Facebook’s Tax Refund

News that Facebook would be receiving a $429 million tax refund was of course misinterpreted by the general public.  The consensus among those who just don’t understand the complete story is that a company as profitable as Facebook should never be able to get out of paying taxes — not with so many ordinary folks who are up to their necks in tax debt, and not in this economic climate.

But Facebook did pay taxes.  According to its 2012 annual earnings report, Facebook says it paid some $2.86 billion in taxes.  So let’s get our facts straight before we go around defriending anyone.  See full story here.

"Where’s My Refund?" v. 2.0

Even with all the shenanigans this year* the IRS decided to upgrade the “Where’s My Refund?” tool that taxpayers often use to track the status of their federal income tax refund and promised that refund processing times will not be adversely affected.  In previous years Where’s My Refund? (“WMR?”) generated an estimated refund receipt date for you based on the fact that 90% of all refunds are processed and delivered within 21 days of the date that you file (assuming you file electronically, which almost everybody does these days).

This year, the IRS claims that “WMR?” will be able to ascertain an “actual personalized refund date.”  Now I’m not sure exactly what this means.  Is it personalized in the sense that it records the date that your return was processed and then adds 21 days, or is the tool more sophisticated than that?

The new version of “WMR?” breaks your refund progress down into three stages (available as soon as 24 hours after you e-file your return):

  1. Return Received
  2. Refund Approved
  3. Refund Sent

There is no information from the IRS about what happens when they encounter problems in the processing of a return.  For instance, if mistakes are found on the return and a refund is not approved, will “WMR?” inform the taxpayer of the hiccup, will it remain stuck on the “Return Received” stage, or will the tool simply stop working?

Here are some “WMR?” tips from the IRS:

  • Don’t try using it before January 30th, even if you’ve already filed.  It won’t work until the 30th.
  • Don’t call.  The IRS claims “WMR?” provides the most complete and up-to-date information about your refund claim and if you call to ask a customer service rep, they will be able to tell you no more than what you already know.  As a tax attorney who is on the phone with the IRS every day, I can certainly vouch for that!
  • Don’t check more than once a day.  Information in the “WMR?” tool is updated overnight and only once every 24 hours, so checking in every couple hours will only slow things down for everyone else.

*It is bold of the IRS to promise more precise refund tracking given the fact that (1) they have spent so much effort integrating the “fiscal cliff” legislation that recently passed and things could still be “buggy;” (2) they have been beefing up security filters that are meant to minimize refund fraud and admit that this will cause some refunds to be delayed; and (3) hundreds of thousands of taxpayers will potentially hire incompetent, unregistered (*Gasp*) return preparers this year due to their return preparer registration program being shot to pieces by a federal judge in D.C.

Truncated Tax ID Numbers

image via ssa.gov

Many people wait with some anxiety for their income tax refund check around this time of year.  If you get a big refund then you, in essence, have given the government an interest free loan all year.  Still, many taxpayers overpay throughout the year because they have grown accustomed to receiving a refund check, which they see as a form of tax relief.

So what if that check never came?  It happens sometimes, and all too often it is the result of identity theft.  The IRS has taken numerous steps to prevent identity theft, but it still pays out billions of dollars in erroneous refunds.  One of the newest proposals in the fight against identity theft is the Truncated Taxpayer Identification Number, or TTIN.

The TTIN is basically the last four digits of a Social Security Number (SSN) and looks something like this: xxx-xx-4777 or this ***-**-4777.  The IRS has issued proposed regulations that would allow certain information return filers to use a TTIN instead of a SSN on their tax documents.  The IRS has run a successful TTIN pilot program in the past and it is believed that this will help curb identity theft.  Even if the regulations are approved, a full 9-digit SSN will still be required for 1040 income tax returns.  The proposed regulation has to do with information returns such as forms 1099, 1098, and 5498.

State of California Holding $14 million in Tax Refunds

In these dismal economic times, so many hard-working citizens have tax debt up to their eyeballs and are desperately seeking tax relief.  It’s hard to believe there are taxpayers out there who let their refund go unclaimed or who don’t notice when it doesn’t come in the mail.  But every year state and federal taxing agencies publish data about the millions and millions of dollars in refund checks that bounce back to them due to a bad address.  Today the California FTB announced in a press release that it is holding over $14 million in refunds.

Granted, some of these refunds are so small that it is hardly worth a taxpayer’s time to call FTB and update his address.  But FTB stated that at the high end of the spectrum we’re talking about refunds in the $35,000 range.  I suppose some of these taxpayers are very wealthy and don’t need the money.  But I wonder how many of them have moved and don’t want the FTB to know their new address.  Or how many of these refunds are not claimed because the taxpayer knows they are the result of questionable tax strategies?

FTB reminds us that the best way to avoid the problem of a returned refund check is to sign up for direct deposit.

Three Projects for the New Commish

image via blog.xssoftware.com

Forbes contributor Stephen Dunn recently blogged about the challenges facing the presently-unnamed IRS Commissioner.  He identified three problems that he feels should be given serious attention once the new commissioner takes office.

1. IRS practioners need a more efficient way to get their hands on taxpayer transcripts.  It is inconceivable that Dunn, as a 27-year tax attorney, would be unable to gain access to his clients’ transcripts through IRS’ E-services.  However, I can personally attest to the complications involved in registering for E-services.  There is no reason why a tax attorney should have to call the IRS simply to order transcripts.  The procedure needs to be simplified.

2. The IRS should change its federal tax lien (FTL) filing procedure.  Dunn believes that the current practice of public lien filing opens the door for abuse by shady tax resolution firms who use lien lists to mass mail thousands of fliers encouraging recipients to call for tax help.  I can see his point here too, even though the abusive tax lien mailers are pretty easy to spot.  Instead, Dunn proposes a solution whereby firms or individuals would have to affirmatively request FTL information from the IRS instead of having that information available to the public.

