FTB Updates Top 500 List

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The California Franchise Tax Board (FTB) updated its “Top 500 Delinquent Taxpayers” list this week.  And to dispel any doubt about the effectiveness of this program, FTB also announced that the list shrunk to only 350 before it went live on their website.

Two times a year, the FTB publicizes a list of individuals and corporations with the biggest state tax debts.  Those on the Top 500 list are identified by name, city/state/zip, amount due, tax lien filing date, and information about state-issued licenses.  The license information is relevant because one of the consequences of being in the Top 500 is the FTB has the authority to suspend state-issued licenses such as drivers license, contractor license, state bar membership, medical board, bureau of real estate, department of insurance, etc.

There are several doctors, attorneys, real estate agents, and contractors on the Top 500 list.  There are about 14 individuals shown to be licensed by the State Bar of California and, interestingly, all but one of those licenses are still active.  The one that is no longer active bears the status of “disbarred,” which leads me to believe that the bar itself revoked the license, not the FTB.  Perhaps the FTB understands that suspending a bar license would severely restrict its ability to collect what is owed.

At the top of the list is the individual with the largest state tax debt on the books — the one I like to call “the winner” — Mr. Mon Bill Hom of Los Angeles.  Hom happens to be an attorney with an active bar license.  He owes $6.3 million, with tax problems dating back at least to 1995 (the year the tax lien was filed).  In looking at his state bar profile, it appears that he was suspended for two years back in 1999 after the IRS cleaned out his client trust account and he didn’t have the money to replace it.

I started this post by saying that the Top 500 Delinquent Taxpayers list is an effective enforcement tool.  Back in August the FTB sent out letters to the potential Top 500 candidates explaining to them that they can avoid being publicly named by resolving their accounts before October 15th.  And in a span of about two months, 150 of them came forward and resolved their accounts with the FTB by either paying in full, entering into an acceptable installment agreement, or settling by way of Offer in Compromise.  I’m sure some of them appealed their cases or filed bankruptcy (which also results in removal from the list), but FTB stated that it was able to collect $5.3 million specifically from debtors trying to avoid the Top 500 list.  I’d call that a success.

Bold New Tax Scams

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Some IRS scam artists are using bolder techniques to get their hands on taxpayers’ personal and financial information.  Emails are very common; we have seen many phony IRS email campaigns over the years.  Deceptive mailers are also prevalent, many of them rising to the level of what I would call a scam.  Far less common is a direct phone call from someone claiming to be an IRS employee, but there has been somewhat of an outbreak of these recently.

Blogger and tax attorney, Kelly Phillips Erb, reported that one of her clients recently got a call from somebody claiming to be from the IRS.  It is Erb’s opinion that IRS scammers are taking advantage of the government shutdown; they feel emboldened by the fact that victims can’t very well call the IRS right now to report them.  A local news source in Minnesota has also recognized an uptick in IRS phone scams, although I don’t agree with them that the test for identifying a phony IRS call is a thick accent.  I have also been informed of a couple IRS phone scams close to home (or perhaps the same one?), one from a client and one from a concerned taxpayer.  The latter was told that the IRS was going to come to his place of employment to arrest him.

Not to get too psychoanalytic or anything, but phony IRS phone calls takes the deception to a whole new level.  Granted, if somebody is tricked into giving up their social security number or credit card number, to them it doesn’t matter if it occurred in an email or over the phone.  The result is the same either way.   However, I do feel like it takes a different type of criminal to be bold enough to swindle somebody in a one-on-one situation.  An email campaign is so impersonal; a criminal can reach thousands of people with a couple clicks of a mouse.  But in a successful phone scam, the criminal needs to utter multiple lies to multiple victims.  It just seems like a much bolder form of tax scam and hopefully it is not a sign of things to come.

Tax Deadline Tomorrow! Are You Prepared?

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There’s a tax deadline tomorrow causing many people to work on their taxes into the wee hours tonight. Even though the federal government is closed, the second tax day is tomorrow, October 15, 2013. This second tax day is the deadline to file your personal federal tax return with the Internal Revenue Service (IRS) if you filed an extension to file your taxes by April 15, 2013, the first tax day.

