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Monthly Newsletter for ncpeFellowship Members Vol. 6 No. 5 May 2015

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Remarks from Beanna

Part I. - What a Filing Season!

It was like no other. When I thought back to the multiple changes of the 1986 tax act, I am convinced that the filing season for 2014 was like 1986 on steroids.

I am always glad to see the season end, wishing I had known as much about taxes and my software in January as I did on April 15th but this year the angst and complexity of the season was overwhelming. It was of little consolation that many of you were suffering as well.

When I am asked, “How did tax season go?” I respond that it went and I am grateful. What didn’t kill me did make me stronger.

Multiple times when encountering difficult situations I remarked to my husband of 47 tax seasons (that’s how we mark our years of marriage) I’m not smart enough to be in this business. But as he tells me, “Beanna, you can’t know everything and taxes are getting more difficult.” And, he is right!

So it begins again, the process of getting ready to encounter a new filing season - the Education we reach out to ncpe to present, the Resources of the ncpeFellowship AND, the Experience that encountering tax issues will bring. The process is proven, the results are our contribution to effective tax administration.

So in all things - Work and play - Stay well and Finish well.

Beanna

Part II - The Fellowship begins its 6th year!

Almost too good to be true, the ncpeFellowship began May 1, 2010 and now we begin our 6th year of bonding our tax professionals in the serious business of tax by education, resources and information.

5th5th

May 1st, 2015

Fellowship Members

Serving

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As we begin our 6th year we honor those ncpeFellowship Members who had the courage and faith to trust us in creating a new organization that would benefit their practices. The following list of current members were first to join the Fellowship in May, 2010:

Jean Bennett-Dicus - First to join!Deryck FerrierMartha BellRuth BoothCaleb BarnhartDavid EllwangerHarry HiltyDon HoodBonnie KnottRichard ReedmanJane BradleyWesley BrooksShirley CallahanJack ConklinSusan CopelandCarol DouglassBob DudleyWanda GoodsonCharles Hensel, Sr.Laurie LutzDoug RiversAbe WarsenbrotRon MermerTom PintagroAndy AndersonWil DufourSusan CarltonJohn StancilMelody Lavoie-CostaDorothy LeamonDeanne JaredAbigail LauterbornLynn JacobsJim PrimmMichael GreenleafJuan MenaRichard DepewDebra DuncanEdward GonzalesCharles MooreCos Borzumate

The Fellowship appreciates your confidence and loyalty.

Additionally, I want to thank my cadre of roving reporters out there, always with an eye to tax news of interest to the Fellowship:

Marty SteinJoan LeValleyCos BorzumatePat HurleyLynn SchmidtLinda and Richard Odemar

Bonnie Harwick

To our monthly contributors to the Taxing Times:

Wayne Hebert - Wayne’s WorldJerry Riles - Ragin’ Cagin’Marti Myers - Armed Forces TaxDon Williamson - The Estate and Trust Guy

We thank all our fine Sponsors of the Fellowship for providing excellent goods and services to our Members.

And, most importantly, we thank you, our Members, for continuing in your membership. Individually you are fabulous, but together we are AWESOME.

To all in the ncpeFellowship, who encourage, appreciate and respond when needed. We have made significant strides this year in getting the attention of the IRS, notably the Form 3115 simplification on February 14 - Love Small Business Day and on “address change notices” going out to taxpayers when the tax professional should have been notified.

While we encourage the IRS to aggressively take bad preparers off the street, we support the growing recognition that tax professionals are a contributing factor to effective tax administration and the tax profession.

So as we look to the future, let those who join us take up our commitment to be the very best in our chosen profession of tax.

BeannaBeanna@ncpefellowship.com or 877-403-1470

Newly Released:

2015 LLCThe Incredible

Limited Liability Company2-CE Hours Webinar

2015 Identity Theft1-CE Hour Webinar

2014 TIPATax Increase Prevention Act

1-CE Hour Webinar

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Remarks from Beanna (1)

Tax News (5)

What A Nightmare (5)93% of Tax Returns by Preparers Had Errors, Study Finds (6)Complaints Rising Against Tax Preparers (6)Prepared in Error (7)Bottom Line: 94-year-old Tax Preparer Still in Top Form (8)Report Finds Taxes Done By Non-CPA Preparers Riddled with Inaccuracies (9)Tax Complexity Is Expensive for Small Businesses (10)Justice Department Asks Federal Court to Permanently Shut Down Liberty Tax Service Franchise Owner (10)H&R Block to Announce Fiscal 2015 Results on June 8 (11)The Danger Of Overstuffing Your IRA (11)Credit and ID Monitoring Won’t Protect you From Tax Cheats (14)Tax Cheaters Buy Used Non-Winning Lottery Tickets to Offset Winnings (14)Attacking Taxes: Preparers Say Identity Theft, Health Care Top Questions (15)The Affordable Health Care Act (15)Warren Buffett’s Nifty Tax Loophole (16)Summary of Estate and Gift Tax Law Changes for 2015 (16)

Washington Developments (17)ABA Weighs In On Proposals to Require Use of Accrual Method By Personal Service Corporations (17)

Practice Management (19)

Apply the Four-year Rule When Throwing Away Old {payroll Records (19)

Legislative Update From Capitol Hill (20)

Proposed Estate Tax Repeal Pending in U.S. Senate (20)Texas, Florida Win as House Passes State Sales Tax Break (20)Seven Bills To Curb IRS Power Pass The House On Tax Day (21)Tax and Accounting Groups Spending Heavily on Lobbying (22)Favor a Flat Tax? Sen. Richard Shelby Just Introduced a Bill to Make It A Reality (23)House Passes Bill to Repeal Estate Tax (24)

Don the Estate and Trust Guy (25)Extension for Estate and Trust Income Tax Return Likely to Require Many Other Extensions (25)

Armed Forces Tax (25)

You receive Form 1098-T from your Military veteran taxpayer, their spouse or child…WHAT NEXT?? (25)

People in the Tax News (25)

Obamas Paid $93,362 in Income Taxes on Earnings of $477,383 (25)Taxing Stephen King, Taylor Swift And Phil Mickelson (26)Michigan Resident Sentenced to Prison for Criminal Contempt Involving Federal Tax Obligation (27)Study: Sen. Pat Roberts Tops List for Donations From Tax Preparers (27)Lois Lerner Will Not Face Contempt Prosecution Over IRS Scandal (28)San Jose Priest Faces Bank Fraud, Tax Evasion Charges (28)Real-estate Heir Blows $3.5M Meant for Charity on Cars, Hotels, Suit (29)

IRS News (29)

TIGTA Reports on IRS Self-Service by Taxpayers (29)Commissioner Sheds Light on Specific Consequences of IRS Underfunding (30)

Seminars:Listing of 2015 NCPE Seminars

With Course Curriculum, Dates, Locationsare on websites

http://ncpeSeminars.comhttp://ncpeFellowship.com

For npceFellowship Members OnlyNew Features on Websitehttp://ncpeFellowship.com

Tax Subject LibrarySearchable By Topic

andSearch for all

ncpeFellowship Newsletters Taxing Times,Tax Court Cases,

other Articles and Postings

Table Of Contents (page)

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House Report: Cash-strapped IRS Prioritized Bonuses, Union Activity Over Helping Taxpayers (31)Would You Let the I.R.S. Prepare Your Taxes? (32)How the IRS Repeatedly Rewrites Obamacare Tax Credit Provisions (33)OPR is Delegated Authority to Regulate the Representation Activities of Unlicensed Return Preparers (35)Tax Man May Have Awarded $2.7 Billion in Improper Business Credits on Returns (35)IRS Had Tough Tax Season Leaving Workers Depressed (35)IRS Runs Out of Forms as Furious Taxpayers Wait In Line for Hours (40)9 Assets Seized and Put Up for Auction by the IRS (40)IRS Won’t Penalize People for Failing to Say They Have Health Insurance on Tax Form (42)TIGTA Addresses IRS Action on Excess IRA Contributions (42)TIGTA: How IRS Should Better Control Third-party Payroll Service Providers (43)

Tax Pros in Trouble (44)

Alton Woman Sentenced to Prison for False Tax Returns (44)Justice Department Sues San Francisco Enrolled Agent to Bar Promotion of Abusive Tax Avoidance Schemes (44)Broward Tax Preparers Get Prison Time For Tax Fraud (45)Fort Worth Judge Spars with Tax Fraudster Over her Hysterectomy, Prison Date (45)Four El Pasoan Women Indicted in Connection with $90,000 Tax Return Fraud Scheme (46)Federal Complaint Filed Against Mother-daughter Tax Return Preparers (47)New York City Tax Return Preparer Indicted for Aiding or Assisting in Preparation of False Tax Returns (47)

Ragin Cagin (48)

How To Tell Inconsiderate Clients You’ll Be Extending Their Returns (48)

Taxpayer Advocacy (49)

Who is Authorized to Sign a Power of Attorney for a Partnership or LLC? (49)No Deduction for Restitution Amount Paid to Avoid Criminal Prosecution (50)

Foreign Taxes (51)

IRS Issues Housing Cost allowances for Those Working Abroad in High-cost Areas in 2015 (51)

State News of Note (51)

States With the Worst Taxes on Average Earners (51)

Wayne’s World (53)

Supreme Court To Hear Challenge To ACA Subsidies (53)

Letters to the Editor (54)

Tax Jokes and Quotes (54)

Sponsor of the Month (55)

ncpe and ncpeFellowship (55)

Searchable Books of

2014 Summer Series NCPE Seminars2014 Fall Series NCPE Seminars

Available For Purchase

2014 Taxation Of Ministers1-CE Hour

2014 IRS Audits1-CE Hour

2014 ACA(Affordable Healthcare Act)

What We KnowWhat We Think We Know

What We Don’t KnowWhy We Have No Clue

The ACA of Today!3-CE Hours

2014 TIPATax Increase Prevention Act

1-CE Hour

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Tax News

What A Nightmare

While Tax Day has come and gone, our broken tax code is here to stay. As millions of Americans sat down and filed their taxes this week, they were reminded of how confusing, complex, and unfair the U.S. tax code is for hardworking families and small businesses. You don’t have to be a tax accountant to take a look at the numbers below and know that our tax code is a nightmare - making the U.S. uncompetitive, hurting job growth and wages.

• #1 – The United States has the highest corporate tax rate in the industrialized world, forcing jobs overseas and leaving America and its workers at a disadvantage as our outdated international tax code threatens competitiveness in the global marketplace.

• 70,000 pages – The U.S. tax code is now more than 70,000 pages long – or 50 times the size of Tolstoy’s War and Peace. It is no wonder our tax code is a mess, riddled with loopholes and special exemptions for the few.

• 30 years - The last time we reformed our tax code was in 1986 – almost 30 years ago – before the days of the internet while Maverick, Goose & Iceman were on the highway to the danger zone.

• 6 billion hours – Hardworking taxpayers spend six billion hours trying to sort through the tax code. Time that could be better spent building a business, spending time with your family, or watching Taylor Swift gifs.

• 44.6 percent – Small businesses face tax rates as high as 44.6 percent, placing a huge economic burden on their businesses, stifling their ability to grow, expand, and hire new workers.

Came and Went - Let’s Thank the Top 20% for Shouldering 84% of the Income Tax Burden with Only 51% of US Income

The Wall Street Journal has an article today titled “Top 20% of Earners Pay 84% of Income Tax,” with the sub-title “And the bottom 20%? They get paid by Uncle Sam. We compare tax burdens as Tax Day approaches.” Here’s the article’s opening:Who pays what in income taxes? With April 15 just around the corner, filers may be curious about where they fit into the system as a whole.

The individual income tax remains the most important levy in the U.S., providing nearly half of federal revenue. This is unusual: On average, most developed nations get only one-third of their revenue from income taxes. Typically they also impose national consumption taxes, such as a value-added tax, that raise as much revenue as their income tax.

The pressure on the U.S. income tax has prompted lawmakers on both sides of the aisle to seriously consider a national consumption tax. But liberals worry that such a levy could unduly burden the poor, while conservatives fear it would be too easy to dial up the rate and collect more revenue. As a result, experts say, there is little chance of tax overhaul this year.

Meanwhile, the table offers a snapshot of who is paying what for the 2014 tax year.

Most of the data in the WSJ’s table is summarized in the two charts above. Here’s a description of the data and an analysis of what the data show:

The data comes from estimates by the nonpartisan Tax Policy Center, a Washington-based research group, as Internal Revenue Service data for 2014 won’t be available for at least two years. Unlike IRS data, it includes information about Nonfiler—both people who didn’t need to file and people who should have filed but didn’t. The total also includes Americans living overseas and others, which is why it is greater than the U.S. Census estimate of 319 million.

Another important difference: The income cited on the table includes untaxed amounts for employer-provided health coverage, tax-exempt interest and retirement-plan contributions and growth, among other things. This can be significant.

The table shows just how progressive the income tax is. The three million people in the top 1% of earners pay nearly half the income tax.

Why is the share of income taxes negative for 40% of Americans? In recent decades Congress has chosen to funnel important benefits for lower-income earners through

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income tax returns. The other groups that participated in the study were the Florida Alliance for Consumer Protection and Reinvestment Partners in North Carolina.

“To see this level of errors is extremely disturbing,” Chi Chi Wu, staff attorney at the National Consumer Law Center, said in a statement. “A tax return may be the most important financial document for an American consumer during the year, and consumers who use paid preparers are placing their financial well-being in the preparers’ hands.”

This isn’t the first time tax preparers flunked such an examination. The Government Accountability Office last year did a limited test and found that only two of 19 tax preparers the agency tested came up with accurate refund amounts.

Minimal Standards for Preparers

This isn’t the first time that tax preparers flunked such an examination. The Government Accountability Office last year did a limited test and found that only two of 19 tax prepares the agency tested came up with accurate refund amounts.

It’s a major issue, the NCLC said, is that just about anyone can put out a shingle and say they are a tax preparer. There are virtually no standards.

Only Maryland, Oregon, California and New York have rules that establish a minimum level of education, training or competence, the NCLC said. Amelia O’Rourke-Owens, a community and economic development fellow at Reinvestment Partners, noted this irony: “All 50 states regulate hairdressers, but only four regulate tax preparers.”

The test tax returns involved returns prepared for either a single parent or for a graduate student, the NCLC said. Most preparers botched the single parent scenario by not properly accounting for the amount of time spent with the other parent as well as omitting side income that should have been reported.

Of 14 tax preparers given the graduate student scenario, 10 failed to use the right form to record income. And of the four who used the right form, three played fast and loose with deductions.

The groups advocate regulating tax preparers and establishing minimum standards.

Complaints Rising Against Tax Preparers

A KVUE Defenders investigation in Austin, TX has uncovered a rise in complaints submitted to the IRS against tax preparers.The Defenders uncovered tax preparer mistakes can cause an avalanche of IRS fees.

Cynthia Rubin-Whitewolf knows this first hand. In 2013, she went to an Austin H&R Block to prepare her taxes.

A few weeks later, the company called to say it completed her return. She paid $574 for the services, picked up her

the income tax rather than other channels. Some of these benefits, such as the Earned Income Tax Credit and the American Opportunity Credit for education, make cash payments to people who don’t owe income tax.

As the WSJ points out, the US federal income tax system is very progressive – higher income groups pay increasingly higher tax rates, and therefore disproportionately higher and higher shares of the total income taxes collected. A couple key points below based on the two charts above:

1. The top 20% of Americans earn about half of all income (51.3%) and pay almost all income taxes (84%). That top fifth is the only quintile whose tax share exceeds its income share – all bottom four quintiles have a lower tax burden as a share of the total taxes paid than their income as a share of the total. For example, the second highest quintile (with incomes of $79,500 to $134,300) earns 20% of US total income as a group, but shoulders only 13.4% of the total US income tax burden.

2. Both of the bottom two quintiles pay negative income taxes, and are therefore net tax recipients. The 130 million Americans who represent the bottom 40% “get paid by Uncle Sam” as the WSJ says, or more accurately they “get paid by the top 60%” since Uncle Sam has no money of his own, and can only extract taxes from one group and redistribute to another group. That is, Uncle Sam is not reaching into his own pockets to pay the bottom 40%, he’s reaching into your pockets if you make more than $47,000, the threshold income level to be in the top 60%.

