Tax Gap Widening in California

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I’m posting this video partly for the rare glimpse inside the California Franchise Tax Board.  Can somebody who works at FTB help me to understand what all those aqua colored contraptions are for?  It looks like they may be used to sort mail, but for all I know, they are the machines that actually assist in processing our state returns.

The actual story reported in this video clip is that more and more Californians are not paying their taxes and that this impacts all residents of the state either directly or indirectly.  The tax gap in California has nearly doubled in the past few years, according to the report.  Jerome Horton, spokesperson for FTB, is quoted saying that the state sees people who fail to pay their taxes as criminals.  The report naively lumps honest taxpayers with unpaid tax debt into the same category as tax evaders.  I would like to say that this the reporter’s error, but it definitely appears that Horton shares this view.

“Fresh Start”: Installment Agreements

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Those with a tax debt are often reluctant to disclose their individual financial information to the IRS, and rightly so. The financial information that is normally required includes details about one’s income, expenses, assets, and accounts. The IRS often uses employment and bank information as levy sources; it’s the first place they go when taking enforced collection actions.

The IRS allows taxpayers to enter into installment agreements without disclosure of financial information as long as the balance due to the IRS is below a certain threshold. Previously that threshold was $25,000, excluding accrued interest and penalties. But the IRS announced yesterday that the threshold has been doubled — now $50,000. Also, instead of a 60-month payoff period, the IRS will now allow payments to be spread over a maximum of 72 months. The only catch is that the taxpayer must agree to a direct debit payment arrangement whereby the IRS is automatically wired payments each month from the taxpayer’s bank account. Those who owe $25,000 or less may still make payments by other methods, including manually writing a check and sending it in each month.

Yesterday’s announcement shouldn’t have been a huge surprise given the new Form 9465-FS that was released in December 2011, although with little fanfare.

For additional information, visit the IRS Newsroom.

“Fresh Start”: Penalty Relief

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Today the IRS announced it will be offering additional tax relief to struggling taxpayers under its Fresh Start initiative. One of the ways the IRS plans to help out taxpayers is by granting penalty relief for the unemployed.  Another way is by expanding the Streamlined Installment Agreement (SIA) program.  Today I will describe the penalty relief provisions and tomorrow I will discuss the changes to the SIA criteria.

Taxpayers who meet the criteria for Fresh Start penalty relief will be given a 6-month grace period on the failure-to-pay penalties for 2011 taxes.  So, what are the criteria?  There are several:

  • You must have been unemployed at least 30 consecutive days sometime during the period January 1, 2011 to April 17, 2012.
  • Self-employed taxpayers must have experienced a 25% or greater reduction in income compared to 2010 due to the economic downturn
  • Your adjusted gross income must be less than $100,000 (or less than $200,000 if married filing jointly)
  • The balance due on your 2011 tax return must be $50,000 or less.
  • You must pay the entire tax debt (including any tax, interest, and other applicable penalties) by the end of the grace period, which is October 15, 2012, otherwise a failure-to-pay penalty will be imposed and calculated from the original payment due date, April 15, 2012
  • You must complete a Form 1127A to request this type of penalty relief

See article in the IRS Newsroom for more details.

As I read through the terms and conditions of the new Form 1127A, I couldn’t help but notice that struggling self-employeds are held to a slightly different standard than the unemployed. What’s worse, earning 25% less for an entire year, or being completely unemployed for 30 days or more?  Clearly if its only 30 or 60 days of unemployment, then its worse to earn 25% less; therefore, the self-employed standard would appear to be higher.  Furthermore, the 25% reduction must be due to the economic downturn, but there is no similar requirement that the 30+ day period of unemployment also be due to the economy.  It appears that it may be easier for the unemployed to obtain 1127A penalty relief than for the self-employed, even though a self-employed who experiences a 25% reduction in income might find himself in worse shape financially.

Notice of Federal Tax Lien

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Most people who come see us for tax relief want to pay their taxes, but do not have the money. Some ask, “What happens if I don’t pay the IRS?”  One of the consequences of failing to pay your taxes is the filing of a Notice of Federal Tax Lien.  It is a relatively simple document showing the type of tax that is owed, tax form number, tax period, the unpaid balance(s), and the following rather blunt language:

“[W]e are giving a notice that taxes (including interest and penalties) have been assessed against the following-name taxpayer. We have made a demand for payment of this liability, but it remains unpaid. Therefore, there is a lien in favor of the United States on all property and rights to property belonging to this taxpayer for the amount of these taxes, and additional penalties, interest, and costs that may accrue.  [IRS Form 668(Y)(c)]

In case there is any question as to what “all property” means, the following explanation can be found on the reverse of the form:

“This Notice of Federal Tax Lien gives public notice that the government has a lien on all your property (such as your house or car), all your rights to property (such as money owed to you) and to property you acquire after this lien is filed.

Two Milwaukee Women Sentenced in Refund Fraud Scheme

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Who? – Roshunda Smith, 34, and Linda Fay Townsend, 46

What? – Filed more than 170 fraudulent returns for family and friends seeking approximately $1.5 million in federal income tax refunds.

How? – The filings listed false employment, income, dependents, tax withholding and estimated tax payments.

The Sentences? – Smith got 46 moths and $450,000 restitution charge; Townsend got 24 months / $70,000.

It is unbelievable to me that these schemes are still cropping up so much this tax season. For somebody who pays attention to IRS press releases and IRS news, I see that they are hot on the trail of any who would dare to perpetrate tax fraud, especially when the criminal is preying on the elderly and uneducated.  But maybe that’s the problem.  Maybe the average person does not see how the IRS has turned things up a notch.  The IRS should probably do a better job of publicizing each time they nail somebody, not only when that somebody is a celebrity.

