How Will Werfel Restore Trust at the IRS?

Posted by Wetenkamp on with 0 Comment

Daniel Werfel was appointed by President Obama as acting Commissioner at the IRS.  He replaced Steven Miller a couple weeks ago and his honeymoon period lasted only a couple hours.  A lot is expected of Werfel, and Congress (and the American people) are not likely going to give him too much time to get it done.  We need to know what he’s going to do to clean things up at the IRS.

He has been at it for less than three weeks so far, but I think he’s on the right track.  He is focused on holding IRS employees accountable for their missteps.  He has ensured that the managers responsible for the tax exempt investigations fiasco no longer have jobs at the IRS, even if that means encouraging them to resign instead of firing them.  Either way they’re being removed, which is the main thing.  He appears to be committed to bringing all the dirt out into the open as a first step in restoring trust.

The newest example of IRS waste that has come to light is the $4.1 million conference that was held in Anaheim, CA in 2010.  At least two high-level IRS employees reportedly accepted lavish gifts in violation of IRS ethics rules and stayed in $1,500 per night rooms during this conference.  Werfel is taking the necessary steps to expeditiously terminate these individuals too.

I do feel like Werfel “gets it” when it comes to restoring trust.  He appears to be acting decisively and quickly.  He is not dodging questions during hearings.  He has also said that what the IRS needs is not more money; it needs better management, which I think is key.  Although that comment can be taken with a grain of salt because who would ask for more money 3 weeks into the job?  Maybe if we give him a few months he’ll be whining about underfunding too.

The IRS has a new misstep every day – what scandal is next?

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During congressional hearings on the Internal Revenue Service (IRS) scandal, Congressman Hal Rogers (Republican – Kentucky) said, “It seems we have a new misstep every day at the IRS.” This is on the heels of news of lavish spending on conferences by the IRS. This of course was expected after new broke in March about the ridiculous Star Trek Parody Videos.

A report released Tuesday by the Treasury Inspector General for Tax Administration (TIGTA) details frivolous spending by the IRS which included $27,000 on an innovation expert, $10,000 on diversity and inclusion expert, $11,000 on a happiness expert, and $17,000 for something called leadership through art.  Given the overall demeanor of the IRS employees I’ve had the pleasure of dealing with as a tax attorney; I don’t necessarily disagree with the IRS trying to improve their happiness.

TIGTA conducted its audit to identify the IRS’s spending on conferences during fiscal years 2010 through 2012.  The audit’s primary focus was on the IRS Small Business and Self-Employed division’s 2010 conference in Anaheim where it spent $4.1 million for planning trips, outside speakers, video productions, and promotional items and gifts for IRS employees.

“Excessive spending by federal agencies on management conferences has been highlighted by recent Inspectors General reports and in congressional hearings,” said TIGTA Inspector General J. Russell George. “Effective cost management is especially important given the current economic environment and focus on Government efficiency. Certain of the IRS’s expenses associated with the Anaheim conference do not appear to be a good use of taxpayer funds.”

In watching the recent hearings, it seems like members of Congress are out of touch with their constituents and surprised as to the frustrations the public has to endure while dealing with the IRS every day. The surface is just being scratched as to inappropriateness at the IRS as the issues under scrutiny have not even (yet) dealt with IRS collection and audit issues. However, there may be pressure to not bring such issues to light as I suspect the IRS collection and audit practices may scare the public, and as Congressman Mike Kelly (Republican – Pennsylvania) repeatedly lectured during Tuesday’s hearings, “do not be afraid of this government.”

Better to be Employed when Filing OIC

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The Offer in Compromise (OIC) is an IRS program whereby some taxpayers are able to settle their tax debts for less than what they owe.  But the OIC option is not for everyone.  For instance, if the fair market value of taxpayer’s assets adds up to more than what is owed, then OIC is not an option.  Also, OIC is not a good option if a taxpayer’s income is too high.

