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Many are IRS issues. If you practice in the specialized area of taxpayer representation, I invite you to join me as we learn about IRS matters of Examination and Collection as well as the Tax Court Cases that are forging how we practice today. The ncpe/ncpeFellowship seminar will address many of the issues each of us face with real-world situations and solutions to your client’s problems.

Ethics - you have them, but IRS says you must have 2 continuing professional hours each year and it will be my pleasure to present the Basics of What Every Tax Professional Must Know and address the most troubling of problems that each of us encounter and what we must do to avoid the dangers that tax preparation brings.

And just in case you think a tax seminar can’t be fun, join us for Two Guys and a Doll where the audience gets to ask Jerry, Wayne and Beanna anything. Well, almost anything! Questions about my age and weight are not allowed. We won’t always agree, but you will get the best information available and YOU get to ask what you always wanted to ask in a seminar.

I hope you will join us. Call ncpe today at 1-800-682-2163 and sign up. A “special gift” will be there for all Fellowship members as a thank you for being a member of the Fellowship.

As I always say, I am glad to see Tax Season come and even more happy to see it go. If you have a special story about the season, please email me with permission to publish. Beanna@ncpefellowship.com. We are all in this together and it is time we all shared our experience.

See you in Denver or New Orleans!

Stay well and fi nish well.

Beanna

Beanna@ncpefellowship.com or 877-403-1470

Remarks from Beanna

I wish I could start the fi ling season over. Ever feel that way? If I could just have known in January what I know on April 16, then the tax fi ling season would have gone so much easier.

One would think it if was your 45th Tax Filing Season (please let me hear from you if you have more under your belt) that it would get easier, but frankly, it is much harder today than it was in 1968. Wait a minute, wasn’t the 1986 Tax Act supposed to be the one that would transform taxes and if you survived it you could survive anything? Well that was before the Affordable Health Care Act and we have just scratched the tip of the iceberg with this one.

Do not miss the ncpe/ncpe Fellowship special seminar in either Denver, CO or New Orleans, LA (see Sponsor of the Month at the end of the newsletter). Wayne Hebert will bring us current with the what’s changed, what’s gone and how to help your clients

Perhaps my greatest frustration is how very long it takes me to do anything, even something simple. Now I know I am not 18 years old anymore, but frankly even a simple return, such as those I do for my client’s children, takes far longer than they should, to the point that I cannot “not charge” for them any longer. The shear compliance matters require I get paid for my efforts. (Let me know how you are dealing with this issue.)

Getting older? How about your clients? 10,000 Americans are turning age 65 daily - that’s 3.65 Million! Did you know the most frequently asked question of a tax professional outside of tax season is “should I take Social Security early?”

Jerry Riles will be presenting Social Security Planning at the ncpe/ncpeFellowship seminar and if you have clients who can benefi t or perhaps you can benefi t, you won’t want to miss this outstanding presentation with examples that will work for you and your clients.

It has taken me a few days to even get near my offi ce door but I know there is a ton of work representing my statements of “that’s for after April 15th.”

Monthly Newsletter for ncpeFellowship Members Vol. 5 No. 5 May 2014

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Remarks From Beanna (1)

Tax News (4)

Tax Freedom Day (4)$100,000 Income: Three Very Different Tax Bills (4)Tax 411: What to Toss and What to Keep After April 15th (5)The Dark Road: The Worst Tax Law You’ve Never Heard About (5)Tax Day in 13 Surprising Charts (11)Happy Tax Day: RNC Files Lawsuit Against IRS for ‘Illegal Stonewalling’ of Scandal Documents (12)Rein In Shady Tax Preparers (13)Tax Preparers Targeting Poor With High Fees (14)Hatch Examines Ways to Protect Taxpayers from Unethical Tax Preparers (16)Lobbyists Big Winners in Tax Code Debate (17)Avoiding the Squeeze: Trusts, Estates, and the New ATRA Tax Regime (17)How To Cheat On Your Taxes (20)How To Cheat On Your Taxes (22)School Food Service Employee Among 25 Charged with ID Theft (23)Tax Refunds Made Faster, More Convenient (23)10 Basic Rules of Every Estate Plan (24)Tax-Smart Billionaires Who Work For $1 (25)Farmers Need to Know About Tax Changes in the Affordable (26)Committee Hearing Highlights Tax Issues Specifi c to Small Businesses (27)CRS Analyzes and Considers Changes to Mortgage Interest and Property Tax Deductions (28)

People in the Tax News (29)

Obama, Biden 2013 tax bills (29)Feds: Philly IRS Worker Cheated on Taxes (30)Cell Block Tax Prep? Inmate Re-Arrested Doing Phony Returns (30)Ex-tax Collector Charged with Embezzlement (31)Gisele Bundchen lands on ‘Supermodel Rich List,’ audited by IRS (31)IRS Hits Lauryn Hill with $867,000 in Additional Tax Liens (32)Former IRS Acting Commissioner Werfel Joins Consulting Firm (32)Camp to Leave Congress After Running Ways and Means Panel (33)

IRS News (33)

IRS Workers Who Did Not Pay Taxes Got Bonuses (33)Prepared Remarks of Commissioner of Internal Revenue Service John Koskinen before the National Press Club (34)IRS to Revise Regulations Limiting Activities of Tax-exempt Groups After Outcry (38)TIGTA Reports on IRS Direct Deposit (39)Improvement is Needed to Better Enable Frontline Employees Identifi cation of Potentially Dangerous and Caution Upon Contact Designations (40)Ten Facts about Amended Tax Returns (41)IRS Provides Employers with Guidance on Correcting Improper Health FSA Payments (42)IRS Intensifi es Work on Identity Theft and Refund Fraud; Criminal Investigation Enforcement Actions Underway Across the Nation (43)IRS Debunks Frivolous Tax Arguments (44)Treatment of Marriages of Same-Sex Couples for Retirement Plan Purposes (44)IRS Issues Housing Cost Allowances for Those Working Abroad in High-cost Areas in 2014 (45)IRS to Make Limited Use of Offshore Bank Data from FATCA (45)Final Regulations Clarify when Third-party Payor is Designated to Perform Acts Required of Employer (46)IRS Among Agencies Using License Plate-Tracking Vendor (47)

Tax Pros in Trouble (48)

Justice Department Files Lawsuit to Stop Las Vegas Man from Preparing Tax Returns (48)Chicago Tax Preparer Indicted for Causing More Than 150 Fraudulent Tax Returns Seeking Over $1 Million in Refunds (48)Justice Department Sues to Shut Down Alabama Tax Return Preparers (48)Tax Preparer who Falsifi ed Returns Gets 30 Months (49)Florida Tax Executives Get Prison for Fraud, ID Theft (49)Justice Department Asks Federal Court to Shut Down Louisiana Tax Preparer (49)Georgia Husband and Wife Tax Return Preparers Sent to Prison for Tax Fraud (49)Former Denver Woman Charged with Visa Fraud, Tax Fraud and Aggravated Identity Theft (49)

Contents (Page)

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Ragin Cagin (50)

Who Will Regulate Tax Professionals? (50)

Taxpayer Advocacy (52)

Speak Up, Speak Out and Often (52)It Is the Most Dreaded Letter a Taxpayer Can Receive (52)IRS Going After Decades-old Debts from Children of Debtors ‘Unbelievable’ (53)Supreme Court Hears Case on IRS Summonses Washington, D.C (54)

International Tax (54)

French Social Security Taxes Do Not Qualify for Foreign Tax Credit (54)Newly Updated FAQs Explain Key FATCA Registration Issues (55)

State News of Note (56)

Tax Day Brings Death of Tax-preparer Disclosure Upgrade (56)NYS Tax Department Saves New Yorkers from Footing the Bill for $413 Million in Bad Refunds (56)Signifi cant Changes To New York Estate And Income Tax Enacted (57)

Wayne’s World (58)

ncpeFellowship Starts 5th Year of Services To Its Members (58)

Tax Jokes and Quotes (58)

Sponsor of the Month (59)

ncpe/ncpeFellowship Special Seminar: “What’s Happening in the World of Tax” (59)

Contents (Page)

ACT: The Affordable Care and Taxation

Business, Individual and Tax Profession Impact

Critical Information For Tax Professionals

and the Impact of ACA! 4-CE Hours Course

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Tax News

Tax Freedom Day

It will take Americans until April 21 to earn enough money to pay off the tax burden of federal, state, and local governments, which now totals $4.5 trillion, according to the Tax Foundation. That date is called “Tax Freedom Day,” and it means Americans will have worked 111 days (since Jan. 1), to pay for government.

According to the Tax Foundation, Americans will pay $3.0 trillion in federal taxes in 2014, and $1.5 trillion in state taxes, for a total bill of $4.5 trillion. That equals 30.2% of the nation’s income, and is more than Americans will spend on food, clothing, and housing combined this year.

In 2013, Tax Freedom Day was on April 18, three days earlier than this year. Tax Freedom Day is later in 2014 mainly because of “the country’s continued slow economic recovery, which is expected to boost tax revenue.

In 1900, Americans “paid only 5.9% of their income in taxes, meaning Tax Freedom Day came on January 22,” said the foundation. The latest Tax Freedom Day for the nation, so far, was on May 1, 2000, meaning American workers paid 33% of their total income in taxes to the government.

Back in 1932, reported the foundation, Americans “spent 10 days paying federal taxes and 46 days paying state and local taxes. By 1940, Americans worked 33 days to pay each.”

During World War II, increased federal spending and borrowing led to Tax Freedom Day falling in April for the fi rst time, in 1943. “The federal tax burden never returned to pre-war levels,” reported the foundation.

$100,000 Income: Three Very Different Tax Bills

There are a lot of differences between Queens, Topeka and Seattle.

One that stands out: People making the same money in each of those places can face very different tax bills.

CNN Money asked the Tax Institute of H&R Block to compare the combined federal, state and local income tax bill on a gross household income of $100,000 in each of the three cities.

For a dual-earner married couple with two young children, the New York City borough of Queens would deliver the biggest tax bite at $8,719. (We had to make some assumptions about the taxpayer’s situation; see them below.)

The Queens couple would pay the biggest bill largely because they would be subject to some of the highest state and local income taxes in the country.

By contrast, the same $100,000 couple in Seattle would pay the smallest total income tax bill -- just $3,286 -- because Washington has no state or local income taxes.

Queens would also be the priciest place tax-wise for childless singles making $100,000, followed by Topeka then Seattle.

But the order changes a little for everybody if one isolates just the federal tax burden.

In that case, Topeka tops the list. A family of four there could owe $4,066 to Uncle Sam versus $3,076 if they lived in Queens or $3,286 in Seattle.

Here’s why: State and city income, sales and property taxes affect a person’s federal tax burden because they are deductible on the federal income tax return. So the lower those taxes are, the smaller the federal tax deduction and the bigger a person’s federal tax bill.

Home prices, too, play a role since they determine how big a mortgage one needs and how large one’s federal mortgage interest deduction will be.

A key reason why Topeka takes the No. 1 spot among the three cities in terms of the federal income tax burden is because residents there are likely to pay less in mortgage interest and property taxes than they would in either Queens or Seattle.

Notes: The tax burden examples for married couples assume one spouse earns $65,000 in wages while the other makes $35,000 and takes graduate classes. The couple owns their home, saves 10% of their income in a 401(k) and contributes 3% to charity. They also qualify for child-related tax breaks as well as two related to tuition and student loan debt.

The same assumptions apply for singles, minus the split-income assumption and the child-related tax breaks.

The Queens households deduct state and local income taxes on their federal return; those in Topeka, where there is no local income tax, only deduct state income taxes; and the Seattle households deduct state and local sales taxes instead.

Not included in these calculations are the full payroll taxes all households would have to pay for Social Security and Medicare.

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home after you buy it will increase your investment.”

Organization is key. You may be the type of person who puts all of your receipts from charitable contributions in one fi le.

That may not be the best idea.

Buchholz recommends organizing all of your tax-related documents by year instead.

“If you got audited on your 2012 return, you would need the documents related to your return,” she said. “A document you can’t fi nd is useless,” Buchholz said.

Think about going digital. Many banks and credit card companies allow customers to download their records and create backup copies, TurboTax noted.

You can scan important paper documents and store them on your computer.

The fi les can be tagged or otherwise marked up with notes without compromising the actual document, TurboTax said.

Remember, if you decide to go this route, these fi les have to be stored in a secure place. Cloud providers such as DropBox, Google and SugarSync are good places to go, TurboTax said.

The Dark Road: The Worst Tax Law You’ve Never Heard About

It broke Ruth Freeborn’s heart to give up her U.S. citizenship that fateful day last year. Unfortunately for the Oklahoma native, though, it was either that, or her family. Ruth’s Canadian husband of 33 years, who earns all of the middle-class family’s income, “simply could not go along with this situation,” she explained. “To fi nd myself suddenly not able to live, bank, save or to keep peace in my marriage while being American at the same time was shocking at fi rst and deeply disturbing to me.”

Ruth wrote “what must have been” hundreds of letters to U.S. senators and offi cials, clinging to the hope that something — anything — could be done to stop what felt like a nightmare. Even as she protested, federal bureaucrats claimed that what was happening to her, and millions of other innocent Americans overseas, was somehow a “myth.” She knew it wasn’t a myth — after all, she was living it.

More than three decades ago, Ruth moved to Canada with her husband to help care for his parents, who were elderly and ill. Then the young couple had a son who was born with multiple disabilities and illnesses, making a move back to the United States all but impossible. All those years, though, Ruth went out of her way at every opportunity to show her community what it meant to be an American — doing volunteer work, helping out neighbors, making sure school children could learn in the best possible environment.

“At every turn I made sure to mention to others that the reason

Tax 411: What to Toss and What to Keep After April 15th

When thinking about what you need to keep, remember the three-year rule.

Spring is fi nally here! Time to clean up - your fi nancial clutter, that is.

We’re talking about all those receipts, pay stubs and W2s piling up in shoe boxes that you use to fi le your taxes.

Choosing what to toss and what to keep isn’t easy. Here are some guidelines.

Remember the three-year rule. Generally speaking, you should keep most tax-related documents for at least three years, Lindsey Buchholz, principal tax research analyst at The Tax Institute at H&R Block told the Daily News.

Why? In most cases, the IRS only has three years after a return was fi led to conduct an audit.

Some will want to hold on to their documents longer. If you underreported your income by 25% or more the IRS can look back six years.

Hold on to your property records. Records relating to your assets, such as your home, should be kept as long as you own that asset and at least three years after the sale.

You’ll need these records to fi gure the gain or loss when you sell or otherwise dispose of the property, the IRS says.

For instance, if you’ve made improvements to your home, you’ll want to keep the receipts.

“When you sell your home, your gain is determined by difference between the selling price of your home and your investment in the home,” Buchholz said. “Improvement to the

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I did so much volunteer work was that I was raised to be this sort of person in the United States by my American family,” Ruth told The New American.

Then, in 2010, Congress passed and Obama signed a new tax law buried deep inside an unrelated “jobs” bill. That changed everything. Of course, even before that, it was already hard enough to be American overseas — fi ling endless amounts of paperwork with the IRS, paying taxes on worldwide income, disclosing foreign bank accounts and assets, and risking life-destroying penalties even for innocent mistakes. When the 2010 scheme became law, though, it was simply too much to bear.

Suddenly, Ruth, like millions of other everyday Americans overseas — missionaries, spouses, teachers, small-business owners, so-called accidental Americans who’ve never even stepped foot on U.S. soil, and countless others — were stuck in a Catch-22. Foreign banks were shutting down Americans’ accounts. Many businesses no longer wanted anything to do with “U.S. persons,” preferring to steer clear of the infamous IRS. Americans abroad were suddenly pariahs.

Ruth’s husband, who makes around $50,000 a year as a technician, drew the line at giving the Obama administration unfettered access to all of the family’s private fi nancial information — and potentially even their meager savings if, for instance, the IRS claimed to uncover some minor mistake or oversight in the mountains of complex paperwork Americans abroad are forced to fi le every year. Moving to the United States was not an option either.

She cried a lot about it. “I’ll never be truly over the fact that I had to lose my citizenship but, it has happened,” Ruth said, adding that she is “horribly hurt” by all of it. “I still feel as if it must be some bad dream since it cannot be possible that the U.S., the country I loved with all my heart, has caused meto have to choose between my family here in Canada or mycountry of birth. And yet, it is real.”

To the political class in Washington, Ruth doesn’t exist. Like the millions of other Americans suffering hardship, she’s just a “myth” to the politicians and administration bureaucrats searching, like a fl ailing drug-addicted giant on the verge of collapse, for just a few extra dollars to stay afl oat just a little while longer. Washington is determined to collect that extra billion or so per year in taxes.

So, in 2010, without any hearings or analysis, the Foreign Account Tax Compliance Act (FATCA) — hidden in the misnamed “HIRE Act” and passed largely by Democrats — was offi cially born. In essence, it is an attempt to turn every foreign government and fi nancial institution on the planet into extensions of the U.S. tax regime, and is supposed to work by imposing huge penalties — a 30-percent “withholding tax” on all U.S. transactions, including sales of securities — on fi rms that do not hand over all information they have on “U.S. persons” to the IRS.

Among the institutions snared in the scheme are banks,

stockbrokerages, hedge funds, pension funds, insurance companies, trusts, and more. For foreign institutions that do not wish to participate, the alternative is total exclusion from U.S. markets. The scheme also forces all “specifi ed” Americans to fi le more byzantine paperwork disclosing even more assets abroad with their annual tax return, Form 8938, under threat of more devastating penalties that in many cases could exceed the value of the actual assets.

Amid the 2008 news that Swiss bank UBS helped some Americans avoid taxes, the shrieking from Capitol Hill was deafening. “These tax evaders cost our country tens of billions of dollars every year in unpaid taxes, and honest, law-abiding taxpayers pay the price,” claimed former Senate Finance Committee Chairman Max Baucus (D-Mont.), one of the chief proponents of the scheme. “Not only is this practice fundamentally unfair, this is money that could be used in any number of other important areas.”

More recently, wild fi gures based mostly on fantastical claims rather than actual data have jumped to $100 billion, $150 billion, or even $370 billion that Washington claims to believe is being “lost” to tax evasion. Democrats in Congress were determined to track down every last penny they believed they were owed, even if it meant turning the world upside down.

FATCA was based on “proposals included in President Obama’s 2010 Budget,” its architects in Congress admit. According to its congressional cheerleaders, it was supposed to bring in an extra $8.5 billion of tax revenue to the Treasury over the next decade. (For perspective, the federal government spends over $10 billion in a single day.) The added torment being endured by millions of innocent Americans living abroad — one of the new tax regime’s myriad effects — is supposedly just collateral damage, or a “collateral benefi t,” as prominent anti-FATCA activist James Jatras with RepealFATCA.com put it.

“The real purpose, in my opinion, is eventually to achieve the power to receive all asset information domestically as well (once it’s established no probable cause is needed, or even a ‘suspicious activity report,’ what’s the difference), subordination of the global fi nancial system to the IRS (and NSA) in a seamless surveillance web, and executive usurpation of the Senate’s treaty authority,” Jatras told The New American.

Fallout from the scheme may make the terror faced by U.S. expats look mild by comparison.

Of course, Ruth Freeborn’s predicament was hardly unique. There are an estimated 7.5 million Americans living overseas. Facing collections by an insatiable federal government drowning its citizens in debts, record numbers of those Americans are being forced to surrender their citizenship.

No publicly available comprehensive record exists of all citizens who either renounced or relinquished their citizenship; however, in 2012, State Department data suggest around 2,000 renounced, up from 1,781 in 2011. For perspective,

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just 742 renounced their citizenship in 2009. Last year, FBI numbers show more than 3,100 renounced — not including those who relinquished.

“The reality is that the U.S. tax system gives dual citizens a good reason to walk away from their U.S. citizenship or permanent-resident status,” former federal prosecutor Jeffrey Neiman said about the growing trend. “It’s a painful process but easier than staying in compliance with the law.”

It is hardly an easy choice, but in many cases, it is now the only one for many U.S. expats — banks all over the world are starting to refuse American clients and shut down U.S. accounts. For a small-business owner or other middle-class American busy trying to sell U.S.-made products overseas, already at a massive disadvantage owing to being forced to pay taxes to two governments, such an obstacle can make it impossible to stay abroad as an American. The choices are either return to the homeland, or sever all ties with Uncle Sam.

“The biggest issue that we’re seeing from Americans overseas is that they are being locked out of fi nancial products and services,” explained Marylouise Serrato, executive director of the group American Citizens Abroad, ACA Inc., citing FATCA and IRS compliance as the cause. “Some of the foreign banks have decided to remove Americans from their client list as a reaction to FATCA. A lot of the people affected are the small investors, people who just need checking accounts, savings accounts, to get by. They are the ones suffering.”

Even IRS offi cials have acknowledged some of the damage. National Taxpayer Advocate Nina Olsen, who leads the Taxpayer Advocate Service (TAS) at the IRS, explained in a devastating report that “some foreign fi nancial institutions (FFIs), such as DeutscheBank, HSBC, and ING have reportedly been closing out foreign accounts of U.S. citizens in response to FATCA’s ‘onerous U.S. Regulations.’” The offi cial document concluded that the scheme “carries with it the potential for substantial resource burdens and signifi cant due process concerns that will arise to the extent that the regime is not correctly and effectively implemented in practice as well as properly conceived in theory.”

Outside critics have offered even sharper criticism. “FATCA supporters cite tax evasion — for which they provide extravagant fi gures — as justifi cation enough for the law,” Andrew Quinlan, president of the free market-oriented Center for Freedom and Prosperity, told The New American. “This is a red herring, which is why the government’s own estimates found it would raise but a pittance of what they claim is lost to tax evasion. FATCA does nothing to identify or target those guilty of evasion, but instead treats all Americans who live, work, or invest overseas as guilty until proven innocent. It’s like stopping a burglary with a nuclear bomb.”

Other major concerns surrounding FATCA include the potential for massive damage to the U.S. economy, destabilization of American banks, an end to fi nancial privacy worldwide and centuries-old constitutional protections, the emergence of a truly global taxation regime under international institutions

such as the OECD (See the related article “A New World Tax Regime”), potentially hundreds of billions in compliance costs, and much more.

There are only two governments in the world that demand taxes from citizens regardless of where in the world they live. One is the gangster regime ruling Eritrea, where the all-powerful “president” and his party, the only legal one, have been in power since 1993. “Torture, arbitrary detention, and severe restrictions on freedom of expression, association, and religious freedom remain routine in Eritrea,” Human Rights Watch says.

In 2011, the United Nations Security Council lambasted the Eritrean regime for its bizarre efforts to collect taxes from Eritreans all over the world. The Obama administration voted in favor of the sanctions resolution, which “condemns the use of the ‘Diaspora tax’ on Eritrean diaspora by the Eritrean Government … and decides that Eritrea shall cease these practices.”

The Eritrean income tax on Eritreans abroad is two percent.

The other government that taxes all over the planet is the one in Washington. The U.S. government demands that citizens pay massive amounts of U.S. taxes and fi le mind-numbing amounts of complex paperwork no matter where they reside and work. According to experts, analysts, and victims of the schemes, the consequences have been devastating for Americans and the U.S. economy.

In a series of interviews with The New American, Roger Conklin, a former business executive who worked successfully in Latin America until the taxation of Americans abroad forced him to return home, explained some of the disastrous effects. Citing other experts, Conklin said the tax laws affecting Americans abroad are “so unbelievably complicated” that even with the best professional assistance, nobody can ever be sure that their IRS fi lings are correct. “The very wealthy can employ the best professional tax advisors money can buy, but cost-wise they are totally beyond the reach of the average middle-class American living and working abroad,” he added.

Just how complex and burdensome is the IRS taxation regime for the millions of Americans abroad? In a 2012 report to Congress, National Taxpayer Advocate Olsen explained that there are 7,332 pages of instructions, 16 IRS publications, and 667 pages of tax forms that are applicable to overseas U.S. citizens. For foreign banks and fi rms seeking to be in compliance with IRS mandates, it is even worse.

When the “Tax Reform Act” was enacted in 1976, drastically increasing taxes on Americans living and working abroad, Conklin was in Brazil selling U.S.-made exports. “I simply could not survive this tax increase,” he explained, adding that he was forced to return to the United States. Almost immediately after Conklin left, a French company with similar products manufactured in France came in and hired most of the same employees.

8

Within eight years, Conklin said, the French company was responsible for $1 billion in exports from France to Brazil, while U.S. exports of the products into that market had dropped to almost zero. It is no mystery why U.S. manufacturing and exports are dying, he said, pointing out that other high-wage countries such as Switzerland and Germany, which do not tax their citizens abroad, continue running massive surpluses.

The same phenomenon Conklin witnessed and experienced occurred worldwide. “There was a mass return of Americans, not only from Brazil but from around the world, as a direct consequence of that legislation,” Conklin continued, echoing his testimony to U.S. lawmakers. “Not coincidentally, the U.S. trade surplus that went down in history as the largest ever was in 1975.” Numerous others who spoke with The New American for this story echoed those concerns.

“But as a direct result of American companies and citizens cutting back and in many cases totally abandoning some foreign markets because of that 1976 legislation, not only was 1976 a trade defi cit year, but the U.S. has never since recorded a single trade surplus,” Conklin explained. “Our cumulative trade defi cit to date, which began in 1976, now exceeds $9.1 trillion and is currently increasing at the rate of $1.95 billion per day.”

Incredibly, however, instead of trying to fi x the problems caused through its pursuit of more and more taxes from Americans abroad, Congress and the Obama administration adopted FATCA.

Recently, American Citizens Abroad submitted a proposal to the Senate Finance Committee asking Congress to replace citizenship-based taxation with residence-based taxation. “The United States is the only industrialized nation that maintains citizenship-based taxation, and it puts us at a disadvantage,” explained ACA executive director Serrato. “Residence-based taxation would simplify all of this, put Americans overseas on equal footing with other foreign nationals, and would reduce the need for legislation such as FATCA.” For now, though, the prospect of genuine, broad reform appears remote.

Economic Damage of FATCA

One of the underreported but major risks to the U.S. economy stemming from FATCA is the potential for wide-scale disinvestment from the United States by foreign institutions seeking to avoid the IRS, penalties, and huge compliance costs. In fact, countless analysts and fi nancial giants have said the 30-percent FATCA “withholding tax” represents a powerful incentive to get out of U.S. markets entirely. The implications for the stock market, bonds, the dollar, and more could be monumental.

Estimates suggest there is currently more than $21 trillion of foreign capital invested in American assets and markets, with about $10 trillion of that in the stock market. However, that could change as FATCA enforcement begins later this year — possibly quickly. The Japanese Bankers Association, the European Banking Federation, the Institute of International

Bankers, and others, for example, have all openly warned in recent years that some of their members could decide to ditch U.S. assets and markets in response to FATCA.

Luxembourg Bankers’ Association CEO Jean-Jacques Rommes, speaking to Democrats Abroad, warned that the best way for banks to lower compliance risks was simply to reduce the amount of American assets they hold. “In other words, divest from the US market, in general,” he explained, as summarized by the Luxembourg Bankers’ Association.

Multiple reports have suggested that small and medium-sized fi rms, unable to bear the compliance costs or the crippling withholding taxes, would be especially likely to ditch American markets. “On the institutional side, the cost of becoming FATCA compliant may be prohibitive for some foreign institutions, and therefore they will divest from their American holdings,” explained Douglas Goldstein, author of The Expatriate’s Guide to Handling Money and Taxes and director of Profi le Investment Services Ltd. Indeed, compliance costs borne by the private sector are expected to dwarf the amount of additional U.S. tax revenue — perhaps by hundreds of times.

Goldstein explained: “Faced with the choice between paying to implement the new rules or divesting from U.S.-based assets, smaller foreign banks that can’t afford to shoulder these costs may choose the latter,” Goldstein added. “After all, there are plenty of promising new markets in which to invest.”

Plenty of evidence suggests the warnings ought to be considered carefully. Surveys of fund managers, for example, have revealed that a signifi cant number would be willing to divest from U.S. markets as FATCA goes into effect. American Citizens Abroad reported on a 2011 KPMG survey of leading fund promoters across a dozen countries, most of whom had assets under management of more than $12 billion. They were asked whether FATCA could lead their funds to directly or indirectly disinvest from U.S. markets.

“For both the U.S. fi xed income market and the U.S. equity market, 6 percent answered yes,” ACA reported. “Another 10 percent for the fi xed income market and 7 percent for the equity market stated that it was thinkable to divest from the U.S. A whopping 29 percent for the fi xed income market and 26 percent for the equity market replied that divestment depended on the detailed implementation rules for FATCA. In other words, for funds managers worldwide, divestment from U.S. securities markets is a real option.”