On September 26, 2013, the IRS announced that “many of the more than 12 million taxpayers who requested an automatic six-month extension this year have yet to file.” These are likely the people that are going to be up late tonight enjoying tax returns instead of playoff baseball and Monday night football. Individuals and their tax preparers alike are guilty of procrastinating until this upcoming second tax day to prepare and file their tax returns.

Many people file a tax extension in April once they prepare their tax return and determine that they’re going to owe a tax liability. Others just need additional time to review their finances and prepare their tax returns. In either case, filing a timely tax extension in April only allows taxpayers extra time to get their tax returns filed. However, an extension to file does not extend the time that taxpayers have to pay any tax due on their tax return. This is often overlooked or simply ignored by taxpayers when requesting a tax filing extension.

If you filed an extension to file but owe a balance due, you will owe interest on any amount not paid by the April 15 tax filing deadline, plus you may owe penalties. The late payment penalty is generally ½ of 1% of any tax not paid by the original filing deadline of April 15, 2013. It is charged when reasonable cause for non-payment is not established, for each month or part of a month the tax is unpaid maxing out at 25%. Fear of not being able to pay the tax due often causes individuals to not file their tax returns, even if they have an extension to file. They’re often delaying the inevitable.

The IRS promotes payment plans to the public to entice the public to file their tax returns even if they cannot immediately pay the entire tax liability. Beware however, as the IRS is a collection machine, their job is to collect the debt owed; assuming of course that they return to work.

There are different types of payments plans allowed by law that may better fit your budget than the IRS may share with you, unless you know the rules. The IRS has a hardship program called currently non collectible status for taxpayers that are unable to pay the tax debt owed. Additionally, the IRS has a debt settlement program for tax payers that can prove that it is in the government’s best interest to collect less money than what is owed, this is called an offer in compromise. The point is that there are options available for taxpayers that cannot pay their taxes owed. The first step is to file your tax return, preferably before tomorrow’s second tax day deadline.

IRS is Closed, but Still Accepting Your Payments

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The IRS has provided a detailed explanation regarding what services are available during the lapse in appropriations — and it’s not much.

  • no live telephone assistance
  • no walk-in availability at local IRS offices
  • no refunds to be issued
  • no correspondence will be opened/reviewed
  • no tax return processing
  • no third party transcript requests
  • no installment agreement requests will be reviewed
  • no hardship status requests will be reviewed
  • no offers in compromise will be reviewed
  • no audit, exam, or appeal conferences
  • no levy releases (presumably)

The IRS clearly stated that they will not be issuing any new levies during the lapse in appropriations.  This applies to automated levies that are generated by ACS (Automated Collection System) as well as those issued by live field agents.  However, the caveat there is that some levy notices appear to have gone out after the government shutdown because they were post-dated.  If a particular levy notice was actually issued prior to the IRS closing its doors, then it will be impossible to get it released for the time being.  Also, “intent to levy” notices (those that warn taxpayers of future levy risks) will continue to be mailed out by the automated system.

But we know that at least some IRS personnel continue to work through the shutdown.  What are they doing?

  • cashing your checks
  • conducting criminal investigations
  • issuing emergency levies & seizures

Emergency collection actions usually involve situations where collection of the tax is in jeopardy: for instance, where the CSED (Collection Statute Expiration Date) is approaching and the IRS is on the verge of forever losing an opportunity to collect a substantial tax debt.  Even during normal operations, the IRS is quite selective in what it deems a “jeopardy” situation.  So during the IRS closure, this scenario would be “extremely limited” according to the IRS.

Government Shutdown: Residual Effects on IRS

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The effects of the “government shutdown” have been far-reaching and I’m certain we will feel the effects for months to come, even if everything is switched back on soon.