3. As the WSJ points out, the top 1% of Americans (about 3.2 million people) earn about 17% of total US income, but pay almost as much in taxes (about 46% of the total) as the 322 million people in the bottom 49% (they pay 54% of taxes while earning 83% of US total income).

Similarly, the top 5% (about 16 million Americans) earn about 29% of total income but pay almost two-thirds (64%).

93% of Tax Returns by Preparers Had Errors, Study Finds

The implications are serious, the group said, given that more than 70 million taxpayers pay tax preparers to do their

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paperwork and went home.

“He doesn’t say we owe any money. He says they’re done, everything is fine,” said Rubin-Whitewolf.

But, everything wasn’t fine. About six months later, the IRS contacted Rubin-Whitewolf’s to tell her she owed about $3,000 in taxes and late fees totaling an additional $274.94.

A KVUE Defenders investigation has uncovered a rise in complaints submitted to the IRS against tax preparers.

When KVUE called H&R Block, a customer service representative explained, “If you have to pay into the IRS, you will be notified. H&R Block will let you know.”

Rubin-Whitewolf argues that didn’t happen with her, so she filed a complaint with the IRS.

“Extremely frustrating because we had enough money to pay our taxes,” said Rubin-Whitewolf.

According to IRS records reviewed by the Defenders, similar complaints against all types of tax preparers nationwide have grown 39 percent, from 8,035 in 2012 to 11,187 in 2014.

While a tax preparer can lose their license for bad returns, Houston-based IRS spokeswoman Lea Crusberg said consumers are ultimately on the hook for any mistakes.

“Whether you prepare it or someone else prepares it, you are legally responsible for what’s on the tax return, which is why you need to look it over and make sure it’s accurate,” said Crusberg.

Rubin-Whitewolf requested H&R Block refund the late fees for nearly a year. One day after the KVUE Defenders contacted the company on her behalf, she got a call.

Not only did the company pay her IRS late fees, it also refunded the cost to prepare her taxes.“I don’t think the lesson was H&R Block is bad. I think it was just a big mistake happened, and we were very lucky because we were persistent and [KVUE News] helped us,” Rubin-Whitewolf said.

Rubin-Whitewolf admits she should have double-checked H&R Block’s work. Despite her problem, she plans to return to H&R Block this year.

How to prevent tax preparer complaints:

1. Check the BBB for complaints 2. Don’t wait until the last minute to file taxes3. Always double-check returns before submitting it4. If you cannot resolve a complaint, taxpayers can contact the IRS and fill out a complaint form.

Editor’s Note: Oftentimes taxpayers will want to know what to do when someone has prepared a return incorrectly, failed to file electronically when authorized, etc. It never hurts to call the local news - if IRS won’t shut them down, we will.

Prepared in Error

Mystery Shoppers in Florida and North Carolina Uncover Serious Tax Preparer Problems

Advocacy groups in Florida and North Carolina conducted 29 “mystery shopper” tests of paid tax preparers. As with previous studies of paid preparers, test results shows the dire need for regulation of paid tax preparers, and the costs to both taxpayers and the U.S. Treasury due to the lack of minimum standards.

Overview of Testing

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• Preparers who were unfamiliar with the tax preparation software or common tax forms, or behaved unprofessionally.

Bottom Line: 94-year-old Tax Preparer Still in Top Form

Every year when tax time rolls around clients ask accountant Dawn Mulhern the same question: “Can I call you next year?”

Every year, she gives the same answer: “If I’m perfectly capable and able to do a good job, I’ll do it.”

Her caveat makes sense, considering that Mulhern is a 94-year-old who started filing tax returns for individuals and businesses in 1948. She’s been at it ever since, and recently renewed her Internal Revenue Service registration as a tax preparer.

While afghans, wheelchairs and soft food may come to mind when picturing a nonagenarian, Mulhern is none of that. She’s more Betty White. She’s polished, professional and as sharp as someone one-quarter her age.

“I keep trying to retire, but I have trouble doing it,” she said. “People ask me all the time why I’m still working. I think it’s good for me.”

Mulhern has about 40 clients, down from the 800 she used to juggle in the 1950s and 1960s, when taxes had to be done with paper, a pencil and surefooted knowledge. Most are longtime customers who have become friends.

“I see them once a year and I hear about their families and what’s going on in their lives,” Mulhern said.

Maggie Quinn, a retired saleswoman and part-time sculptor, has used Mulhern as her tax preparer for more than 30 years. “She amazes me every year. She keeps up on all the tax laws, and she’s very good,” Quinn said. “She taught me well - how to keep records properly and what I can do to not get stuck paying more taxes than I have to.”

Mulhern became an accountant by chance, not choice. She earned a business degree from the University of Wisconsin in

Testers used one of two scenarios – the Single Parent and the Graduate Student.Single Parent scenario

The tester in this scenario was not entitled to claim the minor child because the child lived with the other parent for more than 50% of the time.

• 8 of the 15 preparers had the tester claim the child on the tester’s tax return, improperly inflating the tester’s refund and claiming an Earned Income Tax Credit (EITC) of $2,523.

• 7 of these 8 preparers also appear to have knowingly provided incorrect information on an EITC-related form.Preparers also gave the Single Parent testers questionable advice, such as telling the tester she should work out an arrangement with the father to take turns claiming the child in alternate years.

The Single Parent scenario also involved $800 in side income not reported on a W-2.

• 12 of the 15 preparers did not report the $800 in side income.

Graduate Student scenario

The Graduate Student scenario involved a paid internship at a local nonprofit. All of the preparers properly reported the tester’s income. However, preparers did make errors with this scenario.

• 10 of the 14 preparers did not properly use a Schedule C to report the income. This resulted in omitting nearly $1,300 in self-employment income.

• Of the 4 preparers who did use a Schedule C, 3 preparers took questionable deductions, including 1 preparer who made up $9,562 in fictitious businesses expenses.

Overall Observations

In total, there were documented inaccuracies in the vast majority of the tests.

• 27 out of 29 returns prepared for the mystery shopper tests contained an error. Thus, over 90% of the returns were inaccurate.

Other problematic issues observed include:

• Preparers who forged the signatures of other people or otherwise failed to properly note on the tax form that they were the paid preparer who had completed the form.

• The testers were unable to obtain estimates of tax preparation fees in some cases. In one case, the preparer appeared to vary the amount of the fee on the refund amount, which is contrary to IRS rules.

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Madison, where she was one of 20 women in the 200-student business school.In 1942, fresh out of college, she landed a job with IBM and learned how to key early computers - multiple machines that punch card operators wired individually by job to run payroll or accounts receivable reports.

“We were in training for six months in New York, and it was a fascinating experience,” Mulhern recalled. “The founder, Thomas Watson, was the president of the company. We lived in tents at the IBM homestead in Endicott. They were built on wooded frames, and we had daily maid service.”

Mulhern soon wed law student Bill Mulhern, which cost her the IBM job.

“The company had a policy: Women in my position couldn’t be married,” she said.

Mulhern started helping her husband at his practice near Green Bay, Wis. In the 1940s, there were no tax companies like H&R Block; many people brought their personal and business tax materials to lawyers.

“It’s just the way it was, and with my accounting background, guess who took over most of the tax practice,” Mulhern said.The work was interesting, though, and the husband-and-wife team pioneered a trail that led to changes in the tax laws, she said.

“Bill had a philosophy of finding the best answer for your client, if it was within the law. Just because the IRS interprets the law one way, we might interpret it another,” she said. “We had a number of audits that were very successful.”

Mulhern’s persistence, experience and determination have benefited her clients - and even some who aren’t her regulars. Recently, a friend who wasn’t a client complained that she had to pay $1,800 in taxes last year. Mulhern reviewed her friend’s forms.

“She got the whole $1,800 back. You just have to know what you’re doing,” Mulhern said. “It’s sad to see the number of mistakes in other people’s taxes, and it happens all the time.”Part of Mulhern’s job is calming her clients’ fears.

“Most people go berserk if they get a notice from the IRS,” she said. “I try to talk some sense into them. It’s just an agency. They’re working for us.”

But she thinks the nation’s tax system is broken and isn’t sure if it will ever be fixed.

“Years ago, you could make a call to the IRS and get an answer. Today, you get six answers,” she said. “I think the IRS is very badly run. It’s so huge, and they’ve put too many things into the tax laws.”

Her foremost advice to anyone about taxes is to be honest, and then “be thorough and know what you’re doing.”

Mulhern still drives, and she considers herself lucky to be as fit and active as she is. Her husband died in 1961, and Mulhern kept busy with projects outside her business. She helped form the Suicide Prevention Partnership of the Pikes Peak Region in the 1990s, did free tax returns for AARP members for 18 years and is a wicked bridge player.

So Mulhern has stayed with her tax-preparation work, and that’s a good thing, says her daughter, Susan, a certified public accountant in Denver.

“It’s certainly kept her young and vital,” Susan Mulhern said. “She always told me I could do anything I wanted, and she’s been a good example of that.”

Report Finds Taxes Done By Non-CPA Preparers Riddled with Inaccuracies

Think twice before hiring a tax preparer to file your taxes this year. According to an undercover report by the National Consumer Law Center (NCLC), many unregulated tax preparers are incompetent when it comes to sorting through the complicated IRS paperwork required to file income taxes. What’s worse – tax preparers often knowingly file inaccurate information.

Anticipating such problems, in 2011 the IRS began requiring tax preparers who were not Certified Public Accountants to register and complete tests proving they were capable of filing taxes accurately. As you might expect, tax preparers appealed the case in federal court in 2014, and surprisingly, won the right to continue helping customers prepare their taxes.

The NCLC recently employed secret shoppers to pose as tax filers in 29 test cases in Florida and North Carolina. They found that all but two of the tests resulted in inaccuracies on the tax returns.

Secret shoppers acting as single parents with partial custody of minors were told eight out of fifteen times that they should claim their child as a dependent to earn a $2,523 earned income tax credit, even though this is inaccurate and illegal. It appears that seven of the eight tax preparers were aware that they were illegally misreporting information, and did it anyway. In another test, 12 of 15 tax preparers omitted an $800 side

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income, even though they were aware of it.In another test, 10 of 14 tax preparers failed to file income from a paid internship on the Schedule C form, resulting in an omission of $1,300.

From the 29 test cases, there were several examples of signature forgery, or of one preparer assisting the customer to fill out the forms, while a different preparer signed them.

“To see this level of errors is extremely disturbing,” according to Chi Chi Wu, a staff attorney at NCLC.

While many of the inaccuracies seemed to help the customer save money or earn a higher tax return, it is important to note that such practices are illegal, and that, should you be audited, it is you, not the tax preparer, who will have to answer to the law.

Tax Complexity Is Expensive for Small Businesses

Taxes are time consuming and expensive for small businesses in the United States.

Nearly a quarter of small business owners in the United States spend over 120 hours each year dealing with their federal taxes, according to the most recent survey by the National Small Business Association. That’s three work weeks spent dealing with federal taxes. Additionally, over half of small business owners spend more than one work week (40 hours) on federal taxes each year, according to the most recent survey by the National Small Business Association.

According to the survey, these taxes come with a heavy cost as well, with over a quarter of businesses spending more than $10,000 each year on simply the administration of federal taxes. This does not include the actual tax burden, which 42 percent of respondents said creates the largest burden on their business.

Small business owners ranked payroll taxes and presenting the largest financial burden, followed by state and local tax compliance, income taxes, property taxes, and capital gains taxes. Nearly 70 percent of small business owners said that federal taxes have a moderate to significant impact on the day to day operations of their businesses.

The survey found that 70 percent of small business owners support tax reform that reduces corporate and individual tax rates and business and individual deductions.

Pass-through businesses make up the vast majority of businesses in the U.S. today (chart below). This makes it crucial that tax reform fix both the individual and the corporate tax system.

Justice Department Asks Federal Court to Permanently Shut Down Liberty Tax Service Franchise Owner

The United States filed a complaint asking a federal court in Detroit to bar a Liberty Tax Service franchise owner and his companies based in Illinois and Michigan from preparing federal tax returns for others, the Justice Department announced.

The civil complaint against Syed N. Ahmed and his businesses, Nasah Inc., Millinium [sic] Financial Solutions Inc., Mars Inc.-Hamtramck, and Mahad Inc., was filed in the U.S. District Court for the Eastern District of Michigan. The complaint alleges that Ahmed operates at least 10 Liberty Tax Service franchise locations.

According to the suit, the defendants improperly obtain inflated tax refunds and refundable credits for customers by preparing tax returns that include, among other things, false or inflated Schedule C (Profit or Loss From Business) income and expenses, bogus dependents, false filing statuses, improper education credits and false itemized deductions.

For example, the complaint alleges that one of defendants’ tax return preparers fabricated a driving business without the customer’s knowledge and reported thousands of dollars of expenses for that business that the customer did not incur. The false expenses enabled the customer to receive an earned income tax credit that she was not otherwise entitled to receive, according to the suit.

The lawsuit states that the defendants prepared more than 17,000 federal income tax returns between 2010 and 2013. Based on audit adjustments the Internal Revenue Service (IRS) has made to tax returns prepared and filed by the defendants between 2010 and 2013, the defendants’ conduct has cost the U.S. Treasury approximately $2.8 million, according to the suit.

Return preparer fraud is one of the IRS’s Dirty Dozen Tax Scams for 2015. The IRS has some tips on its website for choosing a tax preparer, and has launched a free directory of federal tax preparers. In the past decade, the Tax Division has obtained injunctions against hundreds of unscrupulous tax preparers and tax scheme promoters. Information about these cases is available on the Justice Department’s website. An alphabetical listing of persons enjoined from preparing returns and promoting tax schemes can be found on here. If you believe that one of the enjoined persons or businesses may be violating an injunction, please contact the Tax Division with details.

Total H&R Block U.S. assisted returns prepared fell 4.6% through April 16. The company believes this decline is due to the second-year impact of discontinuing the company’s free federal 1040EZ promotion and the ongoing impact of industry-wide fraud, particularly related to behavioral shifts in tax filers who claim the EITC. Tax returns prepared through the company’s tax software products, including online, desktop and mobile applications, increased 8.2%.

“Though our assisted return volume declined, we expect to report revenue growth for the second consecutive year and

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are on track to achieve our EBITDA margin guidance,” said Cobb. “By focusing on our Tax Plus strategy, we improved client mix in both assisted and digital and continued to provide our clients with the exceptional expertise and client service that they expect from H&R Block.”

The Affordable Care Act (ACA) intersected with tax preparation for the first time in tax season 2015, requiring millions of taxpayers to file additional forms and in many cases resulting in modified refunds and tax penalties.

“This was the first tax season in what we’ve said will be a multi-year journey to fully realize the impacts of the ACA and I believe we are well positioned as the industry’s ACA experts,” said Bill Cobb, H&R Block’s president and chief executive officer. “We invested in our tax professionals to enable them to provide valuable ACA guidance to our clients and I’m proud of how they delivered.”

Additionally, fraud continued to negatively impact the tax industry as tax identity theft and improper EITC payments continue to cost taxpayers billions of dollars.

“The level of fraud we see in this industry is shocking, and we continue to lead the battle against it. While I’m pleased that others in the industry and our government leaders have joined us in this fight, there is still much more that needs to be done,” Cobb said. “We need mandatory standards for paid tax preparers. Without them, consumers will continue to be victimized by people who aren’t sufficiently trained, or worse, knowingly commit fraud. We also need uniform standards for tax returns claiming refundable credits such as the EITC, regardless of the channel through which they are filed. Congress has already provided clear legislative direction on this matter. Now the Treasury Department needs to put this fraud prevention change into effect for the 2016 tax filing season.”

H&R Block to Announce Fiscal 2015 Results on June 8

In conjunction with the announcement of fiscal 2015 results, the company will host a conference call at 4:30 p.m. Eastern time on June 8, 2015 for analysts, institutional investors, and shareholders to discuss fiscal 2015 results, future outlook and a general business update. To access the call, please dial the number below approximately 10 minutes prior to the scheduled starting time:

The Danger Of Overstuffing Your IRA

If you put too much in an Individual Retirement Account, you can expect to hear from the Internal Revenue Service. That’s the bottom line of a new report by the Treasury Inspector General for Tax Administration, “Actions Can Be Taken To Further Improve The Strategy For Addressing Excess Contributions To Individual Retirement Arrangements.”

