The Treasury Inspector General for Tax Administration (TIGTA) is concerned that the IRS is not prepared to combat the onslaught of tax fraud that is anticipated once the IRS begins paying premium tax credits associated with the Affordable Care Act (ACA). TIGTA recognizes that the IRS has systems in place to combat fraud in general; it has always been one of their top priorities. But specific ACA fraud is another story. The IRS is not prepared for this new responsibility which is bound to reveal unforeseen nuances. The IRS has tested its systems that compute subsidies under ACA and the testing revealed flaws that could result in the IRS being unable to identify fraud prior to the issuance of credits. In plain English, what this means is there is a significant risk that the IRS will inadvertently pay out credits to people who don’t really qualify. According to the IRS, they have already made system corrections prior to the issuance of today’s report and they will be prepared.
Vengeful Audit Paranoia
People who get audited often feel like they have been unfairly targeted by the IRS. Many of our clients have felt this way. When the tax audit notice comes, they immediately review their past dealings with the IRS, trying to figure out why they have been audited and what they did to upset the IRS. Some of the more paranoid audit victims will go back and mentally review all their dealings with any branch of the government, assuming that they were selected in an act of revenge. I suppose it is human nature that causes them to wonder and question why they, of all people, were selected for audit.
Bill Elliot is a high-profile example of this “vengeful audit paranoia.” He was audited after appearing on FOX News earlier this month where he criticized ObamaCare and told the nation about his health insurance policy being cancelled. He couldn’t afford the new premiums offered in the federal health insurance marketplace and needs insurance probably more than the average person given that he is battling cancer.
We can’t know for sure whether Mr. Elliot was targeted by the IRS. We know some of their audit selection criteria, and there are probably others that we don’t know. People are also audited at least in part based on chance. I don’t know of any confirmed “vengeful audits,” but maybe that’s the next IRS scandal…
IRS Offers Disaster Relief in Illinois
Today the IRS announced that it will be offering tax relief to victims of severe storms in parts of Illinois. The destructive weather that began on November 17, 2013 has resulted in the government making disaster declarations in the following counties: Champaign, Douglas, Fayette, Grundy, Jasper, La Salle, Massac, Pope, Tazewell, Vermilion, Wabash, Washington, Wayne, Will and Woodford.
If you live in any of these counties then you will automatically be given extra time to file and pay certain taxes. Deadlines falling anytime between November 17, 2013 and February 28, 2014 will be extended to February 28, 2014. If you have been affected by these storms (either personally or indirectly, such as by having a tax preparer in one of these counties) but you do not reside or do business in the affected area, then you may still obtain tax relief by calling the IRS and explaining your individual circumstances. The IRS disaster hotline is (866) 562-5227.
Maybe this Thanksgiving we should remember to be thankful for great weather, especially here in California.
2013 IRSAC Report
The Internal Revenue Service Advisory Council (IRSAC) released its annual report today, which included recommendations for improving efficiency at the IRS. Here are some of the points that stood out to me:
1. Expand awareness of OPA
Online Payment Agreement (OPA) is a tool that some taxpayers may use to enter into installment agreements if they meet certain criteria. IRSAC says that the IRS should be doing more to encourage taxpayers to use OPA rather than call and waste their time on the phone.
Of the more than 3.1 million total installment agreements created in FY 2012, less than 3 percent (92,519) used the OPA to enter into an installment agreement.
The reason I don’t use OPA is I have found that getting a live body on the phone normally results in a better deal. Plus, the other day I was playing around with it and it wasn’t even working.
2. Reduce processing time for Form 2848, Power of Attorney
3.4 million Power of Attorney forms were filed in fiscal year 2012, but less than 10 percent were filed electronically. The IRS subsequently discontinued electronic filing a few months ago. IRSAC recommends going back to electronic filing and making changes to the form in order to reduce errors that cause them to be returned. I use e-fax to file my Power of Attorney forms. It is quick, inexpensive, and paperless — as close to electronic filing as you can get. In my experience, the processing time has been relatively quick: around 5-7 days usually.
One of the other problems that IRSAC addressed is duplicate filing, which happens when a practitioner files a 2848 and then doesn’t have the patience to wait a week. If that practitioner then calls the IRS and tries to gain access to the account before the POA has been processed, the IRS representative will have him/her fax the POA while waiting on the phone. Sometimes the IRS rep will forward that POA on to the CAF Unit without first checking with the practitioner to see if it has already been filed.
3. Update the transcript request policy on the PPS Line
The Practitioner Priority Service (PPS) phone line is for tax attorneys, accountants, enrolled agents, and such. If you have ever dealt with the IRS by phone then you know how ridiculous the hold times can get. The IRS call center employees should be answering unique questions, taking financial information, and resolving tax accounts; they shouldn’t have to do something that a practitioner can easily do him/herself. Some firms have a habit of calling in and tying up phone lines for simple transcript requests when transcripts can more efficiently be ordered electronically via the IRS website or through the automated phone system.
