Archive for IRS Enforcement
It has been QUITE a tax season! A Review of IRS Activity
According to the newly released 2012 IRS Data Book, the IRS collected almost $2.5 trillion in federal revenue and processed 237 million returns, of which almost 145 million were filed electronically. Out of the 146 million individual income tax returns filed, almost 81 percent were e-filed. More than 120 million individual income tax return filers received a tax refund, which totaled almost $322.7 billion. On average, the IRS spent 48 cents to collect $100 in tax revenue during the fiscal year, the lowest cost since 2008.
The IRS examined just under one percent of all tax returns filed and about one percent of all individual income tax returns during fiscal year 2012. Of the 1.5 million individual tax returns examined, nearly 54,000 resulted in additional refunds.
An electronic version of the 2012 IRS Data Book can also be found on the Tax Stats and the following are some highlights worth noting.
In FY 2012, IRS initiated 5,125 criminal investigations.
In FY 2012, the IRS closed 60,793 applications for tax-exempt status and other determinations. Of those, the IRS approved tax-exempt status for 52,615 organizations. In FY 2012, the IRS recognized more than 1.6 million tax-exempt organizations and nonexempt charitable trusts.
In Fiscal Year 2012, General Counsel received 31,295 Tax Court cases involving a taxpayer contesting an IRS determination that he or she owed additional tax.
IRS workforce and the resources that the IRS spends to collect taxes and assist taxpayers. In Fiscal Year (FY) 2012, the IRS collected more than $2.5 trillion, incurring a cost of 48 cents, on average, to collect $100.
IRS’s actual expenditures in FY 2012 was less than $12.1 billion, which was used to meet the requirements of its three core operating appropriation budget activities.
In FY 2012, the IRS employed a total workforce of 97,941, including part-time and seasonal employees.
IRS Targets – Don’t Be One.
In 2013, the IRS will focus the significant majority of their enforcement budget and subsequent activity in my opinion on three specific areas:
1. Abusive transactions and under reported income on partnership returns (IRS Form 1065).
2. Officer compensation as well as losses taken in excess of basis in Sub-chapter S Corporations (IRS Form 1120-S).
3. Under reported income via Automated Under Reporter Inventory Strategy Database (AUR-ISD)
In 2012, the IRS started a business information-matching program and a Form 1099-K matching program. The IRS sent new notices in late 2012 questioning businesses on the accuracy of their returns, based on information statements filed under business employer identification numbers (EINs). The IRS also matched Forms 1099-K to business returns and sent inquiries to taxpayers with potential discrepancies, requesting explanations for possible unreported income. I have been informed by reliable sources inside the Service that in 2013, the IRS will expand this effort to address small business under reporting vastly beyond its reaches in 2012.
Denver Colorado IRS Stakeholder Meeting Notes
Bessie Castro-Zepeda, Colorado Department of Revenue
Tax Practitioners only helpline; M-F 8am – 430pm (303) 232-2419
Capital Gain Subtraction: For 2012 returns, the department will make every effort to verify required documentation was included in the filing of the return before contacting the taxpayer for more information. That is why it is important the following supporting documents be submitted with the return.
□ A DR 1316 form, “Colorado Source Capital Gain Affidavit” must be completed and included with the return (electronic or paper). With e-filed returns, attaching the form to the electronic return or submitting it as an E-Filer Attachment in Revenue Online is not sufficient. For electronic returns, the information must be data entered on the DR 1316 portion of the return.
□ A copy of the closing statements for both the purchase and sale of the property, or official documentation from the county detailing purchase date and price and sale date and price
□ Copies of the first two pages of the corresponding federal return, Schedule D and any Schedule D attachments
□ If the capital gain was received via a pass-through entity, documentation that the interest in the underlying business satisfies the required five-year holding period
□ If the capital gain is claimed on a 2009 or prior year return and was due to the sale of stock or ownership interest, documentation verifying it was held for at least five years prior to the sale, that the company was a Colorado company for at least five years prior to the sale, and that the stock was acquired after May 9, 1994.