Needless to say, if foreign institutions started fl eeing U.S. markets, the economic damage would be massive — potentiallyapocalyptic, especially considering U.S. trade defi cits and America’s outsized reliance on foreign investment and outside credit just to function.

Making capital fl ight from the United States worse — as well as the consequences of the act — are IRS mandates that would force American fi nancial institutions to report foreign account holders to the U.S. government, and administration pseudo-treaties with foreign governments to share that information.

9

Unlike FATCA, though, which was approved by Congress, the domestic component of the scheme is almost entirely the product of unauthorized executive-branch machinations.

The domestic information-reporting decrees, sometimes called “DATCA,” or the “Domestic Account Tax Compliance Act,” could result in potentially tens or even hundreds of billions worth of foreign deposits fl eeing from U.S. institutions, according to multiple independent experts.

The capital fl ight could become so severe, documents show, and experts and policymakers told The New American, that it might even trigger runs on certain banks, U.S. taxpayer-funded bailouts, another economic crisis, a major devaluation of the already-struggling U.S. dollar, and a destabilization of the American fi nancial system. The cost to embattled American taxpayers, businesses, and consumers would be enormous.

But the Obama administration has no plans to give up on DATCA’s implementation because receiving fi nancial information on Americans abroad won’t happen unless America gives bank information on other countries’ residents to them, as U.S. offi cials admit.

“We see no principled basis on which to require that fi nancial institutions based in other countries collect and provide us with information on U.S. taxpayers, if we take the position that our own institutions should be exempt from similar requirements,” explained Treasury Acting Assistant Secretary for Tax Policy Emily McMahon in a 2012 speech. “To the contrary, we believe that it will be critical to the success of our efforts to implement FATCA that we are able to reciprocate.”

To that end, the Obama administration has been busy negotiating pseudo-treaties with foreign governments mandating the automatic exchange of fi nancial information between jurisdictions — the U.S. Senate gets no opportunity to offer its consent on the deals, despite what the Constitution requires. Among the governments that the U.S. Treasury said were treated as having an “intergovernmental agreement” on FATCA in effect by March of 2014 were Costa Rica, Denmark, France, Germany, Ireland, Italy, Finland, Malta, Mexico, the Netherlands, Norway, Spain, the United Kingdom, Canada, Hungary, Mauritius, Japan, Chile, and more. Multiple Islamic dictatorships and “former” communist regimes were also lining up to sign tax deals with Obama.

If foreigners with U.S. accounts don’t want that information shared — and there are plenty of good reasons for that — it is likely at least a signifi cant number will close their U.S. accounts and send those funds elsewhere.

For about a century, U.S. policy has specifi cally worked to encourage foreigners to invest and deposit funds in the United States. FATCA-related schemes represent something of a dangerous turning point, analysts say.

In fact, according to analysts, hundreds of millions of dollars in foreigners’ bank deposits had already fl ed just from Florida by mid-2012 in response to the scheming. That was before

the controversial new reporting requirements were even in effect. The fi rst reports on foreigners’ accounts under the new reporting scheme were due to the IRS in mid-March. By early 2014, the Texas Bankers Association said some $500 million had fl owed out of the state’s banking system as a result of the IRS rules.

Thus far, there has been very little in the way of offi cially estimating the economic damage. “To this day, the Treasury has refused to do a cost-benefi t analysis,” explained George Cecala, a spokesperson for Rep. Bill Posey (R-Fla.), who has been a leader in Congress on trying to rein in the scheme. He also cited experts and analysis suggesting that the potential impact could be massive for the Sunshine State and the nation as a whole.

In all, it is estimated that U.S. banks have almost $4 trillion in liabilities to private foreign residents. Meanwhile, non-resident aliens — foreigners who do not live in the United States — have close to half a trillion dollars actually deposited in U.S. fi nancial institutions, according to estimates cited in court documents that all sides appear to accept. Due to the controversial way the banking system is structured (“fractional reserve lending”), every dollar in deposits generates roughly $9 in lending.

If just 10 percent of those foreign deposits were to fl ee American banks and institutions due to the Obama administration’s machinations — the conservative end of the estimates — the impact on the U.S. economy would be devastating. Based on surveys, some analysts and industry groups have suggested that as much as 20 percent of those deposits could be at risk of leaving the U.S. economy — perhaps even more.

“This is about trying to prevent a potential future fi nancial crisis,” Cecala from Rep. Posey’s offi ce continued in a phone interview with The New American. “This is not about protecting tax evaders; it’s about preventing a future fi nancial crisis. These regulations put at risk tens or hundreds of billions of dollars in deposits…. This is a very serious problem.”

One of the most signifi cant concerns is the potential for destabilization of the fi nancial sector, Cecala said. “As many as two or three dozen institutions in Florida could be exposed to liquidity issues,” he explained, adding that other states could see similar problems. “So that means the possibility of more bailouts…. What is the impact on the economy?”

The capital fl ight would also have a direct impact on American businesses, families, and more as banks deal with the carnage. “We’re risking a run on deposits, and losing that money to other countries,” Cecala continued. “That money is used to make loans to American families and small businesses.”

Indeed, in more than 75 percent of the state-chartered fi nancial institutions in the South Florida region, over 90 percent of deposits were from foreigners. Florida admittedly has a lot of foreign deposits due to its strong ties with Latin America and the Caribbean, but it is hardly unique.

10

The IRS and the Obama administration, along with a lower-court federal judge who sided with them in an ongoing case about the mandate, contend that only criminals and those seeking to avoid taxes would be likely to withdraw their deposits from U.S. banks under the current and proposed information-exchange regime. However, anybody even remotely familiar with Latin America and other troubled regions of the world knows that is far from the case — the claim is preposterous, in fact.

Consider, for example, the wild currency printing and wealth confi scation so typical of Third World regimes. And governments and economies in Latin America are often unstable, leading people from the region to deposit signifi cant sums into Florida banks, J. Thomas Cardwell, former commissioner of the Florida Offi ce of Financial Regulation, said in testimony before Congress in late 2011 about the scheme, acknowledging that “citizens in some countries rightly distrust their governments.”

While the administration has offered assurances that it would be careful with the sensitive data and not share it with problematic regimes, few believe the claims. The socialist regime in Venezuela, for example, is among the governments that have a tax treaty with the U.S. government and would presumably receive information on Venezuelans, including dual U.S. citizens, with accounts in American banks. Mexico does, too, along with some 80 other national ¬governments.

“Dictators, demagogues, political partisans, corrupt state and local offi cials often act outside the law,” continued Cardwell. “Extortion, abduction, robbery and embezzlement are facts of life. Providing such governments with a list of assets is felt by their citizens to jeopardize not only their property but also their lives and those of their families and associates.” Such concerns were expressed recently after it emerged that the Obama administration was quietly negotiating a FATCA inter-governmental agreement (IGA) with Vladimir Putin’s regime in Russia, as well.

In addition to the potential economic havoc that could be unleashed on America by FATCA and its domestic component, DATCA, there are a wide range of troubling legal issues clouding the scheme as well. In fact, in its quest to implement the plot, the Obama administration is brazenly bypassing Congress. There is no mention of “inter-governmental agreements” or allowing so-called “reciprocity” in the actual statute that contains FATCA. There is also no authority to order domestic banks to collect and share information on all foreign account holders on behalf of foreign governments. And, already, enforcement of the vast and unimaginably complex taxation scheme has been lawlessly and unilaterally delayed several times by the executive branch — similar to the endless executive-branch rewrites and delays of the ObamaCare statute passed by Congress. Despite major concerns raised by lawmakers and others over their authority to do so, the IRS and the U.S. Treasury are moving full-speed ahead.

The U.S. Treasury does not have the statutory or constitutional authority to either gather or share wholesale fi nancial

information, according to lawmakers and legal experts.

The New American offered the Treasury Department multiple opportunities to explain what purported authority — statutory, constitutional, or regulatory — it believes it has to compel U.S. fi nancial institutions to collect and share the information. TNA also asked about the supposed authority for IGAs.

No real answer was ever provided, and no statute was cited, presumably because none exists. Essentially, though, the Treasury pointed to existing tax treaties ratifi ed by the Senate that the U.S. government has signed with other governments as its justifi cation. However, those treaties generally deal with specifi c, individual requests made by authorities in other jurisdictions — not the wholesale NSA-style vacuuming up and transfer of all private fi nancial data without so much as probable cause, a warrant, or even suspicion of wrongdoing, as envisioned in the IGAs and other FATCA-related schemes. Besides that fact, treaties can’t legally override the Constitution anyway.

Lawmakers have been trying unsuccessfully to get answers as well. In a 2013 letter to Treasury boss Jack Lew, Rep. Posey requested info about what statute authorized IGAs: “If such authority exists, please provide a citation to the specifi c relevant statute,” Posey said, adding that FATCA should be either repealed or drastically amended while calling for a moratorium on the scheme and the negotiation of IGAs.

According to Posey spokesman George Cecala, the Treasury has not replied to the letter nor offered any hint about where its purported authority to proceed might come from.

As to the wisdom of the dragnet-style approach to gathering and sharing sensitive information on everyone, Cecala explained that the U.S. government already has tools to locate criminals. “If the Treasury Department suspects criminal activity, they can send an enforcement order,” he said. “What they are asking for is blanket authority to collect all data, centralize it, and then share it with other governments.”

Sen. Rand Paul (R-Ky.), who introduced legislation aimed at reining in the scheme, has also spoken out about the administration’s abuses, saying the administration was acting “without the consent and authority of Congress.” Blasting “hundreds of billions” in compliance costs to the U.S. economy alone, Paul added: “It is a violation of Americans’ constitutional protections, oversteps the limits of Executive power, disregards the mutual respect of sovereignty among nations and drains money from the federal treasury under the guise of replenishing it, and discourages overseas investment in the United States.”

In early January the Republican National Committee (RNC) responded to outraged constituents, voting overwhelmingly to adopt a resolution calling for FATCA’s repeal.

In its resolution, the RNC said that the scheme “has inadvertently ensnared every United States Citizen living overseas due to its overzealous invasion of privacy and

11

punitive taxation and enforcement.” However, despite noting that the U.S. government is one of only two in the world that taxes citizens no matter where they reside, the GOP measure did not call for an end to citizenship-based taxation. It did, however, call on U.S. lawmakers to allow Americans who were forced to renounce their citizenship due to the draconian 2010 law to regain their citizenship.

The 168-member RNC voted overwhelmingly to pass the anti-FATCA measure on January 24 as part of a package containing other resolutions, despite deeply deceptive media coverage ahead of the vote. Reuters, for example, which sells “FATCA compliance services” but does not disclose that to readers, tried desperately to frame opposition to FATCA as support for “tax dodgers.”

To that end, it quoted taxpayer-funded government advocates expressing outrage: “It is mind-boggling that a major political party would even consider endorsing a resolution to facilitate tax evasion,” claimed Heather Lowe, director of government affairs at a UN- and government-funded outfi t known as Global Financial Integrity. “Repealing the law would cripple the U.S. and global efforts to fi ght offshore tax evasion.”

Thankfully, the whole plot is built on a foundation of sand that could crumble at any moment. DATCA represents the “Achilles heel” of the whole ploy, Jatras said, because if U.S. information sharing is stopped, other countries will likely not offer fi nancial info either. “FATCA and the OECD scheme could end up like the League of Nations: a dead letter because the United States, which got the ball rolling, opted out,” he added.

Even “compliance mongers” are now warning that FATCA is set to become a “train wreck.” However, while critics say repealing the law is an important fi rst step in restoring fundamental rights and helping to avoid potential economic calamity, there is an even broader issue that remains unaddressed thus far: citizenship-based taxation. Whether lawmakers are willing to aid Americans and our ailing economy remains to be seen. Come July 1, though, they may have little choice but to take action.

Tax Day in 13 Surprising Charts

You may be surprised to learn what the government does with all the money you pay in federal income taxes. Use our personalized tax receipt calculator to fi nd out how each of your dollars was spent, or view the average taxpayer’s receipt for the U.S. or your state.

The average American taxpayer paid $11,715 in income taxes in 2013. Here’s 13 charts showing exactly how the federal government spent those tax dollars.

On the military:

On Health Care:

On Interest on Debt:

On Unemployment and Labor:

On Veterans’ Benefi ts:

12

On Food and Agriculture: On International Affairs:

On Transportation:

And on Science:

Happy Tax Day: RNC Files Lawsuit Against IRS for ‘Illegal Stonewalling’ of Scandal Documents

The Republican National Committee, just in time for Tax Day, is fi ling a lawsuit against the IRS over what it calls “illegal stonewalling” of its request for documents related to the agency’s targeting of conservative groups.

The RNC said in a statement on Tuesday that the agency, despite several extensions, has failed to produce the documents sought in a Freedom of Information Act request dating back to May 2013. The RNC requested the agency produce correspondence and documents relating to the targeting scandal, in which agents singled out conservative organizations for special scrutiny.

The RNC called the agency’s refusal so far to produce the documents “unacceptable and inexcusable.”

“We’re fi ling this suit because the Obama administration has a responsibility to be transparent and accountable to the American people. The IRS has a legal obligation to answer our inquiry for these records,” RNC Chairman Reince Priebus said in a statement. “If the IRS and the Obama administration don’t have anything to hide, why not answer the request?”

13

The RNC-IRS battle is similar to one being fought on Capitol Hill. Congressional Republicans have accused the agency of stonewalling their requests for emails and documents. House Oversight and Government Reform Committee Chairman Darrell Issa, R-Calif., even threatened IRS Commissioner John Koskinen with contempt if his agency does not respond fully to congressional subpoenas.

The IRS claims that it has devoted hundreds of staffers and millions of dollars to complying with records requests pertaining to the targeting scandal, and other aspects of investigations.

At the RNC, the party says the documents it requested are in the public interest because Americans deserve to know how the agency “interprets and enforces the tax laws.”

“We’re going to keep fi ghting to hold the IRS and Obama administration accountable because Americans deserve a government that treats them fairly and not one that harasses them because of their beliefs nor an administration that goes after its perceived political enemies,” Priebus said.

Rein In Shady Tax Preparers

When you hear the words “tax preparer,” you may imagine a calculator-clutching accountant, carefully scrutinizing receipts beneath a green eyeshade. But the reality is that in most states nearly anyone can be a tax preparer. There’s no test to pass or code of ethics to follow. Walk around a low-income community and you’ll notice that check cashers, payday lenders, pawnbrokers and even furniture retailers offer tax-preparation services.

Of the 142 million individual income tax returns fi led in 2011, 79 million were completed by paid preparers, and a majority of those, 42 million, were fi lled out by preparers who were neither licensed nor regulated. (The rest were prepared by accountants or other professionals, like lawyers and actuaries, or by a relatively small number of government-certifi ed tax practitioners known as enrolled agents.)

With few barriers to entry, the fi eld of tax preparation has

drawn unscrupulous players. Many of them target low-income families who claim the earned-income tax credit, the nation’s single biggest antipoverty program.

The earned-income credit delivered more than $63 billion in refunds last year. It’s no surprise that unethical preparers have descended on low-income communities to get some share of this money. Preparers typically charge hundreds of dollars; federal investigators have found preparers charging as much as $1,000. They usually skim their fees off the top of their clients’ refunds, so taxpayers may not grasp just how much they’re losing.

The consequences of erroneous returns can be devastating: If the I.R.S. fi nds fraud, the taxpayer not only has to reimburse the government, plus interest, but may also be barred from claiming the credit for up to 10 years. Meanwhile, the preparer has likely closed up shop and can’t be tracked down and penalized.

Undercover sting operations by consumer groups and government agencies have uncovered brazen fraud by untrained tax preparers. One investigation in New York State found fraud among roughly 40 percent of paid preparers. Even when preparers aren’t committing fraud or charging onerous fees, they are often incompetent. For example, some preparers claim the standard deduction when itemizing deductions would be more advantageous for the taxpayer.

Only four states — Oregon and California, which pioneered tax-preparation regulation in the 1970s, and New York and Maryland, which followed suit within the last decade — regulate tax preparers. A national solution is both necessary and appropriate, but it has been blocked by small-government activists.

In 2011, the Obama administration introduced regulations requiring tax preparers to pass a basic competency test, undergo a criminal-background check, pay an annual registration fee, and keep current on tax law through continuing education. But the Institute for Justice, a libertarian group partly funded by the Koch brothers, challenged the regulations in court. The case is part of the institute’s continuing campaign against occupational licensing requirements, which they view as a threat to economic liberty.

In February, the Koch brothers won. A panel of Republican-appointed judges on the United States Court of Appeals for the District of Columbia Circuit struck down the rules as beyond the scope of the I.R.S.’s legal authority. The court’s opinion revolved around — no joke — a law called the Horse Act of 1884. That act, which predates the modern federal income tax by nearly 30 years, allowed the Treasury Department to crack down on agents who fraudulently claimed reimbursement for veterans whose horses were lost or killed in the Civil War. The judges found that unscrupulous tax preparers, unlike the dead-horse fraudsters, were not “representatives of persons” and therefore could not be regulated.

Commentators like The Wall Street Journal’s editorial writers

14

have argued that tax-preparer regulations favor national chains like H&R Block and Jackson Hewitt at the expense of mom-and-pop businesses. But there’s no reason to assume that greater accountability would give an advantage to the big guys; even the chains have erred in fi ling for the earned-income credit.

The Obama administration has not yet decided whether to ask the Supreme Court to review the recent ruling. But it’s unlikely to do so, because the business-friendly court would almost certainly rule against the administration. A better solution is for Congress to make it explicit that tax preparers count as “representatives” under the 1884 law. President Obama called for this change in his most recent budget proposal; it would cost the government nothing, because higher collections from more accurate returns should more than make up for the costs of the regulations.

The new chairman of the Senate’s tax-writing committee, Ron Wyden, Democrat of Oregon, and the committee’s top Republican, Orrin G. Hatch of Utah, are holding a hearing today on protecting taxpayers from “incompetent and unethical” preparers. Mr. Wyden understands the power of such oversight. A 2008 study by the Government Accountability Offi ce found that his home state had among the most accurate returns in the country.

If anything can win bipartisan support in Congress, it should be this. Republicans have long been tough on fraud in the earned-income tax credit program. And Democrats should stand up for vulnerable families victimized by tax preparers. Perhaps someday Congress will simplify the tax code, and we’ll all be able to prepare our own returns with ease. Until that elusive day comes, however, Congress must act to protect low-income Americans from swindlers posing as tax professionals.

Alex H. Levy is a third-year law student at New York University

and this article appeared in the New York Times on April 8,

2014.

Tax Preparers Targeting Poor With High Fees

In December, they begin showing up in empty storefronts in neighborhoods where empty storefronts are easy to come by. Cars with phone numbers brightly displayed on the doors roll down the streets, and signs pop up along the sidewalks promising fast money.

For millions of low-income Americans, tax season means the biggest one-time infl ux of money all year. It also means the annual sprouting of commercial tax preparers: some of them big-name franchises, some mom-and-pops and some, as 20-year-old Brittany Dixon discovered this year, shockingly expensive.

Ms. Dixon, a supermarket cashier and college student, took her tax documents — a W-2 form and some education expenses — to the fi rst place she saw, in a storefront near the interstate. The preparation took about a half-hour, and Ms.

Dixon was told the amount of her refund — and that she would be charged nearly $400, about a quarter of the total, in fees.

She told the preparer not to fi le, she said, and found a service willing to do her taxes at no cost. But by then, the fi rst preparer had already fi led and taken its cut. “That was my whole car note,” Ms. Dixon said.

Brittany Dixon, a supermarket cashier and college student, was charged nearly $400 in fees by a storefront tax preparer in Alabama.

There are as many as 1.2 million tax preparers nationwide, and reports have shown that a large majority of customers felt they were well served by their tax preparers. But with almost no regulation in the tax preparation industry and a tax code that is forbiddingly complex, the billions fl owing into low-income households this time of year, primarily in the form of the earned-income tax credit, present a ripe target for the unscrupulous.

Stephen Black, the director of Impact Alabama, a nonprofi t based at the University of Alabama that trains college students to provide free tax help, said his volunteers routinely saw low-income taxpayers who had paid hundreds of dollars to commercial preparers, often for inaccurate returns, and were often unaware that the prices are excessive. “Exorbitant pricing is rampant,” he said.

Mr. Black and many consumer advocates have been pushing for years for more oversight of tax preparation, describing a range of problems.

The Senate Finance Committee will hold a hearing on the issue, which Senator Ron Wyden described as a priority for him as committee chairman.

“I’m open to a variety of different approaches for how to do this,” said Mr. Wyden, a Democrat, whose home state of Oregon is one of four that have regulatory requirements for preparers. “But there should be a fl oor of basic consumer protection and fairness.”

The tax-preparation business has been bumping up against the government frequently in recent years.

15

After prolonged efforts by federal regulators, the once-prolifi c refund anticipation loan, a kind of cash advance that often came with staggeringly high interest rates, has become all but extinct. And last fall, the owners of two national chains aimed at low-income customers — Mo’ Money Taxes, of Memphis, and Instant Tax Service, of Dayton, Ohio — were permanently barred from the business after being charged with a litany of abuses, including encouraging fraudulent tax returns and charging “deceptive and unconscionable” fees.

But one of the federal government’s most aggressive efforts did not fare so well. In 2009, the Internal Revenue Service introduced a plan to require tests, continuing education and registration for tax preparers. Some professional groups and tax preparation businesses, like H&R Block, supported the rules, but many small tax preparers denounced them as unfair and protectionist.

“How can you tell me who can fi ll out my income tax?” asked Albert Turner Jr., a tax preparer in rural Perry County, Ala., which once had one of the country’s highest rates of refund loan use. He said concerns about fraud were overblown given ever stricter documentation requirements.

“Each year it’s getting tighter and tighter,” Mr. Turner said. “It’s hard to defraud the government now.”

Last year, a federal court ruled that the I.R.S. had overstepped its authority in mandating the new regulatory regime, a decision affi rmed by an appeals court this February. Supporters of the rulings said the rules would have done little to stop unscrupulous tax preparers anyway.

“The solution to the predatory pricing issue is more competition, not less competition,” said Dan Alban, a lawyer at the Institute for Justice who represented tax preparers who sued over the regulations. “We shouldn’t be forcing hundreds of thousands of people out of business with these burdensome regulations that aren’t being imposed on them because of anything they’ve done that’s wrong, but because there are a few bad apples we’re trying to catch.”

A temporary sign rose at a Birmingham strip mall.

The challenge for many customers is telling the bad apples from the good.

A majority of earned-income tax credit fi lers use preparers, according to a report by the I.R.S.’s taxpayer advocate, but only about a quarter of those preparers are certifi ed public accountants, lawyers or federally licensed tax specialists. Prices are often not disclosed up front, and many places do not mention the option of paying fees separately, rather than having them automatically, and more discreetly, deducted from the refund.

“It’s one of these areas where normal market forces just don’t work,” said Brett Theodos, a senior research associate at the Urban Institute. “You don’t have competition to modulate prices because of the lack of transparency.”

The federal focus has been on fraud and incompetence rather than prices, and while Mr. Wyden said “the lines blur,” opponents of new regulations question how much overlap there is between the two issues. Some consumer advocates have proposed fee disclosure requirements, while others have suggested caps on how much money can be deducted directly from a refund.

There are plenty of stories here in Alabama of tax fraud in which the taxpayer is complicit. There are also many in which taxpayers fi nd out only after being audited that their refunds had been fraudulently infl ated by preparers, who since then has disappeared.

“A lot of times they don’t even sign it,” Mr. Black said.

Cedrick R., 57, who did not want to give his full name because he was embarrassed about his predicament, learned from a volunteer in Mr. Black’s organization this year that his preparer, who worked out of a strip mall near Tuscaloosa, Ala., had been claiming a full-time college credit on his returns, infl ating his refund and taking half for herself.

“I didn’t get any paperwork,” he said, adding that the preparer had stopped returning calls after he asked about the discrepancy.

Nicole Todd, 40, a mother of three who works at the Y.W.C.A. in Birmingham, said her brother had a similar experience involving falsely claimed school credits.

Ms. Todd considered herself a savvy consumer, at least until a couple of years ago. On the recommendation of a friend, she went to an offi ce set up in a building between an oil-change place and a pawnshop. “They said they’d give you the hookup,” she said. “That’s what they called it.”

After a half-hour of work, the preparer told Ms. Todd that she would be receiving a refund of just over $6,000.

Happy with the payout, Ms. Todd looked through the sheaf of papers only later to fi nd the fees that had been discreetly subtracted: $550 for tax preparation, an “electronic fi ling fee”

16

of $99, a “service bureau fee” of $25, a “transmitter fee” of $99 and an “electronic refund product processing fee” of $32.95.

Ms. Todd, who now does her own taxes, went by the building not that long ago, she said. There is nothing there

Hatch Examines Ways to Protect Taxpayers from Unethical Tax Preparers

U.S. Sen. Orrin Hatch, ranking member of the Senate Finance Committee, delivered the following opening statement at a committee hearing examining effective ways to protect taxpayers from incompetent and unethical tax preparers:

As we all know, the due date for individuals to complete and fi le their annual income tax returns is one week away. And, at this point in the year, millions of Americans face a number of diffi culties in trying to comply with that deadline.

The sheer complexity of our tax system requires the majority of Americans to seek the services of a paid preparer in order to navigate through and comply with the tax code. Of the 142 million income tax returns fi led by individuals last year, nearly 80 million – or roughly 56 percent – were prepared by a paid preparer.

Our income tax system relies heavily on good faith voluntary compliance, which, in turn, requires the services of paid preparers that are both competent and ethical.

The IRS attempted to implement regulations in 2011 that, for the fi rst time, imposed both ethical and competency standards on any person who sought to prepare tax returns for compensation. The D.C. Circuit Court of Appeals, however, has since prevented IRS from enforcing those regulations when it upheld the Loving decision on appeal.

Among the approaches to solving the problem of incompetent and unethical paid preparers that we will hear about today is government regulation. However, there are other approaches worthy of thoughtful consideration.

One approach is comprehensive tax reform that results in a much simpler and straightforward tax system with fewer compliance and administrative burdens. A less complex tax

system that allows for simpler compliance rules will reduce taxpayer and preparer errors associated with complexity, decrease the need for complex tax fi lings, and eliminate opportunities to cheat the system through unethical behavior.

It is my belief that the best way to protect tax fi lers from incompetent and unethical tax preparers is to implement a fair and simple tax system that dramatically reduces their dependence on paid return preparers.

Until we get there, we need to minimize the damage that incompetent and unethical return preparers can cause. I look forward to hearing about different ideas on how to accomplish this worthy goal during today’s hearing.

Of course, with the IRS Commissioner testifying before us today, there are other matters that deserve the committee’s attention.

For example, there is the ongoing investigation into the IRS’s targeting of conservative groups during the 2010 and 2012 campaign seasons. Four congressional committees, including the Finance Committee, are currently looking into this matter. And, up to now, IRS offi cials have, with some exceptions, been cooperating.

That’s why it was disheartening to hear that, two weeks ago, Commissioner Koskinen apparently tried to spin what had gone on at the IRS, claiming that no one had used the word “targeting” to describe what happened.

The fact is that the Treasury Inspector General for Tax Administration (TIGTA) Russell George used the word “targeting” in his May 2013 report to describe the allegations, and, in testimony before Congress, he stated that the allegation had proven to be true.

Furthermore, Commissioner Koskinen himself described the activities as “targeting” during his confi rmation hearings before this committee.

Now, this may seem like we’re engaging in semantics, but the words we use here are important. If the administration, rather than acknowledging what went on at the IRS and trying to fi x it, is going to engage in word-play to minimize what happened, we are going to continue to have diffi culties as we try to resolve these issues.

Even the Washington Post fact checker said it is “silly and counterproductive” to deny that the phrase targeting describes what happened, awarding the Commissioner Three Pinocchios for saying otherwise.

On top of that, we have the regulatory effort at the IRS that appears to be designed to further marginalize these same conservative groups. I’m talking, of course, about the proposed regulations governing the political activities of 501(c)(4) organizations.

People and organizations across the political spectrum have

17

rightly condemned these proposed regulations because they undermine free speech and the ability of American citizens to participate in the political process. The IRS had a record number of public comments fi led in response to the proposal from all points on the political spectrum. And, from what I gather, they were almost uniformly negative.

This regulation, if given the force of law, would effectively silence grassroots organizations by categorizing a number of routine and long-accepted activities as political. And, it would ensure that a number of the administration’s critics remain on the sidelines of the political debate.

This proposal is particularly disturbing given what has already gone on at the IRS with the targeting scandal.