In IRS world, even one day off tends to cause residual delays and bottle-necks.  For example, when the IRS observes a national holiday and shuts down on a Friday or a Monday, the work tends to pile up, making it more difficult for taxpayers to get help for the following couple business days.  This is especially true in the IRS call centers where they have little control over work flow.  A salaried employee, such as an IRS revenue officer, can put in extra time before a day off so that work doesn’t pile up too much.  But the work flow of an hourly call center employee is more dependent on the volume of inbound taxpayer phone calls.

The IRS always experiences high call volumes on Mondays and days following holidays because IRS problems don’t just go away on their own.  If you can’t get through to the IRS on one day, you’ll probably try again as soon as possible.  And I don’t feel like the IRS hold times have ever really recovered to what they once were before the IRS began furloughing employees earlier this year.  But now we are talking about an unprecedented closure of several days in a row (and how many more, we do not know).  I would not be surprised if the residual effects of the IRS shutdown are felt well into 2014.

IRS closed – technical difficulties or government shutdown?

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Because our elected representatives can’t do their job, the government has shutdown. The Internal Revenue Service (IRS) is not immune from the shutdown … but you are still responsible to make payments and meet IRS deadlines.

Curious as to how the government shutdown would impact the IRS collection officers I face off against on a daily basis; I started to make my normal phone calls to the IRS today. The IRS practitioner’s line has a pre-recorded message acknowledging that it is closed due to the government shutdown. The standard collections phone number used by the public at large has a pre-recorded message that it is having technical difficulties. I called a small sample of Revenue Officers that I know and got their voice messages (no surprise there). I also called a couple of the duty lines at my local IRS office. The duty lines were not staffed. One had a rather funny message recorded either yesterday or today, acknowledging the government shutdown and then the person recording the message was either yanked off the phone or spat a profanity into the message.

According to the IRS website, they softly acknowledge the government shutdown as follows:

“Due to the current lapse in appropriations, IRS operations are limited. However, the underlying tax law remains in effect, and all taxpayers should continue to meet their tax obligations as normal.”

Individuals and businesses should keep filing their tax returns and making deposits with the IRS, as they are required to do so by law. The IRS will accept and process all tax returns with payments, but will be unable to issue refunds during this time. Taxpayers are urged to file electronically, because most of these returns will be processed automatically.

If you have an upcoming appointment scheduled with the IRS, you should assume that the appointment is cancelled and will be rescheduled. The IRS will also continue to send its scary collection notices; however, correspondences received will not be reviewed (again, not a real surprise announcement).

I suppose what I’m really waiting for is for a prospective client to contact me with a stack of IRS levy notices that were issued at the eleventh hour on September 30, 2013 by an IRS official knowing they were going on a forced holiday for an undetermined amount of time.

What Kind of a Watchdog is TIGTA?

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It seems like about once a month the IRS finds itself in the news headlines, and it is never anything positive.  Often the problem is that they have mismanaged funds one way or another.  This time, ironically, they have been criticized by the Treasury Inspector General for Tax Administration (TIGTA) for failing to account for some of their Obamacare spending.  I say “ironically” because these people are BEAN COUNTERS for Pete’s sake! Shouldn’t bean counters be able to keep records and track spending?  What do they do all day?  The IRS, and the government in general, needs to handle its finances like a responsible, hard-working individual might handle his personal finances.  And I’m pretty sure that would include carefully tracking where the dollars are being spent.

I know it is easy (and fun) to oversimplify IRS mistakes and problems.  But even if we don’t understand the complexity of the issues at the IRS, the sheer number of problems leaves no doubt that this is an agency in serious trouble.

We could say that it’s up to TIGTA to deal with the details, but there’s only so much TIGTA can do.  They do a great job writing reports and describing in agonizing detail the problems they find during IRS audits.  They even go so far as to make thoughtful recommendations.  But recommendations can be ignored.  I’ve always thought TIGTA should be given real power to drive change.

The media often refers to TIGTA as a government “watchdog” group.  Well, if TIGTA is a watchdog, it’s not a very good one.  An effective watchdog is mean when it has to be.  TIGTA is dedicated and vigilant, but fails to strike when a threat is detected.