So how does the IRS calculate income while reviewing an OIC filed by a taxpayer who is unemployed?  There are many different options:

  1. Unemployment Income – If the Offer Examiner is focused purely on what the taxpayer is earning at the present, then it would make sense to simply use the monthly unemployment benefit amount. However, it is unusual for the IRS to go this route because unemployment benefits tend to be temporary. If the IRS is going to wipe the slate clean then they want to be sure they are getting every last dime they can possibly get from the taxpayer. Unemployment income is normally an understatement of one’s true earning potential.
  2. Income history – Sometimes the IRS compares a taxpayer’s current income with income reported via tax returns going back 1, 2, 3, or even more years. If the present year income appears to be an anomaly, then the IRS may elect to calculate an average income using several years’ tax returns.
  3. Income potential – This is similar to using an income history because it seeks to determine what the taxpayer can theoretically make rather than taking the current income for face value. One example of using income potential would be to increase the income of a taxpayer who is close to finishing school and who will be moving into a high-paying field of work.
  4. Impute income – I have seen the IRS simply impute/assign minimum wage when a taxpayer is unemployed.  However, the IRS is not likely going to do this if the taxpayer has a history of high wages.
  5. Reject the Offer – I put rejection as a final option because, in reality, if the IRS is unable to determine what the taxpayer’s income is, they are more likely to reject the offer than struggle too long figuring it out.

Income is one of the most important factors that the IRS looks at when determining whether to accept or reject an Offer in Compromise. Based on my experience, the IRS simply does not believe it when someone claims their income is $0.  Since the IRS is going to resort to one of the above analyses or simply reject the offer when unemployed, then it is safe to say that an OIC is a more successful form of tax relief for those who have a steady job.

When do you need to file an amended tax return?

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This is the time of the “tax year” that little tax issues on your recently filed tax return usually come to light. You thought your taxes were done when you filed your tax return in April. Well, you may have some more work to do.

The “little issues” may include the discovery of the misfiled or belatedly received income statement, the discovery of a corrected income statement, or remembering that it was (or wasn’t) your turn to claim a shared dependent. The amended tax return, simplified, is a tool often used in one of two ways; 1) to make changes to a filed tax return for the taxpayer’s benefit, or 2) to make changes to a filed tax return for the government’s benefit.

Taxpayer Will Benefit From Amending the Tax Return

The use of an amended tax return is the tool to use when you notice that you paid too much tax or you were due more money back from the government than you received on your original tax return. The government isn’t likely going to make an adjustment when the unadjusted return is in their favor. Therefore, you’re going to need to push the issue to ensure you don’t pay more taxes than you’re legally obligated to pay.

This may include correcting your filing status or the number of dependents to your benefit, or claiming credits you were entitled to claim, but didn’t, on your original tax return. Although more rare, sometimes there are changes in the law that are retroactive and allow you to amend your tax return for a past tax year to take advantage of the change to the law.

In the present age of initial computer review of your tax return, calculation or transposition errors are normally caught fairly quickly by the IRS and normally do not require amending your tax return, as you will normally be notified of errors or the need for additional information.

If you will receive an additional refund by filing an amended tax return, you should normally wait until you have received the refund due to you as shown on your original tax return before filing your amended tax return. Waiting until the original refund is received may help avoid IRS delays and errors in processing your amended return and the additional refund. Generally, to claim a refund based on an amended tax return, the amended tax return must be filed within three years from the due date of the original tax return or within two years from the date the tax was paid, whichever is later.

The Government Will Benefit From Amending the Tax Return

In cases where amending a tax return will result in a higher tax owed and a tax debt, the taxpayer may drag their feet in filing their amended tax return. This situation may include, for example, the realization that you earned more income than you thought you had at the time you filed your tax return, or you claimed a dependent you were not eligible to claim. The reality is that the IRS, for all their faults, is likely to eventually catch an error that will result in a higher tax owed. The real question most taxpayers in this situation face is whether they can actually pay the increase in tax; and they often opt to wait for the IRS to push the issue.

Similar to calculation and transposition errors that benefit the taxpayer, simple calculation and transposition errors that may benefit the government are likely to be discovered in the initial computer processing of your tax return and don’t necessarily require an amendment. It is the more complex or intentional errors that warrant use of the amended tax return to minimize civil and criminal exposure for disclosures made on your original tax return. The use of the amended tax return will minimize the monetary penalties and interest assessed if amended before the IRS corrects the return for you. Like any tax issue, a proactive and organized approach will save you money over time.