Now, last week, Commissioner Koskinen publicly stated that the regulations are not likely to be fi nalized this year. But, that’s not good enough. These regulations should go away entirely. And Commissioner Koskinen has the power to make that happen.

Throughout the public debate over this proposal, little has been said of the role of the IRS Commissioner in approving the fi nal regulation.

However, as was confi rmed by Secretary Lew in his recent appearance before this committee, the IRS Commissioner has the authority to unilaterally prevent these regulations from taking effect. That being the case, any effort to defl ect responsibility in a different direction is futile.

As you can see, Mr. Chairman, we have a number of issues to discuss today. I look forward to a robust and informative hearing.

Thank you.

Lobbyists Big Winners in Tax Code Debate

Lobbying fi rms initially paid to champion changes to the tax code are now fattening their bottom lines ensuring the revisions never become law, according to The New York Times.

In the lead-up to Michigan Sen. Dave Camp’s release of the proposed amended tax code – a 979-page behemoth that took three years to draft – K Street lobbying fi rms appeared to be in Camp’s camp, the Times reported.

But after the late February release of the Camp proposal – the largest revision of U.S. tax code since 1986 – big business, specifi cally oil, fi nancial services, private equity, and real estate industries, have balked at its contents, Bloomberg reported.

Among the myriad items distasteful to corporations is the plan to repeal or make permanent changes to 37 of 55 business tax provisions, such as the research and development tax credit, according to the Times.

Lobbyists are hard at work scrutinizing the proposed tax code

that affects “almost every corporate interest,” according to the Times.

“If you are not at the table, you are on the menu,” lobbyist Heather Podesta told the Times. Podesta’s fi rm has at least 10 tax-related corporate clients.

According to the Times, the largest banks and fi nancial institutions – JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, GE Capital, the American International Group, and Prudential – would be hit with a tax costing them $86 billion over 10 years, while private equity and hedge fund managers are upset over a change that would tax clients’ investment gains at income tax rates instead of the lower capital gains rate.

“A targeted tax on fi nancial institutions, regardless of form or motivation, is misguided and utterly at odds with the fundamental objective of comprehensive tax reform,” said a letter from 11 banking groups, including associations that represent Morgan Stanley and Goldman Sachs, according to Bloomberg.

Insurance companies and ad agencies would no longer be able to include company advertising as a tax-deductible expense. And the small business lobby and industry trade associations are in an uproar over the proposal to tax income over $400,000, or $450,000 for a couple, at a 35 percent tax rate while the corporate tax rate would max out at 25 percent. Most small business owners pay taxes as individuals.

The medical device industry, along with retailers and franchise businesses, have been supportive of the plan.

The lobbying industry, however, is the big winner, according to the Times, noting congressional staff members have coined the Camp proposal the “Build a Vacation Home for Tax Lobbyist Act.”

Revenue at the fi rm Capitol Counsel has nearly doubled, from $8 million at the start of the Obama administration, to more than $14 million last year, according to the Times, while Capitol Tax Partners saw a record jump in its revenue, totaling $12 million in 2013.

Bloomberg reports that one of the single largest lobbying contracts last year went to the Alliance for Competitive Taxation, which paid PricewaterhouseCoopers $1.7 million.

Avoiding the Squeeze: Trusts, Estates, and the New ATRA Tax Regime

Trusts and estates are recognized as separate taxable entities for federal income tax purposes. The estate or trust must fi le a return on Form 1041, U.S. Income Tax Return for Estates and Trusts, on or before the 15th day of the fourth month following the close of the tax year if it has gross income of $600 or more. A trust generally must have a calendar tax year, but an estate may have a fi scal year.

18

An estate or trust is generally regarded as a conduit of its income and is allowed a deduction for the portion of income that is currently distributable or distributed to the benefi ciaries. Income allocated to a benefi ciary is taxed to the benefi ciary, retaining the same character that it had in the estate or trust. This concept of income’s retaining its character in the hands of trust and estate benefi ciaries is very important under the provisions of the American Taxpayer Relief Act of 2012 (ATRA), P.L. 112-240.

It is important to understand how taxable income is computed for an estate or trust. Gross income is reduced by (1) deductions for expenses paid or incurred in connection with the administration of the trust or estate that would not have been incurred if the property were not held in a trust or estate, (2) deductions for income distributions to benefi ciaries, and(3) personal exemptions. Income is determined under thegoverning instrument and local law. The regulations recognizethe importance of local state provisions in determining theincome of a trust or estate (Regs. Sec. 1.643(b)-1).

2012 LEGISLATION

ATRA raised tax rates on individuals, estates, and trusts by raising the maximum tax bracket from 35% to 39.6%. The capital gains tax on the highest income tax bracket increased from 15% to 20%. These maximum brackets are effective for individual taxpayers once taxable income exceeds $400,000 for an individual and $450,000 for taxpayers married fi ling jointly. The threshold for the head-of-household fi ling status is $425,000, and for married couples fi ling separately it is $225,000 (Sec. 1).

In contrast, the income tax brackets for trusts and estates are extremely condensed. For 2014, once the estate or trust has taxable income in excess of $12,150, the top rates of 39.6% for ordinary income (Sec. 1(e) and Rev. Proc. 2013-35) and 20% for long-term capital gains apply (Sec. 1(h)).

In addition, the Health Care and Education Reconciliation Act, P.L. 111-152, (part of 2010’s health care reform legislation)ushered in a complicated new unearned income Medicarecontribution tax of 3.8% on net investment income in excess ofcertain thresholds. The tax is effective for tax years beginningafter Dec. 31, 2012. For most trusts, the tax will generally beeffective for the year beginning Jan. 1, 2013. An estate, whichcan have a fi scal year, can adopt, for example, a Nov. 30 yearend, in which case the 3.8% surtax would not be imposed untilthe tax year beginning Dec. 1, 2013.

NET INVESTMENT INCOME

Net investment income consists of gross income from interest, dividends, annuities, royalties, and rents, other than those arising in the ordinary course of a trade or business other than a trade or business that is a passive activity or a trade or business of trading in fi nancial instruments or commodities (Sec. 1411(c)(1)). It also includes other gross income from a passive activity or a trade or business of trading in fi nancial instruments or commodities (Sec. 1411(c)(2)). In addition, it

includes net gain attributable to the disposition of property other than property held for use in a trade or business that is not a passive activity or a trade or business of trading in fi nancial instruments or commodities. Deductions that are properly allocable to this income or gain are allowed to reduce the amount subject to tax.

For taxpayers who are married fi ling joint returns, the threshold for the net investment income tax is $250,000. It is important to note that this threshold is based on modifi ed adjusted gross income, not taxable income. Single individuals have a threshold of $200,000, and married individuals fi ling separately have a $125,000 threshold (Sec. 1411(b)).

The 3.8% surtax also applies to estates and trusts, but the threshold is the dollar amount at which the highest tax bracket for estates and trusts begins for the tax year. This is only $12,150 for 2014 (Sec. 1411(a)(2), Rev. Proc. 2013-35). Thus, the condensed income tax brackets for estates and trusts will result in many entities’ being subject to the highest tax brackets and the surtax. In contrast, many individual benefi ciaries will be in lower income tax brackets and not be subject to the surtax.

PLANNING OPTIONS

The primary planning objectives for trust and estate administrators are to avoid the condensed trust and estate income tax brackets, benefi t from the benefi ciaries’ larger income tax brackets, and avoid the 3.8% surtax. By making distributions to benefi ciaries, trusts and estates may be able not only to avoid the 3.8% surtax, but also to take advantage of the benefi ciaries’ lower income tax brackets.

The key to achieving these results is to effectively use the special deduction from income available to estates and trusts for distributions to benefi ciaries. Because estates and trusts operate as conduits, substantial tax savings may result from distributing the income, including net investment income, to a benefi ciary who is in a lower tax bracket.

Special consideration should be given whenever the estate or trust owns an interest in a passive activity, because income from a passive activity is subject to the 3.8% surtax. If the fi duciary materially participates in the activity, it might be possible to avoid having the activity labeled as passive. Although the issue is beyond the scope of this article, the IRS has stated that it recognizes that the activities of a fi duciary having suffi cient discretion and control over the affairs of the trust may qualify as material participation (IRS Technical Advice Memorandum 201317010).

It may be possible to either (1) distribute appreciated property directly to the benefi ciary so that the benefi ciary recognizes the capital gain upon sale or (2) include capital gains in distributable net income.

DISTRIBUTABLE NET INCOME

Estates and trusts use the concept of distributable net income

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(DNI), which governs the allocation of taxable income between the trust/estate and the benefi ciaries. DNI will determine the character and the amount of the distribution deduction and the associated income that fl ows through to the benefi ciaries under the conduit theory. The deduction for distributions will act to reduce the trust’s taxes. The benefi ciary’s tax is based on the amount and character of the DNI distributed.

In its essence, DNI refl ects the taxable income of the estate or trust with certain modifi cations (Sec. 643). Capital gains and losses are generally excluded from DNI (Sec. 643(a)(3)), which means they are subject to tax at the estate or trust level. Because of the condensed tax brackets, a minimal amount of capital gains will quickly result in a 3.8% net investment income tax and a higher tax bracket.

The reason for separating income from capital gains in calculating DNI is the differing interests of the income benefi ciaries and the residuary benefi ciaries. Generally, capital gains are considered corpus and pass to the residuary benefi ciaries. Therefore, capital gains are generally taxed to the trust and reduce the amount passing to the residuary benefi ciaries.

DISTRIBUTE NET INVESTMENT INCOME

To reduce income taxes, consideration should be given to distributing income from the trust or estate. The objectives are to use the lower brackets of the benefi ciaries and to avoid the surtax. The fi rst opportunity is to distribute income that would be included in net investment income, which in many instances consists of interest and dividends. Interest and dividends are included in DNI, and therefore the distribution reduces all of the trust’s taxes.

It might also be possible to distribute capital gains. Capital gains are included in net investment income but, as mentioned above, they are normally not included in DNI. Therefore, capital gains are generally taxed to the estate or trust. As described below, it may be possible to include the capital gain distributions in DNI and thereby allocate the gain to the benefi ciaries.

CAPITAL GAINS AND DNI

Capital gains are generally excluded from DNI and are allocated to principal. Therefore, they are typically taxed to the trust, which will increase the trust’s income taxes. However, under Regs. Sec. 1.643(a)-3, capital gains may be included in DNI to the extent they are, under the terms of the governing instrument and applicable local law, or under a reasonable and impartial exercise of discretion by the fi duciary (in accordance with a power granted to the fi duciary by applicable local law or by the governing instrument if not prohibited by applicable local law):

1. Allocated to income;2. Allocated to corpus but treated consistently by the

fi duciary on the trust’s books, records, and tax returnsas part of a distribution to a benefi ciary; or

3. Allocated to corpus but actually distributed to thebenefi ciary or utilized by the fi duciary in determining theamount that is distributed or required to be distributed toa benefi ciary (Regs. Sec. 1.643(a)-3(b)).

A great deal of attention must be focused on the governing instrument and the law of each jurisdiction. Each state may differ in this regard.

ACHIEVING TAX SAVINGS

First and foremost, the provisions within the governing instrument are critical. In the planning stage, attention should be given to the allocation of capital gains and giving the fi duciary suffi cient discretion. The fi duciary should be permitted to distribute trust principal and to allocate receipts and disbursements between income and principal. In appropriate instances, capital gains may even be included in income. If the instrument is silent, state law generally provides the governing rules.

The documents should clearly allow for in-kind distributions. Under the tax rules, when appreciated property is distributed to a benefi ciary, the benefi ciary will report the capital gain when he or she sells it later. This treatment will avoid the trust level taxation and reduce the net investment income tax. It is important that the executor avoid the Sec. 643(e)(3) election, which permits the trust to elect to recognize gain or loss upon the distribution of property to the benefi ciary.

Estates and certain trusts have another special rule under Sec. 663(b) that distributions paid within the fi rst 65 days of the tax year may be treated as paid on the last day of the previous fi scal year. The fi duciary makes the election by checking a box on Form 1041 on page 2 under the “Other Information” heading, line 6, which says, “If this is an estate or a complex trust making the section 663(b) election, check here,” and then taking care to make the distributions within the fi rst 65 days of the next year. This election gives fi duciaries enough time to compute the trust income and affords a very handy lookback in instances where distributions that should have been made were not. The deduction cannot exceed the DNI for the previous tax year. Therefore, the considerations previously discussed regarding capital gain inclusion in DNI will affect this computation.

ADVICE FOR EXECUTORS AND TRUSTEES

Many unique aspects of trust and estate income taxation can help lower the income taxes paid by trusts and estates. Executors and trustees must adhere to fi duciary standards and owe duties of care and loyalty to all benefi ciaries of the estate or trust. Therefore, fi duciaries must be knowledgeable about the circumstances of individual benefi ciaries as well as the overall structure of the entity. Drafting to give a fi duciary suitable discretion will help the fi duciary better manage these considerations. Fiduciaries must carefully document the factors they consider in making decisions about administering the trust or estate and make their decisions accordingly.

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Modern portfolio theory and investing for total return play a large role in trust administration, but they can result in increased taxes at the trust level. Fiduciaries and their advisers must work as a team to develop an appropriate strategy.

Taxes rose signifi cantly in 2013, with new top rates of 39.6% on ordinary income and 20% on capital gain income and the new 3.8% net investment income tax.

These taxes apply to trusts and estates at much lower income levels than for individuals, changing the tax planning that must be done to maximize the income that is distributed to benefi ciaries.

Distributing income subject to the 3.8% net investment income tax to benefi ciaries may avoid the tax entirely because the tax applies to individuals at much higher income thresholds than for trusts and estates. Those benefi ciaries are also subject to the top income tax rate of 39.6% at much higher income levels, so distributing more income to benefi ciaries will further reduce income taxes.

Capital gain income, which is normally taxed to the trust and estate and not distributable to benefi ciaries, may be distributable, in some circumstances, to benefi ciaries and deductible from gross income, another planning technique to lessen taxes.

Editor’s note: Robert S. Barnett is a partner, and Elizabeth

Forspan is an associate, both at Capell Barnett Matalon and

Schoenfeld LLP, attorneys at law in Jericho, N.Y. The authors

would like to thank Sidney Kess, CPA, J.D., for his advice and

guidance. The authors would also like to acknowledge and

thank Rebecca Richards, Esq., for her assistance.

How To Cheat On Your Taxes

It’s almost foolproof, and tax collectors don’t seem to mind. The only catch: You have to be rich Mark Peterson/Redux

As millions of Americans rush to fi le their tax returns on time, trying to be ever-so-careful in hopes of avoiding an audit or, far worse, prosecution, they will fi nd it instructive, and infuriating,

to learn about Jerry Curnutt.

Curnutt can show people how to cheat on their taxes and not get caught. His trick won’t work if you are a wage earner, but those rich enough to invest in real estate partnerships have escaped paying billions of dollars in the past decade by using this technique.

Curnutt knows this because he is a tax detective. He retired from the Internal Revenue Service in 2000 as one of its top snoops, overseeing all investment partnerships. Using his desktop computer, Curnutt discovered a simple way to cheat that no one at the IRS had noticed. Call it Curnutt cheating.

For his brilliant sleuthing, the IRS gave Curnutt commendations and multiple cash awards, each for about $1,000. It sent him around the country to conduct 64 training sessions so IRS auditors could learn how to effi ciently spot these cheats. He also trained state tax auditors from California, Indiana, New Jersey and New York.

But the IRS never put Curnutt’s insights into practice and never cracked down on the cheaters, allowing them to escape paying tens of billions of dollars in federal and state taxes.Now Curnutt’s mission in life, at age 76, is to get states and the IRS to go after these cheats.

Cheating on your taxes carries little risk, despite the myth that legions of aggressive auditors and tax collectors hound taxpayers, a myth the IRS revives each spring when it noisily arrests a few notable people for tax evasion, knowing it will make the news. This strategy is known as general deterrence: Make a very public example of a few people to scare others into complying.

But Congress has cut and cut the IRS staff. Last year the IRS budget worked out to $33.55 per American, a 20 percent reduction compared with 2002, even though the number of taxpayers has grown 11 percent. Those cuts came as Congress enacted myriad laws making the tax code ever more complex and passed all sorts of social welfare legislation via tax code changes.

All that means there are fewer audits of both people and corporations. And most examinations of tax returns are so superfi cial that a few IRS agents deride them as audit lite. Here’s one indication of how little you have to fear: Last year couples and individuals fi led more than 144 million tax returns, and fewer than 1,000 people went to prison, all of them for egregious misconduct. Judges are getting tougher, though. Half of those prison sentences last year were for 15 months or more, compared with just four months in the 1990s.

Another reason to relax: The Justice Department, which handles tax prosecutions, never indicts someone over a single tax return. You have to repeat the same or similar tax offenses to get in front of a grand jury.

Besides, if you are a wage earner Congress has enacted laws that make cheating almost impossible, in large part

21

because the government takes its taxes out of your paycheck before you get your money. In contrast, it trusts investors and business owners to self-report their income, which creates multiple opportunities to cheat, as I have been documenting for years in my articles and books like Perfectly Legal, and as the United States taxpayer advocate has pointed out in reports to Congress.

Given that background, the tax-cheat ploy Curnutt uncovered is remarkably easy. On Form 1065, the one partnerships fi le, just leave Line 10 on Schedule K blank, or report a smaller fi gure than the real one.

Why does that one line go unnoticed when the IRS selects tax returns for audit? IRS software scans only for what it is told to look for. (Think of those Star Trek episodes in which the Enterprise scans a planet for life, detects none and then discovers life forms the scanners were not tuned to notice.)

This week, news broke that the IRS effectively fails to audit massive partnerships, like hedge funds and private equity funds, even though corporations of the same size are under constant IRS audit. A short video, “Tax Analysts Video Examines Audit-Proof Businesses,” explains how partnerships escape audits.

Figuring out what number should be on Line 10 can be a complex challenge, one that Curnutt trained all those auditors to fi gure out. The problem is that the IRS is still not fl agging partnership returns with a blank Line 10 or a dubious fi gure. That means none of them are delivered to auditors. And Curnutt discovered that the IRS needs to check Line 10 only for the year when property with big debts is disposed of, typically 20 years after purchase.

This is not a huge group of returns, but it does represent a big chunk of unpaid taxes. At best, only one in 400 partnerships returns gets audited, because partnerships do not pay taxes-they only pass money on to investors who, in turn, pay any taxes due from partnership profi ts on their own tax returns. Curnutt’s research shows that cheating occurs among a small minority of the million real estate partnership returns fi led each year. And they are not those for the big partners with hundreds or thousands of investors, but mostly groups of three to six people who all know each other. Curnutt fi gured this out by using software to sift through the haystack of complicated tax returns to fi nd the nettlesome few.

Curnutt has been unable to get the IRS to follow up on the insights for which it honored him, for reasons neither spokespeople nor IRS commissioners have explained, despite my repeated queries. So Curnutt began offering his services to every state with an income tax. The response has been underwhelming.

Years ago, a Kentucky tax offi cial told me Curnutt was rebuffed because his audits would have exposed some of the then-governor’s major campaign donors. New York state offi cials under four governors have repeatedly claimed, in writing and interviews, that they already do “Curnutt audits,” but that is

not true.

California’s Franchise Tax Board told Curnutt in 2009 that it could not afford to hire him. His fee? Travel expenses, plus $140 an hour. That is a fraction of the hourly rate states routinely pay lawyers, accountants and other experts for advice that does not raise a penny of revenue. And Curnutt could put many millions into state coffers for minimal expense and effort.

Only one state hired Curnutt: Pennsylvania. From 2002 to 2009, he put in seven months of work there and found hundreds of real estate partnerships that had each failed to report more than $1.6 billion in income. That works out to close to $50 million in unpaid state taxes, and $400 million in federal taxes. Curnutt’s fee came to less than $200,000.

Pennsylvania hired Curnutt when Ed Rendell, a progressive Democrat, was governor. Tom Corbett, an anti-tax Republican, took offi ce in 2011, and the state told Curnutt his services were no longer required.

Several tax authorities have told me over the years to be wary of Curnutt, saying he is just trying to make money because he doesn’t have enough to get by. Curnutt lives in a modest home in Arlington, Texas, halfway between Dallas and Fort Worth, with his wife and a grown son paralyzed from the neck down because a madman shot him (and killed his boyhood friend) because they were being too noisy while playing.

Making money is not what drives Curnutt. He inherited vast farmland that others manage for him. What motivates him is what drives all good detectives: a burning desire to catch the bad guys. It infuriates Curnutt that he knows how to nail the cheats and nothing is being done.

If New York state hired him, Curnutt says, “there is only one possible outcome-all hell will break loose. But there is no way, short of a directive from Governor Andrew Cuomo, that the state Department of Taxation and Finance will allow me to” identify the tax cheats.

New York Attorney General Eric Schneiderman’s offi ce wants to employ the Curnutt investigative techniques but lacks the authority to audit. The state comptroller, Thomas DiNapoli, has authority to look into tax fi lings, but emails from that offi ce make it clear that, as Curnutt puts it, “they want to stay a mile away from this.”

The New York tax agency has told Curnutt, state lawmakers and me that it already looks for the kind of cheating he describes, but a careful reading of its statements shows that it is describing a different and unrelated form of cheating, one likely to snare only non-New Yorkers.

Both the chief of the New York state tax tribunal and the chief clerk told me they had not heard of a case concerning the relevant federal tax code, Section 1231, in decades. State records show the last case was more than 30 years ago. Both also said they could not recall any cases about misreported

22

gains by real estate partnerships, and none show up in a search of fi lings.

None show up because New York state is not looking for this kind of cheating. If it did, Curnutt calculates that it would bring in $200 million in tax money in bad years like 2009, and $700 million in the good years, like 2000 and 2007.

But New York clearly doesn’t need the money to undo massive budget cuts to child care, fi x potholes on state highways or ease the burdens of many millions of people who fi le honest tax returns.

Go Ahead! Cheat!

The odds for taxpayers overall, according to IRS data analyzed by Syracuse University’s Transactional Records Access Clearinghouse for 2013 and 1993, per million taxpayers:

2013 1993

13 20 Recommended for prosecution as a tax cheat6.4 11 Indicted4.2 8 Convicted2.9 4 Sentenced to prison0 0 Caught for “Curnutt cheating” in real estate

partnerships.

By David Cay Johnston , New York Times - April 8, 2014

Tax Identity Theft: Why Everyone Is Vulnerable

A few weeks ago, a friend of mine -- let’s call her Mallory -- got an unsettling call from her accountant. The accountant had been preparing Mallory’s taxes, hit “Send” to e-fi le the fi nished return, and it was rejected. Someone had already fi led a tax return using Mallory’s Social Security number. She’d been a victim of tax identity theft.

The accountant called the IRS, but they wouldn’t talk to her. Mallory called and was directed to the fraud department. While she was on hold, she made more calls: one to a friend at the FBI, another to the FTC and the last one to me.

Mallory had just become a statistic. The aftermath of tax identity theft is messy, and since 2012, the number of victims has been on the rise. Millions of Americans who expected refunds--often desperately needed to make ends meet--have waited the better part of a year to get their money back -- and even then only after they had traversed a paper labyrinth to prove to the IRS they had been the victims of a crime.

Like many of us, Mallory thought she was doing everything she could to protect her identity from this kind of crime and, as a former senior banking executive, she probably was. Unfortunately, we live in a world where breaches -- and the resulting cases of identity theft -- are rapidly becoming the third certainty in life. Doing everything we can do is no longer good enough: too many organizations have too much of your information in databases that are too easily accessed by the

wrong people.

Though most people don’t know enough about this kind of crime, the IRS investigations of tax-related identity theft are up 66 percent since 2012. The agency says it has identifi ed 14.6 million false returns and stopped $50 billion in fraudulent refunds since then, but the problem continues to grow. Victimization is so rampant that the two most popular DIY-tax software programs (H&R Block’s Tax Software and Intuit’s Turbo Tax) now offer a window for tax identity theft victims to input their IRS-issued Identity Protection PIN with their other identifying information.

So what happens if, or when, you become a victim of tax identity theft?

If you know for certain that your identity has been compromised, the IRS has a form for that. But if you’ve already lost your tax refund to an identity thief, their reporting mechanism may not be enough to resolve your existing case. If you know your information is in the hands of the bad guys, make sure you cover your bases with the IRS as well as the credit reporting agencies, the Social Security Administration and your creditors.

While the IRS knows how many thieves it caught, the Treasury’s Inspector General for Tax Administration suspects that an additional 1.1 million fraudulent returns (and $3.6 billion in refunds) slipped through IRS fi lters in 2011. He also reported that the agency issued $183 million in tax refunds that year to identity thieves -- based on the 174,000 Social Security numbers that were used on multiple tax returns in 2011 -- after the criminals had submitted fake returns, before legitimate taxpayers legally fi led.

If you are one of the unfortunate souls whose identity is compromised with the IRS, you might personally have to do the legwork, and it won’t be easy. Mallory is quite experienced in navigating federal bureaucracies, yet still found herself being transferred multiple times and then held on hold by the understaffed IRS fraud department. She wasn’t able to get a great deal of information, and her accountant wasn’t allowed to help. Mallory only clarifi ed the details of the theft when my colleagues at Identity Theft 911 got involved and a prepaid debit card (which had been ordered by the thief to receive the refund) showed up at the home of her parents.

If you fi nd your efforts stymied, it’s worth making a call to your insurance agent, bank or credit union representative, or the HR department at work to fi nd out if they have a program to help policy holders, customers, members or employees resolve identity theft issues. You may want to enroll now if it’s available, and you may be pleasantly surprised to fi nd that it’s free or can be had for a nominal cost depending on your relationship with the institution. It can be a game changer if you become a victim.

In cases where your return is blocked or a refund has been issued to thieves, or you are notifi ed by the IRS that you signifi cantly underreported your income (because someone

23

else had obtained employment using your SSN), you’ll have to have a police report to start the process of proving to the IRS that you are who you say you are and you’ve been victimized. Even then, with the backlogs you’ll still spend plenty of time on the phone and with paperwork trying to work out a resolution to your case.

However, once you resolve your case with the IRS, don’t assume that you’re safe: if identity thieves have your name and Social Security number, they have a permanent option on your life that they can use at their convenience. Even if they are arrested and prosecuted, the nightmare isn’t necessarily over. They may well have sold your information to others who will do more of the same.

1. Get the free credit reports to which you are entitled everyyear. thoroughly review them. Correct any errors andreport suspicious activity to the fraud departmentsof the credit bureaus.

2. Put fraud alerts on your credit fi les.3. Ask each of the three reporting agencies to freeze your

credit.4. Visit sites like Credit.com, which provides a free top line

view of our credit and free credit scores that areupdated monthly. If something in your credit profi lechanges unexpectedly, and you can’t explain it, youmay have become a victim.

5. Check your credit and bank accounts daily.6. Enroll in free transactional monitoring programs that

are offered by your bank, credit union and credit cardcompany so that you will immediately be notifi ed of allactivity in your accounts.

7. Consider buying more sophisticated credit and fraudmonitoring programs to keep track of changes in yourcredit or identity profi les.

8. Find a personal damage control program to “have yourback.”

Your identity is your asset. Unfortunately, it is a highly exploitable commodity for those who view you as their day

Editor’s Note: Excellent article from Huffi ngton Post. A tax

professionals nightmare - when their client’s ID has been

stolen. But what about our personal ID - our PTIN! Make

certain the returns the IRS shows you prepared were really

yours. ID theft includes your PTIN

School Food Service Employee Among 25 Charged with ID Theft

Pamela Rhim-Grant accused of manipulating student information computer database

Federal authorities in South Florida said 25 people have been charged in the latest major identity theft and tax refund fraud sweep.

Miami U.S. Attorney Wifredo Ferrer said Thursday the suspects collectively tried to obtain $36 million in fraudulent tax refunds from the Internal Revenue Service.

“In this sweep alone, more than 13,000 identities were stolen and used to commit this fraud,” Ferrer said.

One defendant is a school food service employee who is charged with stealing the identities of about 400 Miami-Dade County students.

According to the criminal complaint, Horace Mann Middle School food service manager Pamela Rhim-Grant, 40, accessed the student information computer database to steal their identities.

Ferrer said the theft resulted in 216 fraudulent returns being fi led.

Each school year, students are required to fi le paperwork for school lunches.

“With the application you have the Social Security number, you have the birth date, the student’s fi rst and last name,” a parent told Local 10’s Carlos Suarez.

Other defendants include a mail carrier and tax preparers.

South Florida is a national hub for identity theft used to fi le for tens of millions of dollars in fraudulent tax refunds. The latest arrests come just before the April 15 deadline for fi ling federal tax returns.

