Tax Day is Around the Corner; Are You Prepared?

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Happy Tax Day! Come Monday April 15, 2013, your tax returns are due. Have you prepared? While many people filed their tax returns well before the April 15 deadline because they gave the government an interest free loan and are due a refund; many other people delay filing their tax return or never file a tax return. These people dread Tax Day because they know that they’re going to owe a tax debt once they actually do file their tax return. So they believe it’s better to not even file. This is not the correct approach.

If you are in the group of people who procrastinate filing their return or do not file your tax returns in fear of a tax debt, given the present Internal Revenue Service (IRS) collection regulations, this needs to be the year you fix your tax problem. If you have a filing requirement, you need to either file a tax return or an extension to file by April 15. Simply ignoring your filing requirement will likely cost you more money in the long-run as failure to file monetary penalties are severe.

Eventually, the IRS is likely to catch up with your shenanigans. If you had sufficient income requiring you to file a tax return, such income was likely reported to the IRS. Once your income is reported, even if you don’t file a tax return, the IRS may eventually file a return on your behalf by using the reported income and minimum deductions to assess a liability against you.  Even if your income isn’t reported, taxing entities have been known to use other means to estimate your income to assess a liability against you.

You’re legally allowed to file an extension to file, so use it if you’re not ready to file your tax return. This is a simple procedure. Many taxpayers fail to file a timely tax return. Or, alternatively, they elect to pay undue taxes by claiming the standard deduction simply for the purpose of meeting the tax day deadline because they don’t think they have the time to itemize and calculate the deductions and credits they are entitled to claim. While an extension to file is not an extension to pay, filing an extension and properly preparing your tax return will likely save you money.  You must file your extension by April 15. If needed, filing an extension will generally allow you until October 15, 2013, to properly prepare your tax return.

So you filed your tax return or you are about to file your tax return, and you owe a non-disputed tax debt… what do you do now? Can you pay the debt? If you can afford to pay the debt owed, paying the debt is usually the least costly option after penalties and interest are factored into the equation. But if you’re like most people who end up owing a tax debt, you likely were not expecting to owe a tax debt and it’s simply another debt you cannot afford to pay.

If this is the case, there is one thing to keep in mind: the IRS is not your friend when you owe a tax debt, they are like any other creditor, they need as much money from you as they can get, as quickly as they can get it. Even with the public relations blitz over the past couple years of a kinder, gentler IRS, keep this in mind as your financial situation needs to control the final resolution of the tax debt. Too often I hear from people owing tax debts who agreed to some outrageous payment plan because the IRS required such payment based on their liability owed and disregarded their actual financial situation.

Therefore, it’s important to know your financial limitations. If you truly cannot pay your tax debt, there are options available to you. However, you need to have an organized and systemic presentation of your circumstances to get the appropriate resolution to your tax headache. While the IRS will likely pressure you to pay your debt in full within 90 – 120 days or make payments including penalties and interest over the next five to six years, there are other options available which include petitioning for non-payment of the debt, to settling the debt for less than the amount owed. The point is that there are options available to you and the key is to file your return, and then address the debt within your financial limits, do not ignore it. And, if you need professional assistance, call the tax relief attorneys at Montgomery & Wetenkamp toll free at (800) 454-7043 for your free consultation. We can help you resolve your tax debt.

Wesley Snipes Released from Prison

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Perhaps one of the most high-profile celebrity tax crime stories of our time is coming to a conclusion.  Wesley Snipes was released from prison last week after serving about 28 months behid bars in Pennsylvania.  He will now be on house arrest until July 19th under the careful watch of the New York Community Corrections Office.

It is no surprise that TMZ was the first to report the conclusion of Snipes’ prison term.  TMZ follows celebrity tax problems like nobody’s business.  Even the LA Times cited TMZ as its source for this bit of news.

Celebrity tax problems are common, but most of them surface once the IRS files a Notice of Federal Tax Lien (FTL).  A tax lien is a public record that puts creditors on notice that the IRS has an interest in a taxpayer’s property as security against the past due tax debt.  A FTL is considered a “passive collection tool,” and in no way does it implicate the taxpayer criminally.  What made the Snipes case somewhat unique is that he was prosecuted criminally and he actually served time in prison.

IRS Getting Geekier

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As if the IRS weren’t geeky enough already, according to a US News Money story, they are really stepping up their game with regard to tracking taxpayers’ digital activities.  I sometimes lovingly refer to IRS employees as bean counters, and I similarly use the term geek here with all due respect.

The IRS has new advanced digital tracking technology similar to “cookies,” — but more powerful than cookies because the IRS also has access to social security numbers and other confidential information unavailable to the private sector.  It isn’t clear exactly how the IRS will use this new technology, but it appears they will have access to pretty much anything you do online whether it be posting on Facebook, making a purchase with your credit card, or anything in between.

