IRS Accelerates Detection of Fraudulent Refund Returns

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Pursuant to its 2011 audit plan, TIGTA conducted its annual audit of IRS activities during the 2011 filing season. The purpose of the audit was to evaluate whether the IRS timely and accurately processed individual paper and electronically filed tax returns. The final report is dated September 28th, but was just released to the public on November 1st.

One of the highlights of this report was the dramatic increase in fraudulent refund returns. As of April 30, 2011 the IRS had identified 775,723 fraudulent refund returns — $4.6 billion worth — compared to 286,670 identified by the same time last year (a 171% increase). Perhaps even more amazing is the fact that the IRS, through its screening efforts, detected 96% of them, therefore, no refund was issued.

The IRS is clearly increasing its efforts in this area. It is even beefing up its screening of prisoner tax returns, which are often fraudulent. As of April 30, 2011, the IRS reported that it had selected 199,854 tax returns filed by prisoners for screening (a 256% increased compared with the 2010 filing season).

Read full report here.

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IRS May be Levying you in their Underwear

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The IRS has expanded its use of a wireless and remote access technology over the past several years, allowing employees to access the IRS Network from airports, hotels, their homes . . . anywhere. While it’s interesting to think of the IRS revenue officer sitting at home in his boxers in front of the TV sending out wage garnishment notices and lien letters, the more noteworthy issues here are (1) the efficiency of wireless technology and (2) the security issues it poses for the American taxpayer. The IRS really has to balance these competing values and TIGTA has stepped in recently to help do some balancing.

Today TIGTA released an audit report giving mostly positive marks to the IRS wireless activities. The IRS has adequate controls in place that monitor whether or not the secure network has been breached, and these controls are functioning properly. However, some IRS employees have been accessing the wireless network from unauthorized wireless devices (personally owned USB wireless adapters).

IRS Spends $80 Million with Credit Cards: Legitimacy of Purchases Cannot be Verified

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Yet another TIGTA audit has brought to light deficiencies in the Internal Revenue Service. This time the problems relate to the use of IRS-issued credit cards that are made available to certain IRS employees. Purchases on these cards are supposed to be tightly regulated. But TIGTA found that many of the restrictions on these cards have been ignored, and management has failed to take corrective action when violations have been found.

The cards are meant for purchases under $3,000 — purchases over this amount are governed by a separate set of internal controls. Furthermore, card purchases must not be made without prior managerial approval. TIGTA found significant violations in both areas. The $3,000 limit rule is regularly circumvented by splitting up purchases into two transactions. Improper credit card purchases are not always detected because the IRS lacks sufficient management controls. Instead of asking for more funding and more staff for collections, the IRS really needs to keep a better eye on how they are spending the money they do have.

TIGTA’s review covered the period of September 2007 – March 2009. Here are the key stats:

  • 4,270 credit card holders within IRS
  • 1,024 approving IRS officials
  • 16 different IRS business units
  • 174,000 purchases
  • purchases totaling $80 million

Weed Wars in Oakland, CA

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Oakland’s Harborside pot dispensary has a nifty slogan: “Out of the Shadows, Into the Light.” It’s actually a pretty good description of what the Internal Revenue Service has done with their tax returns recently.

Ever since California legalized marijuana for medical purposes, pot shops here are thriving . . . but not if the IRS can help it. The IRS recently audited the 2007 and 2008 returns of Oakland’s Harborside Health Center and hit them with a $2.4 million tax bill. It sounds like a lot of money, but Harborside’s is a huge dispensary with 84 full-time employees and gross revenues of $22 million a year. And what really inflated the tax bill is the IRS’s disallowance of their business expenses. Well, the IRS did allow them to deduct the cost of “medicine” purchased (that’s what Harborside calls it on their website), but nothing more. The IRS’s position is based on an old rule forbidding business expense deductions for operations that traffic in illegal drugs.

I have no idea why the IRS would question the legitimacy of this joint knowing they are the official 1st place winner of the coveted 2011 High Times Medical Cannabis Cup.

Harborside is fighting the audit and publicizing their good deeds, like the fact that they are pumping all kinds of money into the local economy. On Friday, September 30th, Harborside made a ceremony out of its $360,000 city tax payment as if it were some kind of voluntary contribution.

** I can’t take credit for the clever title of this blog post. The Discovery Channel will be airing a reality show based on the Harborside drama called “Weed Wars.”

IRS Audit Issue Going to Supreme Court

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If the IRS is thinking about auditing you, they currently have 3 years from the date your return is filed to decide. It’s called the Assessment Statute Expiration Date (ASED). There is an exception: in cases where the taxpayer omits 25% or more of his gross income, the IRS has 6 years to initiate an audit.

A number of lower courts have ruled one way or another on what constitutes a 25% income omission, and now the US Supreme Court has agreed to review the issue. Of course the IRS would like as much time as they can get, so they argue for a liberal interpretation. They argue that anything having the same effect as a 25% income omission (like an overstated tax basis) should result in a 3 year extension of the statute.

The case that the Supreme Court agreed to hear is Home Concrete & Supply v. U.S.. We need to keep an eye on this one. Currently it is not very common to see tax liabilities going back more than 10 years. The Collection Statute Expiration Date (CSED) on federal tax liabilities is 10 years; after that, the liability drops off the books. But the clock starts to run when the liability is assessed, so if the IRS waits 3 years to conduct an audit and assess the tax on your 2005 return, it would expire (at the very soonest) 13 years later — in 2019. This is assuming the return was filed on time (April 2006) and no other clock-stopping events have occurred in the interim.