Almost 300 people in South Florida have been charged with identity theft and tax fraud since 2012.

Tax Refunds Made Faster, More Convenient

Global Payout, Inc. (OTC Pink: GOHE) and New Payment Solutions, LLC today announce the availability of a “state of the art” tax refund platform designed for EROs (Electronic Return Originators) to offer instant issuance debit cards to their tax return clients. The platform combines both Global Payout’s prepaid debit card offering with the CPG eWallet (Consolidated Payment Gateway Electronic Wallet) technology enabling tax preparers to “instant issue” debit cards that receive direct deposit of refunds from the IRS and US Treasury. New Payment Solutions has approximately 1,000 licensed EROs capable of providing this service to their tax refund receiving customers. The debit cards are reloadable and completely secure.

In 2013, approximately 120 million people fi led tax returns electronically, and nearly 75% of all tax returns fi led that year received a tax refund. An ERO is a tax preparer authorized by the IRS to prepare and transmit tax returns electronically, using approved software, on behalf of individuals and companies. This new payment system is currently being tested with multiple EROs and will be fully available in April. The service is being administered, operated and marketed to the EROs directly by New Payment Solutions, an authorized reseller of Global Payout products and services.

Program benefi ts to the taxpayer include electronically direct-

24

New Payment Solutions (http://newpaymentsolutions.com), with operations in California and Nevada, is a company recently formed by business and technology professionals experienced in the payment systems arena. The services provided by New Payment Solutions including payroll solutions, payouts solutions, tax refund and ERO service support.

10 Basic Rules of Every Estate Plan

Most people still believe that estate planning is all about tax planning. Since the tax law now exempts most estates, they think they don’t really need an estate plan. But they do, and many people need an estate plan more than ever.

That’s a mistake. An estate plan involves a lot more than tax planning, and for most people the non-tax elements of a plan are more important than the tax issues.

There are basic rules and guidelines that apply to every estate

plan, whether it is taxable or not. Draft an effective plan by paying attention to these guidelines, regardless of what the tax law is or might become. You always can make adjustments if the tax law changes.

* Do something. Too many people use uncertainty as anexcuse not to have a plan. Some people can’t resolve issuessuch as who should be the executor, trustee, or guardianof their children. Some can’t decide how much to leave tocharity, or perhaps the estate planner is proposing a strategythey don’t quite understand or aren’t comfortable with yet.

Don’t let these issues leave you with no estate plan or an out-of-date plan. If you can’t pull a complete plan together, at least do the minimum necessary, such as a basic will and powers of attorney. You can do an estate plan in installments. Assemble a simple, basic plan now that covers the essentials. Then, work toward a more robust plan as you learn more about the tools available, refi ne your goals, and resolve disagreements.

* Keep track of your estate. There’s a story that W.C. Fieldsdidn’t think banks were safe, so he diversifi ed by stashinghis money in relatively small amounts in banks all over thecountry. He didn’t keep a master list of the banks, and hisheirs never were sure they found all the money, though theyspent resources trying to track down all the accounts. Fieldsprobably knew how to fi nd everything, but he didn’t giveanyone else all the information.

Different variations of this story occur remarkably frequently in estates of all sizes. The estate owner doesn’t have a master list or fi le of all the property and debts, and the fi les aren’t in great shape, at least not for someone who doesn’t know the system. In those cases, all the property might not be located or the estate spends a lot of time and money trying to locate it. Your estate planner also can’t deliver the best advice without an accurate list of your assets and liabilities.

At a minimum, you should update a complete list of your assets and liabilities once a year and share this with the person (or persons) named as executor in your will. And make sure your

deposited refunds to the tax fi ler’s prepaid debit card by the IRS without any delay. And, the tax fi ler does not have to pay the tax preparation service fee until receiving their refund from the IRS. Additionally, the taxpayer’s prepaid card account is bundled with a free fi nancial education program and a free comprehensive pre-negotiated healthcare plan with up to 65% discount on prescription drugs and up to 80% discount on surgical procedures. More benefi ts may be added in the future.

Benefi ts to the ERO include the swift, electronic payment of tax preparation service fees. At the same moment, when the tax fi ler card account is credited with the tax e-refund, the ERO’s fee is also credited to their master account. The ERO has the option of immediately transferring those funds to their checking or savings bank account through ACH, or the funds can be accumulated for transfer at a later time. This refund payment mechanism helps EROs grow and retain their tax fi ler client base while also providing a new marketing channel to those tax fi lers that would prefer to receive an electronic payment on a debit card instead of a check in the mail. but do not have a bank account. With Nearly one-third of the U.S. population--106 million people--either under-banked or unbanked, this new tax refund platform provides EROs with a large and unique marketing and client acquisition opportunity.

Xavier Frazier and Joy Reed, CEO and CFO of New Payment Solutions, respectively, jointly stated, “We have researched many different technologies of tax refunds to tax fi lers and the payment of service fees to our EROs before we decided to team up with Global Payout. We are glad to have such a highly competitive system that can greatly benefi t the taxpayers as well as the EROs. We believe everybody wins with this refund payment platform, the refund recipients, the EROs, New Payment Solutions, and Global Payout.”

James Hancock, CEO of Global Payout added, “The collaboration between New Payment Solutions and Global Payout was both rapid and collaborative. As a result, we are extremely pleased to achieve an integrated payment system with multiple other technologies that provide a viable ERO service solution with broad benefi ts for all.”

Global Payout, Inc., www.globalpayout.com, headquartered in San Diego, California, is a management consultant services company and program manager offering companies electronic payment and prepaid card solutions. Global Payout has a product line of prepaid products that can be utilized off the shelf or the company can customize payment solutions for qualifi ed businesses. Through Global Payout’s processors and solution providers, the company offers both international and domestic payment solutions. The company provides for U.S. and international prepaid cards allowing account holders without bank accounts to access funds worldwide. As program manager, reseller and consultant, Global Payout is a provider of prepaid cards in the U.S. for payroll and general spend programs. Additionally, Global Payout offers an electronic payment platform that will allow transfer of money to bank accounts, credit and debit cards, prepaid cards and remittance locations, worldwide.

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executor knows where to fi nd all the documents to back up the fi nancial statement. Even better is a complete list of all your key fi nancial items, including online accounts. For help compiling a list, use my report, To My Heirs.

* Estimate cash fl ow. Many people overlook cash fl ow whendeveloping an estate plan. But the cash fl ow and sources ofcash are important. Debts must be paid. Lawyer’s fees andother expenses will be incurred. The expenses of runningand maintaining the estate’s property must be paid, and thesurvivors have their regular living expenses to pay. Of course,if taxes are due they must be paid with cash.

Estimate how much cash the estate will need before it is settled and where it will come from. If the estate won’t have enough cash, reconsider the plan. You can sell some assets now, provide that some people will get property instead of cash, buy life insurance, or give the executor instructions on how to sell property. Many estate planners advise limiting specifi c cash bequests to only a few special cases.

* Choose executors and trustees. Most people spend a lotof time on their plans, then select the executors and trusteesas an afterthought, often automatically choosing the estateplanning lawyer or oldest child as executor and the bankrecommended by the lawyer as trustee. Those might or mightnot be the best choices for you. Unfortunately, a good estateplan can be ruined if the wrong people implement it. Give a lotof thought to who should execute your plan.

* Anticipate confl icts and reduce them. Many estates havebuilt-in confl icts that could have been resolved. For example,if kids don’t get along now, if you are always mediating theirdisputes, then they aren’t likely to amicably manage assetsor decide how to divide them. Perhaps they should be givenseparate ownership of assets, different voting rights, orsomeone else should help make decisions about the property.

Other times the roles of an individual create confl icts. A classic confl ict is when a spouse is made trustee, receives income from the trust, and the children get the trust property after the spouse dies. Often, the children end up believing that the spouse invested for maximum current income at the expense of earning capital gains for the future. Your estate plan should avoid such built-in confl icts. At best they lead to hard feelings and at worst lead to expensive litigation.

* Don’t search for a perfect solution. An estate plan is abalancing act. It strikes a balance between your goals, theneeds of your family, the tax law, and perhaps other factors.You also have to decide whether to leave assets to your heirsdirectly or with some restrictions, such as through a trust.

A good estate planner will present you with several alternative plans. Each will handle the trade offs in different ways. You choose the alternative that strikes the balance you prefer.

* Don’t be a control freak. Some controls can be a good idea,such as when a benefi ciary doesn’t have good judgment orexperience handling a meaningful amount of money. In such

cases, property should be put in a trust.

But some people go a step further and dictate in detail how wealth is and is not to be invested and distributed. There are trusts saddled with restrictions that require them to be invested in Treasury bills, gold stocks, or the stock of certain companies, to name just a few examples. Trustees, executors, and heirs need to be able to adapt to changing circumstances.

* Make your general plan known. If you don’t tell heirs yourplans, they will develop expectations. Feelings tend to behurt when they are surprised after your death. That canlead to anger or bitterness that will be taken out on others inthe family. Also, heirs might plan their fi nances with certainexpectations about your estate plan and be in diffi culty whentheir expectations aren’t realized. You should let people knowgenerally how they’re affected by your plan. For example, ifyou aren’t going to treat heirs equally, will leave money tocharity, or know that someone is expecting certain property,it is important to let the affected people know ahead of time.

* Don’t circulate your will. While you want the general outlineof your plan known among those affected, don’t circulate thewill. You likely need to update it every few years, and anychange in the details gives someone a reason to be upset.Also, having different versions of a will circulating over theyears makes an expensive will contest more likely.

* Things change. Your estate plan never is fi nal. The propertyyou own and the values change. The members of your familychange through births, deaths, marriages, and divorces. Yourgoals might change. You might be inclined to leave more orless to charity or specifi c heirs over time. You need to meetwith your planner at least every two or three years to reviewchanges in your fi nancial picture, family, and goals as well asthe tax law.

* Keep it as simple as possible. Some people and theirattorneys get so wrapped up with the latest estate planningtools that they overlook simpler strategies that will accomplishtheir goals. Be sure complications are necessary to meet yourgoals before putting them in your plan.Remember that any mistakes in your estate plan will live longafter you. Follow these rules and you’ll end up with an estateplan that works well for you and your heirs.

Tax-Smart Billionaires Who Work For $1

Minimum wage is going up, but big-time CEO pay seems to be going the other direction. Not overall pay necessarily, but salary. In fact, it’s increasingly common for common-man honchos to volunteer for a nominal $1 salary. And they may not want a cash bonus, either.

Stock growth and capital gain is a lot more attractive and is taxed much more favorably. Besides, offering to work for a pittance can be a shrewd move. It shows current and prospective shareholders what you’re about.

In 2012, Mark Zuckerberg earned $770,000 in salary and

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unreasonable compensation tax problem remains. How much pay is too much for a privately held company to deduct is fact specifi c.

Conversely, these days the IRS sometimes attacks pay for being too low. Once again, the IRS tries to impose extra taxes as a result. Why would the IRS care if you pay too little? Whether the IRS stands to collect more by arguing that pay is too low or too high turns primarily on the type of business entity paying the compensation.

A C corporation deducts pay as a business expense, so the IRS wants to argue pay is too high and can’t be deducted. But in an S corporation, there are smaller taxes to the owners by paying amounts out as “dividends” not as pay. After all, income taxes apply in any case, and the rates on dividends can be better than pay. What’s more, the payroll taxes on compensation are shared by the employer and the employee. That means each side is paying more tax.

Famous examples of this S corporation tax dodge involved John Edwards and Newt Gingrich. But there’s little to suggest it is illegal. It is simply a question of degree. Many of the tax cases in which people are found to pay too little compensation involve extreme facts, as where someone claims to be working for nothing.

And that brings us back to Mr. Zuckerberg and his ilk. Does the same rationale apply to them? It is hard to see how, since these are public companies, not closely held. And that’s especially true with people like Mr. Zuckerberg and the Google twins Brin and Page. These founders don’t need lots of options and restricted stock.

Where an executive takes $1 cash compensation plus considerable non-cash compensation like options and stock, one could argue there’s an abuse depending on exactly what’s awarded and exactly how the plan is implemented. Even so, most equity in this context is subject to tax as wages.

As a result, it’s hard to see that there’s much for the IRS to go after. Of course, that doesn’t always stop the IRS….

Farmers Need to Know About Tax Changes in the Affordable

The Affordable Care Act, also known as Obamacare, contains a number of tax law changes that could impact agricultural producers.

“In 2010, when the affordable Care Act was signed into law, there was a tax provision that was scheduled to take effect in 2013,” said Roger McEowen, director of the Center of Agricultural Law and Taxation at Iowa State University, in an interview with Farm Press. “This one, in particular, has an important impact on farmers and ranchers across the country in that it adds an additional 3.8 percent tax on passive sources of income.”

The latter can include royalty income and cash rental income

bonus, but now the CEO is Facebook’s lowest-paid employee. That’s right, now Facebook’s Mark Zuckerberg is among billionaire CEOs earning a $1 salary. Of course, he’s worth $27.8 billion, so he could afford to request an annual wage of $1 in 2013.

Mark Zuckerberg, Founder & CEO of Facebook

One dollar pay suggests that a CEO is really looking out for shareholders. Rather than drawing large amounts of cash, taking a big equity stake and virtually no cash looks egalitarian. It also makes the CEO focused on growing the company’s stock.

That’s one reason it’s become popular. Mr. Zuckerberg isn’t the only one doing it. Google’s Sergey Brin and Larry Page each earn a $1 salary. So does Hewlett-Packard HPQ -1.09%’s Meg Whitman (net worth $2 billion) and even OracleORCL -0.67%’s Larry Ellison (net worth $51.5 billion).

But the H-P and Oracle honchos nevertheless earn signifi cant compensation from their companies. Whitman earned $17.6 million in stock and other performance-based awards in 2013. Ellison was paid $79.6 million almost entirely in stock options. Compensation tied to performance is one thing, and can be a good deal for both company and exec.

Some elected offi cials have taken the $1 challenge, including former Mayor Bloomberg and former Governor Schwartzenegger and former Governor Mitt Romney. And some famous past examples included Chrysler’s Lee Iacocca and Steve Jobs. A few other $1 execs, include:

• Richard Hayne, CEO of Urban Outfi tters;• Kinder Morgan oil and gas man Richard Kinder;• Pharmacyclics CEO Robert Duggan, though he won’teven take $1!

But is there any tax game here? Yes and no. Long before the huge executive pay packages of the last few decades, the IRS labeled some pay unreasonable and levied extra taxes as a result. Usually that’s pay that is too big, so can’t be deducted on the company’s taxes.

In fact, now most public companies face a limit on pay deductions of $1 million per employee unless the pay is performance based. But with closely held companies, the

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(1) 3.8% unearned income Medicare contribution surtax.This surtax applies to “net investment income” (NII), which isgenerally investment income (as specifi cally defi ned in CodeSec. 1411) less deductions properly allocable to such income,over certain income thresholds. Small business owners andinvestors in small businesses (such as passive investors inS corporations and partnerships) may be subject to this tax,which could make it more diffi cult for these businesses toraise capital.

(2) 0.9% additional Medicare tax. This tax increases theemployee share of the Medicare payroll tax for individualswith income over certain thresholds. (Code Sec. 1401(b))

(3) Pre-tax Flexible Spending Account (FSA) cap. There isnow a $2,500 annual cap on pre-tax FSA contributions. Somesmall businesses, particularly those that do not offer healthinsurance, offer FSAs so employees may pay for health careexpenses with pre-tax dollars. (Code Sec. 125(i))

(4) Health Savings Account (HSA) withdrawal penalty increase.In effect since January 2011, this provision increases thewithdrawal penalty for non-medical HSA withdrawals from10% to 20%. (Code Sec. 223(f))

(5) Tax on medical device manufacturers. This 2.3% tax ison the revenues of medical device manufacturers, producers,and importers. Some in the medical device industry indicatethat the tax will be paid for by reducing jobs.

(6) Lower itemized medical deduction threshold. Itemizedout-of-pocket medical expenses may only be deducted if theyexceed 10% of the taxpayer’s adjusted gross income (withthe 7.5% threshold continuing for certain taxpayers through2016).

A survey conducted by the National Small Business Association (NSBA), which was released in connection with the hearing, revealed that:

... 49% of entrepreneurs are spending $5,000 or more per year on tax compliance (not including tax owed);... 40% spend more than 80 hours per week dealing with federal taxes;... 86% pay an external tax preparer to handle their taxes;... 73% said federal taxes have a signifi cant to moderate impact on the day-to-day operation of their business;... 67% support tax reform that would reduce both corporate and individual tax rates, coupled with a reduction in business and individual deductions; and... the typical tax compliance cost per employee varies widely depending on the fi rm size, averaging $1,584 for fi rms with fewer than 20 employees, $760 for fi rms with 20-499 employees, and $517 for fi rms with over 500employees.

According to Chairman Graves, “[t]axes are getting more complicated every year, and compliance is a huge drain on [small businesses’] resources. Jobs remain scarce, and the heavy burden of tax compliance is another obstacle to growth.”

that many farmers and ranchers and landowners across the country may have.

“Now it applies once your modifi ed adjusted gross income for a married couple exceeds $250,000, and the thing is to get into that modifi ed AGI number it’s not going to take a whole lot – you can sell off a tract of land. This law says that all dispositions of capital assets are subject to the tax with some exceptions. But the general rule is you include it in your AGI,” McEowen notes.

“A sale of land is going to pop you over the $250,000 threshold. Landowners in the Dakotas or Kansas or wherever there may be fracking that’s going on with respect to underground shale deposits are getting royalty income that’s all passive. They’re going to encounter this problem. And retired farmers who rent ground out have passive sources of income.”

If a farmer or landowner’s modifi ed adjusted gross income exceeds $250,000, “then you have to do another computation to fi gure out what portion of that is passive and how much of it is subject to an additional 3.8 percent tax.”

There are some exceptions retired farmers and ranchers or their spouses can investigate if they are drawing social security, says McEowen.

“It’s an issue that farmers and ranchers and other landowners need to visit with their tax practitioners on to see if they can use that exception,” he notes. “But the 3.8 percent tax on passive sources of income that started in 2013 is a really big deal. I had that as the second biggest development in ag law and taxation in 2013.”

Committee Hearing Highlights Tax Issues Specifi c to Small Businesses

On April 9, the House Committee on Small Business held a hearing titled “The Biggest Tax Problems for Small Businesses.” In his opening statement, Committee Chairman Sam Graves (R-MO) stated that higher taxes, new taxes, increasing complexity, uncertainty, and the time required to resolve issues with IRS hinder small business owners’ ability to make plans for their business and grow their companies.

According to the hearing memo, there are a number of tax-related problems that are specifi c to, or that disproportionately affect, small businesses. The complexity of the Code is a major issue because it leads to increased compliance costs, especially since small fi rms frequently don’t have an in-house accountant or tax attorney. This complexity also negatively impacts IRS’s ability to effectively administer the Code and answer taxpayers’ inquiries.

Changes in the Code, as well as dealing with temporary tax provisions, are also challenging for small businesses. Provisions under the Affordable Care Act (ACA), including the following (which are, except where noted, effective Jan. 1, 2013), are of particular concern to many small business owners and their tax advisors:

28

In a Fiscal Times op-ed, he further stated that “[o]ver time, our tax code has become more complex and truly temporary, with tax changes being made just one year ahead, for months at a time or even retroactively.”

In her opening statement, Ranking Member Nydia Velazquez (D-NY) also spoke of the burdens to small businesses and described fundamental tax reform as “imperative.” She said that it “is important we continue working toward a comprehensive overhaul of the tax code, rather than a corporate-only approach,” and added that she “believe[s] there exists an opportunity to implement long-lasting reforms.”

Tim Reynolds, President of Tribute Inc. (a 38-employee company that develops and markets software for industrial distributors), speaking on behalf of the NSBA, acknowledged the “ambitious policy efforts” in Congress to fi x the Code, but stated that in light of the challenges in enacting comprehensive tax reform legislation, “simplifi cation of the most complex provisions of the Code may help to signifi cantly reduce the burden on individual taxpayers and small businesses.” He said that small businesses lack the accounting and benefi ts staffs of big corporations and are often “at a loss to keep up with, implement, afford, or even understand the overwhelming regulatory and paperwork demands of the federal government and tax code.” Mr. Reynolds also spoke specifi cally about the fact that many proposals have called for reducing the corporate tax rate, whereas most small businesses are pass-through entities that are subject to individual, not corporate, tax rates, and he also addressed the problems inherent in temporary legislation.

Professor David Kautter, Managing Director of Kogod Tax Center at American University, also focused on the burden to taxpayers, and to small businesses, from the complexity of the Code. He also stated that, “[w]hen citizens and business owners do not understand their obligations under the law, resentment, suspicion and skepticism follow.” Professor Kautter also spoke of tax extenders, particularly of Code Sec. 179 expensing, which he said was “for many small businesses...the only one they really care about.” Uncertainty in this area impacts not only small businesses themselves, he said, but it also has an effect on the overall economy. In addition, he spoke of constantly changing fi ling requirements, noting that each change takes time for small business owners and their advisers to understand and implement, and of frequent complaints that resolving issues with IRS takes longer than it used to. He made two specifi c legislative recommendations to the Committee: a simplifi ed method of accounting (described as “a cash method of accounting that more clearly refl ects the cash fl ow of a small business from which taxes could be paid”) for businesses with average gross receipts of $10 million or less, and a single tax rate applicable to all businesses regardless of their legal form.

Rick Endres, President of The Washington Network, Inc. (an IT consulting fi rm), described himself as “the prototypical victim of an uneven tax code that is fi lled with uncertainty, vagueness, and unintended consequences for me and other small IT companies.” He spoke of the negative impact of

the complex Code on his business, noting that tax credits designed to help his business often go unused “because of the complexity of learning to take advantage of them.” He also mentioned one credit in particular, the “Small Employer Health Insurance Credit,” and said that he would pay more to his accountant to fi ll out the 10-page Form 8941 than the credit is worth.

Donald Marron, Director of Economic Policy Initiatives and Institute Fellow, Urban Institute (a nonpartisan think tank focusing on economic and social policy research), described the current tax system as “needlessly complex, economically harmful, and often unfair,” and unlikely to raise enough money to pay the government’s future bills-and thus ripe for reform. The following were the main points of his testimony: tax compliance places a larger burden on small businesses relative to larger ones; small businesses are more likely to underpay their taxes (for reasons ranging from increased cash dealings to inadvertence); small businesses have several tax advantages over larger ones, such as the ability to use Code Sec. 179 expensing, but several of these advantages are currently expired; many small businesses benefi t from the opportunity to organize as pass-through entities and avoid entity-level taxation, but Mr. Marron noted that many large businesses adopt these forms as well and that policymakers shouldn’t assume that all pass-throughs are small business; and that tax reform “will likely shift the relative tax burdens of small and large businesses and recalibrate the choice between pass-through and C corporation structures.”

CRS Analyzes and Considers Changes to Mortgage Interest and Property Tax Deductions

The Congressional Research Service (CRS) has issued a report in which it analyzes the rationales for providing tax benefi ts for homeowners, examines various effects of the mortgage interest deduction and state and local property tax deduction, and reviews options for changing those deductions. The issuance of the report follows shortly after House Ways and Means Committee Chairman Camp (R-MI) proposed limiting the mortgage interest deduction.

The report lists the following currently available tax benefi ts that are associated with home ownership: the mortgage interest (i.e., qualifi ed residence interest) deduction, the state and local property tax deduction, the exclusion of gain on sale of a principal residence, and the exemption for interest on mortgage revenue bonds. It also notes that, through 2013, there was a deduction for payments of premiums for qualifi ed mortgage insurance and an exclusion from income for forgiveness of mortgage debt on a principal residence.

The report notes that the main rationales commonly offered for providing tax benefi ts for homeowners are that homeownership: (1) bestows certain benefi ts on society as a whole, such as higher property values, lower crime and higher civic participation; (2) is a means of promoting a more even distribution of income and wealth; and (3) has a positive effect on living conditions, which can lead to a healthier population. Although these benefi ts may exist, the analysis presented

29

studies by the Congressional Budget Offi ce on gradually reducing the maximum mortgage amount from $1 million to $500,000, and on leaving the maximum mortgage amount at the $1 million level, but limiting the interest deduction to a percentage-e.g., 10%-of adjusted gross income. It noted the Rep. Camp’s proposal (see Weekly Alert ¶ 1 03/06/2014) would reduce the eligible mortgage amount to $500,000 over a four-year period beginning in 2015 and would eliminate the deduction for interest on home equity debt incurred after 2014.

Finally, it noted several proposals to replace both the mortgage interest deduction and property tax deduction with a tax credit. It noted that the current deductions tend to provide a proportionally bigger benefi t to higher-income homeowners since they buy more expensive homes and are subject to higher marginal tax rates. The requirement that homeowners itemize their tax returns also limits the number of owners who receive the tax benefi t. A tax credit for mortgage interest or property taxes could provide a benefi t to more homeowners since itemization would no longer be required. Without the need to itemize, the burden of tax preparation on homeowners would be lessened. Depending on the design of the credit, it could create a more consistent rate of subsidization across homeowners. Making the tax credit refundable would serve to make it better targeted to lower-income homeowners.

People in the Tax News

Obama, Biden 2013 tax bills

A lot of well-to-do people paid more taxes this fi ling season, thanks to the new taxes on wealthier individuals that took effect in 2013.

The president and vice president were part of that group.The 2013 tax returns of both of the United States’ top elected leaders, which they fi led jointly with their wives, were released April 11.

The fi lings show that the Obamas and Bidens, like most taxpayers, get the bulk of their income from wages. The returns also show that President Barack and Michelle Obama’s and Vice President Joe and Jill Biden’s combined incomes were enough to trigger a couple new taxes that were enacted last year to help pay for health care reform. They were also subject to some tax break limitations passed as part of the so-called “fi scal cliff” tax bill.

The Obamas reported $481,098 in adjusted gross income and tax of $98,169. That puts the fi rst couple’s effective federal tax rate at 20.4 percent.

Their total tax bill included $2,310 from new Obamacare taxes. The president and his wife had to pay $2,174 more, thanks to the 0.9 percent added Medicare withholding tax, and $136 as part of the net investment income tax, or NIIT.

in the report highlights the diffi culties that economists have encountered in attempting to establish their existence or magnitude.

One of the effects of the deductions that the report studies is the effect on home ownership. It notes that economists have identifi ed the high transaction costs associated with a home purchase-mostly resulting from the down payment requirement, but also closing costs-as the primary barrier to homeownership. The effects of the mortgage interest deduction and property tax deduction on the homeownership rate are likely to be small because they are not well targeted toward lowering the down payment barrier. While the deductions lower the annual cost of homeownership, they do not provide any upfront benefi t that can assist in completing a home purchase.

The deductions’ effect on homeownership is also limited because the deductions are not well targeted toward the group of potential homebuyers most in need of assistance-lower-income households, which includes younger potential fi rst-time buyers. The mortgage interest deduction and property tax deduction are not well targeted toward this group because homeowners must itemize their tax return to benefi t, and lower-income households itemize their tax returns at a very low rate.

Another effect of the mortgage interest deduction is that it promotes neutrality between homeowners who rely primarily on debt fi nancing (borrowing) and homeowners who rely primarily on equity fi nancing (one’s own fi nancial assets). Without the mortgage interest deduction, equity fi nancing would be tax preferred.

The report said that, in light of the recent housing boom and subsequent bust, it could be argued that debt/equity neutrality is not necessarily a desired policy objective. Debt fi nancing-also known as leveraging-increases a homeowner’s exposure to home price fl uctuations. When a taxpayer is highly leveraged, a relatively small decrease in home price can lead to owing more on his or her house than it is worth.

The report considers three types of potential changes: eliminating the deductions, limiting them, and replacing the deductions with a credit.

As to eliminating them, the report leans towards a gradual elimination, so as lessen the effect on home prices. It noted that the lessened effect would be created by households not anticipating the full effects of the deductions’ elimination until closer to the chosen cut-off date.

In discussing limitations on the deductions, the report emphasized options that would more closely target the goals of increasing homeownership and appealing to potential fi rst-time homebuyers. It notes that the large current limits on the amount of mortgage debt and home equity debt that can qualify for an interest deduction provide a tax benefi t to a large number of taxpayers that would become homeowners regardless of whether the deduction existed. It looked at

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while working full time for the Internal Revenue Service.

Lora Lewis, 51, also allegedly took numerous tax credits for which she was not eligible, including a fi rst-time homebuyers’ credit, an earned income credit and an education credit, the U.S. Attorney’s Offi ce for Eastern Pennsylvania said.