IRAs are one of the best tax shelters around. With a traditional

IRA, your retirement dollars grow tax-deferred; with a Roth IRA, they grow tax-free. So there are strict rules that limit the amount individuals can contribute to IRAs in a given tax year. Noncompliance means lost revenue for the government.

For 2015, the most you can contribute to all of your traditional and Roth IRAs is the lesser of: $5,500 or $6,500 if you’re age 50 or older by the end of the year; or your taxable compensation for the year. If you put in too much, you get nailed with a 6% penalty that accrues every year until the excess contribution is withdrawn. You can fix an excess contribution by taking the money out up until six months after the April 15th when your return is due for that tax year.

Don’t mess with IRA contribution limits or you’ll have to break your piggy bank to pay a 6% penalty.

In one extreme case pending in district court in Illinois, a couple sold their house in 2007 and put the proceeds–$200,000 each–into their IRAs. After being contacted by the IRS, Michael and Cristina Wu took out the excess contributions (and earnings) in early 2010. They’re stuck with penalties for 2007 and 2008, but they’re arguing that they don’t owe the 2009 penalty because they took out the excess contributions before the 2009 tax year deadline.

How big is this problem? TIGTA found that for fiscal year 2011, 57,484 taxpayers without eligible compensation potentially made $125 million in improper contributions, meaning they owed $7.5 million in excise tax. More than a quarter (29%) of the potential excess contributions were $3,000 or more. The IRS downplays this, saying that it works out to a penalty of only $131 per taxpayer. But consider that the problem repeats itself year after year. And it’s not just that the people getting away with this aren’t paying the penalties. They have thousands of dollars more growing tax-deferred or tax-free for decades. That’s the real loss to the Treasury.

The IRS is already taking steps to address the problem of excess contributions. It developed educational materials for individuals and tax preparers. More significantly, it ran a pilot program issuing “soft notices” to taxpayers who appear to have exceeded contribution limits. Now it says it will cast a wider net to catch taxpayers who have potentially put too much in their IRAs: “As the scale of the notice program is increased, the IRS will use the findings from the analysis of the pilot project results to expand the scope of notice recipients.”

The IRS picked out taxpayers who were too old to be making contributions and those who are too young to be making substantial income (it appears parents are improperly funding IRAs in their children’s names—2,585 of the cases were for kids under 10.) Here’s a chart that shows who the IRS has been targeted with notices in the pilot:

National Center for Professional Education Fellowship

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TIGTA said that 1 out of 10 of these notices appear to have been sent in error—as the taxpayers corrected the excess contribution in time. So if you get a notice, don’t freak out. If you’re in the wrong, you should file an amended tax return, although technically, you don’t have to: “Although the notice requests that the individual file an amended tax return if appropriate, it is not required. Instead, the notices are designed to serve as an educational tool, encourage self correction, and improve voluntary compliance.”

In most cases, taxpayers are “clueless” and not intentionally trying to game the system, says Joe Cicchinelli, and IRA technical expert at Slott & Co. in Rockville Centre, N.Y.In order to contribute to an IRA, you must have earned income (there’s an exception that says a working spouse can contribute to a non-working spouse’s IRA if they file a joint income tax return). The year you turn 70 ½ you become ineligible to contribute to a traditional IRA (there are no age restrictions to contribute to a Roth IRA, assuming you have earned income).

A common mistake is doing a rollover IRA from one bank or brokerage to another, without first taking out the required minimum distribution amount for the calendar year (you have to start taking distributions the year after you turn 70.5), says Cicchinelli. Any distribution out of an IRA counts as a minimum required distribution and that can’t get rolled over, so you’ve made an excess contribution. If you rolled over $100,000 but should have first taken a $10,000 minimum distribution, then you’ve made a $10,000 excess contribution. “The argument that you don’t need to take out the minimum distribution until Dec. 31 doesn’t cut it,” he adds.

It’s not just taxpayers making mistakes. When analyzing tax year 2011 Forms 5498 for excess contributions, TIGTA determined that approximately 834,000 (7 percent) of 11.9 million Forms 5498 filed by IRA custodians appeared to be inaccurate. The IRS responded that it will launch an education initiative for IRA custodians too.

ETFs and K-1s Tax Reporting

ETFs have become so popular in part because of the tax efficiencies that they offer relative to traditional mutual funds. Due to the nuances of the creation / redemption mechanism, ETFs are generally able to give investors more control over their tax situation–instead of pinning them with capital gains obligations due to the activities of other investors.

Unfortunately, however, the tax treatment of exchange-traded products cannot be summed up simply as being more efficient than mutual funds. There are various complexities across the different product structures that impact the effective tax liabilities that will be incurred on gains. And there are also some nuances that impact how taxes on various ETP positions must be reported that are of major importance to some financial advisors.

As a general rule, gains and losses for a typical ETP are reported on Form 1099, but there are a number of ETPs that are structured as partnerships and as such, will issue a K-1. Exchange traded funds that utilize futures contracts, whether that be commodity, currency, or volatility, or any other product that is structured as a partnership will send out K-1s. As taxes are such an important part of investing, we outline the complete list of ETFs that issue a K-1 for anyone looking to avoid a more complex tax filing, or simply to educate those on who may be unaware of how their investment is treated from a tax perspective,.

What Is a K-1?

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There is a fair amount of confusion over what exactly a K-1 is and what receiving one of these statements means. A K-1 is a tax document used to report share of profits and losses from interests in limited partnerships. These documents become relevant because many exchange-traded products are technically structured as partnerships, meaning that investors are actually limited partners. Partnerships are typically not required to pay taxes directly, instead passing through those obligations to individual partners. They do that by sending a K-1 to partners each year detailing their interest in the operations of the partnership.

Many investors wish to avoid K-1s primarily because of the inconvenience caused. Schedule K-1 tends to be one of the last documents provided to taxpayers, potentially delaying the timing of their filings. For advisors with hundreds of clients, the administrative burden associated with K-1s can be less-than-optimal. But it should also be noted that receipt of a K-1 generally means a taxable event–even if the related position has not been liquidated. In other words, securities that issue a K-1 may require investors to report and pay taxes on gains annually, even if the security has not been sold.

For some, K-1s are not a significant issue–simply a minor inconvenience. Others try to avoid these schedules at all costs, preferring to use exchange-traded products that can be reported on a Form 1099. Below, we break down the complete list of ETFs that issue a K-1 by their respective asset classes.

Commodity ETPs

Commodity ETPs make up the majority of the K-1 issuing space, as many of these products are structured as partnerships that utilize futures contracts to offer exposure. It should be noted that physically-backed ETPs such as (GLD A-) do not issue K-1s, nor do commodity ETNs. The following table is a list of all commodity ETPs as of February 2015 that issue a K-1.

Currency ETPs

Currency products also have a strong representation in the K-1 space, as a number utilize futures contracts to fulfill their methodologies. Again, not all currency ETPs issue a K-1; the actively-managed currency ETFs from WisdomTree, ETNs from iPath, and grantor trusts from Rydex allow for avoidance of these documents. The following table is a list of all currency ETPs that issue a K-1 as of February 2015.

Other ETPs

The following table shows all other ETPs that issue a K-1, stretching across a few asset classes including equity and alternatives. As a rule of thumb, you should always do careful research before investing in a fund with a complex strategy. Here are the remaining ETPs that issue a K-1 as of February 2015:

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Credit and ID Monitoring Won’t Protect you From Tax Cheats

Georgia is proof that when it comes to tax fraud, no one is safe.

“Criminals in general tend to trap over all industries,” said Mark Green, an IRS spokesman

For example, 1,200 jail and prison inmates nationwide had their social security numbers compromised when Bradford Thomas of Cobb County filed $5 million in fraudulent tax returns.

15,000 people in Clayton and surrounding counties were compromised when fake applications for stimulus payments were nothing more than a scam. The Clayton County duo of Kevin Sonnier and Bernardo Davis filed more than $15 million in fraudulent tax returns.

“The bottom line is that they’re after your social security number,” said Green.

Protecting your tax identity isn’t as easy. Victims have learned the hard way that credit monitoring only protects against fraudulent bank accounts and lines of credit, not income tax fraud.

“That’s supposed to be to protect me, but it didn’t,” complained Stevie Williams, who had her tax return compromised.

“I had a fraud alert on my social and that still did not help. They were still able to file taxes in my name,” said Princess Poyntz, a detective with the DeKalb County Police Department.

Whether you hand over your SSN to a tax cheat yourself or they get it like a metro Atlanta trio did, stealing names, date of births, and social security numbers from medical records, you have to be cautious. 1,900 people thought their information was safe with their tax preparer until Shannon Bradley broke into and filed $1 million in fraudulent returns. Georgia’s high rate of fraud is why the IRS is using the identity protection pin program here first.

“That number not only will it add an extra layer or protection, but will give you comfort knowing scam artists cannot use your social security number to file a bogus return,” said Green.

It’s these safeguards like the identity protection PIN and other

filters that have meant longer lines at the IRS office. This year more taxpayers received a 5071c letter requesting they verify their identity either in person, on the phone, or online.

Tax cheats could even target a past refund - more than 36,000 Georgians still haven’t filed a tax return for 2011. The deadline to file is no later than April 15th, 2015.

Experian recommends the following information to keep in mind when you submit your taxes this year:

Tax filers should keep the following actions in mind when submitting taxes this year:

Do:

• Research any paid preparer or tax-preparation software. While plenty of free help can be found online, scammers also are out there setting up fake websites and software downloads solely designed to bilk people out of their personal information during tax time.

• File online using a computer that is protected with up-to-date antivirus and antimalware software, a firewall and password.

• Keep important tax documents in a locked, secure location.

• Ask potential tax preparers to explain how they protect their customers’ information.

• Enroll in identity protection and take action if alerts indicate potentially fraudulent activity.

Don’t:

• Respond to any email, text message or phone call from someone who says they’re with the IRS. The IRS says it never contacts taxpayers through those methods.

• Let letters linger in your mailbox. During January, important tax documents will arrive via the mail. Thieves know this and have been known to pluck data-rich forms from victims’ mailboxes during tax season.

• File taxes over public Wi-Fi networks. Stick with a secure network connection for all online activity.

Tax Cheaters Buy Used Non-Winning Lottery Tickets to Offset Winnings

Crooked lottery winners who want to evade paying taxes on their winnings can buy or rent truckloads of used lottery tickets and show them to IRS auditors as “proof” that their gambling losses exceeding their winnings.

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Above: eBay sale for “30 bags of $1000 LOSING 2014 NY scratch off lottery tickets. buy what u need”

Attacking Taxes: Preparers Say Identity Theft, Health Care Top Questions

Tania Turner, with Accounting Services of York LLC, works on a client’s taxes in the Springettsbury Township firm. Tax preparers say identity theft, refund delays and confusion about the Affordable Health Care act are among the top issues they’ve have noticed this year.

Tips for filing

• Don’t procrastinate: the IRS advises not to wait until the last minute to file. Waiting may lead to overlooking possible savings and could make your tax return more prone to errors.•File on time: If you owe taxes but you can’t afford to pay, you should still file before April 15 and try to pay as much as you can. This will minimize penalties and interest charges.

•Ask for help: H&R Block suggests seeking professional help with filing your taxes. Doing them yourself may save you money immediately, but you may miss out on possible

deductions and credits because of the changing tax code.

•File an extension: If your tax return is not done by April 15, you can get a six month extension to file, but you should pay any tax due by the deadline.In addition to the usual onslaught of last-minute tax filers who will swarm their offices in the coming days, many tax preparers say identity theft, refund delays and confusion about the Affordable Health Care act are among the top issues they’ve have noticed this year.

Here’s a look at the big issues confronting taxpayers:

Identity Theft

If you filed your taxes early and are still waiting to cash in on your tax return, months after filing, you’re not alone. Tax preparers have noticed some of their customers are having to prove their identities to the IRS before getting their much-anticipated tax return.

“We have people that are waiting nine or 10 weeks to get their money,” said Tammy Curran, a tax preparer with Liberty Tax Service.

Curran said the IRS is cracking down on identity theft and is selecting one of every seven tax filings to “grub by hand.”

The IRS has said it is increasing its efforts to prevent identity theft and has stopped 19 million suspicious returns from 2011 to 2014, resulting in over $63 billion in protected refunds.

Curran said she has noticed Hispanics, in particular, are victims of refund fraud.

“When people come over from Mexico, their ID and social [security cards] are photocopied and sold,” she said.

She said her clients have to go to the IRS office and confirm their identities, but as a result of recent IRS layoffs, this process is taking longer than usual.

“People are having to wait three days to talk to anybody down there,” she said.

The Affordable Health Care Act

While the Affordable Health Care has been around since 2010, the 2014 fiscal year is the first year uninsured taxpayers will have to pay penalties.

David Riggs, president of York Accounting Services, said the penalty for not having health insurance for 2014 is not always $95, contrary to what some people believe.

“We’ve seen some shocked faces,” he said. “They don’t hear about the 1 per cent.”

If you weren’t insured last year, you’ll have to pay either 1 per cent of your yearly household income if it’s higher than

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$10.150, or $95 per person in the household ($47.50 per child under 18), whichever is higher, according to HealthCare.gov. The maximum penalty per family paying this fee is $285.

For example, Riggs said, if your income is over $50,000, that’s a $500 fine.

The penalties will continue to increase in the following years. Next year, the penalties will be 2 per cent of the household’s income or $325 per person for the year. A family of four with a $60,000 income would pay almost $1,000 for not having coverage in 2015.

Tax preparer Michael Hanscom said some people had no idea the government wants them to have health insurance.

“I had people ask me, ‘Why are you asking me if I have health insurance,’” he said, adding that some people may qualify for a hardship exemption, which exempts people with unusual life circumstances from paying the fee.

Warren Buffett’s Nifty Tax Loophole

Warren Buffett has backed higher individual tax rates–while ensuring that his vast wealth in Berkshire Hathaway is almost immune.

Warren Buffett is fond of saying his tax rate is lower than his secretary’s. He does not publicize his tax returns, but for the tax year 2010, he paid $6.9 million on taxable income of $39.8 million, according to partial disclosures he made in 2011.

What is astounding about those numbers is not the 17.3% tax rate, but that Buffett’s $39.8 million of taxable income is only about 0.05% of his reported net worth ($71 billion according to Forbes, which put him third on its list of the 400 wealthiest people in the world for 2015).

Proportionately, that’s like someone with an ever-expanding net worth, currently $10 million, reporting taxable income of only $5,000 and paying a federal tax bill of only $900.

So, how does he do it? Buffett’s principal holding is an economic interest of about 20% of Berkshire Hathaway, the huge conglomerate he has been building since the 1960s. It has a market value of about $350 billion. Berkshire hasn’t paid any cash dividends since 1967. Rather, the company accumulates its prodigious after-tax income ($19.9 billion in 2014) and cash flow ($32 billion in 2014) to get bigger by buying companies, lots of companies. Among its large recent acquisitions were Lubrizol, Burlington Northern Santa Fe, and a shared acquisition of H.J. Heinz.

The Berkshire Model is to buy companies rich in cash flow with histories of paying dividends, then cancel those dividends and retain the cash flow going forward for future acquisitions.

How much tax is Warren Buffett able to avoid by fixing Berkshire’s dividend at zero? The dividend yield of the Standard & Poor’s 500 is about 2%. The price/earnings ratio of the S&P 500 is about 18. Thus, for the S&P 500, approximately 30% of earnings are paid out to shareholders. These dividends are taxable at a current maximum rate of 23.8%.

If Berkshire followed the average of the S&P 500, it would have paid out about $6 billion in dividends in 2014, and Buffett’s share would have been about $1.2 billion.

At a 23.8% tax rate, that would have given Buffett a tax bill of $280 million, or about 40 times the taxes he said he actually paid in 2010.

Thus the Treasury has been getting exiguous tax revenue from one of its wealthiest citizens. Buffett is virtually immune to higher individual income-tax rates, while he promotes higher rates for other rich people, who may have a net worth a hundredth of 1% (0.01%) of his own.

Since, according to his publicly stated plans, Buffett intends to leave the bulk of his estate to charity, his estate won’t be paying much tax, either.

The Buffett Loophole and the Berkshire Model are allowing one individual to build one of the great American fortunes while avoiding individual taxes. Talk about someone not paying his share! ...