If form DR 1316 is included, and the capital gain subtraction claimed is $100,000 or less, the department will continue its practice of reviewing the capital gain subtraction claim two to three years after the return is originally filed, when the IRS provides federal return information to Colorado’s Discovery Section.
For more information, see publication FYI Income 15.
Kenneth Cooper, IRS Examination
Western Area has a lot of priority projects and initiatives coming up in the future. The work plan has expanded exponentially, yet the resources are getting smaller. With this type of blueprint, there is a sense of urgency to close cases.
Our return preparer visits have decreased. This year we did less than half of what we did last year. The visits were more educational visits than audits. We have completed the return preparer visits for this filing season.
Our high income non-filer program consists of individuals with an income of more than $200,000. There is a high non-response from these types of high income non-filers.
1099K information reporting is up tremendously.
Goretti Lysek and Tamara Hobson, Automated Collection Site (ACS)
There are currently three new changes to ACS.
Individual cases that can be worked in ACS have increased from $100,000-$250,000.
ACS is no longer asking for substantiation on financials unless the account will not be paid within the statute of limitations.
BMF/trust fund accounts have increased from $10,000 to $25,000 and now if a client can pay within 120 days they can be setup on an installment agreement for $999,999, or less than $1 million.
Question: Is there a change of when liens are filed?
Response: Liens are filed and starting at $10,000 and up. If you’re on a direct debit installment agreement the amount increases to $50,000. And of course a lien can be withdrawn if less than $25,000.
Comment: An ACS letter was received two weeks after the date on the letter. Practitioner will send the information to Debbie, who will forward it to Goretti.
Comment: Financial review on partial pay installment agreement letter not received then it is defaulted before we get the paperwork for the financial information.
Comment: Direct debit installment agreement payments coming out two to three days late creates a default on the installment agreement
Response: There were some issues in late June with direct debit installment agreements going to Collection. About 54% were deemed late and now the program is being analyzed.
Comment: There seems to be a disconnect when we contact ACS and speak to three different people and receive three different answers about an installment agreement.
Stephanie Valencia, Taxpayer Advocate
Nina Olson’s report to Congress was released this week.
The alternative minimum tax patch has been fixed permanently.
Taxpayer Advocate office will not accept any return cases until March. Hardship cases will get looked at individually.
An open house will be held in Denver in March or April with case advocates and managers. Debbie Rodgers will receive the information to forward to all practitioners.
Andrea Ventura, Collection
Collection has a new Area Director Tom Mathews who reports to the Western area on January 14.
Trust fund recovery protests – If we receive new information within 60 days we can revisit the claim. The taxpayer uses Form 1153W to reopen the case.
Collection has new Form 433A and 433B Collection Information Statements. Form 433A has more details about wage earner/self-employed individuals. Section 5 includes monthly income and expenses. We can use the old forms until June 1, 2013.
Some issues with direct debit installment agreements are that the revenue officer did not get an original signature on the direct debit application, and the bank information was incorrect.
Question: The new collection information statement forms don’t ask for supporting information, why?
Response: Substantiation is still necessary in most cases. A priority of the area Director is to reduce defaults on installment agreements. The Revenue Officer determines what type of supporting documents may be required after making contact with the taxpayer or their representatives.
Loving v. IRS deals blow to IRS Regulation of Tax Return Preparers
In Loving v. IRS the IRS’ authority to regulate commercial tax return preparers has been successfully challenged. United States District Court for the District of Columbia Judge James E. Boasberg granted Loving’s motion for summary judgment describing the IRS Rules as “Ultra Vires.”
“Ultra Vires” as I understand is a legal term meaning “beyond the powers” referring to an activity that exceeds the powers granted to the person (or entity) engaging in that activity creating what the opinion calls “an invalid regulatory regime.”