Lewis is further accused of claiming bogus tax deductions, including IRA contributions that were never made and an automobile that was never purchased, in a bid to reduce her taxable income.

The fi nancial misdeeds allegedly occurred from 2007 through 2011. In all, Lewis defrauded the federal government out of $39,000, prosecutors estimated.

Lewis is charged with one count of fi ling false income tax returns. If convicted, she faces up to three years in prison, the payment of restitution to the IRS and a fi ne of up to $250,000, one year of supervised release and a $100 special assessment.

Cell Block Tax Prep? Inmate Re-Arrested Doing Phony Returns

Who is doing your taxes? Amid a court fi ght between the IRS and tax preparers over regulating that profession, it’s an interesting time. But whoever is doing yours, let’s hope he or

The Obamas also were prevented from lowering their tax bill more because, in addition to taxes related to health care, they faced other new tax laws that applied because of their income level.

They lost all of their $15,600 in exemptions. If the POTUS and FLOTUS had made less money, they could have claimed $3,900 each as well as the same amount for each of their two dependent daughters. And their itemized deductions were reduced from $153,202 to $147,769. Both of these tax-break limits were part of the American Taxpayer Relief Act of 2012 enacted in January 2013.

The Bidens faced similar new taxes and tax-break restrictions.

The veep and his wife paid $96,378 in tax on $407,009 in adjusted gross income. The Biden’s effective tax rate was almost 24 percent.

Their tax bill included $1,497 in the two new health care taxes. The Bidens were able to claim only $1,092 in personal exemptions instead of the $7,800 they could have claimed if they had made less money. Their Schedule A deductions also were cut from $70,794 to $67,584.

Both couples also took alternative minimum tax hits. The Obamas had to pay $9,513 more because of the parallel tax, while the Biden’s AMT bill was an added $2,815.

Both couples also fi led state tax returns.

The Obamas paid $23,328 in state income tax to Illinois.

The Bidens’ total state tax bill came to $18,114. Most of their state obligation -- $14,644 -- went to Delaware. Dr. Biden, who received her doctoral degree from the University of Delaware and teaches at Northern Virginia Community College, paid $3,470 in Virginia income tax.

Feds: Philly IRS Worker Cheated on Taxes

A Philadelphia woman is facing federal charges for allegedly collecting fi ve years worth of unemployment compensation and failing to report the income on her tax return forms, all

31

she is not doing your taxes from lock-up. Two years ago some Prison inmates registered with the IRS as tax preparers.

It has long been true that some tax return preparers are seasonal workers handling the April 15 crush. But prisoners? It might surprise you to know how many prisoners—some serving life—have been registered as return preparers with the IRS. Two years ago, a study by the Treasury Inspector General for Tax Administration—a.k.a TIGTA—said over 300 prisoners registered, 43 serving life..

But that was then. The shop run by Kavin Santos, also known as Steven Augustine, was even better. Well, while it lasted, that is. He is in jail but was rearrested for allegedly fi ling hundreds of tax-credit applications, using phony and stolen Social Security numbers to systematically scam New York State. .

Authorities claim that he started his tax scam from the infamous Rikers Island Correctional Facility in Queens. He continued fi ling the tax-credit forms for a few months after being sent to Coxsackie Correctional Facility in Greene County, New York in 2013, court records show.

Santos had already been sentenced to state prison twice for burglary. And he was getting close to release. Before his recent arrest over tax prep, he was scheduled to be released from custody in January 2016. Now, though, that seems likely to be extended. Hey, got to get through tax season.

A complaint now accuses Mr. Santos of fi ling 387 tax-credit forms for tax years 2008 through 2011. In all, the complaint says he attempted to obtain $32,122 in tax refunds. These are one-page forms, NYC-210, and they enable New York City residents to claim a school tax credit of up to $63 per individual. The forms can be fi led individually with the state Department of Taxation and Finance and do not need to be part of an income-tax fi ling.

Mr. Santos’ little operation actually might have gone on even longer than it did. However, the scheme unraveled when employees with the state Department of Corrections and Community Supervision alerted state tax investigators. Hey, how come there is such a high number of tax-rebate checks being mailed to Santos in prison and deposited into his inmate account? Good question.

Santos had requested paper checks on his tax-credit forms. Then, he had them mailed to various relatives around the New York City area, according to offi cials. The complaint says he used some real and some fake Social Security numbers.

Ex-tax Collector Charged with Embezzlement

Rhode Island State Police say the Cumberland fi re district’s former tax collector has been charged with embezzling nearly $84,000 from her ex-employer.

Authorities arrested 48-year-old Karen Lambert of Cumberland on Friday. She’s accused of embezzling cash tax receipts of

nearly $84,000 from the fi re district between September 2008 and August 2013.

She also allegedly embezzled $11,700 from a Woonsocket property management company where she was a bookkeeper and used the money to try to cover up the alleged fi re district theft.

She was released on $20,000 personal recognizance and is due in court June 2.

Lambert was hired as assistant tax collector in 2006 before being promoted to tax collector in 2008.

Someone who answered the phone at her residence said she wasn’t home but wouldn’t want to talk.

Gisele Bundchen lands on ‘Supermodel Rich List,’ audited by IRS

Gisele Bundchen has revealed that she was audited by the IRS just because she was placed on the Forbes Supermodel Rich List

“It’s sad, because the people who write these things don’t have my bank-account details,” she laughs. “I do OK, I earn plenty, but not as much as they say. I’ve already been audited by the IRS because of this list, and, truthfully, whether I’m on this list or not doesn’t interest me,” the Brazilian supermodel told Vogue magazine.

Mrs. Tom Brady went on to say she’s no different than you or me.

“I’ve got the same interests, the same day-to-day life, as any woman. I want to raise my children well, be a good wife and work. This is what I value: Are my children educated, is my husband happy, are people feeling positive energy from me? There should be a magazine to quantify knowledge, understanding and love for people: That is power.”

According to Vogue, Forbes takes into account the campaigns,

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any further charges. The press is reporting on paperwork that had recently been fi led, and has now become public record.”

Former IRS Acting Commissioner Werfel Joins Consulting Firm

Danny Werfel, the former acting commissioner of the Internal Revenue Service, who stepped in last year to try to turn around the agency in the aftermath of a series of scandals, has now joined the Boston Consulting Group’s public sector practice as a director.

Danny Werfel

Werfel was brought in from the Offi ce of Management and Budget and appointed to head the embattled agency on a temporary basis after the former acting commissioner, Steven T. Miller, stepped down amid revelations that the IRS’s ExemptOrganizations unit had given extra scrutiny to applications fortax-exempt status from groups with terms such as “Tea Party,”“Patriot,” “Progressive” and “Occupy” in their names.

Other scandals involving lavish spending at some IRS conferences and video spoofs of TV series such as “Star Trek” and “Gilligan’s Island” also brought unwelcome attention at congressional hearings. After working to address some of the concerns, Werfel was replaced last December by a permanent commissioner, John Koskinen, who was also brought in from outside the agency.

During his tenure at the IRS, Werfel appointed the IRS’s fi rst chief risk offi cer, deployed an agency-wide risk management program, and executed a number of steps to restore public trust, including an expedited way for groups seeking tax-exempt status to temporarily self-certify themselves pending a decision by the IRS, if they agree to operate within certain limits for political and social welfare activity..

“Danny brings an exceptional track record and understanding of the challenges facing government agencies today,” said Sharon Marcil, a senior partner who leads BCG’s Washington, D.C.-based Public Sector practice in North America. “His abilityto deliver results at the highest levels of complex governmentorganizations and drive tangible improvements in areas oforganizational and operational effectiveness will be a great

endorsements and partnerships that each model has participated in, before estimating what it believes her earnings to be.

IRS Hits Lauryn Hill with $867,000 in Additional Tax Liens

The Internal Revenue Service has fi led seven additional tax liens totaling nearly $867,000 against singer/songwriter Lauryn Hill only months after she was released from prison on tax charges.

Hill, a former member of the group the Fugees, was released last October after serving three months in prison, with another three months to be served in home confi nement. She was sentenced for failing to pay taxes on more than $1.8 million in federal taxes in 2005 to 2007, plus unpaid federal and state taxes in 2008 and 2009 of about $500,000 .

Lauryn Hill

Hill has recently begun touring now that she has completed serving time in prison and home confi nement. However, according to Radar Online, the IRS has now fi led additional tax liens for unpaid taxes from 2005 to 2011, including $422,008.26 for 2005, $19,838.75 for 2006, $61,158.50 for 2007, $58,405.71 for 2008,; $30370.91 for 2009,; $13,247.73 for 2010, and $261,838.19 for 2011.

Upon her release from prison, Hill thanked her fans for their support and for sending her letters, packages and books. “Because of you there was not one day that I didn’t receive mail while I was away,” she wrote on her site. “I appreciated that. Also, know that many of your letters not only touched me but continued to confi rm for me what I already knew but needed to hear again: that sincere expression has a serious purpose.”

Hill’s publicist, Kathryn Frazier, owner of Biz 3 Publicity & Management, denied that the tax liens are new. “So the gist is this: Contrary to media gossip there are no changes in Ms. Hill’s legal status,” she said in an email to Accounting Today.

“Ms. Hill has fi nished her sentence, has been fulfi lling her agreement with the IRS, and is taking care of all outstanding matters in regards to this situation. She is not in jeopardy of

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asset for our clients.”

Prior to the IRS, Werfel spent 16 years with the U.S. Offi ce of Management and Budget, where he provided leadership for policy and implementation in all aspects of federal fi nancial management, eventually taking on the role of Federal Controller -- the government’s chief fi nancial offi cer. After that, he assumed the responsibilities of the Deputy Director for Management at OMB, where he was responsible for leading a broad array of management initiatives across government in areas such as information technology, procurement, performance management, and personnel policy.

“This is an exciting time to join BCG,” Werfel said in a statement. “For more than 50 years, BCG has been at the forefront of providing innovative solutions to help clients improve their performance. BCG can help solve the most critical challenges facing our government by drawing on its decades of commercial experience to bring world-class best practices, coupled with a deep understanding of the unique challenges in the public sector.”

Werfel is a fellow at the National Academy of Public Administration and formerly was a member of the IRS Oversight Board, the Government Accountability and Transparency Board, and the Federal Accounting Standards Advisory Board.

Camp to Leave Congress After Running Ways and Means Panel

Representative Dave Camp, the Republican chairman of the House Ways and Means Committee, won’t seek re-election this year, he said in a statement today.

Camp, 60, who has pursued the biggest changes to the U.S. tax code since 1986, must give up his chairmanship at the end of the year because of Republican term limits.

“During the next nine months, I will redouble my efforts to grow our economy and expand opportunity for every American by fi xing our broken tax code, permanently solving physician payments for seniors, strengthening the social safety net and fi nding new markets for U.S. goods and services,” he said in a statement.

The Michigan Republican was fi rst elected to Congress in 1990, the same year as House Speaker John Boehner. Among his accomplishments are the 1996 changes to the U.S. welfare system.

Camp became Ways and Means chairman when Republicans gained control of the House of Representatives in the 2010 election. He began focusing immediately on tax code changes, working with Max Baucus, then the Democratic chairman of the Senate Finance Committee.

They toured the country last year, trying to build support for a simpler tax system with lower rates and fewer breaks. Their efforts haven’t advanced much, with Congress locked in a

dispute over whether the government should collect more money.

Baucus left Congress earlier this year to become the U.S. ambassador to China.

Camp released his draft tax plan Feb. 26 with no commitment of support from Republican leaders, and it’s now likely to become a blueprint for a future effort, not a law this year.

As recently as Jan. 8, he said he planned to run for re-election, while cautioning that he wasn’t making a formal announcement. Earlier this month, he criticized the term limits rule for committee chairmen.

The past two Republican Ways and Means chairmen who reached the limit -- Bill Archer of Texas and Bill Thomas of California -- didn’t run for re-election to Congress.

Camp joins several other Michigan lawmakers in announcing that they won’t seek re-election. They include Democratic Representative John Dingell, the longest serving member of Congress in U.S. history, Republican Representative Mike Rogers, chairman of the House Intelligence Committee, and Senator Carl Levin, a Democrat fi rst elected in 1978.

Camp is from Midland, Michigan, the home of Dow Chemical Co. He was re-elected in 2012 with 63.1 percent of the vote. He was treated in 2012 for non-Hodgkin’s lymphoma and doctors declared him free of cancer later that year.

IRS News

IRS Workers Who Did Not Pay Taxes Got Bonuses

The Internal Revenue Service handed out $2.8 million in bonuses to employees with disciplinary issues — including more than $1 million to employees who didn’t pay their federal taxes, a watchdog report says.

The report by the Treasury Inspector General for Tax

34

Now that we’ve turned the calendar to April, I know there are usually two things on peoples’ minds. The fi rst is Spring and the second is taxes. Plus watching the Final Four this weekend. As a former Chairman of the Duke Board of Trustees, we had a moment of silence earlier in the tournament. But the loss to Mercer was part of a longer term-strategy to increase the Duke endowment in the hopes of a substantial contribution from an unnamed major investor in the United States, in recognition of the billion dollars we saved him by losing the game.

Moving on, if you came to this luncheon or tuned in expecting to hear about the state of affairs at the Internal Revenue Service, you’ve come to the right place.

I was sworn in as IRS Commissioner a little over three months ago, and I feel exactly the same way I did on Day One: Excited and proud to lead an agency that’s critical to the functioning of our government and one that touches virtually every American. These last three months I’ve traveled to 18 of the 25 largest IRS offi ces around the country. I have talked with and listened to about 8,000 employees so far and been delighted to see the professionalism, skills and dedication of our employees.

I am on this journey because, throughout my career, I have found that the people who know most about what’s going on in an organization are the front line employees. They have important insights into the opportunities and challenges an organization faces.

In light of all that has happened to Federal employees in the last four years, and IRS employees in particular – no pay raises for four years, government shutdowns, furloughs and the negative publicity about the IRS the last year – you might have expected that I would have heard a lot of grumbling from employees about not being paid enough or having to work too hard. Instead, the consistent response I have heard is a concern that we do not have enough employees to provide the level of taxpayer services our employees want to provide and feel taxpayers deserve.

I also have heard at every stop – even in the 18th city – interesting observations and suggestions about how we can improve the day-to-day operations of the agency. And I have explained in town halls with front line workers and meetings with managers at each offi ce that one of my goals is to foster an environment where information fl ows easily from the bottom up in the agency as well as from the top down.

This is critical, not only for us to get the benefi t of observations and suggestions from employees, but also to learn as quickly as possible about problems or challenges. I have noted that it is illusory to think that we’ll never have a problem or make a mistake. We have 90,000 employees administering the world’s most complicated tax code and dealing with millions of taxpayers. Instead, my goal is for us to fi nd problems quickly, fi x them promptly, make sure they stay fi xed, and be transparent about the entire process. I’ve told our employees that if there’s a problem anywhere in the organization, it’s my problem and we’ll fi x it together. If an employee makes an honest mistake, it’s my mistake as well, and we’ll work

Administration said 1,146 IRS employees received bonuses within a year of substantiated federal tax compliance problems. The bonuses weren’t just monetary. Employees with tax problems received a total of 10,582 hours of paid time off — valued at about $250,000 — and 69 received permanent raises through a step increase, the report said. The report looked at bonuses in 2011 and 2012.

Employees’ tax problems included “willful understatement of tax liabilities over multiple tax years, late payment of tax liabilities, and underreporting of income,” the report said.

“We take seriously our unique role as this nation’s tax administrator, and we will strive to implement a policy that protects the integrity of the tax administration system and the reputation of the service,” IRS chief Human Capital Offi cer David Krieg said in a written response to the audit.

The IRS said it has instituted a policy to take conduct into account when handing out bonuses to senior executives. Making that policy apply to all of the agency’s workers would require negotiations with the National Treasury Employees Union.

NTEU President Colleen Kelley said the union would review any proposed changes to its contract for the “relatively small number of employees who may have had some overlap between a performance award review period and a conduct issue.”

In fi scal year 2012, the agency awarded bonuses of $86.3 million in cash and almost 490,000 hours of time off. About 69% of the agency’s 98,000 employees received some kind of bonus.

The IRS suspended most bonuses last year in a cost-savings move to avoid furloughs but restored them in fi scal year 2014.Non-payment of taxes by federal employees is a government-wide problem. The IRS says 311,536 federal employees were tax delinquents in 2011, owing a total of $3.5 billion.

Bills have been introduced in the House and Senate to fi re federal employees with seriously delinquent taxes. The House bill, sponsored by Rep. Jason Chaffetz, R-Utah, failed to clear a procedural hurdle; the Senate bill by Sen. Tom Coburn is in committee.

Editor’s note: Someone needs to remind the IRS of their ability

to levy on wages, even those they pay, of taxpayers who are

severely delinquent in the payment of their taxes.

Prepared Remarks of Commissioner of Internal Revenue Service John Koskinen before the National Press Club

Thank you for that warm welcome. It’s an honor for me to be here today at the National Press Club for the fi rst time as IRS Commissioner.

35

together to remedy the situation. And if there’s a problem that I don’t know about, that’s my fault, because it would mean we haven’t built a culture that encourages information to fl ow up from the front lines through the organization.

As I tell the employees, my theory is that “bad news is good news,” since the only problem we can’t solve is one we don’t know about. And, as a corollary, employees need to know that we don’t shoot messengers, we thank them.

In moving the IRS forward, one of the most important things we have to do is restore public trust in the agency, which was shaken by the management problems that came to light last year with regard to the determination process used for applicants to become tax exempt social welfare organizations under section 501(c)(4) of the IRS code.

Organizations that have 501(c)(4) status can be everything from garden clubs to homeowners associations, but the focus for the last year has been on advocacy groups that spend part of their time and money on political campaigns.

As a result of the inappropriate use of an organization’s name alone as the criterion for setting its application aside for special treatment, doubt has been cast by some on the independence of the IRS. This is an important issue that deserves our attention. But it is also important to put this issue into the proper perspective. The IRS has about 800 employees in its Exempt Organizations Division, and only a small subset of those folks work on processing applications for tax-exempt status for social welfare organizations. Meanwhile, there about 89,000 other IRS employees in offi ces all across the country who are also doing critical work for our tax system and for the nation in other areas.

Nonetheless, taxpayers need to be confi dent that the IRS will treat them fairly. It doesn’t make any difference who they are, what organizations they belong to, or whom they voted for in the last election. None of that matters to us at the IRS. We will do about one million audits of individual taxpayers this year. Some who get audited may be Democrats, some may be Republicans, and others may be something else altogether. But they will all have one thing in common: They’re being contacted by us because there was something on their tax returns that needed follow up. Perhaps we just need a clarifi cation. Maybe there was a mathematical error. Or there could be something seriously wrong with the return. But the return alone is the reason for our inquiry. And anyone else with the same issue would receive the same treatment from the IRS.

To make sure that this problem does not recur, we’ve done a number of things. We have accepted all nine of the recommendations from the Inspector General for Tax Administration. It was his report last May that found applications for 501(c)(4) status were being screened using inappropriate criteria in the determinations process.

Since then, for the last several months the IRS has been cooperating with the investigations into this matter that were

launched last summer. There are six ongoing investigations, four conducted by Congressional committees, one by the Department of Justice and one by the IG.

We were asked by members of Congress to quantify the work we’ve done and how much it has cost. The answer is that more than 250 IRS employees have spent over 100,000 hours working directly on complying with the investigations. This work has cost more than $14 million, which includes adding capacity for our computer systems to make sure we are protecting taxpayer information while processing and producing these materials.

In letters to Congressional Committees two weeks ago and in my testimony before the House Oversight and Government Reform Committee last week, I was pleased to report that we now have provided all the documents we have identifi ed as being related to the determinations process – which was the focus of the IG’s report last May. We have provided the tax writing committees, our primary oversight committees, with almost 700,000 pages of documents. We are still redacting taxpayer information from the last of those documents before they can be shared with the Committees that do not have authority to see taxpayer information.

As a result, my hope is that at least some of the six pending investigations will be concluded and reports issued in the near future. I have made it clear that we will respond appropriately to the facts and recommendations of those reports and move the agency forward.

Our production of materials has proceeded according to priorities set with all of the investigating committees and, as we have now completed our production of documents related to the determinations process, we are prepared to work with the committees on any new avenues they may want to pursue.

You may have noticed that, during my three-hour hearing last week before the House Oversight and Government Reform Committee, some members of the Committee expressed unhappiness with the rate at which we are producing redacted information for them. As I tried to make clear, we never indicated that we would not respond to the very broad subpoena for documents we received in mid-February. Indeed, we have produced documents responsive to each of the subpoena’s categories. In the private sector, a court would require these requests to be reduced to those relevant to the inquiry. Unfortunately, the subpoena contains no such limitations, so the volume of materials requested means we could be at this for a long time.

Another recommendation by the IG was that the Treasury Department and the IRS should provide clearer guidance on how to assess the permissibility of 501(c)(4) social welfare organizations’ activities. So last November, Treasury and the IRS issued proposed regulations that are designed to clarify the extent to which a 501(c)(4) organization can engage in political activity without endangering its tax-exempt status.

While I was not involved in the issuance of this draft

36

proposal, because it happened before I was confi rmed as Commissioner, I believe it is extremely important to make this area of regulation as clear as possible. Not only does that help the IRS properly enforce the law, but clearer regulations will also give a better roadmap to applicants, and will help those that already have 501(c)(4) status properly administer their organizations without unnecessary fears of losing their tax-exempt status.

During the comment period, which ended in February, we received more than 150,000 comments. That’s a record for an IRS rulemaking comment period. In fact, if you take all the comments on all Treasury and IRS draft proposals over the last seven years and double that number, you come close to the number of comments we are now beginning to review and analyze. It’s going to take us a while to sort through all those comments, hold a public hearing, possibly repropose a draft regulation and get more public comments. This means that it is unlikely we will be able to complete this process before the end of the year.

Before leaving this topic, I want to note one other thing. Last month, former IRS Commissioner Randolph Thrower passed away at the age of 100. Commissioner Thrower led the IRS from 1969 to 1971, during the early years of the Nixon Administration, which turned out to be a challenging time for the agency. Commissioner Thrower held fi rm against attempts being made at that time to politicize the agency. The White House eventually fi red him for his principled stance.

I’m sure if Commissioner Thrower were here today, he would say he was only doing his job. But he was doing much more. His refusal to let politics compromise the IRS is an important reminder to all IRS Commissioners now and in the future of what our mission is. I intend to follow his example. I want to reassure everyone listening to me today that the IRS is an agency of career civil servants who are dedicated to serving the American taxpayer in a fair and impartial manner. That’s how it’s always been, and that’s how it will stay on my watch.

We have other important challenges to face. One example of this is insuring that the tax fi ling season goes smoothly. When I started in December, I told our employees that I wanted to help with the fi ling season and, as the new kid on the block, the best thing I could probably do was to stay out of the way. I’ve been very successful at that and, at least partially as a result, the fi ling season has gone very well thus far. Through the end of March, we’ve received more than 90 million tax returns and issued more than 73 million refunds, for approximately $207 billion.

As we get closer to the April 15th deadline for fi ling returns, I think it’s important to realize what a tremendous accomplishment it is for the agency to process 150 million individual taxpayer returns every year. This doesn’t happen by accident and it doesn’t happen automatically. It happens because thousands of dedicated and experienced employees work for months planning for the next fi ling season and then administering it.

Another top priority of ours: taxpayer service. This fi ling

season, as we do every year, the IRS provides services to taxpayers to help them fulfi ll their tax obligations.

Taxpayers want and need more online tax information and services, and we’re working to meet that demand by making improvements to our website, IRS.gov. Last year alone, taxpayers viewed IRS.gov web pages more than 450 million times, to get forms and publications, fi nd answers to their tax questions and check the status of their refunds.

One of the most popular features on IRS.gov is the “Where’s My Refund?” electronic tracking tool, which taxpayers used more than 200 million times last year. Now that doesn’t mean, of course, that there are 200 million taxpayers. Some of them just can’t resist checking over and over to see how their refund is doing.

This year we have several new digital applications that will expand what taxpayers can do online. One of these applications is IRS Direct Pay, which provides taxpayers with a secure, free, quick and easy online option for making tax payments. Another innovation, Get Transcript, is a secure online system that allows taxpayers to view and print a record of their IRS account, also known as a transcript, in a matter of minutes. We are also in the fi nal stages of revamping the IRS Online Payment Agreement, which allows taxpayers to apply for an installment agreement online.

To provide better service, the IRS is also expanding the methods it uses to communicate information to taxpayers. We have moved beyond traditional media, like newspapers and TV news to also take advantage of social media, such as YouTube, Twitter and Tumblr.

During my three months on the job, I have been surprised to learn how much time, effort and resources we provide trying to help taxpayers determine the amount they owe and how to pay it. As I have said, it may take me a while to convince the average taxpayer that “we’re from the IRS and we’re here to help you,” but we really do work hard to make it as easy as possible to fi le your taxes.

Along with taxpayer service, another high priority for the IRS is maintaining a robust tax compliance program and building on the work that’s been done to improve compliance in a number of areas. One of the most important of these is the battle against refund fraud, especially fraud caused by identity theft. I say “battle” because we really do have a fi ght on our hands against identity thieves who steal peoples’ information outside the tax system and use that information to fi le a tax return claiming a refund.

We’re doing a much better job of stopping suspicious returns before they can be processed compared to a couple of years ago, and our criminal investigators are making great progress in helping the Justice Department fi nd these criminals and put them behind bars. Last year we protected $17.8 billion from refund fraud, we initiated 1,400 investigations, and we obtained over 1,000 indictments and 400 convictions. We’re also doing a lot better at helping identity theft victims clear up

37

environment since we are the only major agency functioning basically at the post-sequester level rather than having been moved back toward the pre-sequester level of funding. Since Fiscal 2010, IRS appropriations have been cut by about $900 million and we have 10,000 fewer employees even as our responsibilities continue to expand.

We recognize the need to become more effi cient, no matter what happens to our funding level. Since 2010, the IRS has cut annual spending on professional and technical service contracts by $200 million. We generated $60 million in annual printing and postage savings by eliminating the printing and mailing of certain tax packages and publications, and by transitioning to paperless employee pay statements.

Real estate is another area where we have found major savings. In 2012 the IRS began a sweeping space-reduction initiative that is projected to reduce rent costs by more than $40 million and reduce total IRS offi ce space by more than 1.3 million square feet by the end of this fi scal year. Taken together, we’re spending $300 million a year less in these areas.

We will continue our efforts to fi nd savings and effi ciencies wherever we can. And we will continue to carry out our core responsibilities and work toward preserving the public’s faith in the essential fairness and integrity of our tax system. But these budgetary constraints will pose serious challenges to our efforts to enforce the tax laws and provide excellent customer service.

Essentially, the federal government is losing billions in revenue collection to achieve budget savings of a few hundred millions dollars, since the IRS estimates that, for every $1 invested in the IRS budget, it produces $4 in revenue.

As I said during my confi rmation hearing, I didn’t fi nd a single organization in my 20 years of private-sector experience that said, “Let’s take our revenue operation and starve it for funds and see how it does.”

So far this fi ling season, we have been fortunate that the volume of phone calls to our toll-free lines is actually down a bit compared to this time last year. One factor is the lack of major tax changes in 2013, which means fewer questions from taxpayers. Our improved website and its applications also have helped provide taxpayers with important support without requiring a phone call.

As a result, for now, we’re maintaining a level of phone service around 72 percent. That’s much better than last year’s overall average of 60.5 percent. But we expect that for the year we will drop well below 70 percent and end up closer to last year’s 60.5 percent. That would mean more than 30 percent of taxpayers trying to reach us on the phone couldn’t get through. It wasn’t that long ago, with proper funding, that our level of service was 88 percent.

Along with phone service, we’re also concerned about the amount of time it takes for people to get help in person when

their IRS accounts after they have been victimized. The time for resolving a new case has been reduced from over 300 days to roughly 120 days. But there’s still room for improvement, and we intend to do even better.

Perhaps our most intense challenge is fulfi lling the responsibility Congress has given us to implement tax-related provisions of enacted legislation, including the Affordable Care Act. We have a lot of work to complete if we are going to be prepared for major ACA provisions that go into effect this year, including the premium tax credit and the individual shared responsibility provision. As I have told our employees, the signifi cant challenge of implementing the Affordable Care Act provides us with a major opportunity to demonstrate the skill, dedication and competence of the IRS. After the diffi culties experienced last fall with the rollout of ACA, if we can have a smooth fi ling season next year including the appropriate review of the returns of taxpayers who took or were eligible for the advanced premium tax credit, the public and the Congress will have to say, “That’s some organization with an amazing work force.”