Summary of Estate and Gift Tax Law Changes for 2015

The American Taxpayer Relief Act of 2012 made permanent the higher estate and gift tax exclusions, and annual inflation adjustments to those exclusions. Therefore, we all now can count on annual changes to the relevant tax thresholds under the estate and gift tax laws. The following is a summary of the federal law changes, and some important state law changes in 2015.

Estate Tax

The federal estate tax exemption has increased from $5.34 million in 2014, to $5.43 million in 2015. This means that a

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married couple may shield up to $10.86 million from federal estate tax during their lifetimes and at death. The maximum estate tax rate continues to be 40%.

In addition, there have been changes in state estate tax laws for 2015. New York passed legislation in 2014 that will increase the exemption each year until it equals the federal exemption in 2019. On April 1, 2015, the exemption will increase to $3.125 million. However, estates that exceed 105% of the exemption amount will not receive the benefit of the exemption. As a result, estates greater than $3,281,250 will not receive the benefit of the exemption in 2015. The maximum estate tax rate (for estates exceeding $10 million) remains at 16%. Further, New York previously did not have a gift tax, but under the new law, gifts made within three years of death will be included in the decedent’s taxable estate. Gifts are only included if the decedent made them between April 1, 2014 and January 1, 2019 while he or she was a resident of New York. The new law, however, does eliminate New York’s generation-skipping transfer tax, which was previously assessed at the rate of 16%.

In Hawaii, the exemption has increased to $5.43 million (the same as the federal estate tax exemption). In Illinois, the exemption continues to be $4 million. California, Georgia, and Florida continue to have no state estate tax in 2015.

Gift Tax

The federal gift tax exemption has also increased from $5.34 million to $5.43 million. Thus, a married couple may make lifetime gifts having a value of $10.86 million without incurring any federal gift tax. The maximum gift tax rate is still 40%.

The federal gift tax annual exclusion amount for 2015 continues to be $14,000. This means that a married couple may make gifts in 2015 having a value of up to $28,000 per recipient without incurring any federal gift tax. The federal gift tax annual exclusion also is indexed to inflation but in $1,000 minimum increments. This usually means there are several years between adjustments.

The federal estate and gift taxes continue to be unified and have the same exemption amounts and tax rates. This means that at death, the estate tax exclusion is effectively reduced by any exclusion previously used to make lifetime gifts.

Generation-Skipping Transfer (GST) Tax

The federal GST tax is a tax assessed on transfers during lifetime or at death to or for the benefit of grandchildren or more remote descendants. This tax is in addition to any gift or estate tax that may apply.

The GST exemption has also increased from $5.34 million to $5.43 million, which means that a married couple may shield up to $10.86 million from GST tax during their lifetimes and at death. The maximum GST tax rate continues to be 40%.

Tax on Net Investment Income

A 3.8% net investment income tax continues to be imposed on the unearned income of individuals, estates, and trusts that have income above $250,000 (for married couples filing jointly), $200,000 (for single taxpayers), and, for 2015, $12,300 (for estates and trusts). Unearned income includes income from interest, dividends, non-qualified annuities, royalties, rents, capital gains, and other passive income.

Conclusion

Federal and state estate and gift tax laws currently seem to be relatively stable as compared to 2010 and years prior. However, as Congress and many states look for tax law changes to raise revenue, care should be taken to understand the current status of these laws and to monitor for potential changes.

Washington Developments

ABA Weighs In On Proposals to Require Use of Accrual Method By Personal Service Corporations

In a letter sent to key lawmakers, the American Bar Association (ABA) has set out its objections to a tax reform proposal that would impose the accrual accounting method on law firms and other personal service businesses. The ABA stated that forcing these taxpayers to use the accrual method would, among other things, create unnecessary complexity, increase compliance costs, increase taxes on affected taxpayers, and adversely affect clients.

Under the cash method of accounting, gross income includes cash or property actually or constructively received during the tax year. Deductions are usually taken in the year cash or property is actually paid or transferred. It doesn’t matter when the income was earned or when the expense was incurred.

Under the accrual method, income is reported in the tax year in which the right to income becomes fixed and the amount of the income can be determined with reasonable accuracy. Deductions are claimed in the period in which all events have occurred that determine the fact of the liability and the amount of the liability can be determined with reasonable accuracy. ( Code Sec. 446(c) )

The accrual method is mandatory for purchases and sales (unless IRS consents to a change) where inventories must be used. ( Reg. § 1.446-1(c)(2)(i) ) Inventories must generally be used where the production, purchase, or sale of merchandise is an income-producing factor. ( Reg. § 1.446-1(a)(4)(i) )

However, there are exceptions that apply for small businesses, as follows: taxpayers (other than tax shelters) with 3-year average annual gross receipts of $1 million or less do not have to account for inventories or use an accrual method of accounting; and qualifying small businesses with 3-year

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average annual receipts of more than $1 million but not more than $10 million that are not prohibited from using the cash method and otherwise would have to keep inventories and use accrual accounting may, instead, use the cash method for an eligible trade or business. Qualifying small businesses that may use the cash method for all of their trades or businesses are (1) businesses whose principal business activity for the immediately preceding tax year is other than mining, manufacturing, wholesale trade, retail trade, or information industries; (2) service providers, including those providing property incident to those services; and (3) fabricators or modifiers of certain tangible personal property.

The cash method generally may not be used by C corporations, partnerships that have a C corporation as a partner, or tax shelters. ( Code Sec. 448(a) ) This rule doesn’t apply to farming businesses, qualified personal service corporations (defined in Code Sec. 448(d)(2) , including many law and accounting firms), or entities with annual gross receipts of $5 million or less. ( Code Sec. 448(b) )

In November of 2013, Senate Finance Committee Chairman Max Baucus (D-MT) released a discussion draft containing a number of tax proposals, including the reformation of certain tax accounting rules.

According to a summary of the proposals, businesses “must navigate a maze of tax accounting rules to determine their taxable income,” and “[s]imilarly situated businesses are often subject to substantially different tax accounting rules.”

The goals of the tax accounting proposals in the discussion draft are to simplify tax accounting rules so as to lessen compliance and enforcement costs, and improve tax neutrality by “eliminating the use of certain accounting methods that allow taxpayers in some industries to significantly defer or otherwise distort income measurement.”

To that end, the proposals in the discussion would:

. . . allow all businesses (other than tax shelters) with 3-year average annual gross receipts of $10 million or less to (i) elect to adopt either the cash method or accrual method of accounting, regardless of whether inventory is a material income producing factor in the business; and (ii) immediately deduct the cost of inventory, even if it is a material income producing factor in the business if the cash method of accounting is adopted;

. . . require business that do not satisfy the above gross receipts threshold, including those engaged in farming and personal service businesses, to adopt the accrual method of accounting.

ABA’s position. In a letter sent to Congressional leaders and Mark Mazar, Assistant Secretary of the Treasury for Tax Policy, William C. Hubbard, ABA President, stated that the ABA “unequivocally oppose[s]” proposals to require personal service businesses (namely, law firms) with annual gross receipts over $10 million to switch from the cash method to the

“more complex and costly” accrual method. (The ABA letter focuses its criticism on the proposals in the discussion draft, above, but makes clear that it opposed all similar proposals.) The letter emphasizes that the ABA is generally in favor of tax reform and applauds efforts to simplify the Code, but strongly disagrees with this proposal and urges its removal from any new tax reform legislation.

The letter states that the mandatory accrual accounting proposal would significantly complicate tax compliance for many small business taxpayers. Sole proprietors and personal service corporations tend to favor the cash method because of its simplicity and because it correlates with how they operate their business. In particular, for law firms, imposing the accrual method would force them to calculate and pay taxes on multiple types of accrued income, including work in progress and other unbilled work, accounts receivable (i.e., where the work has been done and billed but not yet paid for), and accounts paid (where the work has been done, billed, and paid for). This, in turn, would require much more detailed work and billing records and, likely, additional accounting and support staff-raising compliance costs and also increasing the risk of noncompliance.

Enacting the proposal would also lead to economic distortions that would adversely affect the businesses that currently use the cash method and those that retain them-such as law firms and their clients. Namely, it would require the businesses to pay taxes on income that they have not and may never receive (“phantom income”). It would also force some firms to borrow funds in order to pay accelerated tax obligations. This would be especially burdensome for the legal profession because many lawyers aren’t paid by clients until long after the work is completed, according to the letter.

The ABA further reasons that mandatory accrual accounting would adversely affect clients since the firm would have to collect its fees much sooner than it currently does. Accident victims, start-up companies, and other clients who require an alternative or flexible fee basis would be especially affected, and many firms would have to reduce the amount of pro bono legal services that they currently provide.

The proposal would also constitute a “major, unjustified tax increase on small businesses.” According to the Joint Committee on Taxation, a comparable proposal would generate $23.6 billion in new taxes over 10 years-by forcing small businesses to pay taxes on phantom income up to a year or more before it is actually (if ever) received. It would also discourage professional service providers from joining with other providers to create or expand a firm and thus discourage the growth of small businesses.

Use Resources and Toolsfor Tax Professionals

On Our WebsitencpeFellowship.com

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Practice Management

Apply the Four-year Rule When Throwing Away Old {payroll Records

The Spring, 2015 issue of the SSA/IRS Reporter, a joint publication of the Social Security Administration and IRS, offers some valuable pointers for employers to follow in cleaning up their old payroll files. In most (but not all) cases, that means following a four-year retention rule. The Reporter cautions that failure to meet record retention requirements can result in sizable penalties and large settlement awards for employers unable to provide the required information when requested by IRS or in an employment-related lawsuit.

Records relating to income, Social Security, and Medicare taxes. The record retention rule for these taxes is set forth in Reg. § 31.6001-1(e) . As applied to employers that withhold and pay federal income, Social Security, and Medicare taxes, the SSA/IRS Report says records relating to such taxes must be kept for at least four years after the due date of the employee’s personal income tax return (generally, April 15) for the year in which the payment was made.

According to the SSA/IRS Reporter, these records include:

• the Employer Identification Number (EIN);

• the employee’s name, address, occupation, and social security number;

• the total amount and date of each payment of compensation and amounts withheld for taxes or otherwise, including reported tips and the fair market value of non-cash payments;

• the amount of compensation subject to withholding for federal income, social security, and Medicare taxes, and the corresponding amount withheld for each tax (and the date withheld if withholding occurred on a different day than the payment date);

• the pay period covered by each payment of compensation;

• where applicable, the reason(s) why total compensation and taxable amount for each tax rate are different;

• the employee’s Form W-4, Employee’s Withholding Allowance Certificate;

• each employee’s beginning and ending dates of employment;

• any statements provided by the employee reporting tips received;

• fringe benefits provided to employees and any required

substantiation;• adjustments or settlements of taxes; and

• amounts and dates of tax deposits.

Employers should also follow the four-year retention rule for records relating to wage continuation payments made to employees by an employer or third party under an accident or health plan. Such records should include the beginning and ending dates of the period of absence, and the amount and weekly rate of each payment (including payments made by third parties). Employers also should keep copies of the employee’s Form W-4S, Request for Federal Income Tax Withholding From Sick Pay, and, where applicable, copies of Form 8922, Third-Party Sick Pay Recap.

A different rule applies for records substantiating any information returns and employer statements to employees regarding tip allocations. Under Code Sec. 31.6053-1(l), these records must be kept for at least three years after the due date of the return or statement to which they relate.

Claims for refund of withheld tax. The SSA/IRS Reporter says employers that file a claim for refund, credit, or abatement of withheld income and employment taxes must retain records related to the claim for at least four years after the filing date of the claim.

Fringe benefit records. Code Sec. 6039D(b) provides an explicit recordkeeping requirement for employers with enumerated fringe benefit plans, such as health insurance, cafeteria, educational assistance, adoption assistance, or dependent care assistance plan. They are required to keep whatever records are needed to determine whether the plan meets the requirements for excluding the benefit amounts from income.

Unemployment tax records. The Federal Unemployment Tax Act (FUTA) requires employers to retain records relating to compensation earned and unemployment contributions made. Under the “records in general rule” in Reg. § 31.6001-1(e) , such records must be retained for four years after the due date of the Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, or the date the required FUTA tax was paid, whichever is later.

Records should be retained substantiating:

. . . the total amount of employee compensation paid during the calendar year;

. . . the amount of compensation subject to FUTA tax;

. . . state unemployment contributions made, with separate totals for amounts paid by the employer and amounts withheld from employees’ wages (currently, Alaska, New Jersey, and Pennsylvania require employee contributions);

. . . all information shown on Form 940 (with Schedule

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A and/or R as applicable); and . . . if applicable, the reason why total compensation and the taxable amounts are different.

The SSA/IRS Reporter reminds employers that record retention requirements are also set by the federal Department of Labor (DOL) and state wage-hour and unemployment insurance agencies.

Legislative Update From Capitol Hill

Proposed Estate Tax Repeal Pending in U.S. Senate

Members of the U.S. Senate will next consider the proposed repeal of the federal estate tax, a tax that can total up to 40 percent for some of the largest estates.

The U.S. House of Representatives approved the Death Tax Repeal Act, a longtime Republican priority, earlier this month.

3rd District Congressman Evan Jenkins (R-W.Va.)

“It (estate tax) really targets small businesses, people who own farmland. It is something that’s been around for almost 100 years and we are one of only four developed countries that actually have such a tax,” said 3rd District Congressman Evan Jenkins (R-W.Va.), a repeal supporter.

“When you work hard, you build a small business, you have family farmland — why should you have the federal government, at the passing of a parent, come in and tax that small business, that farmland, 40 percent for the inheritance?”Last week, the vote for the Death Tax Repeal Act in the U.S. House was 240 to 179.

In addition to Jenkins, 1st District Congressman David McKinley (R-W.Va.) and 2nd District Congressman Alex Mooney (R-W.Va.) voted in favor of the repeal.

The White House, though, has called the proposal a giveaway that would raise federal deficits.

According to the Joint Congressional Committee on Taxation, repealing the estate tax would cost the federal government

$14.6 billion in 2016 and a total of $269 billion during the next ten years.

Currently, the estates of more than $5.43 million for individuals or $10.86 million for couples are taxed at rates of up to 40 percent. In all, less than one percent of estates meet those thresholds, according to the federal government.

“While the raw number of people who actually have to pay to the tax may be a small number, the fact is that there are lots of folks, lots of folks, who are forced into estate planning in order to avoid that tax,” Jenkins argued.

Changes President Barack Obama is proposing to capital gains could take total estate tax rates to more than 60 percent, if approved.

“The idea of working hard all your life, whether it be 40 or 60 percent at the time of your death goes to Uncle Sam, I think is un-American,” Jenkins said on Monday’s MetroNews “Talkline.”

Texas, Florida Win as House Passes State Sales Tax Break

The bill would save taxpayers - and cost the government—$42.4 billion over the next decade. The U.S. House of Representatives voted to let taxpayers deduct state sales taxes on their federal returns, a victory for residents of Texas, Florida and other states that lack an income tax.

The 272-152 vote would reinstate a tax break that expired at the end of 2014 and make it a permanent feature of U.S. tax law. The bill would save taxpayers -- and cost the federal government -- $42.4 billion over the next decade.

“It’s about fairness and it’s about certainty,” said Representative Dave Reichert, a Republican from Washington state.

“It’s about fairness and it’s about certainty.”

Representative Dave Reichert

Seven states lack an income tax: Texas, Florida, Washington, Alaska, South Dakota, Nevada and Wyoming. In addition, Tennessee and New Hampshire don’t tax wages yet tax other

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types of income, such as interest and dividends.

Residents of Washington, Texas and Florida use the sales-tax deduction at a rate more than twice the national average, according to data from the Pew Charitable Trusts.

The issue is a priority for lawmakers from those states who say it’s unfair that state income taxes are deductible under permanent law and sales taxes aren’t. There are 60 Republican House lawmakers from the nine states, or 25 percent of the party members in the chamber.

There were 34 Democrats who voted for the bill, and 24 of those represent states without income taxes. Just one Republican voted against the measure.

Veto Threat

Like other Republican attempts to extend lapsed tax breaks, the measure isn’t likely to become law. President Barack Obama has threatened to veto the bill because it lacks offsets to prevent the federal budget deficit from widening.

Democrats have voted repeatedly for short-term extensions of the break.