If the Supreme Court rules in favor of the IRS, then we could start seeing more 16-year-old liabilities here and there.

IRS Customer Service Audit

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The two things you can be sure of in life are, as the saying goes, death and taxes.  As for the taxes, they are apparently unavoidable on many different levels.  If it’s not the payment of taxes, it’s the waiting on hold with the IRS to get answers to your tax questions.  It has become a fact of life and, as a tax relief attorney, I think I have accepted it.

Wanna see what I’m talking about?  Click here for IRS phone numbers.  Enjoy!

The average wait time has increased every year since 2007.  According to a recent TIGTA audit, IRS average telephone hold times were up to 10 minutes during the 2011 filing season.

During that same timeframe, the IRS achieved a 74.6 percent level of service. Doesn’t sound too impressive until you realize that their goal was 71 percent. So, yes, the IRS surpassed its goal, but you’re probably wondering why they are not setting their sights a little higher.  Well, the answer given by TIGTA is the same tired old problem of limited resources and increased demand. And what exactly is the “level of service” measurement anyway? It’s actually a comparison of the total number of taxpayers who attempt to call the toll-free telephone lines (a whopping 80 million during the 2011 filing season) and the number of taxpayers who actually gain access to the system and are placed in the IRS queue. Certainly a big percentage of the callers hang up before connecting, I know I have more than once.

One bright spot, in my opinion, is the “Estimated Wait Time Message” feature that was implemented for the first time a few years ago. What this does is it helps me to decide if I want to hang up and try again when the call volume is lower. It is actually very helpful, and I have noticed that the estimates are usually pretty accurate.

Nobody likes waiting on hold, but if you consider the massive volume of calls that come in to the IRS each day, I don’t think it’s unreasonable to have to “take a number.”  I think the hold times would be even easier to swallow if, when you finally did connect with a representative, you were greeted by a somebody with solid customer service skills.  It’s the whole quality vs. quantity issue.  But I guess that’s for another day and outside the scope of this particular audit.

Free Tax Prep: You Get What You Pay For

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A total of 3.1 million individual income tax returns were prepared for elderly, disabled, and low-income taxpayers at Volunteer Program sites in FY 2010. IRS Volunteer Programs include  the Volunteer Income Tax Assistance and Tax Counseling for the Elderly Programs. These programs scored extremely low marks from TIGTA (Treasury Inspector General for Tax Administration)  in arecent audit.

The findings of this review are very troubling. ~ J. Russell George, TIGTA

TIGTA found that volunteers are not following guidelines, using intake forms incorrectly, and even knowingly falsifying the facts. This resulted in a sharp increase in inaccuracies during the 2010 filing season. An abysmal 39 percent of the returns picked up by TIGTA auditors were prepared correctly. However, the sample size of the audit was very small: 14 out of 36 returns were error-free.

TIGTA is also concerned that the volunteers are not being properly screened. This is especially troubling given the amount of sensitive personal information that is entrusted to the volunteers by taxpayers who are perhaps more vulnerable to identity theft and fraud than the average citizen.

So, what does TIGTA recommend the IRS do to turn things around? There were many recommendations, and the IRS agreed to implement all of them. Here are just a few:

  • Evaluate the quality review process
  • Include “secret shopper” component in audit process
  • Improve volunteer standards of conduct
  • Develop a process for keeping a closer eye on volunteers
  • Revise intake procedures

These recommendations obviously lack the specifics needed to immediately put them into practice. It will be up to the IRS to fill in the blanks and decide how it will implement these changes. It really is unfortunate that the government cannot provide competent tax prep services to those who are willing to participate in the tax system, but do not have the resources or ability to file on their own. I wonder how many of these people realize that when they sign their name on the return, the error made by the preparer becomes their own error. I also wonder how many of the mistakes made by volunteers have resulted in a tax debt when a refund was expected.

Are IRS Audits Random?

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As tax relief attorneys, we frequently get the question, “How likely is it that I will be audited?” or “Does the IRS audit people randomly?”

IRS audits are not completely random. You may have heard that the self-employed are a more common target than wage-earners.  This is true.  Income reported on a Schedule C is, according to some, one of the most likely types of returns (or parts of returns) to be audited. According to Forbes columnist, Robert Wood, the sole proprietorship is one of the most tempting targets for the IRS.  Formation of a legal entity like a partnership or a corporation may add complexity to your business, but it is not as routinely audited as the sole proprietorship.

According to the IRS, cases are selected for audit based on a variety of factors, including statistical formula, document matching, and related examinations.

Nobody can audit-proof your return. There is always a chance that the IRS will scrutinize your income and your business filings. But there are certainly steps that can be taken to reduce the likelihood of an audit.  One of those steps is to simply avoid filing as a sole prop.

FTB’s Massive Filing Status Audit

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The California Franchise Tax Board announced today that they mailed out 135,000 audit letters to taxpayers suspected of erroneously claiming Head of Household status on their 2010 tax returns. A similar audit campaign last year resulted in additional assessments exceeding $35 million. People use Head of Household status because of the tax savings, but few really understand how it works. To qualify, the taxpayer must provide care for more than one-half of the year and pay more than one-half the cost of maintaining their home. The qualifying person must be related to the taxpayer and meet the requirements to be a qualifying child or relative.