As I further understand this means that tax return preparers who have not yet taken the competency test do NOT have to take it. It also means that there will be no Registered Tax Return Preparers (RTRPs) with the IRS and that the industry goes back to the way things were in 2009, before the Tax Return Preparer Initiative was launched. The wild, wild west where incompetency and fraud ran rampant. The only exception noted is that all tax return preparers still must register for and receive an annually renewable practitioner tax identification number or PTIN.
How will the IRS respond? This will be interesting to watch develop. Check out The Original Complaint.
S Corp Late Filing Penalty Excused IRC 6699 Ensyc Technologies v. Commissioner
Considering the scope of the reasonable cause language to the Code Sec. 6699 penalty for late filing of an S corporation return, the Tax Court determined that the failure to timely file a 2008 2008 1120-S tax return was due to reasonable cause not subject to penalty in Ensyc Technologies v. Comm’r, T.C. Summary 2012-55 (6/14/12). The following are the facts as I understand:
1. Ensyc Technologies, an S corporation operated entirely by its president who works from his home in Idaho with the assistance of subcontractors, had its tax returns prepared by an accountant in Nevada.
2. Ensyc’s annual tax return for 2008 was due March 16, 2009.
3. On March 10, 2009, Ensyc’s accountant sent Ensyc IRS Form 1120S, U.S. Income Tax Return for an S Corporation, to file with the IRS. The accountant also sent copies of Schedules K-1, Shareholder’s Share of Income, Deductions, Credits.
4. Ensyc’s files contained a copy of a Form 1120S bearing the President’s signature dated March 16, 2009.
5. The IRS has record receiving a Form 1120S from Ensyc on September 11, 2009 postmarked September 8, 2009.
6. The 1120-S form itself was dated February 24, 2009.
7. Code Sec. 6699 basically states that an S corporation not timely filing its annual tax return is liable for a per-shareholder penalty for every month the tax return is late up to 12 months. However the penalty is not imposed if the failure to timely file the return is due to reasonable cause.
8. On the theory that the Form 1120S it received on September 11, 2009, was the only Form 1120S Ensyc had filed for tax year 2008, the IRS assessed a $6,408 late-filing penalty.
9. On February 1, 2010, Ensyc requested a collection-review hearing with the Office of Appeals regarding levy action.
10. The IRS Office of Appeals determined that Ensyc did not timely file a Form 1120S nor did it have reasonable cause for failing to timely file the form and sustained the levy.
11. Ensyc took the case to the Tax Court, arguing that it was not liable for the late-filing penalty because it mailed a Form 1120S on March 16, 2009.
12. The Tax Court examined the possible explanations for why the IRS had no record of receiving the Form 1120S and essentially determined that the tax return was not timely mailed.
13. The Tax Court then considered whether there was reasonable cause for not filing the form on time noting that no judicial opinion had yet considered the scope of the reasonable cause exception to the Code Sec. 6699 penalty.
14. The court applied the ordinary-business-care-and-prudence test from IRC 6651 concluding that Ensyc exercised ordinary business care and prudence in its efforts to timely file its Form 1120S for 2008.
15. The Tax Court specifically noted that the President routinely mailed Ensyc’s tax returns on time. Further he mailed the Schedules K-1 to Ensyc’s shareholders and that an Ensyc shareholder filed an annual individual income-tax return on April 15, 2009 reflecting the shareholder’s pass through loss.
16. The court believed the President’s testimony that he thought he had mailed the 2008 Form 1120S on March 16, 2009. As a result, the court found that Ensyc’s failure to timely file a Form 1120S for the 2008 tax year was due to reasonable cause and, thus, Ensyc was not liable for the Code Sec. 6699 penalty.
17. It was also noted that pursuant to INTERNAL REVENUE CODE SECTION 7463(b), this opinion may not be treated as precedent for any other case.
I think the lesson learned here is to file on time and avoid the penalty.
IRS Can Levy More Than 15% of Social Security Benefits According to Bowers V. US
The distinction of how this is possible distills down to understanding the nuanced difference between a ‘Continuous’ and a ‘One Time’ IRS tax levy.