“We need to provide certainty to taxpayers in affected states that the sales tax deduction will be available to them this year,” said Representative Danny Davis, an Illinois Democrat. “But then we need to focus on comprehensive reform.”

Under the bill, taxpayers could deduct state and local sales taxes instead of income taxes. They could base the amount of the deduction either on actual purchases or use a government formula.

“We ought not force states into income taxes who believe sales tax is the right way to go,” said Representative Kevin Brady, a Texas Republican.

Republicans backed the bill even though they have repeatedly proposed broader changes that would prevent taxpayers from deducting state and local taxes. The proposals would use the proceeds to reduce federal income tax rates.

Camp Proposal

The deduction for state and local taxes would have been repealed in a draft tax revamp proposed last year by then-Representative Dave Camp of Michigan, the former chairman of the House Ways and Means Committee.

In a 2014 interview with talk radio host Hugh Hewitt, Republican Paul Ryan of Wisconsin, now the Ways and Means chairman, suggested that the deduction effectively subsidizes profligate state governments.

“Go complain to your governor or your state representative, but don’t make people from states that have got their fiscal house in order pay for the states that don’t,” he said then.

“Why should Wisconsin pay for Illinois?”

Seven Bills To Curb IRS Power Pass The House On Tax Day

The House of Representatives passed numerous bills Tax Day to curb what Republicans claim are IRS abuses. The seven bills were all sponsored by Republicans on the Ways and Means Committee. All passed the House by a voice vote, with no members of Congress objecting, including Democrats. “This is about stamping out a culture of arrogance at the IRS,” Speaker John Boehner said in a statement after the votes. Here are the seven bills:

1. Force the IRS to Implement the Taxpayer Bill of Rights. The IRS has a bill of rights posted online, but Republicans want a better one. The Taxpayer Bills of Rights Act (H.R. 1058) will codify as a core responsibility of the IRS Commissioner and all agency employees the right of American taxpayers to quality service, to privacy, to pay no more than the correct amount of tax, and to challenge the IRS’s position and be heard.

Lois Lerner testifies before the House Oversight and Government Reform Committee March 5, 2014.

2. Prevent the IRS from Targeting Donors to Non-Profits. Over the past few years, the IRS has threatened to subject contributions to conservative organizations to the gift tax in yet another attempt to exploit its influence to crack down on groups whose political beliefs do not align with its own. The Fair Treatment for All Gifts Act (H.R. 1104) will permanently ensure that the IRS cannot use the gift tax for political intimidation.

3. Prohibit IRS Employees from Using their Personal Email Accounts. Events over the past few months underscore the importance of maintaining transparent record keeping procedures for Executive Branch employees. The IRS Email Transparency Act (HR 1152) will increase accountability at the IRS by prohibiting employees, many of whom handle confidential taxpayer information, from using personal email accounts when conducting official government business.

4. Stop IRS Abuse of Taxpayer Privacy Protections. The IRS has admitted to leaking confidential taxpayer information

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filing system, in which the IRS would provide taxpayers with a filled-out form containing all of their information and estimate their taxes. Former IRS commissioner Doug Shulman had pushed the idea of such a “real-time tax system” during his tenure, but the IRS’s archaic technology and a series of budget cuts over the past five years have combined to prevent the agency from developing such a system.

However, MapLight pointed out that the tax authorities in several other industrialized countries such as Denmark and Spain have developed such technology, and argues that such a system is being held back by lobbying efforts.

For whatever purpose the lobbying money is being spent, MapLight’s analysis helps show which accounting and technology companies and organizations are spending heavily and which politicians are the biggest beneficiaries.

MapLight looked at contributions from H&R Block, Jackson Hewitt, Intuit, the American Institute of CPAs and the National Society of Accountants. It found that since 2011, the five companies and organizations have spent a total of $35 million lobbying Congress and federal agencies. To search MapLight’s Lobbying Spending Database.

MapLight also analyzed the 2013 personal financial disclosures of members of Congress to determine which members own stock in Intuit, H&R Block and Jackson Hewitt. Eight members of Congress reported owning between $57,249 and $219,242 worth of stock combined in the three companies. Seven members of Congress reported owning between $57,249 and $218,242 worth of stock combined in Intuit.

from several organizations to liberal journalism outlets. The Taxpayer Knowledge of IRS Investigations Act (H.R. 1026), will end this misuse of the tax code that has allowed IRS employees to violate the privacy rights of American citizens and then prevent those same protects for their own cover.

5. Allow Social Welfare Groups to Self-Declare their Tax-Exempt Status. The IRS has attempted to stifle conservative groups through indefinite delays of the tax-exempt status process. Rather than merely rejecting an organization’s request for 501(c)(4) status, the IRS has targeted applicants by stalling to make a decision for months and even years in some cases. H.R. 1295 will allow social welfare groups, like 527 tax-exempt organizations, to self-declare their status rather than being subject to extraordinary delays and inappropriate questioning due to their political views.

6. Permit Organizations to Appeal Denied Requests for Tax-Exempt Status. In the past, some 501(c)4 applicants who endure this grueling process drew additional scrutiny from Washington, D.C. officials and arbitrarily precluded from the appeal rights afforded to other applications. H.R. 1314 will allow these organizations the fundamental right to appeal adverse determinations by the IRS to ensure a fair and impartial review process.

7. Fire Employees Found Guilty of Targeting Americans for Political Purposes. The Preventing Targeting at the IRS Act (H.R. 709) ensures that any IRS employee found guilty of targeting individuals or groups based on their political affiliation should be fired immediately. It’s about time we hold government agencies accountable for their mistreatment of American citizens.

Rep. Paul Ryan, Chairman of the Ways and Means Committee released a statement praising their passage in the full House before turning the subject toward his goal of overhauling the entire tax code.

“We’ve said from Day One that we’re going to clean up the IRS, and these bills are a key part of that effort,” Ryan said. “These are common-sense, bipartisan reforms that will provide real accountability and help make sure people are never unfairly targeted again … If we really want to give relief to taxpayers and create opportunity in our country, we need to overhaul our broken tax code to make it simpler, flatter, and fairer for all Americans. These bills are a firm step forward.”

Tax and Accounting Groups Spending Heavily on Lobbying

MapLight, a nonpartisan research organization that tracks money’s influence on politics, has released a new analysis of how major tax and accounting organizations are spending funds on lobbying Congress and federal agencies.

The group contends that the lobbying is helping prevent Congress from passing a proposal to implement a return-free

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Additionally, MapLight analyzed campaign contributions from the political action committees of tax preparation companies and trade associations representing public accountants including H&R Block, Intuit, the National Society of Accountants and the American Institute of CPAs to all congressional candidates between January 1, 2009, and December 31, 2014.

Congressman Jim Cooper, D-Tenn., introduced a bill in 2011 that would have streamlined tax returns for most individuals. The so-called “return-free” filing bill never even came up for a vote in the House Ways and Means Committee, which has jurisdiction over the IRS. Sen. Ron Wyden, D-Ore., and Sen. Dan Coats, R-Ind., included the proposal in their failed 2011 tax reform bill. Cooper’s office said congressional inaction was due, in part, to opposition from tax preparation companies like Intuit and H&R Block.

The average member of the House Ways and Means Committee received, on average, 2.8 times more money ($7,072) from the tax preparation industry compared to the average member of the House of Representatives ($2,509) during the 2014 election cycle. Since Rep. Cooper’s 2011 bill to streamline individual tax returns died, the industry has increased its campaign contributions, and Congress has not considered any other return-free filing proposals.

Since 2011, the tax preparation industry has contributed nearly $2.6 million to congressional candidates. During the 2014 election cycle, seven of the top 10 recipients of campaign contributions from the tax prep industry were either in congressional leadership or served on the committees that oversee the IRS.

The top recipient of tax preparation funds, Sen. Pat Roberts, R-Kan., is a senior member of the Senate Finance Committee and received $18,999 from the tax preparation industry during the 2014 election cycle. As the chairman of the Senate Agriculture Committee, Sen. Roberts also oversees the Commodity Futures Trading Commission, which in October 2014 issued a proposed new code of conduct for accountants.The chairman of the House Ways and Means Committee, Rep. Paul Ryan, R-Wis., was the third highest recipient of funds from the tax preparation industry, receiving $16,100 during the 2014 election cycle.

The average member of the Senate Finance Committee

received, on average, 1.5 times more money ($10,818) from the tax preparation industry compared to the average senator ($6,905) during the last six years.

Congress has failed to consider any other return-free filing proposals since Rep. Cooper’s bill died, MapLight pointed out. Instead, members have introduced bills to prevent return-free filing from spreading. Rep. Zoe Lofgren, D-Calif., and Rep. Eric Cantor, R-Va., introduced a bill in 2007 to limit the proposal. The bill died, and Rep. Cantor eventually left Congress. But Rep. Lofgren has continued to receive campaign contributions from the tax preparation industry including from Intuit, whose Mountain View, Calif., headquarters are not far from Rep. Lofgren’s San Jose-based district. During the 2014 election cycle, Intuit was Rep. Lofgren’s third highest campaign contributor, MapLight noted.

Since failing to consider return-free filing, Congress has focused its attention on regulating fraudulent paid tax preparers, which the industry largely supports. In 2010, the IRS announced a plan to require paid tax preparers to receive certification before being allowed to charge a fee for filling out tax returns. Intuit and H&R Block supported the program. In February 2014, though, a federal appeals court struck down the IRS program, concluding the agency did not have the authority to regulate paid tax preparers.

Earlier this year, Sen. Wyden and Rep. Steve Cohen, D-Tenn., introduced bills that would authorize the IRS to certify paid tax preparers. Several states, including Oregon and California, already subject paid preparers to such a process. In 2012, 82 million Americans paid a professional to prepare their taxes. H&R Block is a strong supporter of this type of legislation, and even testified in support of a similar bill last year.

Favor a Flat Tax? Sen. Richard Shelby Just Introduced a Bill to Make It A Reality

Sen. Richard Shelby, R-AL, has introduced the “Simplified, Manageable and Responsible Tax” or SMART Act. The act would establish a flat tax on all income, something Shelby said he’s been pushing for since he was first elected to the Senate in 1986.

“The SMART Act is a straightforward solution that would require taxpayers to only file a simple postcard size return,

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which would save Americans time and money,” Shelby said. “The SMART Act would also allow businesses to redirect resources away from tax compliance and instead focus on expanding their businesses and creating jobs.”

U.S. Sen. Richard Shelby

Shelby’s proposal would institute a 17 percent across-the-board flat income tax. Currently, the Internal Revenue Service tax rate ranges from 10 percent to 39.6 percent. Shelby’s plan also includes a limited number of exemptions: $14,480 for a single person; $18,490 for head of household; $28,960 for a married couple filing jointly; and $6,240 for each dependent.In turn, the existing loopholes for individuals and businesses would be closed. And, earnings from savings would not be included as taxable income, something Shelby said gives an immediate tax cut for almost all taxpayers.

House Passes Bill to Repeal Estate Tax

The House has voted to repeal the federal tax on estates, a politically volatile issue that affects few inheritances.

Republicans refer to it as the “death tax.” They say it prevents small business owners and family farmers from passing businesses on to their heirs.

“Can you imagine working your whole life to build up a family-owned business and then upon your death Uncle Sam swoops in and takes nearly half of what you spent a lifetime building up for your children and grandchildren?” asked Rep. Kevin Brady, R-Texas, who sponsored the bill.

“It is at its heart an immoral tax,” he said.

Democrats say repealing the tax is a giveaway to the rich, since the only families that pay it have many millions in assets. The bill now goes to the Senate where Democrats appear to have enough votes to block it.

The White House has threatened to veto the bill in part because it would add $269 billion to the budget deficit over the next decade.

“This proposed repeal of the estate tax is nothing more than a massive unfunded tax break for a small sliver of America’s wealthiest families,” said Rep. Jim McDermott, D-Wash. “What

are they doing? Shoveling a quart of a trillion dollars out the door to the richest.”

The vote was 240-179.

The House also passed a bill to make permanent a deduction for state and local sales taxes that expired at the beginning of the year. The White House threatened to veto that bill in part because it would have added $42 billion to the budget deficit over the next decade.

The federal tax rate on estates is 40 percent, but big exemptions limit the share of estates that pay it to fewer than 1 percent.This year, the exemption is $5.43 million for a single person. Married couples can exempt up to $10.9 million. Larger estates pay taxes only on the amounts above these thresholds.

A total of 5,400 estates are expected to pay the tax this year — out of about 2.6 million deaths, according to the nonpartisan Joint Committee on Taxation, which provides official estimates for Congress. That’s 0.2 percent of all deaths in the U.S.

Republicans say that some business owners get hit with the tax because they have valuable assets that don’t necessarily generate a lot of cash. They cite family farms, which may sit on valuable land but don’t generate enough money to pay hefty estate taxes unless heirs sell some or all the land.

“The super rich? They don’t pay this tax. They have a legion of lawyers and tax planners. They have charitable trusts and foundations,” Brady said. “These are family-owned, hard-working, risk-taking, determined Americans who are building their business, their farm, their ranch. These are not, as we will hear today, the Paris Hiltons and robber barons of the Teddy Roosevelt days.”

The deduction for state and local sales taxes helps people who live in the nine states without a state income tax on wages.

House Republicans say the measure is about fairness because people in states that have incomes taxes can deduct those taxes on their federal returns.

The vote was 272-152.

These seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Also, New Hampshire and Tennessee tax income from interest and dividends, but not wages.

The deduction is one of dozens of temporary tax breaks that are routinely extended every year or two. House Republicans are working to make selected ones permanent.

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GI Bill benefits include up to 100% tuition and fees, housing allowance, book stipends, benefit transferability and more. The “Post 9/11 GI Bill” is the most common benefit seen. The monthly housing allowance averages greater than $1,200, but can as high as $2,800. The book stipend is up to $1,000 per year.

As always, we should get copies of the payments received from the school’s Bursar’s office. Look for payments indicated as “Chapter 33” (Post 9/11). Also keep an eye on the 1098-T to determine correctness. Recently, I saw the Chapter 33 payments from the Bursar’s office shown as “scholarships” on a 1098-T. In this situation, the student had more “scholarship” than tuition paid. An uninformed preparer may have had the student include the excess as scholarship income. This would not be correct, as it was payments from the VA.

Children taking advantage of the “Post 9/11 benefits” receive the tuition and fees, housing allowance and book stipends. Presuming the child is a full time student, the child would receive $15,400 per year in benefits, not considering the cost of tuition and fees. It could occur that the child has provided over one-half of their own support, disqualifying them as dependents.

People in the Tax News

Obamas Paid $93,362 in Income Taxes on Earnings of $477,383

President Barack Obama and his wife, Michelle, reported adjusted gross income of $477,383 for 2014, down 0.8 percent from last year, according to tax returns released Friday by the White House.

The Obamas paid $93,362 in federal taxes for an effective income tax rate of 19.6 percent. They made most of their income from the president’s salary, plus about $16,000 in interest and $88,000 in book royalties.

In his sixth year in office, Obama’s earnings continued to decline and the couple reported their lowest income since 2004, before he was elected to the U.S. Senate.

They made most of their income from the president’s salary, plus about $16,000 in interest and $88,000 in book royalties.“Every year, it looks exactly the same and I think that’s certainly done by design,” said Anthony Nitti, a partner at the accounting firm of WithumSmith & Brown in Aspen, Colorado. “There’s just no stock market investments whatsoever, same charitable contributions every year.”

Obama’s tax bill includes the cost of some of his own policies, including higher tax rates on wages and investment income for top earners. He also checked a box on the tax return that wouldn’t exist without his Affordable Care Act, verifying that he had health insurance for 2014.

Barack Obama, 53, and Michelle Obama, 51, paid $39,566 in

Don the Estate and Trust Guy

Extension for Estate and Trust Income Tax Return Likely to Require Many Other Extensions

Automatic extensions for estate and trust income tax returns are filed on Form 7004 using Code “4” for an estate and Code “5” for a trust. Like extensions for individuals, the Form 7004 is due 3 ½ months from the close of the entity’s taxable year, i.e. April 15, for calendar year filers. However, the automatic extension is only for 5 months, not the 6 months normally granted to individuals.

This means that the Form 1041 and more importantly any Form K-1’s accounting for distributions attributable to distributable net income (“DNI”) of the estate or trust must be filed with the IRS and in the hands of the beneficiaries by September 15, to enable the individuals to file their returns by extended due date for Form 1040, i.e. October 15.