The Commish on “Risk and Uncertainty”

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One attribute of our tax system that adds uncertainty is its impermanence.  Short term provisions, that sunset but are then often extended, have an unsettling effect on both clarity and stability.

In 2010, the Joint Committee on Taxation identified more than 130 tax provisions that were set to expire at the end of 2010, with approximately another 70 to sunset at the end of 2011. And 40 more tax provisions are set to expire at the end of 2012. This year, we actually had a tax provision that was set to expire in two months.

 A perfect example of uncertainty for business taxpayers caused by expiring provisions is the Research and Experimentation tax credit. Its purpose is to foster innovation and technological development while spurring economic growth and competitiveness.

However, for the past 30 years, it has been extended 14 times, many of those retroactively, for periods ranging from six months to five years. Such persistent uncertainty about the future availability of the R&E credit diminishes its incentive effect as taxpayers often do not know if they can depend on the credit when making decisions on future investments in research and development.

~ IRS Commissioner Douglas Shulman, February 15, 2012

How Will the IRS Spend its $12.8 Billion Proposed Budget?

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The IRS is asking for $12.8 billion for 2013 — that’s over $944 million more than their 2012 budget.  And $404 million of that will be spent on enforcement.  There will be more audits and more aggressive collection efforts in the near future.  Tax relief will be harder to come by and I don’t imagine that stacking tax debts will not be tolerated.

The only way the government can justify spending so much on the IRS is if they can expect a healthy return on the investment, and the IRS believes it can deliver.  In fact, the IRS’s crystal ball shows it will collect $1.48 billion with the increased funding.

How else will the money be spent?  Here are the IRS’ priorities:

  • increased scrutiny of offshore accounts and foreign financial transactions
  • crack down on fraudulent returns and identity theft
  • enhancing compliance and professionalism of return preparers
  • improvement of IT programs

Things are going to be very difficult for taxpayers who have fallen on hard times and can’t pay.  And to make matters worse, according to Fox Business writer Bonnie Lee, there’s no funding left over for improving customer service.

Goodbye to Large Dollar Unit

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It used to be that cases with a total aggregate balance of $100,000 or more were worked by a special unit within the IRS called the Large Dollar Unit (LDU).  It has been exceedingly frustrating dealing with LDU over the years.  They tended to ask for every last shred of documentation to substantiate every claimed expense.  And because they required so much documentation, it was never practical to get it over to them by fax (in fact, they would not even allow it).  So the docs had to be mailed in, and they would inevitably get lost.  Or if they did get logged in, they would take forever to look at them.  And if it finally got to the point where a case was nearly ready to be finalized, they would tend to ship it off to a local Revenue Officer to close the deal.  It was like a bad joke: they would string you along for months, then at the last moment, when it looked like we were going to reach a resolution, the case would be transferred to the field.

Well, according to one IRS representative I spoke with today, LDU has been “disbanded.”  That was the word he used, and I kind of liked it.  Now, every $100,000 + case will be transferred directly to a local Revenue Officer.  This is great news for practitioners like myself.  Revenue Officers tend to have more experience and more discretion to be able to close a deal without adding any more red tape than necessary.  Now I guess we will have to see if this in fact a new procedure or just a “flavor of the month.”

Romney on Tax Reform

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Mitt Romney has written an op-ed piece for the Wall Street Journal describing his vision for tax reform and tax relief.  He identifies problems with the tax code as one of our countries top problems:

  • record-breaking unemployment
  • deficit spending
  • big inefficient government & lack of leadership
  • screwed up tax code

I believe we must make the tax code simpler and fairer. We must reduce tax rates for job creators to promote economic growth. And we must still raise enough revenue to stop the endless borrowing that threatens American prosperity.

Romney lists 5 specific changes he would implement if he were elected the next US president:

  1. across-the-board 20% reduction in marginal individual tax rates
  2. reduce the corporate tax rate to 25%, transition from a world-wide taxation system to a territorial one, and make the R&D tax credit permanent
  3. maintain the low 15% rate on capital gains & eliminate it entirely for those earning below $200,000
  4. get rid of the AMT and the death tax
  5. bring stability to the tax code by making these changes permanent

Read the full op-ed piece here.  I’m not sure how he would achieve #5, although it sounds great.  So would that mean the Turbo Tax software I purchase in 2012 would also work for tax years 2013, 2014, 2015 . . . ?!

Offer in Compromise

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The Offer in Compromise (OIC) is often considered the ultimate form of tax relief. If you are considering an OIC to address your outstanding IRS tax debt, there are a few things you should know.

First, not everyone with a tax debt should attempt an OIC. The OIC is a special program generally reserved for low-income taxpayers with few assets. The OIC filing fee is $150 and the IRS also requires that you pay 20% of your offer amount up front when the offer is filed. Unless you are confident that the offer is going to be accepted, you may be better off saving yourself these fees.

Second, not everybody who meets the criteria for the OIC should file an OIC. Basically, it just has to make good sense. For example, the offer amount must be low enough in comparison to the overall tax debt. Also, if the balances you owe are old and about to expire, you may be in a situation where it would make more sense to “wait out” the statute of limitations rather than make an offer to the IRS.

Third, a tax attorney can maximize your chances of filing a successful Offer in Compromise. An experienced tax attorney will help you determine if the OIC is right for you and if it makes sense to file. An experienced tax attorney has the skills needed to present your financial information in a manner that is most advantageous to you.