Under Code Sec. 6331(h) once a tax levy is approved, the effect of the levy on specified payments received by a taxpayer is continuous from the date the levy is first made until the levy is released. A continuous levy attaches to up to 15 percent of any specified payment including social security payments.
However as a one-time levy, the 15 percent cap on continuing levies under Code Sec. 6331(h) does not apply to monthly social security benefits allowing the IRS to take more than 50 percent of the taxpayer’s monthly benefit in Bowers v. U.S., 2012 PTC 133 (C.D. Ill. 5/22/12).
In the Bowers case we learn that according to the court, the IRS has discretion to approve continuous levies under either Code Sec. 6331(a) or (h) however it is not required to attach a continuous levy even where the type of property might be eligible for one.
The court stated in this case that social security payments represented a present, vested right to receive benefits in fixed monthly payments for the taxpayer’s life and the amount of the benefits are based upon a formula that included prior wages.
Because the social security benefits were not contingent on the performance of any additional services the tax levy could attach to the entire stream of Social Security payments as a one-time levy under Code Sec. 6331(a) and (b). Thus, the levy was considered a one-time levy.
As a one-time levy, the 15 percent cap on continuing levies under Code Sec. 6331(h) does not necessarily apply.
I think the lesson learned here is that if you are having your social security levied try to have it levied under IRC 6331(h) as a continuous levy subject to the 15% maximum threshold..
IRS Restrictions on Contacting Taxpayers
I’ve worked with many good people inside the IRS on a wide variety of cases. So please do not get me wrong I’m not bashing ALL IRS employees. However like any big bloated bureaucracy I’ve also worked with some real shit heads inside the IRS who take their orders to advocate on behalf of the US government a little too seriously. When indeed government bureaucrats should be focused on getting maters resolved some use their vested authority to wreak havoc on good people’s lives using what I refer to as procedural maneuvers.
One such example is when IRS Revenue Officers can negatively impact the ability of taxpayers to obtain appropriate and effective representation during collection investigations. According to the Treasury Inspector General for Tax Administration (TIGTA) “IRS employees are required to stop an interview if the taxpayer requests to consult with a representative and may not bypass a representative without supervisory approval.” Evidently this is not happening as provided for by law in that “between October 2010 and September 2011, TIGTA’s Office of Investigations closed 19 direct contact complaints involving IRS employees, of which eight were disciplined or counseled for their actions by IRS management officials.” AKA – a slap on the wrist.
The IRS’s compliance with Internal Revenue Code Sections 7521(b)(2) and (c) is in my opinion woefully inadequate. The audit report I reference goes on to state that “in the sample of 73 cases, TIGTA found that 14 revenue officers deviated from procedures by: 1) contacting the taxpayer directly, instead of the authorized representative, on the initial or subsequent contact in the collection investigation, 2) not sending copies of taxpayer correspondence to the authorized representative, or 3) not allowing enough time for the taxpayer to obtain a representative.” The report in question clearly states “IRS personnel are intentionally disregarding the direct contact provisions of the Internal Revenue Code.”
As such if you are under investigation you need to know your rights. You also need to keep in mind that IRS employees are specifically trained to create the perception that they are ‘helping’ you ‘achieve compliance’ when indeed they are compiling evidence to portray you as a delinquent or even a criminal. Check out the report yourself here ->
http://www.treas.gov/tigta/auditreports/2012reports/201230089fr.html.
IRS Stakeholder Liaison Meeting Summary
The following are the notes from the most recent IRS Stakeholder Liaison Meeting held in Denver Colorado as prepared by IRS Senior Stakeholder Liaison Deborah Rodgers
Michael Shuler, Local Taxpayer Advocate
Nina Olson, the National Taxpayer Advocate’s (NTA) objectives report was released in June, revealed some issues that will be coming out in the annual report in January. Some of Nina’s concerns were around the difficult filing season. The expiring tax provisions cause chaos for the tax professionals and taxpayers, when Congress waits until the end of the year to address these provisions. The AMT tax, sales tax deduction, mortgage insurance premium deduction, and age 70 1/2 IRA charitable contributions are included in this list and are usually retroactive when reinstated.