Note, therefore, if the estate or trust extends its returns, the returns of all the beneficiaries will also probably have to be extended if they received any distributions during the year. If you extend the Form 1041 and the estate or trust made any distributions to beneficiaries during the year be sure to tell the executor or trustee to inform the beneficiaries that they will also need to extend their returns.

Armed Forces Tax

You receive Form 1098-T from your Military veteran taxpayer, their spouse or child…WHAT NEXT??

You will need to determine if any GI Bill compensation has been received. There are a variety of GI bill programs, each with their own compensation rules. The term GI Bill refers to any Department of Veterans Affairs education benefit earned by members of Active Duty, Selected Reserve and National Guard Armed Forces and their families. Payments received for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) is tax free. However, it will greatly affect the ability to claim education credits. These payments could also affect dependency status.

The Post 9/11 GI bill is the most common program seen at this time. In July of 2008 the Post 9/11 Veterans Educational Assistance Act of 2008, was signed into law. The Post-9/11

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mortgage interest. They have chosen not to refinance or pay off the mortgage on their home in Chicago, even though they could probably save money that way.

Treasury Bonds

Because the Obamas are invested in Treasury bonds, they would do much better by paying off the mortgage instead of getting the limited tax breaks available at their income level, said Steven Bankler, an accountant in San Antonio, Texas.“Even if you’re not in more lucrative investments, why are you paying the spread?” he said.

The Obamas overpaid their federal taxes throughout 2014. They will get a $20,641 refund and direct another $5,000 to their 2015 taxes.

The Obamas donated $70,712 to charity, almost 15 percent of their adjusted gross income, according to the statement. Their largest donation, $22,012, went to the Fisher House Foundation, a Rockville, Maryland-based organization that provides housing to families of military members and veterans receiving medical treatment.

They also donated to the American Red Cross, Mosaic Youth Theatre of Detroit and Sidwell Friends School in Washington, which their daughters attend.

The White House also released a state return showing that the Obama family paid $22,640 in Illinois taxes.

Vice President Joseph Biden and his wife, Jill, reported $388,844 in adjusted gross income and $90,506 in federal taxes for a rate of 23.3 percent.

Taxing Stephen King, Taylor Swift And Phil Mickelson

Everyone has to pay taxes, and yet no one especially wants to showcase their taxes to the public. Taxes are private between the taxpayer and the government, or at least they are supposed to be. If you claim that deduction, you have to be prepared to prove you are entitled to it to the IRS. But you shouldn’t have to justify it to your neighbors or on TV. And yet, taxes can sometimes appear to be a spectator sport.

If you are a loved and admired figure, it can be pretty daunting. And that is what happened to Stephen King, a famous Maine resident whom Maine Governor Paul LePage implied had moved out Maine because he didn’t want to pay state income taxes. LePage made the comments in a radio address in which he was pushing a tax overhaul plan. The governor argued that famous residents were leaving the state because the income tax was too cumbersome, the Portland Press-Herald reported.

“Meanwhile, remember who introduced the income tax here in Maine,” LePage said. “Well, today former Governor Ken Curtis lives in Florida where there is zero income tax. Stephen King and Roxanne Quimby have moved away, as well.” But the

Governor’s comments backfired, with the author demanding an apology.

Author Stephen King signs copies of his new book ‘Revival: A Novel’ at Book People on November 15, 2014 in Austin,

Texas.

Although King winters in Florida, he says he is happy to pay his Maine taxes, which provide public services. He reportedly is still waiting for the Governor to apologize. And while King seems the victor, not everyone who says something about taxes comes off as nicely. Take golfer Phil Mickelson, who triggered a firestorm over California taxes several years ago. When California raised tax rates to 13.3% from 10.3% for those making more than $1 million–retroactively–Mickelson said he would have to make some “drastic changes.”

He even suggested that taxes were one of the reasons he withdrew from the investment group buying San Diego’s Padres. “There are going to be some drastic changes for me because I happen to be in that zone that has been targeted both federally and by the state and, you know, it doesn’t work for me right now,” Mickelson said after his T37 finish at the Humana Challenge in Palm Springs, California.

Tiger Woods came to his defense, noting that he had also left California for Florida. Professional athletes and entertainers face a dizzying array of tax laws. Most states and countries tax them when they perform or play in their boundaries. Foreign athletes and entertainers must file U.S. income tax returns and face special withholding rules. What is considered U.S.-source can be debated but includes pay for performances, endorsements, merchandise sales, and royalty or other income closely related to the event.

But when you are a resident–as Mickelson is of California–you get taxed on everything. Most PGA Tour players live in no-tax

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states like Florida or Texas. Yet many who leave will find it’s not as easy to escape California’s clutches as they thought. A California resident is anyone in the state for other than a temporary or transitory purpose. See FTB Publication 1031.Plus, it includes anyone domiciled in California who is outside the state for a temporary or transitory purpose. The burden is on you to show you’re not a Californian. Besides, even if you successfully shed your state’s residency, some income could still be taxed by your former state.

Of course, if you are really famous, you might end up with a tax named after you, as could happen to Taylor Swift. The governor of Rhode Island Gina Raimondo has called for a proposed luxury tax for pricey second homes. It has been called the Taylor Swift tax. The idea is to implement a statewide property tax on second homes worth more than $1 million. Grammy winner Swift has a beachfront mansion in Westerly, Rhode Island that fits the ticket.

And you can’t exactly move a mansion. The Governor is purely trying to raise revenue, but notes that even with a higher property tax bill, Rhode Island homes are a comparative bargain. Just think how much it would be worth in California.

Michigan Resident Sentenced to Prison for Criminal Contempt Involving Federal Tax Obligations

A resident of Commerce Township, Michigan, was sentenced to serve 18 months in prison to be followed by one year of supervised release for criminal contempt, announced Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division.

In July 2014, Doreen Hendrickson was convicted of criminal contempt following a federal jury trial in Detroit. Hendrickson violated an injunction involving federal tax obligations issued by U.S. District Judge Nancy Edmunds of the Eastern District of Michigan in May 2007. Today’s sentence was imposed by U.S. District Judge Victoria Roberts.

According to court filings and evidence presented at trial, Hendrickson and her husband, Peter Hendrickson, filed federal income tax returns for the years 2002 and 2003 on which they falsely claimed they earned zero wages. Based on these false returns, the Internal Revenue Service (IRS) issued the Hendricksons more than $20,000 in income tax refunds that they were not entitled to receive. In 2006, the Tax Division sued the Hendricksons to recover these refunds. As part of that litigation, Judge Edmunds ordered the Hendricksons to file corrected amended tax returns for 2002 and 2003 that reported all of their income, and further ordered them to repay their fraudulently obtained refunds to the IRS. Judge Edmunds also barred the Hendricksons from filing additional false tax returns.

In 2009, Peter Hendrickson was convicted of filing multiple false income tax returns, including the 2002 and 2003 returns that he filed jointly with his wife. The tax returns at issue

were based on the false and frivolous tax theories that Peter Hendrickson promoted in his book, “Cracking the Code,” and on his website, Lost Horizons. Peter Hendrickson was sentenced to serve 27 months in prison in that case.

The evidence presented at Doreen Hendrickson’s trial showed that she violated the injunction issued by Judge Edmunds when she failed to file amended 2002 and 2003 tax returns. Also, in direct violation of Judge Edmunds’s order, Hendrickson filed a false income tax return for 2008 on which she falsely claimed that wages she earned as a movie extra were not taxable. This tax return was submitted while her husband was under indictment for filing false tax returns.

Acting Assistant Attorney General Ciraolo commended special agents of IRS-Criminal Investigation, who investigated the case, and Trial Attorneys Melissa S. Siskind, Jeffrey B. Bender and Jeffrey A. McLellan of the Tax Division, who are prosecuting the case. Ciraolo also thanked the U.S. Attorney’s Office of the Eastern District of Michigan for their substantial assistance.

Study: Sen. Pat Roberts Tops List for Donations From Tax Preparers

US. Sen. Pat Roberts has received more money from groups representing tax accounting and preparation-related businesses than any other member of Congress over the past two years, according to a nonpartisan analysis. Maplight is a nonpartisan California-based site that studies campaign donations and lobbying. It released an analysis this week that tied the failure of legislation meant to simplify filing your taxes to political spending by H&R Block and other companies that “have a large financial stake in ensuring long, complicated tax returns continue to be the norm.”

Rep. Jim Cooper, D-Tenn., first introduced legislation that would shift the U.S. to a return-free system, similar to Denmark and Spain, in 2011.

Under this system the IRS would provide taxpayers with a form already filled out with their information, which taxpayers would then look over and confirm. An estimate of how much they owe or should receive would already be calculated. Cooper’s bill and a similar one in the Senate failed to advance that year after heavy lobbying against it by the tax preparation industry.

H&R Block, Jackson Hewitt, TurboTax’s parent company, Intuit, and trade groups such as the National Society of Public Accountants and Americana Institute of Certified Public Accountants have spent a combined $35 million lobbying Congress and federal agencies since 2011, according to Maplight’s analysis.

These groups also have contributed a combined $2.6 million to congressional candidates since 2011.

Roberts, a senior member of the Senate Finance Committee and a Kansas Republican, received $18,999 in campaign contributions from the tax preparation industry between 2013

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not appropriate for a United States Attorney to present a matter to the grand jury for action where, as here, the Constitution prevents the witness from being prosecuted,” he wrote.

Lerner’s attorney, William Taylor, said in a statement that he was not surprised by the decision.

“Anyone who takes a serious and impartial look at this issue would conclude that Ms. Lerner did not waive her Fifth Amendment rights,” Taylor said. “It is unfortunate that the majority party in the House put politics before a citizen’s constitutional rights. Ms. Lerner is pleased to have this matter resolved and looks forward to moving on with her life.”

Boehner’s office, however, saw the decision not to prosecute as the evidence of politics at work.

“Once again, the Obama administration has tried to sweep IRS targeting of taxpayers for their political beliefs under the rug,” Boehner spokesman Michael Steel said in a statement. “But unaccountable federal bureaucrats using their power to attack the First Amendment strikes at the heart of our democracy, and the American people deserve the truth. The White House still has the opportunity to do the right thing and appoint a special counsel to examine the IRS’ actions.”

The White House has resisted that suggestion, but Lerner and others at the IRS are not necessarily out of the woods. Federal prosecutors still have an open investigation into whether laws were broken in the agency’s scrutiny of politically active nonprofits.

The scandal erupted after the Treasury Department’s inspector general reported that conservative groups seeking tax-exempt status had been singled out for greater scrutiny by the IRS, although it later emerged that liberal groups were targeted as well.

Editor’s Note: The American Taxpayer, required to prepare and submit a complete and accurate return deserves better than this. Absolute personal opinion and I can be quoted.

San Jose Priest Faces Bank Fraud, Tax Evasion Charges

A priest with the Archdiocese of San Jose was indicted by a federal grand jury on tax evasion and bank fraud charges after he allegedly deposited donation checks from parishioners into his own bank and failed to declare more than $1 million of income to the Internal Revenue Service, prosecutors said Monday.

Hien Minh Nguyen, 55, worked as a priest with the diocese for more than 20 years, said U.S. Attorney’s Office spokesman Abraham Simmons. He held multiple positions, including Director of the Vietnamese Catholic Center, for which he had sole signature authority of the center’s bank, Simmons said.Between 2005 and 2008, Nguyen requested that parishioners make donations to the center, but then deposited at least 14 checks, totaling $19,000, directly into his personal account,

and 2014, when he won re-election to a fourth term in the Senate. That’s nearly $2,000 more than any other member of Congress.

Roberts’ Washington office did not respond to multiple requests for comment about the donations and Maplight’s analysis.

Lois Lerner Will Not Face Contempt Prosecution Over IRS Scandal

Former IRS official Lois Lerner exercises her Fifth Amendment right not to speak about the IRS targeting

investigation before the House Oversight and Government Reform Committee during a March 5, 2014, hearing in

Washington, D.C.

Lois Lerner, the former Internal Revenue Service official at the center of the furor over the agency’s alleged targeting of politically active nonprofits, will not face prosecution for refusing to testify before Congress, federal prosecutors announced Wednesday.

The House of Representatives voted last year to hold Lerner in contempt for refusing to testify before the House Oversight and Government Reform Committee, then chaired by Rep. Darrell Issa (R-Calif.). She had offered a short statement professing her innocence of any wrongdoing in the scandal and then twice invoked the Fifth Amendment. The contempt citation was forwarded to the U.S. Attorney’s Office for the District of Columbia for prosecution.But in a letter to House Speaker John Boehner (R-Ohio) dated March 31, departing U.S. Attorney Ronald Machen said that a team of veteran prosecutors had reviewed the referral and decided that while Lerner’s refusal to answer questions was “willful,” her short statement of innocence had not been enough to waive her right to not incriminate herself.

“The team also concluded that Ms. Lerner did not waive her Fifth Amendment privilege by making an opening statement on May 22, 2013, because she made only general claims of innocence,” wrote Machen, who resigned his post effective April 1. “Thus, the Fifth Amendment to the Constitution would provide Ms. Lerner with an absolute defense should she be prosecuted under [Congress’ contempt laws] for her refusal to testify.”

“Given this assessment, we have further concluded that it is

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Simmons said.

The indictment also accuses Nguyen of failing to report $1.1 million of income to the IRS between 2008 and 2011, according to court documents.

Nguyen has been on personal leave since December 2013, said Liz Sullivan, a spokeswoman for the diocese.

“The Diocese has been cooperating with an ongoing criminal investigation by the Internal Revenue Service into the conduct of Monsignor Hien Minh Nguyen since October of 2012,” said Bishop Patrick J. McGrath. “Any facts in the matter are the part of the investigation, and only the IRS has the authority to make disclosures at a time of its choosing. At the request of the IRS, we have had minimal direct communication with Monsignor Hien.”

Nguyen was arrested Saturday in Fort Lauderdale, Fla. and made his first court appearance Monday morning facing 14 charges of bank fraud and four counts of tax evasion. He is due back in court April 21 and could face as much as 35 years in prison if convicted, Simmons said.

Real-estate Heir Blows $3.5M Meant for Charity on Cars, Hotels, Suit

The heir to a Manhattan real-estate fortune squandered millions of dollars that was supposed to go to a Jewish charity, going on a spending spree that included fancy cars and posh hotels, according to court papers.

The United Jewish Appeal claims it was supposed to get the remainder of a trust set up by building mogul Bill Gottlieb, who died in 1999, according to a filing in Manhattan Surrogate’s Court.

Gottlieb’s late sister’s husband, Irving Bender, eventually became the beneficiary of the trust, and ¬allegedly blew $3.5 million meant for the charity.

Irving’s epic spending spree allegedly included $43,000-plus for a luxury car, $7,000 for rooms at the swanky W Hotel in Union Square and about $50,000 for a five-month stay at the Boca Raton Resort & Club in Florida.The club “was vastly beyond his ‘usual and normal standard of living,’ ” the UJA says.

Irving also spent more than $100,000 a month on “eye-opening” medical expenses near the end of his own life, court papers allege.

The UJA claims Irving was treated at times by “up to 11 nurses billing for more than 75 hours a day,” even though his doctor prescribed just four nurses for 48 hours a day.

According to the UJA, Irving and wife Mollie lived a “very modest lifestyle, did not own their own home, did not have any significant income aside from trust income, did not have any valuable assets and would be unable to pay the expenses”

that Irving racked up.

Gottlieb died owning an estimated $1 billion or more worth of property in Greenwich Village, Chelsea and lower Manhattan.Terms of the trust gave Mollie Bender interest payments and principal needed for emergencies and “to maintain her usual and normal standard of living,” with the benefits passing to Irving upon her death, court papers say.

But the UJA alleges that US Trust, which in 2002 was put in charge of the trust and is owned by Bank of America, “abidcate(d) its responsibility” and signed off on Irving’s lavish spending following Mollie’s death in 2007.

The UJA also notes a “possible conflict of interest” involving the Benders’ son, Neil, who became sole owner of the Gottlieb real-estate empire following his dad’s death in 2012.

US Trust “may have hoped that return for complicity in these distributions, it would procure bigger business down the road from . . . Neil Bender,” court papers say.