Along with the ACA, another important piece of legislation we’re in the process of implementing is the Foreign Account Tax Compliance Act, which is more commonly known as FATCA. This law is important because it requires foreign fi nancial institutions to tell us about accounts owned by U.S. citizens. With this information, we can do a much better job of combating offshore tax evasion. Our goal is to make it more and more diffi cult for Americans to hide their money in a tax haven to avoid paying taxes.

The importance of FATCA is not just that we’ll be collecting more money. It is also important because the average taxpayer has to be confi dent that, while they are paying their taxes, the very wealthy, with fancy lawyers and accountants, are no longer able to hide their money in foreign countries and avoid paying their fair share to support the operations of the government.

When I became Deputy Mayor of Washington, the city’s theory of snow removal had been that “the sun will come up tomorrow.” So, when I began, we had a “snow summit” and I told the leadership team that, whatever else we were going to do, we were going to get the snow off the streets. That’s my feeling today at the IRS. Whatever else we are going to do, we are going to implement the non-discretionary legislative mandates we have been given: the Affordable Care Act and FATCA.

This brings me to what I believe is the biggest challenge facing the IRS today, the substantial decline in our funding, which puts signifi cant strain on our ability to provide adequate services to taxpayers and to maintain strong service and enforcement levels to ensure the integrity of our voluntary compliance system.

For the IRS to keep making progress in all the areas I’ve just mentioned, it is critical for us to receive adequate resources. The agency continues to be in a very diffi cult budget

38

The IRS Taxpayer Advocate has estimated that individuals and businesses spend about 6.1 billion hours a year complying with the fi ling requirements of the tax code. All in an effort to determine and pay the right amount of taxes.

We can do better than that. And, while tax policy is the domain of the Treasury Department, the Administration and the Congress, those of us involved in tax administration are anxious to do whatever we can to assist in the process.

Thank you very much for letting me spend this time with you.

IRS to Revise Regulations Limiting Activities of Tax-exempt Groups After Outcry

The Internal Revenue Service plans to rewrite proposed regulations limiting the political activities of the same type of tax-exempt groups the agency was accused of targeting after backlash from GOP lawmakers and politically active nonprofi t groups.

IRS Commissioner John Koskinen told USA Today on Monday that the agency will likely “re-propose a redefi ned rule and ask for more public comment.” He expects the process will take “until the end of the year and beyond” to complete.

Koskinen said the revised rule will take into account criticism from conservative groups concerned the regulations will put free speech rights at risk. Some liberal groups voiced concerns that the regulations could bar voter education and registration programs, Koskinen said.

“I think we have to take all of that into consideration,” Koskinen told USA Today. “There are very thoughtful comments and concerns, and one of the questions that has evoked a lot of comment is, once you defi ne what political activity is, to what organizations should it apply in the 501(c) context and how much of it should be allowed? All of that is going to be very important.”

In November, Treasury and the IRS issued draft regulations that would limit the political activities of such groups that fall under section 501(c)4 of the tax code. The proposed regulations attracted a record 150,000 public comments.

Under current rules, social welfare organizations may conduct some political work as long as it is not their main activity.

they go to one of our Taxpayer Assistance Centers. We’ve had reports from fi eld staff in offi ces across the country of taxpayers lining up outside our centers well before the centers open in the morning to make sure they receive service the same day, sometimes waiting up to three hours to be served after they enter the offi ce. Expanding our online offerings can only go so far to ameliorate these problems. As Forbes magazine noted earlier this year, when you punish the IRS you punish taxpayers.

Our information technology operation is still another area that the IRS has always been focused on. Our use of IT helps us do a better job of stopping potentially fraudulent returns before they are processed and allows us to keep making improvements to our operations and our website. Our 2014 budget had $330 million for IT work related to implementing ACA. None of that money was provided. Since we are mandated by statute to implement ACA, that has meant that other vital IT projects have had to be shelved.

The solution to the budget problem that we face starts with the Administration’s Fiscal Year 2015 budget proposal, which was released last month. The Administration proposes a funding level of approximately $12.5 billion for the IRS for Fiscal 2015, which would reverse the erosion in our budget over the last several years.

I think it’s fair to ask what value the American taxpayer would get for that extra billion or so dollars that the Administration is proposing. It would help taxpayers get the service they need and strengthen compliance efforts in key areas, especially the two I mentioned earlier – refund fraud and offshore tax evasion. The budget proposal halts the declines in key enforcement personnel we’ve had and allows the IRS to again invest in necessary basic infrastructure.

Ultimately, it’s in everyone’s best interests to have an IRS that can do its job. We don’t believe that any member of Congress wants their constituents – be they taxpayers, tax preparers or fi nancial advisors – to go through the aggravation of not getting the help they need from the IRS. They don’t want their constituents waiting in line for hours at a taxpayer assistance center or having trouble getting through on our toll free lines.

So my hope is that once we get beyond the issues surrounding the 501(c)(4) application process, and once the major tax-related provisions of the Affordable Care Act that I mentioned earlier are up and running, we can have a more normal discussion about our budget. I look forward to working with Congress to solve this budget problem. I hope that one of the legacies of my time as IRS Commissioner will be that we put the agency’s funding on a more solid and sustainable footing.

There’s another way in which Congress can help the IRS improve the work it does to assist taxpayers and ensure compliance with the tax laws, and that is to simplify the tax code. Congressman Dave Camp, Chairman of the House Ways and Means Committee, put it well when he introduced his tax reform proposal a few weeks ago. He said that the tax code is ten times the size of the Bible, without the good news.

39

same account. While such a limit does not ensure that all direct deposits are in the name of the fi ler, it does help limit the potential for fraud. If a limit was in place, the remaining tax refunds would be converted to a paper refund check and sent to the taxpayers. While it is possible that a paper tax refund check could be sent to the identity thief, converting the paper check is more diffi cult than withdrawing a direct deposit. To cash a check, individuals usually have to provide picture identifi cation matching the name on the tax refund check, in this case the name of the legitimate taxpayer. This means that the identity thief would need to obtain false identifi cation to cash the fraudulently obtained tax refund check. This serves as another deterrent to fraud.

The IRS was concerned about limiting the number of direct deposits to a single account because of situations in which an account is in the name of multiple individuals. Lastly, the IRS acknowledged that tax refunds are subject to payment guidance in the regulations.[ However, the IRS places responsibility for compliance with Federal direct deposit regulations on the taxpayer, indicating it is the taxpayers’ responsibility to ensure that their tax refunds are only direct deposited into their accounts.

We analyzed the approximately 1.5 million tax returns we identifi ed to determine the impact of the IRS’s decision to not limit the number of direct deposits to a single bank account. Figure 6 provides a breakdown of the most egregious examples of multiple tax refunds being deposited to the same bank account.

Bank Accounts With Volumes Greater Than 300 Direct Deposits

Deposits to debit card accounts are being used by identity thieves committing tax return fi ling fraud. For example, investigators working the Tampa scheme identifi ed that most of the fraudulent tax refunds were direct deposited to a debit

The proposed new rules would block such things as running ads that “expressly advocate for a clearly identifi ed political candidate or candidates of a political party” as fulfi lling their tax-exempt mission.

The rules proposed in November also would limit voter drives and voter registration efforts and distribution of literature.

Republicans accused the Obama administration of trying to legalize the targeting of conservative groups. In February, the House voted in favor of a bill that would “put a hold” on the proposed rules until Congress and the Treasury Department’s inspector general complete their investigations of the IRS targeting scandal.

Last week, the House Oversight and Government Reform Committee voted to hold Lois Lerner, a former IRS offi cial at the center of the targeting scandal, in contempt of Congress for refusing to answer questions at a pair of hearings.

Lerner previously headed the IRS division that processes applications for tax-exempt status. She refused to answer questions at a House Oversight Committee hearing last May about IRS agents improperly singling out tea party applications for extra scrutiny. She again refused to answer questions at hearing in March.

Lerner has emerged as a central fi gure in investigations by two congressional committees. On April 9, the House Ways and Means Committee voted to refer her to the Justice Department for possible criminal prosecution.

The IRS’ inspector general said in a report last year that tax-exempt applications from tea party and other conservative groups were set aside for special scrutiny simply because they included words such as “tea party” and “patriots.” Several hundred applications, from both conservative and liberal groups, languished for years without a ruling by the IRS, the report said.

Meanwhile, Rep. Paul Gosar, R-Ariz., and six other House Republicans wrote to House Appropriations Committee Chairman Hal Rogers, R-Ky., earlier this month requesting that the next general spending bill prohibit bonuses for the IRS division that carried out the agency’s screening efforts.

The Washington Post reported that the GOP lawmakers also criticized the agency’s decision in February to reinstate performance bonuses for its employees after reaching a deal with the Union for Federal Employees.

“It sends the wrong message to the American people that Congress would allow these ‘performance awards’ to be doled out after the wrongdoing that occurred,” the lawmakers wrote.

TIGTA Reports on IRS Direct Deposit

To improve the IRS’s conformance with direct deposit regulations and to help minimize fraud, we recommended that the IRS limit the number of tax refunds being sent to the

40

card account. As of February 16, 2012, the IRS had provided us with approximately 5,000 debit cards confi scated during the investigation of that scheme.

Taxpayers who request to have their tax refund deposited onto a debit card enter a bank account number and bank routing number provided by the debit card company on their tax return.

The IRS fi rst began receiving confi scated IRS mail from the Tampa scheme in September 2011. As of February 16, 2012, the IRS had provided us with information relating to 3,457 paper tax refunds checks and approximately 5,000 debit cards confi scated as part of that scheme.

Further complicating this process is that the confi scated mail was being worked by multiple functions within the IRS. The IRS informed us that it is in the process of implementing a tracking system for these confi scated tax refunds. However, a tracking system still had not been implemented as of February 10, 2012.

The IRS Return Integrity and Correspondence Services’ Accounts Management Taxpayer Assurance Program has a process in which it works with banks to obtain information on questionable tax refunds. In December 2011, one bank associated with the confi scated debit cards from the Tampa scheme provided the IRS with a list of 60,000 bank accounts, including debit card accounts, it had identifi ed nationwide with questionable tax refunds. The bank intercepted and prevented questionable refunds totaling $164 million from being deposited into these accounts. However, this process relies on the banks to provide the IRS with much needed information to identify tax refunds deposited to debit cards.

Subsequent to the completion of our audit testing, IRS management noted that efforts are underway to establish processes to recover potentially fraudulent tax refunds intercepted by banks, including establishing a specifi c code that fi nancial institutions can use to reject questionable direct deposits specifi cally for name mismatches or questionable tax refunds.

The Commissioner, Wage and Investment Division, should:

As previously recommended, coordinate with responsible Federal agencies and banking institutions to develop a process to ensure that tax refunds issued via direct deposit to either a bank account or a debit card account are made only to an account in the taxpayer’s name.

IRS management agreed that limiting the direct deposit of refunds to bank accounts or debit cards held in the taxpayer’s name would be a deterrent to the commission of identity theft. The IRS will work with the Financial Management Service, which administers the requirements for government-wide direct deposits on behalf of the Department of the Treasury. The IRS will initiate discussions with the Financial Management Service to revisit this issue and reevaluate the feasibility of imposing such restrictions.

Based on the discussions with the Financial Management Service, the IRS will determine whether such restrictions can be effectively implemented.

As previously recommended, limit the number of tax refunds issued via direct deposit to the same bank account or debit card account in an attempt to reduce the potential for fraud.

IRS management agreed that limiting the number of tax refunds issued via direct deposit to the same bank account or debit card would reduce the potential for fraud. They will initiate discussions with the Financial Management Service to revisit this issue and reevaluate the feasibility of imposing such restrictions. Based on the discussions with the Financial Management Service, the IRS will determine whether such restrictions can be effectively implemented.

Work with the Department of the Treasury to ensure fi nancial institutions and debit card administration companies authenticate the identity of individuals purchasing a debit card. Furthermore, prevent the direct deposit of tax refunds to debit cards issued or administered by fi nancial institutions and debit card administration companies that do not take reasonable steps to authenticate individuals’ identities.

The IRS will work with the Department of the Treasury Financial Crimes Enforcement Network to develop procedures that can be implemented to ensure authentication of individuals’ identities. The Department of the Treasury Financial Crimes Enforcement Network establishes the rules governing how fi nancial institutions and debit card administration companies authenticate the identity of individuals purchasing a debit card. The IRS will initiate the discussion with the Department of the Treasury Financial Crimes Enforcement Network to determine appropriate next steps to improve authentication requirements.

Editor’s Note: This timely article was submitted by Don Rihn,

member.

Improvement is Needed to Better Enable Frontline Employees Identifi cation of Potentially Dangerous and Caution Upon Contact Designations

The IRS has approximately 25,000 employees who have direct contact with taxpayers and their representatives (hereafter referred to as frontline employees). The safety of its employees is a top priority for the IRS. As such, the IRS has programs to help protect employees when interacting with individuals who are known to be violent, abusive, or pose some other type of danger. Examples include the Potentially Dangerous Taxpayer (PDT) and Caution Upon Contact (CAU) programs.

41

This audit was initiated in response to a Treasury Inspector General for Tax Administration Offi ce of Investigations referral that identifi ed paid tax return preparers who may pose a threat to IRS employees conducting offi cial business.

Frontline IRS employees can be exposed to many diffi cult, threatening, and dangerous situations. The overall objective of this review was to determine the adequacy of processes and procedures for employees who have direct contact with taxpayer representatives and to identify those representatives who are designated as potentially dangerous or who need to be approached with caution.

The IRS has not developed suffi cient procedures to enable frontline employees to readily identify whether a taxpayer representative has been designated as PDT or CAU. While a frontline employee can research an individual’s tax account for the PDT or CAU designation using the individual’s Social Security Number (SSN), the employee typically does not have a taxpayer representative’s SSN. The employee generally must search for the representative’s tax account using the representative’s name. Without the SSN, the employee is unable to defi nitively identify and examine the representative’s tax account for a PDT or CAU indicator.

The IRS does maintain systems that can be used to better identify if a taxpayer representative has either a PDT or CAU designation. However, these systems either do not provide the designation information or the IRS is unwilling to grant employees access based on concerns for privacy.

As of August 29, 2013, the IRS designated 84 taxpayer representatives with a PDT or CAU indicator. Although this number is a small percentage of the 2.3 million representatives in the Centralized Authorization File, the safety of frontline employees, others working in the same facilities, and taxpayers is at risk when these employees unknowingly meet with potentially dangerous taxpayer representatives. IRS employees reported four incidents of physical assault by taxpayer representatives in Calendar Years 2010 through 2012. The IRS agreed that even one assault is one too many.

TIGTA recommended that the Deputy Commissioner for Services and Enforcement: 1) develop a process to enable frontline employees to readily access information that identifi es whether a taxpayer representative has been designated as a PDT or CAU; and 2) ensure that internal guidance is updated with procedures to research taxpayer representative designations and that outreach and training is performed to ensure that frontline employees are knowledgeable of the revised process.

IRS management’s response to the report states that they believe their current procedures are appropriate to ensure the safety of employees. However, TIGTA remains concerned that frontline employees do not have a process to readily identify whether a taxpayer representative has been designated as PDT or CAU.

Ten Facts about Amended Tax Returns

Did you discover that you made a mistake after you fi led your federal tax return? You can make it right by fi ling an amended tax return. Here are the top ten things to know about fi ling an amended tax return.

1. Use Form 1040X, Amended U.S. Individual Income TaxReturn, to correct errors on your tax return. You must fi le anamended return on paper. It can’t be e-fi led.

2. You usually should fi le an amended tax return if you madean error claiming your fi ling status, income, deductions orcredits on your original return.

3. You normally don’t need to fi le an amended return to correctmath errors. The IRS will automatically make those changesfor you. Also, do not fi le an amended return because youforgot to attach tax forms, such as a W-2 or schedule. TheIRS will usually send you a request for those.

4. You usually have three years from the date you fi led youroriginal tax return to fi le Form 1040X to claim a refund. Youcan fi le it within two years from the date you paid the tax, ifthat date is later. That means the last day for most people tofi le a 2010 claim for a refund is April 15, 2014. See the 1040Xinstructions for special rules that apply to certain claims.

5. If you are amending more than one tax return, prepare a1040X for each year. You should mail each year in separateenvelopes. Note the tax year of the return you are amendingat the top of Form 1040X. Check the form’s instructions forwhere to mail your return.

6. If you use other IRS forms or schedules to make changes,make sure to attach them to your Form 1040X.

7. If you are due a refund from your original return, wait toreceive that refund before fi ling Form 1040X to claim anadditional refund. Amended returns take up to 12 weeks toprocess. You may spend your original refund while you waitfor any additional refund.

8. If you owe more tax, fi le your Form 1040X and pay the tax assoon as possible. This will reduce any interest and penalties.

9. You can track the status of your amended tax return threeweeks after you fi le with ‘Where’s My Amended Return?’ Thistool is available on IRS.gov or by phone at 866-464-2050. It’savailable in English and in Spanish. The tool can track thestatus of an amended return for the current year and up tothree years back.

10. To use ‘Where’s My Amended Return?’ enter your taxpayeridentifi cation number, which is usually your Social Securitynumber. You will also need your date of birth and zip code.If you have fi led amended returns for multiple years, selecteach year one by one.

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IRS Provides Employers with Guidance on Correcting Improper Health FSA Payments

Chief Counsel Advice 201413006

In Chief Counsel Advice (CCA), IRS has provided additional information about procedures contained in regs for how employers who make improper health fl exible spending account (health FSA) payments correct such situations.

Health FSAs are benefi t plans established by employers to reimburse employees for health care expenses, such as deductibles and co-payments. (Prop Reg § 1.125-5(a))

In Notice 2013-71, 2013-47 IRB 532, IRS provides that an employer, at its option, can provide for the carryover to the immediately following plan year of up to $500 of any amount remaining unused as of the end of the plan year in an employee’s health FSA.

Prop Reg § 1.125-5(a)(1) and Prop Reg § 1.125-5(b) provide that after an expense for a qualifi ed benefi t has been incurred in an FSA, the expense must fi rst be substantiated before the expense is reimbursed. Prop Reg § 1.125-6(b) provides rules for substantiation of these expenses. Prop Reg § 1.125-6(d) provides rules for substantiation when the expenses are paid via a debit card that is associated with the FSA.

Prop Reg § 1.125-6(d)(7) provides the following correction procedures for any improper payments using a debit card:

(i) Until the amount of the improper payment is recovered,the debit card must be deactivated and the employee mustrequest payments or reimbursements of medical expensesfrom the health FSA through other methods;

(ii) The employer demands that the employee repay thecafeteria plan an amount equal to the improper payment;

(iii) If, after the demand for repayment of improper payment(as described at (ii) above), the employee fails to repay theamount of the improper charge, the employer withholds theamount of the improper charge from the employee’s pay orother compensation, to the full extent allowed by applicablelaw;

(iv) If any portion of the improper payment remainsoutstanding after attempts to recover the amount (see (ii)and (iii) above), the employer applies a claims substitutionor offset to resolve improper payments, such as areimbursement for a later substantiated expense claim isreduced by the amount of the improper payment. So, forexample, if an employee has received an improper paymentof $200 and subsequently submits a substantiated claimfor $250 incurred during the same coverage period, areimbursement for $50 is made; and

(v) If, after applying all the procedures described in (ii)through (iv) above, the employee remains indebted to theemployer for improper payments, the employer, consistent

with its business practice, treats the improper payment as it would any other business indebtedness.

All of these proposed regs are regs on which taxpayers may rely.

The CCA provides that the correction procedures for debit card payments provided under items (ii) through (v) above may be applied to improper payments under a health FSA. The employer is the sponsor of the health FSA and is responsible for complying with the rules provided under the Code and regs. A third-party administrator may apply the overpayment correction procedures on behalf of the employer.

An employer may apply the rules of (ii) through (iv), above, in any order, but the order must be consistently applied for all participants in the employer’s health FSA. An employer may apply the correction method in (v), above, only after all correction methods in items (ii) through (iv) have been pursued by the employer. Forgiveness of improper payments as uncollectible business indebtedness should be the exception rather than a routine process.

Code Sec. 125(d)(2)(A) and Prop Reg § 1.125-1(o) generally provide that a cafeteria plan does not include any plan which provides for deferred compensation. Thus, the correction methods in (ii) through (iv), above, should be applied during the period of coverage (the plan year) in which the improper payment was made to the participant. To the extent a participant repays the amount of an improper payment, the amount is available for reimbursing other claims incurred in the plan year or, if the plan has adopted a carryover policy pursuant to Notice 2013-71, is available for claims included in the next plan year (subject to the limitations of Notice 2013-71).

In cases in which the correction methods in (ii) through (iv), above, were not applied during the period of coverage during which the improper payment was made to the employee, the employer should apply (v), above, in accordance with the rules at “Form W-2 treatment...” below.

Form W-2 treatment when employee doesn’t repay: In cases in which all other correction procedures have been exhausted by the employer and the employer treats the improper payment as business indebtedness in accordance with (v), above, the improper payment should be reported by the employer to the employee as wages on a Form W-2 to the extent the employer forgives the indebtedness after requesting payment consistent with collection procedures for other business indebtedness. The amount included in income is subject to withholding for income tax, FICA and FUTA, since the benefi ts are made available to the employee by the employer for the performance of services. The improper payment is reportable in the tax year of the employee in which the indebtedness is forgiven.

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Over the last several weeks all 25 CI fi eld offi ces across the nation have or are conducting enforcement operations related to refund fraud investigations. For example:

• This week, the Miami Field Offi ce is conducting 23enforcement actions, including indictments and arrests.This is Miami’s second surge of enforcement actionswithin the last six months.

• In the Tampa Field Offi ce, 7 enforcement actions will beconducted.

• In the Los Angeles Field Offi ce, 10 tax return preparerswere recently indicted for seeking millions of dollars infraudulent tax refunds.

“Virtually every Criminal Investigation fi eld offi ce is working identity theft and refund fraud cases,” said Weber.

This work refl ects the continued high priority being placed on identity theft by the IRS and Criminal Investigation. In Fiscal Year (FY) 2013, the IRS initiated approximately 1,492 identity theft related criminal investigations, an increase of 66 percent over investigations initiated in FY 2012. Direct investigative time applied to identity theft related investigations has increased 216 percent over the last two years. Prosecution recommendations, indictments, and those convicted and sentenced for identity theft violations have increased dramatically since FY 2011. Sentences handed down for convictions relating to identity theft have been signifi cant, ranging from two months to 317 months.

As the IRS continues to battle the ID theft and refund fraud issue, the following are some of the most recent Criminal Investigation case highlights from across the nation during the last three months. All details are based on court documents:

Miami Resident Convicted in Stolen ID, Tax Refund Scheme Utilizing Stolen EFINS — On March 27, 2014, A Miami man was convicted by jury of one count of access device fraud and fi ve counts of aggravated identity theft. According to the indictment and evidence, the defendant obtained an IRS Electronic Filing Identifi cation Number (EFIN) and used it to fi le 52 fraudulent tax returns, many fi led with stolen identities.

Florida Couple Sentenced for Stolen Identity Refund Fraud — On Feb. 27, 2014, in Tampa, Fla., two defendants were sentenced to 121 months and 192 months in prison, respectively. As part of their sentence, the court entered a $790,421 money judgment against each, as well as $790,421 in restitution. Both pleaded guilty to conspiring to commit wire fraud and aggravated identity theft. According to court documents, the defendants and others orchestrated a scheme

IRS Intensifi es Work on Identity Theft and Refund Fraud; Criminal Investigation Enforcement Actions Underway Across the Nation

The Internal Revenue Service announced today it has started more than 200 new investigations this fi ling season into identity theft and refund fraud schemes. IRS Criminal Investigation has started 295 new identity theft investigations since January, pushing the number of active cases to more than 1,800.

The coast-to-coast effort by Criminal Investigation is underway as part of a larger effort at the IRS to combat identity theft and refund fraud by pursuing identity thieves, preventing fraudulent refunds from being issued and helping victims of this crime.“Identity theft is one of the fastest growing crimes nationwide, and refund fraud caused by identity theft is one of the biggest challenges facing the IRS,” said IRS Commissioner John Koskinen. “The investigative work done by Criminal Investigation (CI) is a part of an aggressive effort by the IRS to combat this issue on all fronts. We are making substantial progress in refund fraud protection, and the work by CI highlights the important steps we are taking.”

Since the start of 2014, increased activity by CI has led to more prosecution recommendations, indictments and sentencing hearings, which refl ect the overall success by the IRS on the increased number and effectiveness of ID theft fi lters used during the processing of tax returns. Highlights of this year’s work include:

“We remain committed to allocating investigative time and resources to bringing to justice those who steal honest taxpayers’ identities for their own personal gain,” said Richard Weber, Chief of IRS Criminal Investigation.

A new and key component for IRS-CI’s efforts this year is to investigate the misuse of Electronic Filing Identifi cation Number (EFINS). An EFIN is assigned to tax preparers that have completed the IRS e-fi le Application to become an Authorized IRS e-fi le Provider. After the provider completes the application and passes a suitability check, the IRS sends an acceptance letter, including the EFIN, to the provider.

IRS Criminal Investigation recognized an increase in the fi ling of tax returns utilizing stolen or fraudulently acquired EFINs. Since the start of the fi scal year through March 31, 2014, the IRS has revoked or suspended 395 EFINS based on recommendations from CI, and CI has initiated 60 EFIN source investigations involving EFINS used by individuals involved in refund fraud and identity theft schemes. By revoking and suspending the EFINs, IRS can prevent the transmission of the fraudulent tax returns, thwarting the criminal attempts to steal refunds.

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to defraud the United States Treasury by causing fraudulent federal income tax returns to be fi led using stolen identities, and soliciting personal identifying information and addresses from co-conspirators in Florida and Georgia. To facilitate the scheme, the conspirators coordinated the withdrawal of fraudulently obtained tax refund amounts from prepaid debit cards. The identities used to fi le the fraudulent tax returns in this scheme belonged to individuals living in various states across the country. As part of the conspiracy, at least 322 federal income tax returns for tax year 2011 were fi led claiming refunds of $2,701,844.

Tax Return Preparer Sentenced in Fraud and Identity Theft Scheme — On Feb. 18, 2014, a Georgia man was sentenced to 259 months in prison, three years of supervised release and ordered to pay $7 million in restitution. According to information presented in court, from approximately July 2010 to January 2013, the defendant operated a tax preparation business, working with others, led thousands of victims to believe that they could apply for “government stimulus payments” or “free government money” by providing their names and Social Security numbers. The defendant and his co-conspirators acquired names from a variety of sources, including prisons and homeless shelters. In actuality, no stimulus program existed, and the defendant and his co-conspirators instead used the victims’ personal information to fi le fraudulent tax returns that claimed a total of over $19 million in bogus refunds. The scheme affected over 15,000 victims in virtually every state across the country. A co-defendant was also sentenced to 104 months in prison and ordered to pay $7 million in restitution, and forfeit his interest in 17 separate pieces of real estate, thousands of dollars that were previously seized from his bank accounts, and other personal items previously seized by the government.

New Jersey Woman Sentenced for Conspiring to Defraud the United States — On Feb. 10, 2014, a New Jersey woman was sentenced to 44 months in prison, three years of supervised release and ordered to pay $1,082,638 in restitution. The defendant pleaded guilty to one count of conspiracy to defraud the United States. According to court documents, between April 2008 and August 2011, the defendant and others advised numerous people that they could receive tax refunds of several thousand dollars each by fi ling fraudulent federal tax returns. The scheme involved reporting infl ated amounts of income and taxes withheld, which resulted in artifi cially infl ated tax refunds. The defendant and co-conspirators instructed others to provide names, social security numbers, dates of birth, number of dependents and addresses. After obtaining this information, fraudulent tax returns were fi led using Internet-based software from the defendant’s residence. The tax refunds were received in the form of either United States Treasury checks or prepaid debit cards deposited into various accounts the defendant established in the names of her conspirators. The defendant retained a percentage of the refunds as her fee for fi ling the fraudulent returns. On Aug. 22, 2011, law enforcement agents executed a search warrant at Mitchell’s residence and recovered ledgers containing identifying information for approximately 100 individuals, as well as a stack of prepaid credit cards issued in the names

of dozens of people. Subsequent analysis of this information revealed that a total of 127 people were participants and/or victims, and defendant fi led hundreds of fraudulent tax returns seeking $1,082,638 in refunds.