Understandably so, the IRS isn’t rolling out this technology with much fanfare or noise.  The less the public knows about what triggers an IRS audit or what information is used to identify suspicious activity, the better, as far as the IRS is concerned.  But industry experts and scholars are very concerned about what all this could mean for individual privacy rights.  One thing that is clear is the IRS can’t continue to operate under procedures and safeguards that were designed when everything, including tax returns, was recorded on paper.

So, exactly how much can the IRS find out about you?  The answer to this question is quickly approaching “everything” if at one time it was somewhere in cyberspace.

And finally, some interesting geeky statistics:

  • An entire year of tax returns occupies 15 terabytes (only 1.5% of total IRS storage)
  • Total IRS storage is 1.2 petabytes (one quadrillion bits of information)
  • IRS has expanded its data capacity  by 1,000 percent in the past six years

Offer in Compromise Fees

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Sometimes taxpayers are not 100% clear about the role of the IRS.  Some IRS employees can be very convincing and will lead people to believe that they only want to help and provide some kind of service to the taxpaying public.  This is a nice concept (and one that is embraced by IRS mission statements as well), but it is not reality.  The reality is that the IRS exists to collect revenue, and only to collect revenue.  The more one delves into the “back office” of the IRS, the more obvious this becomes.  This fact is emphasized over and over (both explicitly and implicitly) in official IRS policies and procedures.

One example of this is seen in the Offer in Compromise (OIC) process, specifically with respect to OIC fees.  The IRS accepts offers from taxpayers who have very little to give in the first place, so it is interesting how the IRS places such a big emphasis on the accompanying OIC fees.  An OIC must include a non-refundable $150 processing fee and a 20% deposit (20% of the offer amount).  In fact, if either of these payments are missing then the offer is deemed “Not Processable,” and is returned to the taxpayer.  Yes, there is a fee waiver process for taxpayers who fall below the poverty line, but it rarely works as it should.

Also, IRS employees are given specific instructions on how to categorize offers that are received in Centralized Offers in Compromise sites based on whether or not the OIC packages include money.  IRM 5.8.2.2 lists the different categories, and I don’t believe it is any coincidence that the offers with fees are at the top of the list.

Indian Tax System Broken

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Americans are pretty conscientious about paying their taxes compared to some other countries.  How about the extreme tax-dodging that goes on in India?!  Many farmers and impoverished Indians are exempt from paying taxes.  But on the other end of the spectrum are the very wealthy (and there are many of them in India) who openly refuse to pay taxes.  The millionairs don’t feel they should have to pay because they cannot trust their corrupt government officials to spend the money appropriately.  They don’t want to bank roll their politicians and make them any richer.  Basically, few people have bought into the idea of paying taxes in India, and there is no shame in the dramatic underreporting of income.  Very interesting article here.

IRS Tips for the Self-Employed

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People incur tax debts for a variety of reasons.  Sometimes wage earners get into trouble by claiming too many exemptions on Form W-4, which results in too little tax being withheld for the federal government.  Sometimes people don’t understand the tax consequences of certain transactions; they see their job as their only source of income and fail to consider other taxable events such as debt forgiveness or retirement account distributions.  But a huge percentage (probably the vast majority) of people with IRS problems are the self-employed.  The self-employed typically get into trouble when they either fail to make estimated tax payments or when they claim invalid/excessive expenses which results in “underreported income.”

Today the IRS offers tips for self-employed taxpayers that will keep them out of hot water:

  1. You may be self-employed even if you don’t consider yourself “self-employed” so be careful!
  2. File a Schedule C to claim your business/self-employment expenses and reduce your taxable income
  3. Pay self-employment tax (Social Security and Medicare) as well as income tax
  4. Make estimated tax payments throughout the year so you don’t have a large bill that you can’t pay come April 15th.  See form 1040ES.
  5. Check to be sure you can deduct the entire business expense or if it must be capitalized
  6. Business expenses are allowable only if they are both ordinary and necessary

 

Hello Old Friend … Baseball is Here Again!

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It’s finally here, and the San Francisco Giants are ready to defend their World Series title and the Tax Attorneys at Montgomery & Wetenkamp are ready to root them on. If you remember last year’s opening day, it was confusing; read about last year’s confusion here. This year, however, it’s simple; the season started with a national game on Sunday night (even if it was just the Battle of Texas more suited for a football matchup), and everyone else gets started today.

The only thing that irks me about this year’s opening day is the World Series Champion San Francisco Giants are again not getting to open the season at home against the Dodgers as World Champs. Even in 2011, the then defending World Champion Giants didn’t open at home, they opened in Los Angeles as they do today. Don’t get me wrong, it’s the best rivalry in sports, just we deserve an opening day at home, especially as the World Champs. Raising the banner and getting the rings in front of the Dodgers and their “fans” would be awesome.

