TIGTA Questions Tax Gap Stats

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The most current “tax gap” figure is $450 billion — a little too nicely rounded, isn’t it? Seems like a wild guess, right?

Every year Americans collectively owe hundreds of billions of dollars in taxes.  But the IRS is successful in collecting only part of that.  The “tax gap” is the difference between these two figures.  It is the difference between taxes owed and taxes paid without resorting to enforced collections.  Of course it is much more than a “gap” these days; it is more like a chasm.  Tax gap data is some of the most important data there is for an agency whose primary duty is to figure out who isn’t paying and get them to pay.

As important as this information is, the IRS calculates and reports the tax gap only once every 5 years.  The most recent tax gap analysis was completed in January 2012, which provided tax gap data for tax year 2006 ($450 billion).  If you see a problem with this delay in information, you’re not the only one.  Recently the Treasury Inspector General for Tax Administration (TIGTA) issued an audit report criticizing the IRS’ tax gap analysis procedures.

One of the criticisms was related to the turnaround time on these reports.   Granted, tax gap figures are not easy to come by.  We’re talking about some very difficult calculations that are based on pretty convoluted data.  Indeed, part of the reason why the IRS only does this report every 5 years is because it takes nearly that long to gather and report on the data.  However, TIGTA would like to see tax gap reports churned out more regularly.  The more current the data, the more likely it is to assist with tax policy and administration.

As you can imagine, there are probably a thousand different versions of the tax gap (a thousand different ways to calculate it).  That’s what I mean by “convoluted data.”  But, as if it weren’t complicated enough already, TIGTA also recommended that the IRS include separate estimates for revenues lost in the “informal economy” (i.e., drug deals and small cash transactions) and offshore tax evasion.  Also, the IRS has been asked to change the way it calculates the corporate tax gap.

So, really it’s the same old story with the IRS: they’re being asked to do more, do it more quickly, and do it with less money.  Poor guys.

IRS Scams: Inside & Out

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The IRS makes a lot of money off the American people and certain American people make a lot of money off the IRS.  Some people cheat the system as ordinary citizens from outside the agency.  And some cheat the system by virtue of their insider/employee status.  Tax scams have evolved over time and have adapted to changes in technology.  But what has not changed are the most basic elements of almost all tax scams.  They rely on the fact that nearly everybody in the country has (or potentially could have) some kind of contact or interaction with the IRS.  And they rely on the fact that the IRS is so huge that they can’t always keep very close tabs on their own personnel.

Two recent headlines illustrate my point.

1. Santa Cruz, CA Phone Scam: Scammer targets South Asians and Indians, claims to be an IRS representative, tells victims that there is an open criminal tax investigation against them, and convinces them to wire money.  The strategy is simple: if you contact enough people, somebody is bound to take the bait.

2. Baton Rouge, LA IRS Manager Sentenced for Illegal Tax Business: She operated a tax & accounting business while serving as a supervisory revenue agent and group manager.  She used IRS databases for the benefit of her own business.

The IRS manager has been caught, the phone scammer has not.

The $10,000 IRS "The Apprentice" Parody

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Apparently it’s that time again.  That time when we poke fun at the IRS for idiotic mistakes, bad judgment, unfair rules, . . . horrendous training videos.  It has already become a regular topic for many writers and bloggers, but just how regular and how idiotic is up to the IRS.

Well, to be fair, the latest IRS training video, a spoof on Donald Trump’s reality show “The Apprentice,” was produced in 2011, around the same time as the now famous Gilligan’s Island and Star Trek videos.  So to say that the IRS is in total control of the negative press isn’t completely true; they’re still dealing with repercussions from the mistakes of a prior era, as they put it.  They claim to have a shorter chain on management and those that would have approved the ridiculous videos now.  Hopefully by now they have learned their lesson and are going to stick to things they are good at like bank levies and wage garnishment.

The Apprentice parody ranks right up there with the worst ever made.  I cannot for life of me imagine how it cost the IRS $10,000 to produce such utter garbage.  It was obviously filmed in one take, so even if they had to rent out the conference room to get just the right lighting and feel, it could not have been for more than a few hours.  They saved money on props by making some of them by hand and bringing others from home.  They saved money on wardrobe by wearing their own suits.  They even scrimped on the wig worn by the guy playing the part of “The Donald” — it was completely wrong.  Way too thick and way too dark.  And if they paid more than $100 to whoever was responsible for writing that train wreck of a script, then they got hustled.  One thing is for sure: these are 100% legitimate IRS amateurs, not paid actors, because they are horrible.