Bank of America spokesman Bill Halldin said: “Our position is we acted in accordance with Mr. Gottlieb’s direction in the trust.”

Neil Bender didn’t return a message left at his office, but a spokesman, Marty McLaughlin, noted that the UJA — which wants a trial over its allegations — had already received $6.75 million from the trust.

“Now they’re hoping for more,” McLaughlin said, using a Yiddish term that means “wheeling and dealing.”

IRS News

TIGTA Reports on IRS Self-Service by Taxpayers

Due to continued budget cuts, IRS is becoming increasingly dependent on technology-based services to provide taxpayer assistance, the Treasury Inspector General for Tax Administration (TIGTA) said in an audit released on April 16. (Audit Report No. 2015-40-032)

Consequently, the agency continues to offer more self-assistance alternatives that taxpayers can access 24/7, TIGTA said. The purpose of the audit was to provide selected information regarding the just-completed filing season.

The audit offered some details related to the functioning of the Affordable Care Act. As of Feb. 26, IRS had processed 737,000 tax returns that reported more than $2.1 billion in premium tax credits that were either received in advance or claimed when filing, the audit said. In addition, some 3.7 million tax returns reported shared responsibility payments totaling some $655 million for not maintaining required health insurance coverage.

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. . . Smaller workforce. Since 75% of IRS’s budget is personnel, it has absorbed much of the budget reductions by shrinking its workforce. At the end of fiscal year (FY) 2014, IRS had 13,000 fewer permanent full-time employees compared with 2010, and another 3,000 are expected to be lost through attribution by the end of FY 2015.

. . . Drop in audit and collection cases. Of the 13,000 employees lost since 2010, 5,000 were key enforcement personnel. This loss translates to a drop in audit and collection cases, which, in turn, results in a drop in revenue collected. Koskinen estimated that every $1 invested in IRS’s budget produces $4 in revenue. He described this paradoxical consequence of underfunding as follows: “I never found an organization in my 20 years of private sector experience that said, “I think I’ll take my revenue operation and starve it for funds to see how it does.” But that is what’s happening now to the IRS.”

. . . Reduction in services. IRS had to substantially reduce hiring of extra seasonal help during the filing season, which has caused its level of phone service to slip to below 40%.

. . . Less specialized examiners. The Commissioner stated that although businesses might interpret the underfunding as good news, in that fewer audits are being conducted, the ones that are conducted are likely to be more burdensome due to a lack of examiners with specialized training in complex business issues. Guidance in highly specialized corporate areas will also likely suffer.

. . . Effect on voluntary compliance. Koskinen stated that the effects of underfunding also pose a threat to voluntary compliance-that if people think they won’t get caught, or if they are frustrated by not being able to get the help they need, the system will be put at risk-and that a 1% decline in compliance translates into $30 billion in lost government revenue. He noted in a post-speech discussion there isn’t an “on-off switch” for voluntary compliance and that once it is compromised, it will be a very difficult problem to fix. He also speculated that, when and if voluntary compliance is noticeably compromised, the decline will likely be by more than 1%.

. . . Risks to future workforce. In addition to problems stemming from having fewer employees, Koskinen also emphasized that underfunding threatens IRS’s ability to properly develop its workforce for the future. He also stated that over half of IRS’s employees are over 50 years old, with 25% of the workforce becoming eligible to retire over the next year, and that less than 3% of the employees are under 30. . . . Antiquated technology. Underfunding has left IRS unable to fully improve and modernize its information technology infrastructure, meaning that its systems are increasingly at risk.

Goal of an improved (but cost effective) taxpayer experience.

“The IRS’s efforts to monitor and prepare for the legislative extension of certain tax provisions prior to the start of the filing season enabled it to begin the filing season as scheduled,” said J. Russell George, the inspector general. “However, this filing season it has become increasingly difficult for taxpayers contacting the IRS by telephone to reach an assistor.”

EITC

The earned income tax credit (EITC) is the subject of a recent article published by the Washington, D.C.-based Tax Policy Center. (Earned Income Tax Credit in the United States)

According to the article, while the EITC encourages work for many, it may also reduce work or wages for others. As a poverty measure, in 2012, it lifted six and a half million people out of poverty. Despite that achievement, “the credit fails to provide substantial benefits to workers without children, is complicated, has a high erroneous payment rate, and creates substantial marriage penalties for some low- and moderate-income couples,” the article said.

“Extending the credit to workers without children or replacing it with an individual worker credit could solve some or all of these criticisms,” it added.

Commissioner Sheds Light on Specific Consequences of IRS Underfunding

In a panel discussion hosted by the Urban-Brookings Tax Policy Center on April 8, IRS Commissioner John Koskinen highlighted ways in which IRS budget cuts are currently affecting the agency, taxpayers, and the tax system in general. He spoke of the drastically reduced workforce, which is resulting in fewer audit and collection case closures-and less government revenue-as well as fewer, but more burdensome, corporate audits due to the lack of sufficiently specialized examiners. He also warned of the future consequences of continued underfunding, saying that IRS’s ability to “fully deliver” on its mission will be compromised.

According to Koskinen, underfunding of IRS is the “most critical challenge” that the agency faces. He stated that the effects of five years of budget cuts are becoming apparent and could negatively impact IRS’s ability “to continue to deliver on its mission during filing season and beyond.” He also emphasized that, during this time, the taxpayer base has increased significantly and IRS’s responsibilities have expanded-to include, among other things, implementation of the Foreign Account Tax Compliance Act (FATCA) and tax-related provisions of the Affordable Care Act (ACA). Also, by July 1 of this year, IRS has been directed to implement parts of the Achieving a Better Life Experience (ABLE) Act and a new certification requirement for professional employer organizations.

The effects on underfunding on IRS, according to Koskinen, include:

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efficiently doesn’t pass the laugh test given the misguided judgment demonstrated by an organization that has lost the confidence of the American people.”

Editor’s Note: America’s taxpayers are doing more with less. Should we not expect the IRS, really all government agencies, to make do with less -to prioritize and perform their jobs?

House Report: Cash-strapped IRS Prioritized Bonuses, Union Activity Over Helping Taxpayers

Internal Revenue Service (IRS) Commissioner John Koskinen speaks at IRS headquarters in Washington.

While facing budget cuts, the IRS nevertheless prioritized worker bonuses, union activity and the implementation of President Obama’s health care law over assisting taxpayers during tax season, according to a new report released Wednesday by the House Ways and Means Committee.

The findings, in a Republican-led report, were released ahead of a subcommittee hearing Wednesday morning with IRS Commissioner John Koskinen.

The IRS has faced congressional budget cuts of $1.2 billion since 2010, and has faced criticism in recent years over the targeting of conservative groups applying for tax-exempt status and reports of wasteful spending. The new report said the cuts were intended to “force the IRS to manage its resources more effectively and immediately stop inappropriate activities.”

However, while cuts were made in part to focus the agency on customer service, the report asserted that “spending decisions entirely under the IRS’s control led to 16 million fewer taxpayers receiving IRS assistance this filing season.”

The panel found the IRS had cut customer services while continuing to hand out bonuses to employees, allowing staff to conduct union activities, failing to collect debt owed by employees of the federal government and spending over $1.2 billion on implementing ObamaCare.

Even though the IRS’s budget for taxpayer assistance remained flat from fiscal year 2014 to 2015, the level of over-the-phone customer service significantly decreased, with the agency shifting staff in customer service to focus on written correspondence instead of telephone calls. Meanwhile, the

The Commissioner said that IRS is considering how to “ take advantage of the latest technology to move the entire taxpayer experience to a new level-and do it in a way that’s cost-effective for the government.”

To this end, Koskinen said that the online experience with IRS should be comparable to that which people have dealing with their financial institution. He envisioned taxpayers having an IRS account that they could log in to securely, get needed information, and interact with the agency as needed. This, in turn, would reduce the need for in-person help.

This more modern system could also help IRS with compliance by, among other things, helping to identify problems in tax returns upon filing rather than years later.

He stated that, even within the limitations of the current budget, IRS has been able to make a number of significant technological improvements in the past few years. One is the “Where’s My Refund?” electronic tracking tool on IRS’s website. Another is “Get Transcript,” an online system that allows taxpayers to view and print a record of their IRS account.

Koskinen did emphasize, however, that an improved experience has to take into account the needs of all taxpayers, including those who “aren’t comfortable in the digital environment” or can’t afford to conduct their transactions online.

Taxpayer Advocate insights. National Taxpayer Advocate (NTA) Nina Olson spoke of IRS as the country’s most powerful creditor and highlighted collection actions that IRS can take without any sort of Court approval-such as a bank lien or wage levy. She said that these powers underscore the need for care, legitimacy, taxpayer accessibility, and due process. She provided statistics on the ability of taxpayers to speak with assistors and spoke about specific types of issues that taxpayers call about and problems that occur when they can’t get through-such as a taxpayer who made a simple mistake on a return, couldn’t get through on the phone to correct it, had his wages automatically levied upon, then re-attempted to get through and get the funds back because he can no longer afford basic living expenses. She also noted that failing to “fund the phones” has downstream economic consequences in that, once her organization (the Taxpayer Advocate Service) gets involved, there are now two employees working to remedy what may well have been a very easy problem to fix.

The NTA then said that she believes that taxpayer trust in IRS, and the legitimate use of its power, drives voluntary compliance-and that when IRS is largely unreachable by taxpayers, its actions look increasingly arbitrary and capricious. She spoke of the overall shift to automated procedures and emphasized the continuing importance of personal engagement and its positive effect on compliance.

Political response. In response to the Commissioner’s speech, Peter Roskam (R-IL), Ways and Means Oversight Committee Chairman, issued a press release stating that “[t]he argument that the IRS lacks the resources to operate

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the United States. Every year he says pretty much the same thing: No other industrialized country asks its citizens to jump through as many hoops to calculate their taxes as ours.

It isn’t just lawmakers or the hapless-seeming Internal Revenue Service that is perpetuating the annoyance of tax time, he adds. Instead it is the private sector — specifically, the software company Intuit, which makes TurboTax, the most popular tax program in the country.

For more than a decade, Mr. Bankman and a small group of tax experts have called on the government to create a tax preparation method that they say would vastly reduce the time and cost of tax-filing for most people. Intuit has been a primary obstacle to the effort.

The reform plan would work like this: Today, employers, banks, brokerage firms and pretty much every other financial organization in the country send the federal government detailed records about our economic activity every year. These organizations also send you, the taxpayer, a similar set of documents, which are forms with names like W2 and 1098. After you file your taxes, the government matches its two sets of documents to make sure you have filed correctly.

To Mr. Bankman, this double documentation doesn’t make much sense. If the government is already collecting financial data from employers and banks, why can’t the I.R.S. use that information to precalculate our tax returns for us? At the very least, why can’t tax software just connect to the government’s database to download all the information that the government has collected, saving us all that record-keeping and data entry?

“Imagine if your vehicle registration fee was done the same way,” Mr. Bankman asked in a recent interview. “Imagine if the state said, ‘Go to your car, find your VIN number and then look at this table that has different tax rates to find out how much you owe.’ If they did, people would probably need to hire an expert for that too.”

The idea of the government filling our tax returns for us, known as “return-free filing,” has been met with much opposition from several groups, including conservatives suspicious of the I.R.S. And as the investigative news organization ProPublica reported in 2013 and 2014, some of the most intense opposition has come from Intuit, which has spent millions lobbying to oppose methods for the I.R.S. to create a tax-filing system that might free us from having to use software like TurboTax.

In a statement, David Williams, Intuit’s chief tax officer and a former I.R.S. official, said the company opposed return-free filing because the plan “minimizes the taxpayers’ voice and control over the tax process by reducing their role in filing their taxes and getting their own money back.” Echoing some conservative critics of the plan, he argued that the return-free plan “necessarily prioritizes revenue generation for government but does not advance taxpayer rights, citizen empowerment or real simplification of the tax code.”

number of calls doubled in that period.

The panel found that wait times increased from 18.7 minutes to 34.4 minutes, and answered calls decreased from 6.6 million to 5.3 million.

“In January 2015, the IRS commissioner estimated that taxpayer service would decline while delays in tax refunds would increase. While the IRS commissioner has blamed this solely on budget cuts, in reality the IRS deliberately diverted resources away from taxpayer services,” the report found.

Despite the drop in service, there was no significant decrease in bonuses for IRS employees. Notably, in November 2014, despite another round of budget cuts at the IRS, Koskinen announced that employees would receive bonuses at the same level as for the previous year, unless they had substantiated conduct issues, the report said.

While acknowledging that the agency has cut the amount of time spent on discretionary union activity, the report questioned why it could not have been decreased further, asserting that “the amount of resources spent on discretionary union activity could have assisted nearly 2.5 million taxpayers.”

The report noted that while the IRS’s implementation of ObamaCare was deemed a success by Koskinen, “the IRS achieved this supposed success by prioritizing … implementation over other activities, including core responsibilities like taxpayer assistance.”

The panel also claimed the agency had failed to pursue recommendations for streamlining and reducing waste and abuse. It concluded that what it called “large areas of systemic waste and inefficiency” present in 2010 remained unaddressed in 2015, and highlighted in particular that the IRS spent $2.1 million on litigation services that the government could have conducted itself.

Would You Let the I.R.S. Prepare Your Taxes?

Around this time every year, Joseph Bankman, a professor of tax law at Stanford Law School and a longtime advocate of using technology to simplify tax filing, gets on the phone with reporters to explain what is wrong with how we do our taxes in

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expenditure group known as the Alliance for California’s Tomorrow, Intuit sank $1 million into the race for California state comptroller in support of Tony Strickland, a Republican who opposed ReadyReturn. Mr. Strickland lost to John Chiang, a Democrat, but Intuit’s money was nevertheless effective.

“It was a huge signal to politicians everywhere how much Intuit cares about this,” Mr. Bankman said. “People in other states who had been interested in it started saying, ‘We just don’t want to pick a fight with Intuit.’  ”

Intuit is far from the only opponent of return-free filing. Groups that call for lower taxes, like Grover Norquist’s Americans for Tax Reform, say it is a “conflict of interest” for the government to both collect taxes and calculate how much people owe.

Although all advocates for return-free filing stress that the program would be voluntary, Ryan Ellis, tax policy director for Americans for Tax Reform, said that mail from the I.R.S. did not strike people as optional.

“If you’re a typical American and you get this packet from the I.R.S. that says, ‘Here’s what we’ve determined your liability is,’ no one is going to challenge it,” Mr. Ellis said. “People are scared, intimidated or otherwise occupied in their lives, and they’re going to just accept what the I.R.S. sends them.”

Some scholars say that government tax collectors may not have adequate resources to set up the program, and that it may not ultimately save many much time and money. “Some people wouldn’t have to buy software, but if you consider the cost to the I.R.S., my sense is the net social costs might go up,” said Eric Toder, co-director of the Urban-Brookings Tax Policy Center.

Mr. Bankman agrees that people may not always challenge the I.R.S.’s calculation, but argues the I.R.S. might include tax breaks that taxpayers wouldn’t have otherwise found. (Critics of the I.R.S., which revealed in 2013 that it had targeted conservative groups for special scrutiny when determining tax status, scoff at this idea.) Mr. Bankman also conceded that while he has no hard data to suggest that the program would save money nationally, in California, the program was found to be cost-effective.

“One of the biggest costs that people have is the anxiety — and this would definitely cut down on that,” he said.

How the IRS Repeatedly Rewrites Obamacare Tax Credit Provisions

The plaintiffs in King v. Burwell argue that an IRS regulation unlawfully extends tax credit eligibility beyond what is expressly authorized under Section 1401 of the Patient Protection and Affordable Care Act (PPACA). It appears that this sort of administrative rewrite of the PPACA may be more the rule than the exception, as there are at least two other instances of the IRS rewriting the PPACA’s tax credit eligibility requirements.

He added that some of the aims of return-free filing, including lower prices and simplified filing, could be provided by the private sector. The I.R.S. already partners with Intuit and other tax preparation companies on a system called Free File, which lets people with low incomes use software like TurboTax free. And rather than download people’s financial data from government sources — which Mr. Williams said might not be very secure — Intuit prefers to connect its systems to banks, employers and other private companies to obtain taxpayers’ information, he said.

Dennis Ventry, a professor at the School of Law at the University of California, Davis who has studied the issue, said that while Free File and Intuit’s integrations with private companies were beneficial, they won’t be nearly as helpful as a government program to reform tax filing.