Cindy Thomas Defends "Low-Level" IRS Employees in Sharp Email to Lois Lerner
At the height of the IRS Tea Party targeting scandal, high-level IRS employee Lois Lerner blamed low-level IRS employees in a Cincinnati office for flagging tax-exempt applications that contained words such as “tea party” or “patriot.” Lerner had said that “line people . . . didn’t have the appropriate level of sensitivity about how this might appear to others.”
But one of these underlings in Cincinnati showed plenty of sensitivity in a May 10th email to Lerner that was made public this week by investigators on the House Ways and Means Committee. Her name is Cindy Thomas, then-director of that office. She took offense to Lerner’s labeling of her and others as “low level employees,” noticing right away that the Cincinnati tax-exempt division was being blamed in order to protect high-level IRS management. Tax law and IRS news can be dull at times, but Thomas’ email reads like a juicy piece of gossip:
As you can imagine, employees and managers [in the Cincinnati tax-exempt division] are furious…How am I supposed to keep the low-level workers motivated when the public believes they are nothing more than low-level and now will have no respect for how they are working cases? The attitude/morale of employees is at the lowest it has ever been…the previous 1½ years inside the determinations unit has been miserable enough because of the division’s workload and lack of help with strategic planning from Washington…Now our leader is publicly referring to employees who are the ones producing all of this work with fewer resources than ever as low-level workers!
This is obviously more than a defensive response from a manager with a bruised ego. I respect the way she stood up for her employees. And because I know first-hand the condition the IRS is in (and the condition it has been in for several months now), I don’t doubt anything she said. This email, though emotionally-charged as it is, goes to the heart of the scandal in a way that is more raw and sincere than anything we have seen to date.
IRS Hesitates to Enforce Erroneous Refund/Credit Penalty
If you file a tax return and claim a refund, but it turns out that you should not have claimed a refund (or if you claimed an excessive refund), you could be liable for payment of penalties. Similarly, if you made an erroneous or excessive claim for a tax credit, the IRS has authority to assess penalties. The penalty could be as much as 20 percent of the erroneous refund or credit claim, and it may be assessed without regard to the taxpayer’s good intentions. Innocent mistakes are equally subject to penalty.
The IRS hasn’t been very diligent in enforcing this penalty in the past several years, but the Treasury Inspector General for Tax Administration (TIGTA) hopes that will change. In a recent audit report, TIGTA discovered that the IRS had initially misinterpreted the law allowing assessment of penalties, and then even after modifying their official interpretation, still failed to adequately enforce it.
It seems hard to believe that there would be a tax penalty statute on the books that the IRS wasn’t interested in enforcing, but it’s true. Between May 2007 and May 2012, the IRS assessed only 84 erroneous refund penalties totaling $19 million. That’s only about 17 per year, although the average assessment was upwards of a quarter million each. It looks like the IRS had been targeting only the most egregious high-dollar cases.
In May 2012 the IRS admitted the tax law interpretation error and published an updated memorandum, but still has not put into place processes and procedures to guide front-line IRS personnel who make the day-to-day decisions of whether or not to pull the trigger on penalties. Consequently, between June 2012 and May 2013, the IRS had allowed over 700,000 erroneous tax credits to slide by un-penalized to the tune of $1.5 billion in lost revenue. And it is not just about lost revenue; it is about training the American taxpayer to be careful with the claims made on tax returns, because errors and false claims impose a big burden on the IRS in terms of both time and money.
IRS Quietly Rolls out FTS Program Nationwide
Part of the problem with the IRS’ terrible reputation is that their scandals and mishaps get publicized in every way imaginable, and often for a few days longer than necessary. But the good things the IRS is doing tend to go unnoticed. I guess it’s just not as much fun to read about.
I found an example of this today. The IRS is expanding a pilot program that it began in select locations in 2006 that allowed small businesses to opt for alternative dispute resolution rather than the standard formal appeals process (and then potential litigation) when disputing an audit. The program is called Fast Track Settlement (FTS). It is a smart and attractive option, since the IRS claims that disputes can be resolved in 60 days when they go through FTS, and taxpayers maintain their appeals rights through the process. The only problem I see is that the mediator in a FTS proceeding is an IRS appeals officer rather than a neutral third party. Yes, appeals is a separate arm of the IRS, but it’s still the IRS as far as I’m concerned.