It’s pretty obvious that I derive a certain amount of selfish joy from critiquing IRS videos, but my primary reason for doing it is to help expose the underlying problem of waste.  This exposure has been difficult for the IRS.  Public relations are not the best right now.  I hope they have learned their lesson.

 

More on the Individual Mandate

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With the individual mandate element of ObamaCare going into effect in 2014, some people who are currently without health insurance may be wondering if they should begin looking into joining the ranks of the insured. We now know what the penalty will be for failure to secure insurance, so there will certainly be those who do a little cost/benefit analysis. As the deadline creeps up on us, perhaps some are also wondering why. Why is there a penalty at all?

I found a succinct and informative article on the PBS website that answers many of the common questions that pop up in relation to the individual mandate: http://www.pbs.org/newshour/rundown/2013/09/how-will-the-obamacare-mandate-impact-you.html

If you aren’t already aware, Americans will be required to obtain health insurance beginning in 2014 or else pay a tax penalty of up to $95 per adult and half that for each child, or 1 percent of the household income, whichever is greater. And if you still don’t have coverage by 2016, you’ll pay as much as $695 per adult and $347 per child pursuant to the individual mandate.

What I really like about the PBS article is the plain-language explanation of the “why.”  For the health care overhaul to work, there has to be a broad base of participants. If everybody participates, including the young and the healthy, then the rates will (ideally) remain low. If coverage were not mandatory, then there would be an inordinate number of sick, high-cost participants which would drive the price of insurance through the roof.

However, opponents of the individual mandate believe that the penalty isn’t severe enough to ensure anything near 100% participation. Some people will certainly weigh their options and risk a penalty that will be lower than a health insurance premium, especially if the IRS is not going to do too much to enforce the individual mandate.

Veterans Groups Resist IRS Audits

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The IRS does a fairly good job taking care of American military families, but what about our veterans?

Some think the IRS is picking on the American Legion and other non-profit veteran organizations.  The American Legion is a veterans organization that was incorporated by Congress in 1919.  They are “the nation’s largest wartime veterans service organization, committed to mentoring youth and sponsorship of wholesome programs in our communities, advocating patriotism and honor, promoting strong national security, and continued devotion to our fellow servicemembers and veterans.”  They are also highly enthusiastic about baseball and that’s good enough for me.

Jerry Moran, a Senator from Kansas, is unhappy about audits that the IRS has undertaken of certain American Legion posts.  Apparently the IRS requires that they maintain dates of service and character of service records for all its members or face $1,000 per day penalties.  American Legion officials are claiming that they have never heard of this requirement.

Really this requirement is not unreasonable, given the fact that it is the IRS’ job to make sure all tax-exempt organizations are meeting the requirements for tax-exempt status.  But veteran groups are claiming that they have never been informed of the record-keeping obligations.  Moran wants to know when this requirement came about, under whose watch, and by what authority.  These are valid questions since the audits are being conducted pursuant to mere IRS “guidelines” found in the Internal Revenue Manual.  Moran is asking the IRS to point to the actual legal authority that grants them the right to conduct these audits and levy tax penalties for non-compliance.

Accounting Today asked about these audits.  The IRS’ response:

  • There is no special enforcement effort underway; just routine compliance activity
  • Authority for these audits is granted by Internal Revenue Code Section 501(c)(19)
  • The IRS HAS made efforts to inform veteran organizations of their obligations by way of outreach programs and special publications, so if they didn’t know, they should have known

Gay Married Couples Must File Federal Returns Jointly

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These are some of the questions that remained after the landmark Supreme Court decision (US v. Windsor) in June that struck down the Defense of Marriage Act.

  • What happens when couples marry in a state that recognizes same-sex marriage, but then move to a state that does not recognize it?
  • Will same-sex marriages be considered valid for federal tax purposes retroactively?
  • Will civil unions be treated as marriages for federal tax purposes?

Many questions were answered today in  Revenue Ruling 2013-17.  It states that “same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes” regardless of their current state of residence and regardless of what other state(s) they move to subsequent to that legal marriage.  It isn’t just about filing status, although that appears to be the focus.  There are over 200 code provisions having to do with “marriage” or “spouses” and now we can be sure those also apply to same-sex married couples.  Gay married couples may apply for refunds unless they are barred by the statute of limitations.  Civil unions will not be treated the same as marriages under the revenue ruling.

But just like marriage itself, it isn’t all rainbows and butterflies.  Same-sex couples who are legally married must file jointly; they no longer have the option of filing as single people.  They may, however, elect to file “married filing separately” as married couples have always had that option.  Also, as was pointed out by some tax professionals, many same-sex married couples are going to find that there is no tax advantage at all when they file jointly.  In fact, some couples with similar incomes will get hit with the “marriage penalty,” which is not an actual penalty, but is a common description of the situation in which their tax liability as a couple is much higher than it would be if they were single.