IRS Debunks Frivolous Tax Arguments

The Internal Revenue Service today released the 2014 version of “The Truth about Frivolous Tax Arguments.” The document describes and responds to some of the common frivolous tax arguments made by those who oppose compliance with federal tax laws. The cases cited demonstrate how frivolous arguments are treated by the IRS and the courts. The 2014 version includes numerous recently-decided cases that demonstrate that the courts continue to regard such arguments as illegitimate.

Examples of frivolous arguments include contentions that taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment; that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable.

Frivolous Arguments appeared on the IRS annual “Dirty Dozen” list of tax scams that was released on February 19.

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. While taxpayers have the right to contest their tax liabilities, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for fi ling a frivolous tax return is $5,000. The penalty is applied to anyone who submits a tax return or other specifi ed submission, if any portion of the submission is based on a position the IRS identifi es as frivolous.

Those who promote or adopt frivolous positions also risk a variety of other penalties. For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to fi le penalty. The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.

Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter.Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefi ts based on frivolous arguments may be prosecuted for a criminal felony.

Treatment of Marriages of Same-Sex Couples for Retirement Plan Purposes

The IRS issued Notice 2014-19, which provides guidance on how qualifi ed retirement plans should treat the marriages of

45

complex formula.

The excludable housing cost amount is the excess, if any, of (1) the individual’s allowable housing expenses for the year (i.e., the housing expense limitation) over (2) a base amount. For 2014, a taxpayer’s allowable housing expenses, assuming he is eligible for the entire year, generally can’t exceed $29,760; subtracting the base amount of $15,872 yields a generally applicable maximum housing amount exclusion of $13,888.

IRS may issue regs or other guidance providing for the adjustment of the maximum allowable housing expense limitation on the basis of geographic differences in housing costs relative to housing costs in the U.S. (Code Sec. 911(c)(2)(B))

Notice 2014-29, makes adjustments for housing costs during 2014 in high-cost foreign areas. Specifi cally, it contains a table that (1) identifi es locations within countries with high housing costs relative to U.S. housing costs, and (2) provides an adjusted annual maximum and daily housing expense limitation for a qualifi ed individual incurring housing expenses in one or more specifi ed high-cost localities in 2014 to use (instead of the otherwise applicable annual housing expense limitation of $29,760, or the prorated daily amount) in determining his housing expenses. A qualifi ed individual incurring housing expenses in one or more of the high-cost localities identifi ed in the table for the year 2014 may use the adjusted limit provided in the table (in lieu of $29,760 or the prorated daily amount) in determining his housing cost amount on Form 2555, Foreign Earned Income.

For some locations, the limitation on housing expenses provided in Notice 2014-29, Sec. 3, may be higher than the limitation on housing expenses provided in Notice 2013-31, 2013-21 IRB 1099 (for 2013). A qualifi ed individual incurring housing expenses in such a location during 2013 may apply the adjusted limitation on housing expenses provided in Notice 2014-29, Sec. 3, in lieu of the amounts provided in Notice 2013-31 (and as set out in the Instructions to Form 2555 (2013)).

IRS anticipates that future annual notices providing adjustments to housing expense limits will make a similar election available to qualifi ed individuals that incur housing expenses in the immediately preceding year. For example, when adjusted housing expense limitations for 2015 are issued, it is expected that taxpayers will be permitted to apply those adjusted limitations to the 2014 tax year.

IRS to Make Limited Use of Offshore Bank Data from FATCA

The Internal Revenue Service initially will make limited use of information supplied by other governments about U.S. citizens’ offshore holdings because of budget constraints, Commissioner John Koskinen said.

Major pieces of the Foreign Account Tax Compliance Act, or FATCA, take effect July 1 as the U.S. seeks to clamp down

same-sex couples following the Supreme Court’s decision in United States v. Windsor. The Windsor decision invalidated Section 3 of the 1996 Defense of Marriage Act (DOMA) that barred married same-sex couples from being treated as married under federal law.

The notice:

• gives examples of Code requirements under whichthe marital status of the participants is relevant tothe payment of benefi ts,

• provides guidance on how to satisfy those requirementsin light of Windsor and Revenue Ruling 2013-17,and

• describes when retirement plans must be amended tocomply with Windsor, Revenue Ruling 2013-17, andNotice 2014-19

Recognition of marriages of same-sex couples for tax purposes

Following the Windsor decision, the IRS issued Revenue Ruling 2013-17, which holds that married same-sex couples are now treated as married for all federal tax purposes where marriage is a factor, if the couple is lawfully married under the laws of one of the 50 states, the District of Columbia, a U.S. territory or a foreign jurisdiction. Notice 2014-19 gives additional guidance on how qualifi ed retirement plans should treat the marriages of same-sex couples.

Plan amendments required with respect to plan provisions inconsistent with Windsor

• If its terms are inconsistent with Windsor or RevenueRuling 013-17, a retirement plan must be amended tocomply with Windsor and Revenue Ruling 2013-17.For example, a plan must be mended if it defi nes“spouse” by reference to section 3 of DOMA, r onlyas a person of the opposite sex.

• Not all plans need to be amended in order to be incompliance. An amendment generally is notrequired if a plan’s terms are not inconsistent withWindsor or with Revenue Ruling 2013-17.

• Required amendments must be adopted by the later ofDecember 1, 2014, or the applicable date under the IRS’general amendment guidance for qualifi ed retirementplans, Revenue Procedure 2007-44.

IRS Issues Housing Cost Allowances for Those Working Abroad in High-cost Areas in 2014

Notice 2014-29, 2014-18 IRB

A new Notice provides adjustments to the limitation on housing expenses under the Code Sec. 911 housing cost exclusion for specifi c locations for 2014.

A qualifi ed individual may elect to exclude from U.S. gross income his foreign earned income and housing cost amount. (Code Sec. 911(a)) Under Code Sec. 911(c)(1), the maximum excludable housing cost amount is calculated by way of a

46

on tax evasion by its citizens with money outside the country. The law has led to agreements with governments around the world to exchange information.

“One of our biggest challenges lies in having the resources to build and maintain systems that can effectively use all of the incoming data,” Koskinen said Monday at the Tax Executives Institute conference in Washington. “As with any major new initiative, we expect a learning curve—for the IRS as well as for everyone affected.”

John Koskinen

Koskinen, 74, said he was conscious of the potential diffi culties that foreign banks are having in developing systems to comply with FATCA.

“We will be understanding of these problems as long as these intermediaries are making reasonable, good faith efforts to comply,” he said. “We’ll be much less sympathetic to people who don’t have a good story to tell.”

He said the IRS, which doesn’t plan to postpone the July 1 deadline, would have diffi culty coming up with a rule that would provide leeway to fi nancial institutions trying to comply without benefi ting those who haven’t tried at all.

Koskinen said the agency’s budget request of $12.5 billion for fi scal year 2015, a $1.2 billion increase, is a “critical step forward” in improving taxpayer service.

He also said the IRS has supplied Congress with all of the documents requested to investigate the agency’s scrutiny of Tea Party groups. Koskinen is scheduled to testify on March 26 about the investigations at the House Oversight and Government Reform Committee.

Final Regulations Clarify when Third-party Payor is Designated to Perform Acts Required of Employer

T.D. 9662, 03/28/2014; Reg. § 31.3504-2

IRS has issued fi nal regs under Code Sec. 3504 that provide

circumstances under which a payor is designated to perform the acts required of an employer, and is liable for employment taxes with respect to wages or compensation paid to individuals performing services for the employer, pursuant to a service agreement between the employer and payor. The fi nal regs, which generally adopt proposed regs issued last year, are effective for wages or compensation paid by a payor in quarters beginning on or after Mar. 31, 2014.

An employer may choose to enter into an agreement with a third party, such as a payroll service provider or a professional employer organization (PEO), under which the third party (payor) remits wages to the employer’s employees and takes steps to ensure the employer’s employment tax withholding, reporting, and payment obligations are satisfi ed. Under Code Sec. 3504, IRS is authorized to designate the payor to perform those acts that are required of employers under the Code. Code Sec. 3504 further states that, except as otherwise provided, all provisions of law (including penalties) applicable with respect to an employer are applicable to the designated payor; however, the employer for whom the payor acts remains subject to the provisions of law (including penalties) applicable with respect to employers. Accordingly, both an employer and the payor are liable for the employment taxes on wages or compensation paid by the payor.

The proposed regs provided rules regarding the employment tax obligations under certain three-party arrangements in which a payor enters into an agreement with the employer (client) to perform the employment tax obligations of the client with regard to wages or compensation paid by the payor to individuals performing services for the client, but the payor does not use established IRS administrative procedures (i.e., Form 2678, Employer/Payer Appointment of Agent) to request authorization to fi le employment tax returns and performs other acts for the client.

The proposed regs also provided exceptions to when a payor is designated under Code Sec. 3504 to perform the acts of an employer even if the payor has entered into an agreement that includes all of the components of a service agreement, as well as numerous examples to illustrate the rules regarding designation.

The fi nal regs generally adopt the 2013 proposed regs, with certain amendments described below.

Under the fi nal regs, unless one of the following exceptions applies, a payor would be designated to perform the acts required of an employer with respect to wages or compensation paid by the payor to any individual performing services for any employer under a “service agreement” (see below) between the payor and the client. For purposes of the fi nal regs, the term “wages” would have the same meaning as for purposes of employment taxes (FICA, FUTA, and income tax withholding). (Reg. § 31.3504-2(a)) The 2013 proposed regs included the phrase “as an agent” to describe the payor in several places, and a commenter raised concerns regarding potential implications of the term. IRS removed this language from the fi nal regs, noting that it was unnecessary.

47

The fi nal regs would not apply to:

(1) A payor that reports wages or compensation on a returnunder the client’s EIN (such as a reporting agent or a PSP),reporting the wages or compensation paid to individualsperforming services for the client. (Reg. § 31.3504-2(d)(1))(2) A common paymaster for wages or compensation itpays within the context of the concurrent employmentarrangement under Code Sec. 3121(s) or Code Sec.3231(i) and their regs. (Reg. § 31.3504-2(d)(2))(3) A payor that is the employer of the individuals (includingan employer within the meaning of Code Sec. 3401(d)(1).(Reg. § 31.3504-2(d)(3))(4) A payor that is treated as an employer under Code Sec.3121(a)(2)(A). (Reg. § 31.3504-2(d)(4))

The proposed regs contained an exception that provided that a payor is nott designated to perform the acts required of an employer for any wages or compensation paid by the payor to the individuals performing services for the client if the payor is the employer. (Prop Reg § 31.3504-2(d)(3)) However, the proposed regs weren’t clear as to whether this exception applies to a third-party payor of sick pay (i.e., amounts paid on account of sickness or disability) that is treated as an employer under the employment tax regs. The fi nal regs clarify that a third-party payor of sick pay that is so treated will not be designated under the fi nal regs to perform the acts of an employer with regard to sick pay. (T.D. 9662) IRS also stated that, with regard to arrangements involving a third-party payor of sick pay that is treated as an agent, these arrangements aren’t “service agreements” and thus the regs wouldn’t apply to designate the payor to perform the acts of the employer. (T.D. 9662, 03/28/2014)

The fi nal regs also clarify that the employer exception includes a statutory employer under Code Sec. 3401(d)(1); Code Sec. 3401(d)(1) provides that for purposes of federal income tax withholding, “employer” means the person for whom an individual performs or performed any service as an employee of such person. However, if the person for whom the individual performs or performed the services doesn’t have control of the payment of wages for the services, “employer” means the person having legal control of the payment of the wages. (Reg. § 31.3401(d)-1(f)) Thus, when one person is the common lawemployer of an individual because it controls the individual’sday-to-day performance of services, another person may bethe employer liable to collect, report, and pay employmenttaxes because it’s solely in control of the payment of wages tothe individual. The fi nal regs add an example (Reg. § 31.3504-2(e)(8)) to demonstrate how this exception is applied.

The fi nal regs also do not apply if the payor has been authorized as the employer’s agent under Reg. § 31.3504-1. (Reg. § 31.3504-2(a))

The fi nal regs provide that if a payor is designated as an agent to perform the acts of an employer, all provisions of law (including penalties) applicable with respect to an employer are applicable to that payor and that each employer for whom the payor is designated to act remains subject to all provisions

of law (including penalties) applicable to an employer. (Reg. § 31.3504-2(c))

For purposes of the above rules, a service agreement is a written or oral agreement under which the payor:

(1) implicitly or explicitly asserts it is the employer (or co-employer) of individuals performing services for the client.This includes agreeing to: (a) recruit and hire employees orassign employees as permanent or temporary members ofthe client’s workforce, or participate with the client in theseactions; (b) hire the client’s employees as its own and thenprovide them back to the client to perform services for theclient; or (c) fi le employment tax returns using its own EINthat include wages or compensation paid to the individualsperforming services for the client.(2) pays wages or compensation to the individuals forservices the individuals performed for the client; and(3) assumes responsibility to collect, report, and pay, orassumes liability for, any employment taxes with respectto the wages or compensation paid by the payor to theindividuals who performed services for the client. (Reg. §31.3504-2(b)(2))

IRS Among Agencies Using License Plate-Tracking Vendor:

The IRS and other U.S. agencies awarded about $415,000 in contracts to a license plate-tracking company before Homeland Security leaders dropped a plan for similar work amid privacy complaints. Federal offi ces such as the Forest Service and the U.S. Air Force’s Air Combat Command chose Livermore, California-based Vigilant Solutions to provide access to license plate databases or tools used to collect plate information, according to government procurement records compiled by Bloomberg.

“Especially with the IRS, I don’t know why these agencies are getting access to this kind of information,” said Jennifer Lynch, a senior staff attorney with the Electronic Frontier Foundation, a San Francisco-based privacy-rights group. “These systems treat every single person in an area as if they’re under investigation for a crime -- that is not the way our criminal justice system was set up or the way things work in a democratic society.”

IRS offi cials awarded the company a $1,188 contract for “access to nationwide data” in June 2012, according to records available online. That contract ended in May 2013, according to federal procurement records.

“The IRS uses a variety of investigative tools similar to other law-enforcement agencies to assist with criminal cases,” Eric Smith, an agency spokesman, said in an e-mail. He declined to say how the IRS used the records in its investigations.

48

Tax Pros in Trouble

Justice Department Files Lawsuit to Stop Las Vegas Man from Preparing Tax Returns

The Department of Justice fi led a civil lawsuit in the U.S. District Court for the District of Nevada to stop Bill Sunga Modina, who allegedly does business as 5M Financial and 6M Financial, from preparing federal tax returns. According to the complaint, Modina has prepared over 2,200 tax returns since 1992.

The complaint alleges that Modina understates his customers’ federal tax liabilities by reporting false or infl ated employee business expenses and infl ated or fabricated charitable contributions. In addition, the complaint alleges that Modina has failed to provide his preparer identifying number on tax returns he prepared, thereby obscuring his identity as the tax return preparer. According to the complaint, Modina’s activities have resulted in an estimated average tax loss of over $4,400 per return, and the total tax loss could allegedly be as high as $9,680,000 due to Modina’s false and fraudulent return preparation.

Chicago Tax Preparer Indicted for Causing More Than 150 Fraudulent Tax Returns Seeking Over $1 Million in Refunds

A Chicago tax return preparer was indicted on federal charges alleging that he was responsible for submitting more than 150 false federal individual income tax returns seeking over $1 million in refunds for individuals whom he knew were not entitled to them. The defendant, PHILLIP SMITH, allegedly was paid a portion of the tax refunds his clients received. The case is typical of federal tax prosecutions that occur throughout the year, but it serves as a reminder to taxpayers of the importance of voluntary compliance with their tax obligations as the April 15 fi ling deadline approaches.

Smith, 51, was charged with 11 counts of wire fraud and two counts of making a false claim to the Internal Revenue Service in an indictment returned yesterday by a federal grand jury. The indictment also seeks forfeiture of approximately $840,706 in fraudulently obtained refunds. Smith will be arraigned on a date to be determined in U.S, District Court.

“One of our top priorities is to maximize revenue by investigating abusive tax return preparers,” said James C. Lee, Special Agent-in-Charge of the IRS Criminal Investigation Division in Chicago. “IRS Criminal Investigation investigates tax fraud year round, not just at tax time. Taxpayers who might be thinking about cheating with next month’s deadline looming should think twice or they risk literally paying the consequences. We are committed to assuring honest taxpayers that everyone pays their fair share.” Mr. Lee also cautioned that taxpayers should choose carefully when hiring a tax preparer.

According to the indictment, in exchange for fees, Smith fabricated false Forms W-2 that purported to be issued by fi ctitious companies, knowing that his clients would use them to support false tax returns that would be submitted to the IRS. The bogus W-2s stated false annual wage and tax withholding amounts designed to fraudulently generate signifi cant Earned Income Credits and tax refunds from the IRS. Smith fraudulently obtained employer identifi cation numbers for the fi ctitious companies from the IRS, which he included on the bogus W-2s.

Between January 2010 and April 2013, Smith allegedly prepared and caused to be submitted to the IRS more than 150 false tax returns seeking more than $1 million in refunds.

In some instances, Smith directed clients to provide the bogus W-2s to reputable tax preparation businesses knowing thatthe tax preparers would rely on the false information andsubmit false returns on behalf of his clients, the indictmentalleges. In other instances, Smith prepared the false returnsand submitted them electronically for his clients, it adds.

At times, Smith posed as the employer during telephone calls with IRS representatives to verify his clients’ purported employment, and he created false employment verifi cation letters and paystubs for his clients to submit to the IRS when it sought additional records, the charges allege.

The indictment details 11 examples of false returns in which Smith caused taxpayers to seek and obtain fraudulent refunds ranging from $5,292 to $9,864.

Each count of wire fraud carries a maximum sentence of 20 years in prison and a $250,000 fi ne, and each count of making a false claim on the United States carries a maximum penalty of fi ve years in prison and a $250,000 fi ne. If convicted, the Court must impose a reasonable sentence under federal statutes and the advisory United States Sentencing Guidelines.

Zachary T. Fardon, United States Attorney for the Northern District of Illinois, announced the indictment with Mr. Lee. The government is being represented by Assistant U.S. Attorney Michelle M. Petersen.

The public is reminded that an indictment contains merely charges and is not evidence of guilt. The defendant is presumed innocent and is entitled to a fair trial at which the government has the burden of proving guilt beyond a reasonable doubt.

Justice Department Sues to Shut Down Alabama Tax Return Preparers

The United States has requested that the federal district court in Montgomery, Ala., permanently bar Tonja Renee Toney and Jenika Williams from preparing federal income tax returns for others, the Justice Department announced today.

According to the complaint, fi led in the U.S. District Court for the Middle District of Alabama, Toney and Williams each prepared tax returns as employees of Premier Tax in

49

Montgomery in 2007 and 2008, and both pleaded guilty to charges related to their work at Premier Tax. The complaint further alleges that both prepared false and fraudulent tax returns after being interviewed by Internal Revenue Service (IRS) agents in connection with their activities at Premier Tax.

The complaint alleges that both defendants have knowingly prepared federal income tax returns for customers that understated the customers’ tax liability by reporting false income in order to infl ate the taxpayer’s claim to an Earned Income Tax Credit.

Tax Preparer who Falsifi ed Returns Gets 30 Months

Ronald Vernon Strawn, 69, pleaded guilty last year to three counts of aiding and assisting in the preparation of fraudulent tax returns, according to a news release from the IRS.

Strawn admitted to fi ling falsifi ed federal tax returns in 2005 and 2006 on behalf of two clients. Those returns included fake business losses that underreported income by as much as $200,000.

U.S. District Judge Cormac J. Carney ordered Strawn to pay just under $2 million in restitution to the IRS and submit to a year of supervised release after his time behind bars.Strawn has been in custody since his 2012 arrest in Arizona.The original indictment included 50 counts of tax-related crimes against Strawn, who had a lengthy career counseling clients and preparing their taxes, according to the IRS.

Florida Tax Executives Get Prison for Fraud, ID Theft

Former executives at a Broward County tax preparation fi rm have been sentenced to federal prison for their roles in a $2 million tax fraud and identity theft operation.

A federal judge sentenced 29-year-old Camilla Gonzalez to more than eight years in prison. Co-defendant Patricia Alcime, also 29, got nearly eight years behind bars. They were president and vice president at Luxury Tax Inc.

Court documents show that the pair fi led more than 700 fraudulent tax returns in 2011 using personal information from identity theft victims. The refunds were paid into accounts controlled by Gonzalez and Alcime or loaded onto debit cards. They were also ordered to pay $1.8 million in restitution to the U.S. government and forfeit more than $500,000 in their bank accounts.

Justice Department Asks Federal Court to Shut Down Louisiana Tax Preparer

The United States has fi led a complaint seeking to bar Joyce Bougere-Keyes, and her business, Joyce Tax & Financial Service LLC, from preparing federal tax returns for others, the Justice Department announced.

The civil injunction complaint, fi led in the U.S. District Court for the Western District of Louisiana, alleges that Bougere-Keyes, of New Iberia, prepares federal income tax returns for customers that report fabricated and/or infl ated business income and expenses to maximize the amount of the Earned Income Tax Credit her customers claim. Bougere-Keyes has also improperly claimed education credits for ineligible taxpayers. Since 2009, Bougere-Keyes has prepared over 7,500 individual income tax returns and the loss to the U.S. Treasury caused by her conduct could exceed $1 million.

Georgia Husband and Wife Tax Return Preparers Sent to Prison for Tax Fraud

Detrick and Natashia Tucker, a husband and wife who owned and operated a tax preparation business named T&T Express Tax located in Pine Mountain, Ga., were sentenced to serve 12 months and one day and 46 months in prison, respectively, for crimes relating to the preparation of false tax returns, announced Assistant Attorney General Kathryn Keneally of the Justice Department’s Tax Division and U.S. Attorney Michael J. Moore for the Middle District of Georgia. Detrick Tucker previously pleaded guilty to aiding and assisting in the preparation of false tax returns and Natashia Tucker pleaded guilty to conspiring to defraud the United States by fi ling false tax returns. Natashia Tucker was ordered to pay $1,483,025 in restitution and Detrick Tucker was ordered to pay restitution in the amount of $66,235.

According to court documents, the Tuckers conspired to fraudulently infl ate refunds on their clients’ tax returns in order to increase the popularity of T&T Express Tax and secure more business. Detrick Tucker contributed to the conspiracy by registering T&T Express Tax with the Internal Revenue Service (IRS) so that the false returns could be electronically fi led and by performing managerial duties. He also knowingly allowed Natashia Tucker to use his IRS registration numbers to fi le her own false tax returns. As the main tax return preparer at T&T Express Tax, Natashia Tucker prepared the majority of the false returns at the business. She primarily obtained the artifi cially high refunds by abusing the Earned Income Tax Credit and by creating false business information for her clients. During its three years of operation, T&T Express Tax fi led at least 268 fraudulent federal tax returns that claimed over $1,000,000 in false refunds.

The case was investigated by special agents of the IRS-Criminal Investigation and the Georgia Department of Revenue. Trial Attorneys Alexander Effendi and Charles Edgar Jr. of the Tax Division prosecuted the case.

Former Denver Woman Charged with Visa Fraud, Tax Fraud and Aggravated Identity Theft

A woman from Miami, Fla., and formerly of Denver, Colo., appeared in federal court and was charged with aggravated identity theft, tax fraud, visa fraud and social security fraud.

This case was investigated by the following agencies: U.S.

50

penalty of not more than fi ve years in federal prison, and a fi ne up to $250,000, per count;

• 13 counts of misusing a SSN, which carries a penalty ofnot more than fi ve years in federal prison, and a fi ne upto $250,000, per count;

• six counts of aggravated identity theft, which carries amandatory penalty of two years in federal prison, and afi ne up to $250,000,

• four counts of aiding in a false tax return, which carriesa penalty of not more than three years in federal prison,and a fi ne up to $100,000, per count.

The charges contained in the indictment are allegations, and the defendant is presumed innocent until proven guilty.

Ragin Cagin

Who Will Regulate Tax Professionals?

A majority of “preparers” who help individuals fi le their taxes are not regulated by the Internal Revenue Service, according to a new report, and they are often putting fi lers at risk by submitting incorrect returns.

Tax preparers are either “enrolled” -- generally meaning they are certifi ed to some degree -- or “unenrolled.” About 55 percent of paid preparers are unenrolled, according to the Government Accountability Offi ce audit. The IRS attempted to regulate the unenrolled preparers in 2009, but a federal court

Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HSI), Internal Revenue Service’s Criminal Investigation, the Bureau of Diplomatic Security Service (DSS), and Social Security Administration’s Offi ce of the Inspector General (SSA OIG).

Libia Hernandez-Garcia, 60, was originally indicted by a federal grand jury in Denver May 21, 2013. Her indictment remained sealed until she was arrested in Miami Feb. 26, 2014. A superseding indictment was fi led Feb. 25. She made her initial appearance April 16, 2014 before U.S. Magistrate Judge Kristen L. Mix, where she was advised of her rights and the charges pending against her. Her indicted co-conspirator, Diana Aleph Aguilar Hernandez, made her initial appearance March 13, 2014 on one count of visa fraud.

According to the charging documents, from 2009 through 2011, Hernandez-Garcia fraudulently claimed fi ve income tax refunds by preparing and fi ling federal income tax returns for several individuals. Furthermore, for her personal 2009 through 2011 federal income tax returns, she submitted false claims for federal income tax returns totaling over $16,000.

From 2009 through 2012, Hernandez-Garcia is charged with committing aggravated identity theft by misusing the Social Security Number (SSN) of several individuals. She caused the fi ling of individual income tax returns which falsely included the name and SSN, as a dependent, for the person identifi ed as the fi ler of the tax return.

From 2008 through 2011, Hernandez-Garcia is also charged with assisting in preparing and fi ling with the IRS the U.S. Individual Income Tax Return of her husband for tax years 2007 through 2010, which were materially false and fraudulent. Particularly, the dependents claimed on her husband’s tax returns could not lawfully be claimed as his dependents.

Furthermore, on two separate occasions, one in 2008 and another in 2011, Hernandez-Garcia made false statements under penalty of perjury in Petitions for a Nonimmigrant Worker. Such false statements included:

• the benefi ciary of the H-1B visa petition, Diana AlephAguilar Hernandez, would be employed by a local hoteloperating under a national brand name as OperationsManager;

• Libia Hernandez was an authorized offi cial to makesuch a petition on behalf of that hotel;

• Libia Hernandez was authorized by that hotel to act onbehalf of the company in labor certifi cation matters; and

• the rate of pay for the benefi ciary would be $51,000 and$35,425 per year, respectively.

Specifi cally, Hernandez-Garcia was charged with the following crimes:

• two counts of visa fraud, which carries a penalty of notmore than 10 years in federal prison, and a fi ne up to$250,000 per count;

• fi ve counts of fi ling false tax claims, which carries a

51

said it did not have the authority to do so, a decision that was upheld in the U.S. Court of Appeals in February.

Here is a fl ow chart to demonstrate the types of preparers:

As the chart shows, 56 percent of tax fi lers in 2011 used the unenrolled preparers. GAO sent undercover auditors to 19 of these preparers and presented them with a variety of scenarios to test their accuracy in fi ling taxes. In this sample, just 2 of 19 -- or 11 percent -- of the tax professionals calculated the correct number for the individual’s tax return. The preparers’ errors included not counting non-salary income such as tips, claiming ineligible children for the Earned Income Tax Credit and not asking questions they were legally required to ask of the fi ler.

These mistakes, which ranged from telling individuals they owed $52 less than they actually did to getting a refund of $3,718 more than they were entitled to, put both the preparers and the fi lers “at risk of IRS enforcement action,” GAO said.

“Taxpayers rely on paid preparers to provide them with accurate, complete, and fully compliant tax returns,” GAO wrote in its report. “However, tax returns prepared for us in the course of our investigation often varied widely from what we determined the returns should and should not include, sometimes with signifi cant consequences.”

While GAO conceded the sample was limited and not necessarily representative, auditors provided data to back up their fi ndings. The IRS’ National Research Program found from 2006 through 2009, unenrolled preparers made errors 60 percent of the time. This outpaced even individuals who fi led their own returns, just half of whom made errors.

Tax fi lers pay a signifi cant price tag for these fl awed returns; the sample of preparers charged GAO between $160 and

$480 for their services.

President Obama proposed in his fi scal 2015 budget blueprint to provide the IRS statutory authority to investigate and regulate the unenrolled preparers. Just four states currently do so on their own, and in the state with the strongest regulations -- Oregon -- mistakes on tax returns occur less frequently, according to GAO.

“Providing IRS with the necessary authority for increased oversight of the paid preparer community will help promote high-quality services from paid preparers, will improve voluntary compliance, and will foster taxpayer confi dence in the fairness of the tax system,” the auditors wrote.