I’m not sure why it took seven years for the IRS to make FTS available nationwide, but besides that, it seems like another opportunity lost for those in charge of the IRS’ public perception. The IRS is at least partly to blame for this phenomenon. In times like these, the IRS needs to be doing everything it can to leverage their good PR, and that means making sure the public knows about every single time-saving and money-saving measure, otherwise we will only remember the Star Trek parody video and similar headlines.
"This is George Miller with the IRS…"
It sure was nice of the IRS to warn taxpayers of a “pervasive telephone scam” last week. The scam artists apparently target recent immigrants, threaten jail time, and run credit card payments over the phone. The IRS described a number of things to look out for, presumably so we all can independently determine if the call we received is from a scammer or from an actual IRS representative. The only problem is sometimes the thieves and the IRS agents share some of the same characteristics. Let me show you what I mean.
- Scammers use phony names and IRS badge numbers: Great, but how would we know if the name or badge number is fake?! The IRS says that they often use common names. But I know there are plenty of real IRS reps who have common names. Plus, recent immigrants may not be fully aware what is or is not a common American name. It might have been helpful if the IRS had given a sample ID number so that taxpayers could at least know if it was the correct number of digits. Many of the representatives I speak with use 7-digit ID numbers (assuming I have been talking with the IRS for the past 8 years and not phone scammers).
- Scammers may be able to recite the last 4 digits of the victim’s SSN: So can a real IRS rep.
- Scammers spoof the IRS toll-free phone number on caller ID: When I have received calls from revenue officers, offer in compromise examiners, and appeals agents, it usually shows “Unknown” on caller ID, so this is good to know.
- Scammers sometimes follow up the call with a bogus email: Real IRS agents never send emails, so this is actually a dead giveaway.
- Scammers produce phony call center background noise: I have often heard phones ringing and low chatter that is characteristic of a call center when talking with the IRS, so I’m not sure how helpful this tip is.
I think this IRS warning is useful, but only by becoming familiar with the entire list of characteristics. If you receive a call fitting one of the above descriptions, there may not be cause for concern (unless you are asked to provide credit card info). But if you receive a call with many of the above characteristics, it is probably a phony IRS call and a scam.
Some IRS News & Some FTB News
Internal Revenue Service
The IRS expects the 2014 tax season to be delayed by one to two weeks. That would mean the new tax season would begin somewhere between January 28th and February 4th. The reason for the delay? None other than the historic Fall 2013 government shutdown.
The IRS normally begins tuning and tweaking their complicated tax return processing systems in the fall, even before the start of the 4th quarter. This year’s system testing period was delayed when the IRS closed its doors during the first half of October. You should also be aware that the February 4th start date is only an estimate. The IRS will re-evaluate and confirm the 2014 Tax Season start date in December.
California Franchise Tax Board
We often hear about federal tax scams, but the FTB recently sent out a warning to California residents to keep their eyes and ears open for phishing schemes and identity theft. There is apparently a scheme which targets elderly taxpayers in Beverly Hills. The caller, posing as a FTB employee, tells the victim that they were ticketed for a red light violation and their case has been forwarded to the FTB for collection purposes. As ridiculous as this may sound, the IRS has been given so many additional responsibilities over the years that it’s hard to say what they may have a hand in. So, why not the FTB too?
The moral of the story is the same as it always is for the IRS: they won’t contact you by email, and they will rarely call you without sending a series of notices first. You need to be suspicious if either of these things happen to you.
IRS Asks for Patience
The IRS issued an “Operations Resumption Statement” last week on its website after opening its doors back up on October 17th. The IRS wants taxpayers and tax professionals to know that that they are aware of the backlog that has resulted from the 16-day shutdown:
At this point, we know we received a large amount of correspondence during the closure. We know there will be a substantial increase in demand for our phone services and many other operations
In other words, “stop reminding us about the delays and long hold times; we know we have problems right now.”
The IRS also acknowledged that it will take time for the call centers and walk-in assistance centers to ramp up to normal levels of operation. Since they are still assessing the damage caused by the government shutdown, there is no way to estimate how long the ramping up process will take. I would guess that things will be slow for several weeks, perhaps even a couple months. This is based on my experience as a tax attorney over the years. Even one day off at the call centers often has residual effects on hold times and mail processing times. A 16-day shutdown is unprecedented and we have no way of knowing when the IRS will be back to “normal” at this point.
In light of the enormous backlog that the IRS has committed to focus on over the next several weeks, the IRS has asked that taxpayers and tax professionals delay or limit their contacts with the IRS except in urgent situations. Of course, after 16 days many of the issues that could have been considered non-urgent have now been upgraded to higher levels of urgency. And I think the IRS realizes that too. They just ask for our patience right now. Ask anyone who deals with the IRS on a regular basis — if there is anything we know, it’s patience.