Further Attempts to Regulate Return Preparers

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The government is trying to impose regulations on tax return preparers again.  This time they are relying on rather questionable authority.  It is a post-Civil War statute called the “Horse Act of 1884.”

After the Civil War, individuals often filed loss claims against the US government, primarily for horses that were lost in battle.  A cottage industry sprung up that provided representation in the filing of such claims.  Not surprisingly, once agents started filing loss claims for a fee, there was a spike in fraudulent claims, so the government began regulating them, giving only the ethical ones the title of “enrolled agent.”

That title still exists today.  Enrolled agents are tax preparers that also have authority to represent taxpayers before the IRS.  They often prepare tax returns, but they are also permitted to negotiate for tax relief as a representative of the taxpayer.  In the hierarchy of tax professionals, they fit somewhere between a regular tax preparer and a tax accountant.  The legal team opposing regulation points out that the key difference is that a tax preparer may not actually represent a taxpayer.  The IRS would have the court ignore this distinction and expand a 140-year-old statute.

I don’t know if it is fair to require that every tax preparer take tests, pay fees and maintain a license.  With so many people using tax software to file on their own, the mom-and-pop tax prep firms already struggle quite a bit these days.  Regulation of the entire tax preparation industry would hit some firms pretty hard.

Introducing the tax evasion beanie baby

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This week, the creator of the Beanie Baby toy phenomenon, Ty Warner, was charged with tax evasion. The charges allege that Warner committed tax crimes on his 2002 tax return by failing to report $3.2 million in income on a secret Swiss bank account that held as much as $93.6 million in assets. The federal government alleges that Warner falsely reported his 2002 income as $49.1 million, omitting money he made on his UBS account. He amended his 2002 return in 2007, yet it is alleged that he again understated his tax by $885,300.  In 2009, Warner tried to avoid prosecution by taking advantage of the Internal Revenue Service (IRS) amnesty program known as the Offshore Voluntary Disclosure Program. According to Warner’s tax attorney, the IRS denied amnesty to Warner.

Warner is expected to plead guilty as part of a plea agreement and will pay a civil penalty of $53.6 million for failing to file a required Report of Foreign Bank and Financial Accounts (FBAR). Warner is not the first UBS client to be prosecuted for tax crimes. Since 2009, the United States has prosecuted approximately 70 taxpayers, 30 bankers, lawyers and advisers in a crackdown on offshore tax evasion. I wonder if this is the time to sell those Beanie Babies I have in the attic.

IRS Collecting Less Revenue "By Force" . . . For Now

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According to the latest TIGTA report, enforcement revenue is down at the IRS.  Enforcement revenue is the money collected through enforced collection activities rather than through voluntary compliance.  Enforcement revenue is down because the IRS has decreased the overall number of enforced collection actions (i.e., lien, wage garnishment, bank levy, property seizure).  The number of enforced collection actions is down because the number of IRS enforcement personnel is down.  And the number of enforcement personnel is down because the funding that the IRS used to receive for these positions is down as well.  According to TIGTA:

The 13 percent reduction in enforcement revenue correlates to the 14 percent reduction in the number of enforcement personnel … since Fiscal Year 2010, approximately 8,000 full-time IRS positions have been lost—about 5,000 from front-line enforcement personnel.

But who are considered enforcement personnel?  Auditors?  Revenue Officers?  Call center personnel?  All of the above?  One news source suggests that these 5,000 lost “enforcement” positions are auditor positions, but I would take it to mean something broader than that.  The TIGTA report does not specify.  I think it matters, because 5,000 lost auditor or revenue officer positions is rather significant, and could realistically be responsible for the 13 percent drop in enforcement income.  However, 5,000 fewer Automated Collection Department phone operators would result in extended hold times, but probably not a drastic drop in enforcement revenue.

Maybe 13 percent is not enough to make an appreciable difference from the perspective of a tax practitioner.  The IRS is supposedly issuing fewer liens and levies, but I sure haven’t seen this to be the case.  And it is certainly not something we can count on continuing for too long.