3. The IRS must stop sending out refunds based on fraudulent 1099 forms.  This popular scam has truly gotten out of control, with millions of dollars being paid to criminals each year.  And it really needs to be prevented on the front end because after the refund has been paid, it costs way too much to try to get the money back.

The new commissioner is certainly going to inherit a large “to do” list.  This is only the start.

IRSAC 2012 Report, Part II

image via networkeducator.com

Identity theft is another prevalent issue for the IRS and another topic that the IRSAC has attempted to address in its report.  But I don’t think their recommendation for curbing identity theft would be popular with most taxpayers who (mistakenly) see their April refund check as the ultimate form of tax relief:

The IRS should strongly consider delaying refunds until after verification of the taxpayer’s identity. For taxpayers that rely on an early refund in January, the IRS should consider a process under which 25 percent of the refund is issued prior to verification, and the remaining 75 percent issued after verification.

Everything the IRS has done up until now has been aimed at speeding up the refund process and shifting over to a “real-time” tax system.  See IRS Real Time Tax Initiative.  But with the onslaught of fraudulent refunds obtained by using stolen identities, the IRS may have to backpedal somewhat.  The thought of having to wait a little longer will be very frustrating to the average taxpayer.  I imagine it would be somewhat like having to go back to a dial-up internet connection after being accustomed to DSL.  Of course, from a tax attorney perspective, the solution is to adjust your withholdings so you don’t end up with a huge refund in the first place.

The Dangers of the Split Refund Option

TIGTA has sniffed out another serious IRS problem.  The latest TIGTA report expresses Treasury’s concern with the administration of direct deposit refunds by the IRS.  More taxpayers than ever are taking advantage of this option because it is the most convenient and fast way to get your refund.  But this also happens to be the way many tax refund crimes are perpetrated:

Direct deposit is frequently the payment method used by individuals who attempt to commit filing fraud. Direct deposit provides the ability to quickly receive fraudulent tax refunds without the difficulty of having to negotiate a tax refund paper check. To cash a check, individuals usually have to provide picture identification matching the name on the tax refund check

~ TIGTA Report No. 2012-40-118

Specifically, the concern addressed in this report has to do with the splitting up of deposits into multiple accounts.  The IRS allows refund recipients to specify that the funds be deposited into one, two, or three accounts if they so indicate on Form 8888.  However, this option often invites foul play.  As a way of measuring the magnitude of the problem, TIGTA counted the number of times multiple refunds were deposited into the same accounts.  This method isn’t exactly perfect because there are harmless reasons for multiple deposits, such as in the case of joint bank accounts.   However, even ruling out these benign cases, TIGTA is finding that tax cheats are abusing the split refund deposit option.  For example, some tax preparers are illegally diverting funds to their own accounts to cover their tax help and return preparation expenses.

IRS’ Plain Language Notices

As I was looking around on the redesigned IRS website today, I came across the “Understanding your IRS Notice of Letter” page and was reminded how much I like it.  It features a table of IRS notices organized by notice number, and including a short description of the notice content in plain language.  This is a good resource for taxpayers who have no idea what they received in the mail and who just need a tax relief starting point.  And it’s nice that the IRS is making changes to its notices and letters so they are easier to understand, even though the most common phrase on these notices is:

You owe money on your taxes as a result of these changes.

Coincidentally, I did come across a couple notices that seem to suggest that the IRS is looking out for the taxpayer by pointing out tax advantages that were not claimed:

CP08 – You may qualify for the Additional Child Tax Credit and be entitled to some additional money.

CP09 – We’ve sent you this notice because our records indicate you may be eligible for the Earned Income Credit (EIC), but didn’t claim it on your tax return.

But somehow I doubt anybody ever gets this kind of notice!

Cleveland Lady Returns $400k IRS Refund Check

The IRS recently issued a $400,000 refund check to a little old lady in Cleveland who was supposed to get only $700 back.  Some IRS employee somewhere is getting chewed out and/or fired over this, right?  Actually, probably not.

Everything at the IRS is automated.  It wouldn’t surprise me to learn that this was the result of a computer glitch or identity theft of some kind.  When the computers read the returns and the computers write the checks, it’s hard to place the blame on any one individual.

To avoid any potential tax problems, the taxpayer’s moral compass lead her directly to her local IRS office to return the check, and I can only imagine the fiasco that ensued.  The sources that reported this story say she was required to confirm her identity before the IRS would accept the check or even talk with her about it.  But once she turned it over, I bet it got passed around that office like a hot potato.  I’m sure the managers spent the better half of their work day trying to figure out what to do with it.  And I’m sure all the other employees wasted the rest of their day making jokes or talking about how they might have spent it.


Some Refunds Delayed This Tax Season

According to the latest TIGTA audit report, there were some serious delays with the issuing of refunds this tax season, but things have already improved.  TIGTA cites “programming problems” as the source of the delays.

Our report found that the IRS is catching and preventing more fraudulent refunds and screening more prisoner tax returns; however, programming problems associated with Modernized e-File delayed some refunds, which may have contributed to a doubling of visits to the  “Where’s My Refund” feature at IRS.gov over the previous year.

~ J. Russell George, Treasury Inspector General for Tax Administration

If you tried to use the tool early in the tax filing season, you may have suspected it was broken.  I used the “Where’s My Refund” tool and found that it worked just fine (both on the IRS website and using the mobile app IRS2Go) as long as you wait the requisite 72 hours after filing your return.  Of course this was after the kinks were worked out of  the refund process.  TIGTA says that the source of the delays was found and fixed by February 18th.  So I guess it paid to delay just a little this year…