On the other hand, we get to raise the banner and get the rings in front of the Cardinals, as we did in 2011, which is almost as good as sticking it to the Dodgers. However, the Cardinals did take it from the Giants in 2011 thanks to Scott Cousins. I guess I need to remember that baseball’s Opening Day is just one game… and since we open the season in Los Angeles, we get the bad guys at home to end the season; when the games really count. Play Ball and enjoy the story of the season…

 

IRS Expands ID Theft Program to All 50 States

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Around this time last year, the IRS began a pilot program in the state of Florida that allowed IRS personnel to share confidential taxpayer information with local law enforcement to simplify the finding and prosecuting of identity thieves. Then in October 2012, the IRS opened up the program to eight more states: California, Texas, Alabama, Oklahoma, Georgia, Pennsylvania, New Jersey, and New York. Now effective Friday, March 29, 2013, the “Law Enforcement Assistance Program” has been opened to all 50 states.

This is basically how the program works:

  • Local law enforcement identifies potential identity theft situation
  • With the help of IRS, local law enforcement reaches out to identity theft victim to request consent for disclosure of personal tax records
  • If victim agrees to disclose the information, the victim completes a special IRS disclosure form
  • Law enforcement submits paperwork to IRS Criminal Investigation
  • IRS Criminal Investigation processes the paperwork and disclosure forms, then forwards the relevant documents to the requesting local law enforcement officer(s)

This appears to be an important and successful program, with more than 1,560 waiver requests received over the last 12 months. However, it is also apparent that the goal of helping the victims of identity theft will be achieved with or without the cooperation of local law enforcement. The IRS says it has resolved a whopping 200,000 identity theft cases since the beginning of 2013!

The IRS follows a three-pronged approach to combating identity theft:

  1. Prevent it from ever happening in the first place
  2. Where it cannot be prevented, detect it as early as possible
  3. Assist those who have been victimized

IRS Regrets Star Trek Parody

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The Internal Revenue Service has now released the Star Trek parody training video it produced at the cost of $60,000.  The video’s release was soon followed by a formal apology.

The IRS recognizes and takes seriously our obligation to be good stewards of government resources and taxpayer dollars. There is no mistaking that this video did not reflect the best stewardship of resources.

In the past few years the IRS has struggled fulfilling its responsibilities on a tight budget.  This video raises some serious questions for IRS management.

I watched every painful second of this video and, frankly, I’m more offended by the quality of the acting and the production than I am by the cost of making the video.  With that kind of budget I would have expected something better.  William Shatner himself found it apalling.  See for yourself: IRS Star Trek parody.

As a tax attorney I have spent hundreds of hours on the phone with IRS personnel over the years, and I can count on one hand the number of folks who had any sense of humor.  I think this video was well-intentioned, but it just reinforces the public perception that most IRS employees are unhappy working stiffs who lack passion and creativity and only care about punching out at the end of their shift.

Controversial IRS Parody Videos

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There is plenty of controversy surrounding the IRS’ $4 million per year professional video production studio in New Carrollton, MD.  Most of the controversy has been stirred by a man named Charles Boustany, Jr., chairman of the House Ways and Means Oversight Subcommittee who sees the studio as the ultimate in government waste.

In an attempt to gather details to strengthen his case against the IRS and its television studio, Boustany became aware of a couple parody videos produced by the IRS at a combined cost of $6o,000, and he wrote a letter to the IRS demanding that the videos be made public.  The IRS has admitted the existence of the videos and confirmed that they are indeed parodies of the old TV shows Gilligan’s Island and Star Trek, but the IRS has so far refused to release them to Boustany.

I’d be interested in seeing the videos too, although I admit it would be more out of morbid curiosity than anything else.  I feel like I’ve been shown a teaser for a movie that I’ll never get to see.  It’s easy to see both sides of the issue:

PROS: The production studio is necessary because the IRS has been able to create a popular collection of YouTube videos that are valuable for educating the taxpaying public.  The studio also provides a means for training and educating IRS employees through visual media, which is often less expensive than flying employees here and there for meetings in different cities.  Humor is an effective tool in training meetings.

CONS: Besides a few key videos (for example, one showing how to check the status of a refund, and one showing how to get your tax return prepared for free) the IRS YouTube videos are really not all that popular, so how much they actually help educate the general public is highly questionable.  High quality videos are fine in the right economic climate, but we just don’t have the money for this kind of thing right now.  Training videos don’t have to be entertaining.

You know, if an IRS employee can’t stay tuned into a regular boring video, then maybe they’re not the right person for the job because bean counting can be pretty boring too.