Blocking IRS Collections

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If you do not develop a plan for dealing with your tax debt, the IRS will find a way to collect what you owe one way or another.  One way the IRS does it is through enforced collection actions such as wage garnishment, interception of federal and state refunds, levy on federal benefits like Social Security, bank levy, and seizure of property.  The IRS also encourages and persuades folks to voluntarily comply with tax laws through public outreach campaigns, phone calls, and letters.  Of course, those “nice guy” techniques only get them so far.  There are several different ways to block IRS collection efforts, but some I cannot recommend because they are illegal.

Recommended

  • pay what you owe
  • set up an installment agreement
  • prove hardship
  • file an Offer in Compromise

Not Recommended

  • hide assets
  • bribe an IRS revenue officer
  • give false information
  • dump a pile of dirt in front of an IRS revenue officer to prevent them from getting near your assets

Let me be perfectly clear.  I include the “not recommended” list only to give you a keen understanding of what you should not do.  And the dirt dumping sounds like a ridiculous example, but it really happened.  The guy that did it was sentenced to three years of probation just last week.  In an attempt to collect unpaid taxes from 45-year-old Walter M. Trizila, IRS revenue officers visited his property to see if there were any assets worth seizing.  The IRS set its sights on a certain dump truck, but Trizila didn’t want to part with it.  He entered a front-end loader, charged at the revenue officers, and then dumped a mound of dirt between them and his truck.

Trizila is apparently a very literal kind of guy.  He knew he had to “block” IRS collections and he did it the only way he knew how.  Unfortunately for him, it resulted in a misdemeanor conviction for assault, resisting or impeding a federal officer.

IRS Violating Software License Terms

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The IRS is using some computer software that it hasn’t paid for, and is paying for other programs its employees aren’t even using, according to a new TIGTA audit released Tuesday that said the tax agency could be violating copyright laws.

The Treasury Inspector General for Tax Administration found serious problems with IRS software license management practices, many of which could be remedied if they would simply keep better records.  Read the full report here.

Software licenses are typically written in such a way that the software may be shared only on a certain number of computers.  The IRS appears to be doing what so many other private parties tend to do: sharing software on more systems than is allowed by a license.  And then they have also been doing what few people in their right mind would do: paying for licenses that they aren’t using.  This is a signature IRS move if I have ever seen one!

Online FATCA Registration Begins

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The Foreign Account Tax Compliance Act (FATCA) was enacted in the wake of the UBS scandal to crack down on tax evasion overseas.  “FATCA requires foreign financial firms to report to the IRS offshore accounts held by Americans that are worth more than $50,000.

Foreign financial institutions that fail to comply with FATCA face a 30-percent withholding tax on their U.S. source income, a penalty that could effectively freeze them out of U.S. financial markets.

FATCA does not take effect until July 2014, but there have been many steps leading up to it, including this latest step: the registration process.  Remember though, the registration process is not an individual tax requirement but, rather, is meant to secure the cooperation of financial institutions.  If you are a in charge of a foreign bank, investment firm, or insurance company and you need to know, the schedule of events appears to be as follows:

Registration may be done on paper, but the IRS highly encourages that it be done through their secure online web application.  Once a firm has registered, the IRS issues them a Global Intermediary Identification Number (GIIN).  Registration ensures that the IRS knows who to call when they have questions about suspected tax cheats.

 

IRS Launches New ACA Website

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The IRS’ new Affordable Care Act website is up and running.  Most of the new content is organized into three main parts: (1) Individuals & Families, (2) Employers, and (3) Other Organizations.

The Individuals & Families page is further broken down into two subtopics designed to educate the public on what they need to consider immediately (in 2013) and what they should look forward to in 2014.  Individuals should explore and begin planning for open enrollment in the Health Insurance Marketplace, which opens October 1, 2013.

The Employers page has a separate set of instructions for small employers (fewer than 50 full-time employees) and large employers (50 or more full-time employees).  It helps to educate employers on their specific coverage and reporting requirements and also explains what employer credits might be available.

Some organizations will be subject to special rules under the Affordable Care Act.  These “other organizations” include insurers, miscellaneous business types, non-profits, and government agencies.

The ACA website features a nifty news bar so we can always stay informed of new developments related to the Affordable Care Act.  It also very neatly lists all the various tax provisions, both in layman’s terms and in the form of news releases, notices, regulations, revenue procedures, revenue rulings, and Treasury decisions for the tax lawyer and studious type.  Lastly, the new ACA website includes links to related federal government websites like the Department of Health & Human Services, the Small Business Administration, and the Department of Labor.