In 2013 , the Bush tax cuts sunset. These include the long-term capital gains rate cuts, child tax credit and the adoption credit.
Tax fraud and identity theft are growing. Innocent people are caught in the system to prevent fraud ID theft. The ID theft line is understaffed. One in nine calls were getting through during the filing season.
The Advocate’s office is also concerned about IRS disregarding the Taxpayer Assistance Orders (TAOs). The TAO process is provided by statute. A TAO is effective because it can raise issues to higher levels of management. Taxpayer Advocate Service is successful with TAOsevery day, but there are issues with the program raised in the NTA’s Objectives Report, including there not being any consequences if the TAO is disregarded. The Systemic Advocacy Management System also known as SAMS is another very effective way to raise issues. Every one of these will get a high level contact and some result in systemic advocacy projects. Sam’s link is: http://apps.irs.gov/app/samsnet/IssueQualification.jsp
Question: Are you aware of any steps to fix the OVDP program?
Response: No. The OVDP program is closed. The OVDI is the current program. TAS has raised the issue through TAOs and a TAD about IRS not following their own FAQ #35 which appeared to state that reasonable cause and mitigating factors could be considered in the calculation of the closing agreements.
Comment: In cases of inadvertent or inherited funds one size does not fit all.
Response: The IRS says that the participants can always withdraw from the voluntary program. Most people don’t look at withdrawal as a viable option. It should be considered in those types of cases.
Comment: A lot of practitioners are concerned about their advice. Although we cannot offer comment on what advice to provide to your clients, the National Taxpayer Advocate is continuing to advocate for changes to the program that will address the “one size does not fit all” criticism and provide for a more fair process for those who did not shift assets overseas to avoid tax reporting but inadvertently got caught in a non-disclosure.
Bessie Castro-Zepeda, Colorado Department of Revenue
Q: Why does the CDOR send out tax notices disallowing credits and deductions on e-filed returns PRIOR to reviewing the supporting documentation that is mailed in with form DR 1778 “E-filer Attachment Form”?
A: It is the policy of the Taxpayer Service Division, in the event of a review of a credit or deduction claimed on an e-filed return, to wait 30 days for supporting documentation to be received. If the documentation is not received after the 30 day window, the credits/deductions are denied and a letter is sent requesting the backup documentation.
Q: Why is the CDOR disallowing the Colorado Minimum Tax Credit on line 31 of Form 104CR when the credit is simply a calculation based from information reported on the Federal return?
A: The Colorado Minimum tax credit is being disallowed in cases where Form 104AMT is missing or incomplete. There may have initially been a training issue where the credit was being disallowed incorrectly by an examiner but for the most part, the credit is denied due to missing or incomplete information.
In general, CDOR and, specifically the Income Tax Accounting Section, only denies credits/deductions when there is missing or incomplete documentation. The tax booklet makes it clear what documentation is needed when a credit is claimed. Most of the issues we (Income Tax Accounting Section) run into are missing documentation on amended returns. The taxpayer may have claimed a credit on the original filing and supplied the appropriate documentation, but if the credit is unchanged (or even reduced) on the amended form and there is no supporting documentation we will deny it.
A few tips for filing this year: It is highly encouraged that e-file is used to file returns. Also, we encourage the use of our website, Revenue Online (www.colorado.gov/revenueonline) to file protests and for taxpayers to review their accounts. This is the preferred method to correspond with DOR as the phone system is very difficult to get through on.
The inclusion of forms (104cr, 104pn) and all backup documentation on original AND amended returns needs to be stressed. Even if a credit remains unchanged on an amended filing, it will be denied if the corresponding form is not attached.
To ensure payments are correctly posted to the proper account, ACH debits are recommended – as well as payment through our online portal (this is done through Revenue Online website).
