches

Posted by Wetenkamp on with 0 Comment

Do you know the difference between a non-profit religious organization and a church?  Perhaps the biggest difference is their tax obligations.  While it is true that neither  is required to pay taxes, a pastor, televangelist, or broadcasting company that is registered as a religious organization must file information returns (Form 990) with the IRS that disclose how their money is spent.  However, churches, for the most part, do not have to answer to anyone.

John Burnett, reporting for National Public Radio, writes about a Christian television network called “Daystar” that operates much like a wealthy corporation, except without the transparency.  Yet they call themselves a church and the IRS has never questioned it so far as anyone knows.  There is a 14-point test that the IRS may use (in theory) to determine if an entity qualifies as a church under the law, but the IRS doesn’t enforce it. And if these churchy executives decide they want to drive Bentleys and live in sprawling chateus, they do it.  If they want to spend donation money on their own pet causes, then they do it.  According to IRS insiders, the government just doesn’t audit churches anymore, for at least the past five years anyway.

As part of America’s commitment to religious freedom, anyone can start a church, start preaching and passing the collection plate. They are presumed to be a church by the IRS — no questions asked.

Quoting former Daystar employees and tax attorneys, Burnett makes it pretty clear that Daystar would never meet the criteria for church status if the IRS were to enforce its own rules.  We all know how good the IRS is about enforcing its own rules…

IRS Provides Guidance on Tax Treatment of Bitcoin

Posted by Wetenkamp on with 0 Comment

Its status has been up in the air for some time now, but today the IRS provided guidance on the tax treatment of online currency such as Bitcoin.  The official position is that virtual currency is not to be treated as legal-tender currency, but should be treated as property instead.  Bitcoins, therefore, should be reported and taxed as ordinary income, or as assets subject to capital gains, as the case may be.

[V]irtual currency is treated as property for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.

Therefore, in real world applications, employees who are paid in virtual currency must pay taxes on that income just as they would pay taxes on dollars.  And an employer would have to withhold taxes, report these wages on a W-2, and comply with payroll tax laws.  And, of course, a 1099 is required for the self-employed who are paid in Bitcoin.

Perhaps of greater concern to some Bitcoin users around the world is the impact this IRS notice will have on “miners” (computer geeks who compete to unlock new Bitcoin by cracking codes).  If they want to be 100% legit, they will have to go back and determine how much Bitcoin they mined throughout the year, its fair market value on the date it was mined, and include it in their income.