Dan Alban represents a group of independent tax return preparers and tells the Cato Institute his clients have already won at the U.S. District and Court of Appeals levels in Washington, D.C.

“The basis for the challenge was that the IRS did not have the legal authority to impose the licensing regulations because Congress had never passed a statute authorizing licensing,” he says.

Alban estimates that 10 to 20% of all tax preparers would be put out of business, because the opportunity costs and out of pocket expenses would be prohibitive. As a result, Alban says big tax preparation fi rms would benefi t from the lack of competition. Meanwhile, the licensing regulation does not apply to tax software companies.

Regardless, the government’s reasoning for the licensing regulation was to curb what it calls high error rates on tax returns, while protecting consumers from fraud.

“The government actually had zero evidence that unlicensed preparers were any more dishonest than licensed preparers and also had zero evidence that licensed preparers made errors at any higher rate than licensed preparers,” he says. “On top of that, the government had zero evidence that the licensing regulations that they would have imposed would have done anything about fraud or error rates.”

The IRS is due to fi le a petition with the U.S. Supreme Court by mid-May, if it wants the case heard.

What we know today is that the Courts have said the IRS does not have the authority to regulate tax return preparers, however they do have the authority to register and require PTINs of return preparers.

The question of the day is:

• Will the IRS seek determination of its authority by fi linga petition with the United States Supreme Court?

• Will Congress act to give the IRS the authority toregulate the Tax Profession Industry?

• Will IRS provide for “voluntary” compliance of thetax professional community with testing and CE

52

requirements?• Will the Tax Professional community regulate itself?

What an interesting time to be in the business of tax!

Jerry

Taxpayer Advocacy

Speak Up, Speak Out and Often

During the recent fi ling season it was discovered that widowed taxpayers were unable to fi le returns electronically. Filing a paper return delayed the fi ling and therefore the resulting refund in many cases.

ncpeFellowship Member Elizabeth Tinics knew this was not right.

She contacted her Senator, The Honorable Maria Cantwell, and the Senator Contacted the Commissioner of the IRS.

The timeline is very important here, and is as follows:

Elizabeth contacts the offi ce of Senator Cantwell on March 12, 2014.

The Senator contacts the Commissioner.

Letter dated March 25, 2014 to Elizabeth:

I am responding to your letter to Senator Maria Cantwell on March 12, 2014. You asked why you could not fi le electronic returns on behalf of deceased taxpayers’ spouses. Senator Cantwell asked us to respond directly to you.

For the 2014 fi ling season, we made changes to our computer programs and systems to help prevent identity theft for taxpayers recently deceased. As a result of these changes, some spouses of deceased taxpayers were unable to fi le electronically. However, we corrected that problem on March 15, 2014, and these taxpayers can now fi le electronically.

I apologize for the inconvenience this issue caused you and your clients, but I hope this information is helpful. If you have any questions, please contact me.

Sincerely,Paul J. MamoDirector, Submission Processing

Well done, Elizabeth! A true act of advocacy for all taxpayers!

It Is the Most Dreaded Letter a Taxpayer Can Receive

Dear Taxpayer,

Some of the information that you provided to us does not agree with the information we received from other sources.

-- The Internal Revenue Service

You’ve just joined an elite club, one whose initiation ritual is an IRS audit. Unfortunately, you can’t refuse membership -- and the dues could be astronomical.

When the IRS Restructuring and Reform Act was enacted in 1998, lawmakers ordered the agency to focus more on taxpayer rights instead of collection activities. Not surprisingly, the number of audits -- or examinations, as the agency prefers to call them -- dropped dramatically.

The fi rst year of the kinder, gentler IRS, about 1 in 79 tax returns were audited. By 2003, it was even easier for tax scoffl aws; that year, according to IRS data, only 1 in 150 individual taxpayers were audited.

The number of audits nowadays remains low. In fi scal year 2013, the IRS audited 1.4 million people. That’s less than 1% of returns fi led last year and the fewest audits in fi ve years.Even better news is that most of us aren’t the target of IRS examiners. The tax collector has been focusing on the rich.

If you made less than $200,000 last year, your chance of being audited was just 0.88%. That’s down from the 0.94% audit rate in fi scal year 2012.

Your audit odds increased if your income was between $200,000 and $1 million. Last year, 3.26% of returns fi led by individuals in that income range were audited.

And if you made more than $1 million, almost 11% of returns got closer looks from IRS auditors.

Still, all those 2013 audit rates were down from the prior fi scal year.

The lower level of return examinations, however, is not just out of the goodness of Uncle Sam’s heart.

Furloughs during last summer’s sequestration and general budget cuts forced the IRS to pull back on some of its audit operations.

In addition to a fi ler’s overall income, other fi gures also get auditors’ attention.

When it comes to avoiding prying IRS eyes, it’s best to be just one of the crowd. “Don’t draw any more attention to your return than you need to,” says Robert G. Nath, author of “The Unoffi cial Guide to Dealing with the IRS.” “Simple, plain-vanilla returns are fairly safe.”

53

The IRS says there are several ways a return can be selected for audit and the fi rst is via the agency’s computer-scoring system known as Discriminant Information Function, or DIF. The IRS evaluates tax returns based on IRS formulas, and DIF is based on deductions, credits and exemptions with norms for taxpayers in each of the income brackets.

The actual scoring formula to determine which tax returns are most likely to be in error is a closely guarded secret. But Nath, a tax attorney in the Washington, D.C., area, says it’s no mystery the system is designed to screen for returns that could put more money in the government Treasury.

Tax experts believe one discriminant information function component looks at average deduction amounts. This allows IRS examiners to spot inconsistencies, such as a high mortgage interest deduction and low income.

Tax specialists examined 2011 return statistics, the latest complete data, and came up with the following itemized deduction averages. These are for illustrative purposes only. Experts note that the IRS takes a dim view of taxpayers who base their claimed deductions on these fi gures. The numbers can be useful, however, in giving you a general idea as to whether certain deductions on your return might seem out of line.

Allison Einbinder, owner of Dollars and Sense, a tax and accounting fi rm in Oakland, Calif., recommends that all fi lers review the differential comparisons. How you stack up against a national standard, she says, will give you an idea of whether the IRS might take a closer look at your return.

So what is likely to trigger a discriminant information function red fl ag?

• Higher incomes.• Income other than basic wages; for example, contract

payments.• Unreported income, such as investment returns.• Home-based businesses, especially when in addition to

salary income, and home offi ce deductions.• Noncash charitable deductions.• Large business meal and entertainment deductions.

• Excessive business auto usage.• Losses from an activity that could be viewed as a hobby

rather than a business.• Large casualty losses.

Returns claiming the earned income tax credit, designed as a tax break for lower-income wage earners, also catch IRS eyes. The credit’s complexity often results in legitimate mistakes on returns. Some fi lers, however, have been caught making false claims to increase the payment the credit provides.

Schedule C fi lers who report a business loss also are likely to face more questions from the IRS. The agency wants to be sure that it was indeed the economy, and not an effort to trim taxes, that produced the bad business results.

But don’t let fear of a potential audit discourage you from fi ling for tax credits or taking legitimate tax deductions.

Although some tax return actions are likely to fl ag your return, Nath says that doesn’t necessarily mean you’ll be audited.

Even if your return is questioned, it’s not a foregone conclusion that you’ll end up owing the IRS. As long as your deductions and expenses are legitimate and you have documentation, Nath says, they will be allowed.

The groundwork you put into preparing your return will pay off in an audit situation. “Be confi dent in what you entered,” says Einbinder. “That’s easy when you have good records to support your tax return entries.”

And even if an audit doesn’t go your way, don’t despair. “You have rights to contest audits,” Nath says, “at every level of the process.”.

IRS Going After Decades-old Debts from Children of Debtors ‘Unbelievable’

The old maxim that you can’t hold children responsible for the sins of their parents no longer applies — at least as far as Washington is concerned.

Congress quietly passed legislation in 2011 lifting the former 10-year statute of limitations on money owed to the government, allowing Uncle Sam to collect debts going back decades. The measure also allows the government to collect from debtors’ children and grandchildren, according to Fox News.

Now, “some 400,000 Americans may see their tax refund checks grabbed by the government,”

Former Justice Department attorney J. Christian Adams called it “classic abuse” during his appearance on “The Kelly File.”

“Imagine it,” he told Fox News Host Megyn Kelly. Instead of a refund check, “you get a letter from the IRS. And it says, ’40 years ago, your parents got a disability payment that we happened to overpay. … So now we’re taking it out of your tax

54

refund.’”

Think it can’t happen in America? Think again. Fox also reported:

A woman named Mary Grice, whose father died when she

was 4 years old in 1977, leaving her mother with fi ve children.

Thirty-seven years later, the Social Security administration is

claiming that it overpaid someone in her family, but it isn’t sure

whom, and is going after Ms. Grice for the alleged debt.

When Megyn Kelly asked Adams what the chances are of

the government dropping the debt against Grice, Adams

answered, “Zero.”

“This is an administration that loves to suspend laws when they’re inconvenient and not enforce certain laws,” Adams said. “Let’s see if they do it here.”

Editor’s Note: Congress has reportedly put a stop to this

practice of the IRS.

IRS Offer in Compromise Acceptance Rate at All-Time High in 2013

Clean Slate Tax, IRS Offer in Compromise Acceptance Rate at All-Time High in 2013:

Supreme Court Hears Case on IRS Summonses Washington, D.C

In a brief fi led with the U.S. Supreme Court on March 17 and scheduled for a hearing April 23, Michael Clarke and his partners in Dynamo Holdings, LP argued that they are entitled to a limited evidentiary hearing to show that summonses were issued improperly by the IRS as retribution for their refusal to extend a statute of limitations.

The Eleventh Circuit earlier ruled in Clarke’s favor, and the IRS appealed to the Supreme Court.

In his brief, Clarke argued that “Under United States v. Powell, 379 U.S. 48 (1964), an individual or entity that receives an IRS summons is entitled to the opportunity to show, at an adversary

hearing, that the summons should be quashed because judicial enforcement of the summons would constitute an abuse of the court’s processes—including, for example, if the summons was issued by the IRS for an improper purpose.”The government argued in its brief that the Eleventh Circuit decision “erroneously reduced to zero the amount of evidence that is required” to rebut the IRS showing of good faith.

International Tax

French Social Security Taxes Do Not Qualify for Foreign Tax Credit

Eshel, (2014) 142 TC No. 11

The Tax Court has held that U.S. citizens weren’t allowed a foreign tax credit under Code Sec. 901 for social security taxes paid to France while the taxpayers were working there for a non-American employer. The Court found that Sec. 317(b)(4) of the Social Security Amendments of ‘77 (SSA ‘77, P.L. 95-216, 91 Stat. 1509) precluded the taxpayers from taking the credit on those taxes.

Code Sec. 901 permits taxpayers to claim a credit for income, war profi ts, and excess profi ts taxes paid or accrued during the tax year to any foreign country or to any U.S. possession.Sec. 317(b)(4) of the SSA ‘77 provides that:

Notwithstanding any other provision of law, taxes paid by any individual to any foreign country with respect to any period of employment or self-employment which is covered under the social security system of such foreign country in accordance with the terms of an agreement entered into pursuant to section 233 [emphasis added] of the Social Security Act shall not, under the income tax laws of the United States, be deductible by, or creditable against the income tax of, any such individual.

Section 223 of the Social Security Act authorizes agreements with foreign countries to establish totalization arrangements concerning the social security systems of the U.S. and those other countries. A totalization agreement with another country must allow certain individuals who have contributed to the social security systems of both nations to combine the respective periods of coverage under each for purposes of determining entitlement to benefi ts, which are then prorated. (42 U.S.C. §433(c)(1)(A), (C))

Ory and Linda Coryell Eshel, husband and wife, were dual citizens of the United States and France. They resided in France during 2008 and 2009. Ory Eshel worked for a non-American employer that paid him a salary. He paid two taxes to the French Government-la contribution sociale généralisée (CSG) and la contribution pour le reimbursement de la dette sociale (CRDS)-and claimed credits for these payments under Code Sec. 901. IRS disallowed the claimed credits in reliance on SSA section 317(b)(4), contending that taxpayers paid

55

CSG and CRDS to France in accordance with the terms of the U.S.-France Totalization Agreement (Totalization Agreement).The Tax Court rules against the taxpayers. In ruling that SSAsection 317(b)(4) precluded taxpayers’ foreign tax credits forCSG and CRDS paid to France, the Court noted:

... Taxes are paid to a foreign country “in accordance with the terms of” a totalization agreement if those taxes are covered by, or within the scope of, the totalization agreement. The Court cited its decision in Erlich v. U.S., (Ct Fed Cl 2012) 109 AFTR 2d 2012-1277, which came to this same conclusion.

... Although they were enacted after the effective date of the Totalization Agreement and thus were not specifi cally listed in it, the CSG and CRDS are covered by, or within the scope of, the Totalization Agreement because they “amend or supplement” the French social security laws enumerated in that Agreement.

Newly Updated FAQs Explain Key FATCA Registration Issues

IRS has issued new frequently asked questions (FAQs) on the Foreign Account Tax Compliance Act (FATCA). Among other things, the FAQs clarify terms used in earlier guidance and provide registration-related information to specifi c types of entities.

Background. On Mar. 18, 2010, the Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 (Code Sec. 1471 through Code Sec. 1474, FATCA) to the Code. Chapter 4 requires withholding agents to withhold 30% of certain payments to a foreign fi nancial institution (FFI) unless the FFI has entered into an agreement (FFI agreement) with IRS to, among other things, report certain information with respect to U.S. accounts. (The withholding rules are essentially a mechanism to enforce new reporting requirements.) Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents, with respect to certain payments made to certain non-fi nancial foreign entities. The statutory provisions are generally effective for payments made after Dec. 31, 2012, but their implementation has been delayed and phased in over several years.

IRS issued fi nal FATCA regs on Jan. 17, 2013 that, among other things, provided for a phased implementation of the FATCA requirements over the period beginning on Jan. 1, 2014. Subsequently, in Notice 2013-43, 2013-31 IRB 113, Treasury and IRS provided revised timelines for implementing various FATCA requirements with the goal of a more orderly implementation of FATCA.

An FFI agreement generally includes a qualifi ed intermediary (QI) agreement, withholding foreign partnership (WFP) agreement, or withholding foreign trust (WFT) agreement that is entered into by an FFI and that has an effective date or renewal date on or after Dec. 31, 2013. (Reg. § 1.1471-1(b)(43)) QIs, WFPs and WFTs are parties that have entered into agreements to withhold tax under Chapter 3 of the Code,

i.e., the portion of the Code under which tax is withheld onnonresident aliens and foreign corporations. (Reg. § 1.1471-1(b)(101), Reg. § 1.1471-1(b)(140) and Reg. § 1.1471-1(b)(142))

To ease the burdens of FATCA implementation and compliance, the U.S. issued two model intergovernmental agreements (IGAs), which represent alternate ways to implement FATCA in a way that is designed to increase reporting compliance by FFIs while addressing diffi culties with implementation under FATCA partner local law.

Last year, IRS issued an announcement (Ann. 2014-1, 2014-1 IRB 393) and two sets of FAQs on the FATCA registration system. Earlier this month, IRS delayed the FFI registration deadline and also provided relief for FFIs in jurisdictions that do not yet have an IGA in effect but have reached agreements in substance with the U.S. on its terms. (See ¶ 20.)

The updated FAQs are separated into subject-matter categories, as follows. The FAQs that are duplicative of those issued earlier (see above) are not covered in this article.

... QIs/WFPs/WFTs. If an FFI has a QI/WP/WT agreement in place, the FFI’s responsible party for purposes of a QI/WP/WT agreement does not have to be the responsible offi cer chosen by the FFI for purposes of certifi cation under the regs or for FATCA registration purposes. (FAQ 3)

An FFI in a country that has not signed an IGA, the local laws of which do not allow reporting U.S. accounts or withholding tax, should register as a Limited FFI, provided that certain requirements are met. (FAQ 7)

For registration purposes, an EAG may organize itself into subgroups, so long as all entities with a registration requirement are registered. An FI that acts as a Compliance FI for any members of the EAG is, however, required to register each such member as would a “Lead FI” for such members. (FAQ 8) A Lead FI means a U.S. fi nancial institution (USFI), FFI, or a compliance FI: 1) will initiate the FATCA registration process for each of its member FIs that is a participating FFI, registered deemed-compliant FFI, or limited FFI; and (2) that is authorized to carry out most aspects of its members’ FATCA registrations. (FAQ 9)

The sponsoring entity that agrees to perform the due diligence, withholding, and reporting obligations of one or more sponsored entities under Reg. § 1.1471-5(f)(1)(i)(F) should register with IRS via the FATCA registration website to be treated as a sponsoring entity. While a sponsoring entity is required to register its sponsored entities in order for those entities to obtain GIINs, the temporary and proposed regs provide a transitional rule that, for payments prior to Jan. 1, 2016, permit a sponsored entity to provide the GIIN of its sponsoring entity on withholding certifi cates if it has not yet obtained a GIIN. (FAQ 10)

The RO listed on line 10 of Form 8957 (or the online registration system) can authorize a POC to receive FATCA-

56

related information regarding the FI and to take other FATCA-related actions on behalf of the FI. While the POC must be an individual, the POC does not need to be an employee of the FI. (FAQ 11)

A USFI is generally not required to register under FATCA, with a number of exceptions. (FAQ 12) An FFI that has a withholding obligation and will be fi ling Forms 1042 and 1042-S with IRS will be required to have an employer identifi cation number (EIN), which can be applied for using Form SS-4 or the online registration system. (FAQs 12, 14) An FFI is also required to obtain an EIN when it is a QI, WP, or WT (through the application process to obtain any such status) or when the FFI is a participating FFI that elects to report its U.S. accounts on Forms 1099 under Reg. § 1.1471-4(d)(5). (FAQ 13)

A foreign central bank of issue will generally be exempt from FATCA registration and withholding if it meets the requirements to be treated as an exempt benefi cial owner (e.g., as a foreign central bank of issue, a controlled entity of a foreign government, or an entity treated as either of the foregoing under an applicable IGA). (Reg. § 1.1471-6) A withholding agent doesn’t have to withhold to the extent that it can reliably associate the withholdable payment with documentation to determine the portion of the payment allocable to an exempt benefi cial owner; however, an exempt benefi cial owner may be subject to withholding on payments derived from certain types of commercial activity. (Reg. § 1.1471-6(h)) (FAQ 14) A foreign pension plan will be exempt from FATCA registration and withholding if it meets the requirements to be treated as a retirement fund under Reg. § 1.1471-6(f) or under an applicable IGA. A withholding agent doesn’t have to withhold to the extent that it can reliably associate the withholdable payment with documentation to determine the portion of the payment allocable to an exempt benefi cial owner (here, a retirement fund). (FAQ 15)

A direct reporting NFFE is eligible to register for status as such and, when registering, should complete an online registration (or submit a paper Form 8957), following the detailed instructions set out in FAQ 16. A sponsor of a sponsored direct reporting NFFE should register online (or on Form 8957) as a sponsoring entity, following the detailed instructions set out in FAQ 17.

IRS puts a registration into “Registration Incomplete” status when it has identifi ed an issue with the registration. Affected taxpayers should review the registration for any of the following errors: (i) the FFI has identifi ed itself as a QI with a QI-EIN of which IRS has no record; (ii) the RO has been identifi ed with initials only and no specifi c name has been provided; (iii) the RO doesn’t appear to be a natural person; or (iv) the registration was submitted prior to Jan. 1, 2014 (see Notice 2013-43). Then, the registration should be updated accordingly and resubmitted for processing. (FAQ 18)

State News of Note

Tax Day Brings Death of Tax-preparer Disclosure Upgrade

The Colorado Senate killed a bill that would have ramped up public-disclosure requirements for professionals who prepare those tax submissions.

House Bill 1285 would have required tax preparers to present clients with a list of their qualifi cations, year-round contact information and a statement they are willing to represent the customer in the event of a government audit.

Co-sponsoring Sen. Irene Aguilar, D-Denver, said after hearing too many stories of poor Coloradans getting taken advantage of by shady preparers, added disclosure would help people know who they’re paying.

But Sen. Owen Hill, R-Colorado Springs, argued — as business groups did during committee hearings— that HB 1285 imposed a regulatory burden on honest preparers and did nothing to rein in those who were incompetent or dishonest.

And Democratic Sens. Cheri Jahn of Wheat Ridge and Lois Tochtrop of Thornton joined Republicans to kill the measure.

“We need less loopholes, we need fl atter taxes, we need less regulation,” Hill said. “And this bill does none of those.”

Ed Sealover covers government, health care, tourism, airlines and hospitality for the Denver Business Journal and writes for the “Capitol Business” blog. Phone: 303-803-9229.

NYS Tax Department Saves New Yorkers from Footing the Bill for $413 Million in Bad Refunds

The New York State Department of Taxation and Finance today announced the results of its fraudulent refund prevention program. In 2013, 255,000 fraudulent and erroneous refunds totaling more than $413 million were stopped, and the Department has identifi ed $287 million in questionable refunds already this year.

The Department uses a combination of sophisticated

57

technology and highly trained staff to review every tax return and stop suspicious refunds before they’re issued. The program is a model for other states, and was recognized this year with an Outstanding Technology Award by the Washington, D.C.-based Federation of Tax Administrators.

Of the 10 million income tax returns processed by the Department each year, hundreds of thousands claim refunds that are questionable due to errors or outright fraud, including identity theft.

“Honest New Yorkers can rest assured that their tax dollars are not being sent to undeserving individuals and refund schemers,” said Commissioner of Taxation and Finance Thomas H. Mattox. “Tax evaders are on notice that we will catch you and, where appropriate, work with local and federal authorities to bring you to justice.”

The New York State Offi ce of the Comptroller also reviews tax refunds before payments are issued and can use data not available to the Department to detect additional fraudulent refund claims. In 2013, 5% of the stopped refunds were initially identifi ed by the Comptroller’s Offi ce and then investigated by Department staff.

Signifi cant Changes To New York Estate And Income Tax Enacted

PROVISIONS OF INTEREST TO ALL NEW YORKERS

1) Increase in New York Estate Tax Exemption Amount:

The New York estate tax exemption (i.e., the amount an individual may pass at death free of New York estate tax), which was previously $1,000,000 per individual, has been immediately increased to $2,062,500 for individuals dying on or after April 1, 2014, and is scheduled to increase each year over the next fi ve years so that it is equal to the Federal estate tax unifi ed credit amount (currently, $5,340,000 per individual and indexed for infl ation) for estates of individuals dying on or after January 1, 2019.

The New York estate tax exemption is phased out for taxable estates valued above the exemption amount, and no exemption is available for taxable estates valued above 105% of the exemption amount.

While proposed legislation would have reduced the top New York estate tax rate, the fi nal legislation preserves the current maximum rate of 16%. (The maximum rate is reached for individuals with taxable estates exceeding $10,100,000.)

The effect of the new law is that an individual who will have a taxable estate valued below 105% of the increased exemption amount should have a lower New York estate tax burden than under the prior law. An individual who will have a taxable estate valued above that threshold will not receive the benefi t of the New York exemption amount, but, because of the way the estate tax is calculated, should generally pay the same amount of New York estate tax as under the prior law.

The increased exemption amount should provide some tax savings for married couples above that threshold. However, proper planning – including careful titling and ownership of assets between married couples – will be necessary to realize the full benefi ts of the increased exemption amount.

2) Certain Lifetime Gifts Subject to New York Estate Tax

Under the new law, taxable gifts made by an individual within three years of death are added back to the individual’s estate for purposes of calculating the New York estate tax, effectively taxing those gifts for New York purposes upon death. New York does not otherwise impose a gift or estate tax on lifetime gifts.

The new rule is limited in its application, and affects only gifts made between April 1, 2014, and January 1, 2019, by an individual who was a resident of New York at the time of the gift. In addition, annual exclusion gifts and qualifi ed gifts for medical or educational purposes would not be implicated by this new rule.

3) New York Generation-Skipping Transfer (“GST”) TaxRepealed

The new law repeals the New York GST Tax, which had limited application.

PROVISIONS RELATED TO TRUSTS WITH NEW YORK GRANTORS OR NEW YORK BENEFICIARIES

4) New Income Tax Imposed on New York Benefi ciaries forCertain Trust Distributions

New York law has long provided that certain trusts – though considered New York resident trusts for income tax purposes – may be exempt from paying New York state and city incometaxes because they satisfy three conditions: (i) all trusteesare domiciled outside New York, (ii) all trust property islocated outside New York, and (iii) the trusts have no NewYork source income. This exemption remains, but under thenew law, a new state (and, if applicable, city) income tax maybe imposed on a New York resident benefi ciary of such anexempt resident trust who receives a trust distribution if, inprior years, the trust had accumulated rather than distributedits income. Various exceptions to the new rule apply, includingdistributions of income that was earned by the trust before2014, and distributions made to the benefi ciary before June1, 2014.

The new income tax on New York benefi ciaries should not affect widely used grantor trusts, the income of which is taxable to the trust’s grantor.

5) New York Income Tax Imposed on Grantors of “ING Trusts”The new law will cause the income of so-called IrrevocableNon-Grantor Trusts, or “ING Trusts,” to be subject to New Yorkstate (and, if applicable, city) income taxes. These trusts hadpreviously not been subject to New York state or city income

58

taxes.

Wayne’s World

Little did we know four years ago when ncpe selected Beanna Executive Director of the ncpe Fellowship that we would have received the huge response we did from the Tax Professional Community.

The web site, www.ncpefellowship.com, is an outstanding source of information at your fi ngertips. The NEW Resource Guide is a direct result of your recommendations and suggestions. The Newsletter is a fi rst of every month “must read” for those in the tax professional community. The Court Cases, a favorite of many, keep you current with decisions of the court that affect each of our taxpayers. And, the timely announcements by Beanna keep you up to date when you are in and out of tax season.

What we have learned is that you value what ncpe has to offer not only during the seminar season but all through the year.

CONGRATULATIONS to the ncpeFellowship Members for letting Beanna hear what you need and allowing ncpe to react to it.

NEVER forget, we do it all for you!

Jerry and I wish to thank Beanna for an outstanding job and may year number fi ve bring even more benefi ts for the members of the ncpeFellowship.

Wayne

Letters to the Editor

Let me hear from you at Beanna@ncpeFellowship.com.

Tax Jokes and Quotes

A man was driving along the road when all of a sudden he has to swerve to avoid a box falling off the lorry in front.

Seconds later a policeman pulled him over for reckless driving. As the policeman starting writing the ticket he noticed the box was full of nails and tacks.“I had to serve or I’d have run over those and blown my tires!” protested the driver.“Ok”, replied the offi cer, ripping up the ticket, “but I’m still bringing you in.”“What for?!” retorted the man.“Tacks evasion”, answered the policeman.

From Fellowship Member Ingo Klein:

Do you realize that some tax forms ask you to check a box if you are BLIND?

Quote: “Two years ago it was impossible to get through on the phone to the IRS. Now it’s just hard to get through. That’s progress.” -Charles Rossotti, former IRS Commissioner

Disappointed that you never had time to write the great American novel? Don’t fret, just go dig out your past tax returns.

Quote: “The Eiffel Tower is the Empire State Building after taxes.”

Under the Freedom of Information Act, a man with a small business sent a request to the IRS asking if they had a fi le on him. The IRS wrote back, “There is now.”

Quote: “It would be nice if we could all pay our taxes with a smile, but normally cash is required.”

Q: Who audits IRS agents?

Quote: “Next to being shot at and missed, nothing is quite as satisfying as an income tax refund.”

Q: How do you drive a CPA insane?

A: Fill out Form 1040EZ.

Quote: “The government defi cit is the difference between the amount of money the government spends and the amount it has the nerve to collect.”

Why is it that when the IRS loses a tax return, it is considered a mistake, but when you lose a receipt, it is considered tax evasion?

Quote: “The wages of sin are death, but by the time taxes are taken out, it’s just sort of a tired feeling.”

59

Q: How do you humble a person that fl aunts their wealth?

A: Have them fi ll out a tax return.

Quote: “Even when you make a tax form out on the level, you don’t know when it’s through if you are a crook or a martyr.”

Q: Why is a tax audit like a tornado?

A: There’s a lot of screaming and you end up losing your house.

Quote: “When are we going to be allowed to list the government as a dependent?”

People often say that taxes and death are the same, but thisis wrong. Death is a taxable event, but taxes never die!

Your editor felt a little “extra” humor was justifi ed after this fi ling season!

To Register, call: ncpe 800-682-2163Special gift for members who attend.

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“What’s Happening in the World of Tax”

Next Edition of Taxing Times: June 1st, 2014