Mr. Ventry said that if return-free filing were operated nationally, tens of millions of people with simple tax situations might have to do just a few minutes of work at tax time every year. The I.R.S. would send them a tax return that had already been filled in with their financial data, and if everything looked in order, they would file it either through the mail or electronically. The return would be completely voluntary. People who disputed the I.R.S.’s calculation would be able to do their taxes the old-fashioned way. Tens of millions of additional taxpayers with more complex returns would be able to save time by downloading all the financial information that the government has collected about them during the year. You would be able to do your return without hunting for every stray W2 or 1099 in your household.

“It can help all 145 million taxpayers,” Mr. Ventry said.

But Intuit’s opposition to return-free filing has been ferocious. In the last five years, according to disclosure documents, Intuit spent nearly $13 million on federal lobbying. That is about the same amount that companies many times its size have spent on lobbying. Apple, which has an annual income about 40 times that of Intuit, also spent about $13 million on lobbying in the same period. While documents show that Intuit lobbies on several issues, including immigration, cybersecurity and intellectual property law, the company’s largest lobbying contracts all involve the issue of tax administration.

More than a decade ago, Mr. Bankman helped create a California program known as ReadyReturn that precalculates some residents’ state tax returns. It received little marketing and fewer than 100,000 people used it at its peak — yet every year in surveys run by California’s Franchise Tax Board, more than 95 percent of those who had used ReadyReturn said they would use it again. Mr. Bankman said that people who used the system saved about $30 a year in costs and about 30 minutes in time. Seeing the success of the program, tax authorities in other states began contacting Mr. Bankman for help in setting up a similar plan.

Then Intuit mobilized against ReadyReturn, hiring lobbyists to oppose the effort in the capital and financing candidates who pledged to overturn it. In 2006, using an independent

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It’s easy to come up with a policy supporting this re-write of Section 36B, but I can’t identify any statutory authority for doing so. Policy-wise, the regulation addresses a problem related to imperfections in the Exchange regime, under which differences between estimated household income and actual household income can lead to tax repayments. But authority-wise, Congress plainly and unambiguously limited the premium tax credit to persons who come within the 100 and 400 range; the Treasury lacks the authority to grant credits to persons outside that range.

Not only does this regulation flout the relevant statutory text, it also creates an incentive for taxpayers to misrepresent their income so as to receive tax credits for which they would not otherwise be eligible. Writes Grewal, “the regulation rewards those who inflate their income at enrollment time and offers no benefits for the cautious taxpayer who wants to claim a credit only at the end of the year.”

As with the regulatory change expanding tax credit eligibility to some unlawful aliens, the IRS cited no authority for making this change. It did, however, provide an interesting justification. As Grewal explains,

The Preamble to the regulation cites no statutory authority for re-writing Section 36B. It says only that the IRS is intending to “clarify” the statute, but I’m not sure what’s unclear about the 100-400 percent range. More confusingly, the IRS rejects extending the regulation to persons who end up above the 400 range, noting that that interpretation is “contrary to the language of Section 36B.” Apparently, it’s ambiguous whether 50 is less than 100, but unambiguous that 450 is greater than 400.

These IRS rewrites have potential consequences beyond the extension of tax credits beyond what Congress authorized. As with the tax credit regulation at issue in King, the latter of these changes has the potential to expose employers to penalties that are not authorized by the text of the PPACA. Put more plainly, by expanding eligibility for tax credits the IRS is also expanding employer exposure to the employer mandate and its associated penalties. Will this produce additional litigation? Who knows. Whether or not it does, it is further evidence that the IRS is intent on implementing the law some wish Congress enacted as opposed to what was actually signed into law.

These administrative rewrites of plain statutory language should be troubling whether or not one supports the PPACA. As Professor Grewal concludes:

A complex regime cannot be fairly administered when the words of the law are routinely flouted, especially when the granting of benefits to one group potentially triggers penalties for others.

Fairly administering this law requires implementing it as written, and seeking legislative revision of those provisions now understood to be unworkable or unwise. Congress has already made over one dozen changes to the PPACA that

Section 1401 (which creates Section 36B of the Internal Revenue Code) authorizes tax credits for the purchase of qualifying health insurance in an exchange “established by the State under Section 1311″ of the Act. The IRS rule also authorizes tax credits for the purchase of health insurance in an exchange established by the federal government. The Supreme Court will rule on this challenge later this year.

In a series of posts at “Notice & Comment,” the blog of the Yale Journal on Regulation, Professor Andy Grewal documents two additional cases in which the IRS has rewritten the PPACA’s tax credit eligibility requirements so as to expand eligibility beyond what Congress authorized. Combined with other instances of the IRS and HHS disregarding the PPACA’s plain text, it appears the federal government has little regard for what the PPACA actually says.

In his first two posts, Professor Grewall explains how IRS regulations disregard the statutory text so as to extend tax credit eligibility to some low-income aliens not lawfully residing in the U.S. In this way, the IRS regulation “casts a wider net than the statute” by expanding the number of people eligible for tax credits. Yet the IRS never provided any rationale for this change. Indeed, if one had just read the IRS explanation for what its regulations accomplish — as opposed to the regulations themselves — one would not even be aware of what the IRS did.

In a second pair of posts, Professor Grewal explains how the IRS also issued regulations effectively disregarding the income requirements for tax credit eligibility. Under the PPACA, individuals are only eligible for tax credits if they earn between 100 and 400 percent of the poverty line. Under the IRS regulations, however, the 100 percent threshold is disregarded in some instances. Writes Grewal:

Under the regulation, a person becomes an “applicable taxpayer” and therefore eligible for ACA tax credit if she gets health insurance on an exchange, the exchange estimates that her income falls with the 100-400 percent range, and she in fact gets advance payments, even though her annual household income is less than the 100 percent amount required by law. Being an applicable taxpayer carries significant consequences and can cause one’s employer to face severe penalties under Section 4980H. . . .

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have been signed into law, and there is no reason it could not make others. If more changes are necessary (and I suspect most think they are), it is a job for Congress, not the IRS.

OPR is Delegated Authority to Regulate the Representation Activities of Unlicensed Return Preparers

Effective September 3, 2014, The Commissioner signed Delegation Order 25-16 (Rev. 1), which includes authority for the Office of Professional Responsibly (OPR) to receive and process referrals for misconduct by tax return preparers who engage in limited practice before the IRS under Revenue Procedure 81-38. OPR also was given authority for disciplinary actions in connection with the new Annual Filing Season Program under Rev. Proc. 2014-42.

Rev. Proc. 81-38 contains the terms and conditions for representation of taxpayers before Examination, Customer Service, and the Taxpayer Advocate Service by unenrolled, unlicensed tax return preparers. Under the revenue procedure, which dates back to the late 1950’s, any unenrolled/unlicensed return preparer is generally eligible to act as a taxpayer’s representative so long as the preparer BOTH prepared and signed the return under examination.

Restrictions exist if the preparer was convicted in the last five years of a federal tax crime, has had CAF privileges suspended previously, or has been suspended or disbarred from practice before the IRS. Additionally, Rev. Proc. 81-38 prescribes standards of ethical conduct and fitness to practice applicable to preparers who engage in representation, similar to provisions in Circular 230. Preparers who violate the standards are subject to loss of their limited practice privileges.

The revenue procedure provides for notice to a preparer of the proposed termination of the preparer’s limited practice privileges, an opportunity to respond (and request a conference), and an administrative appeal of an initial adverse determination. Delegation Order 25-16 (Rev. 1) authorizes OPR to carry out these functions. OPR has developed a formal process, including standardized documents and operating procedures to implement this authority. OPR is also educating the Operating Divisions about Rev. Proc. 81-38 and encouraging compliance personnel who interact with unenrolled preparers appointed as representatives to make referrals to OPR in appropriate situations.

Note that Rev. Proc. 2014-42, which becomes effective for all tax returns prepared after December 31, 2015 requires a successful applicant for the Annual Filing Season Program Record of Completion to agree to be governed by all of Subpart B of Circular 230 and Section 10.51 of Subpart C. Beginning January 1, 2016, unlicensed/unenrolled return preparers, who do not participate in the new Rev. Proc. 2014-42 program, will not be able to represent under any circumstances with respect to returns they prepare and sign on or after that date.

Editor’s Note: Practitioner’s who are participants in the

Annual Filing Season Program are allowed to represent their taxpayers on a limited basis - examination and customer service issues. Now these practitioners will come under the same purview of the IRS Office of Professional Responsibility as CPAs, Attorneys and Enrolled Agents.

Tax Man May Have Awarded $2.7 Billion in Improper Business Credits on Returns

Treasury Inspector General for Tax Administration finds big credit processing errors on business...

Errors with certain business tax credits may have cost the Internal Revenue Service more than $2.7 billion in 2013.

The money was lost from carry-forward business credits in more than 3,000 electronically filed corporate income tax forms, according to a report by the Treasury Inspector General for Tax Administration. These credits can be used for future filings and are awarded to corporations for offering services such as childcare for employees’ children.

“Given the amount of potential tax revenue at risk, it is imperative that the IRS improve its processes to ensure that corporations accurately claim carryforward general business credits,” Inspector General J. Russell George said.

IRS Had Tough Tax Season Leaving Workers Depressed

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A 16-year IRS veteran, Gaddy wishes she could share some of her own IRS troubles with her visitors. Her salary has risen only 2 percent in the last four years. The center lost its secretary and hasn’t replaced her because of a four-year-old hiring freeze throughout the agency, which means Gaddy and the remaining employees handle clerical duties, too. One of her fellow specialists spends all his time now answering questions via webcam from taxpayers in Harrisburg, Pa., because that office is short-staffed. Last year, to reduce the lines, the IRS discontinued its practice of preparing simple tax returns as a courtesy for people, many of them elderly. But in Philadelphia the queues have stayed the same or grown longer, because so many people come in with questions about tax credits for Obamacare and what to do to prevent identity thieves from stealing their refunds. (Because the refunds come on ATM-ready debit cards, thieves like to file victims’ returns ahead of time, with a different address.) “I mean, we still had lines,” Gaddy says, “but not out the door and around the corner.”

The IRS has never been an easy place to work. Its 84,000 employees, 65 percent of them women, generally don’t tell people outside the service where they draw a paycheck. It’s no way to make friends. They toil in purposely anonymous buildings—a big sign outside might attract crazies. In 2010 an antigovernment zealot flew a single-engine plane into a building in Austin, Texas, where 190 agency employees worked, killing one of them. “Well, Mr. Big Brother I.R.S. man, let’s try something different, take my pound of flesh and sleep well,” the pilot, Joseph Stack III, wrote in a six-page suicide note.

More recently, the IRS has become a casualty of the budget battles between the Obama White House and House Republicans. Since the GOP won control of the chamber in 2010, the agency’s annual budget has fallen by $1.2 billion, to $10.9 billion in 2015. Meanwhile, the agency has lost 11 percent of its employees. Last year it started 19 percent fewer criminal investigations than 2013. This year alone, it expects to close at least 46,000 fewer audits. Nobody likes being scrutinized by the IRS, but audits are a key component of the tax system that keeps the U.S. afloat. “It’s core to the country,” says Jeffery Trinca, a former Senate aide turned lobbyist who specializes in tax policy.

“I buy my own pens. I buy my own clips and hole punchers and things of that nature. It’s not uncommon”

The agency’s customer service operation has been hobbled, too. In late March, the IRS said fewer than 40 percent of the people who call during this tax season will get through to someone. A decade ago, the figure was 83 percent. The agency is so short on funds that some employees purchase their own office supplies, even though the IRS says they shouldn’t. “I buy my own pens,” says Catherine Ficco, a revenue officer in West Nyack, N.Y. “I buy my own clips and hole punchers and things of that nature. It’s not uncommon. There’s no money to order supplies or paper for my printer.”

The IRS has long been disliked, but its employees aren’t used to being vilified. In May 2013 the agency disclosed that it had

They start lining up before 7 a.m. An hour and a half later, more than 60 people are waiting to get into the Internal Revenue Service’s Taxpayer Assistance Center in Philadelphia, across the street from the Liberty Bell. Young men in parkas and Phillies caps lean sullenly against the wall. Older couples camp on the hard marble floor with their forms in their laps. Some have haunted the lobby for several days, waiting to see someone like Candace Gaddy.

Inside the service center, Gaddy, an IRS taxpayer assistance specialist, sits stoically in a beige cubicle marked by an electric sign with a red numeral 5. She has long, dark hair and wears a white turtleneck, black vest, black jeans, and black boots. She’s neatly arranged stacks of tax forms on her table in front of her. The speakers of her Hewlett-Packard computer softly emit the Jay Z song 99 Problems. She’ll hear quite a few from taxpayers today.

The IRS’s understaffed Taxpayer Assistance Center in Philadelphia has been cutting back services for overwhelmed filers, many of them elderly.

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given extra scrutiny to Tea Party groups that were seeking nonprofit status. To Democrats, the decision to group together Tea Party applications and other politically oriented groups was merely a misguided attempt to find a consistent rule after years of muddled policy. “There were some boneheaded decisions,” President Obama told Fox News. To Republicans, the IRS’s hard look at Tea Party groups proved the service has a political bias. Since then the IRS has been consumed with scandals large and small: an expensively produced internal video that featured top executives dressed as Star Trek characters; a lavish conference funded with enforcement money where officials slept in presidential suites, albeit discounted ones; and the rehiring of employees accused of misconduct, including some who hadn’t filed their own taxes.

With a presidential election next year, Republicans seem determined to keep the scandals percolating. Texas Senator Ted Cruz may have set the tone in March, announcing his candidacy with a promise to abolish the IRS. He says its agents won’t be needed after he throws out the current tax structure and replaces it with a simple flat tax, enabling Americans to fill out their returns on postcards. Cruz wants them reassigned to border patrol duty.

In May 2013, Obama ousted Steven Miller, the acting IRS commissioner, and shortly after named John Koskinen, a former corporate takeover expert, as his replacement. Koskinen has two challenges: restoring the public’s confidence in the service and keeping employees from giving up hope. It may be too late for the latter. IRS veterans say it’s fine for Republicans and Democrats to disagree about the level of taxation in America, but they can’t do their jobs without functional computers and sufficient supplies. “I still get calls from people that worked for me who talk about the overload they are facing and what’s happening to them,” says Dorothy Taylor, a former IRS territory manager who was based in Plantation, Fla., before retiring in December 2013. “I try to reassure them that there have always been ups and downs in the organization. I tell them to just keep their heads down and do their job, and hopefully the IRS will pull through like it has in the past. But my concern is, will it?”

People who’ve spent their careers at the IRS all say the same thing: The pay wasn’t fantastic, but the health care and pension benefits were. And they went to the office each morning with a sense of purpose. Without their efforts, they knew, the federal government would stop working.

Whether they worked in Manhattan or Peoria, IRS veterans talk about something else that kept them at the service: the feeling of camaraderie. It was nice that they appreciated one another, because nobody else did. “You go to a party, and if you say you are from the IRS, half the people move into the other room,” says Richard Schickel, a former senior collections officer in Tucson who retired in December 2013. “After a while, your wife and relatives get tired of listening to your stories. They say, ‘How could you take those people’s houses and their businesses?’ The only place you get understanding is with other IRS people.”

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said, ‘OK, how do I do this?’ And they tried to walk me through, because there just aren’t enough people here to do it.”

In 2012 the IRS reduced its training and travel budget by $54 million. That might not sound like much for an agency with a multibillion-dollar budget, but it punctured morale further. It became difficult, if not impossible, for employees to get together in one location. “The members of our team were scattered all around the country,” says David Stanley, an IRS research program manager who worked in Oakland, Calif., until his retirement last year. “We weren’t able to meet physically for about three years. You have all these people working in isolation.”

The IRS all but stopped sending managers to conferences to speak to accountants and other tax professionals about what could trigger an audit. It wasn’t just the cost of traveling. Ron Cerruti, a former territory manager in San Francisco, says the

When Schickel was hired in 1981, the IRS was decentralized. The 33 districts throughout the country each had their own criminal investigation, collection, audit, and customer service departments. Every district was like an extended family. Employees knew one another. They played softball together. They went on social outings. “Most of them were just decent people,” Schickel says of his former co-workers. He’s still friends with many of them.

It became more challenging for IRS employees to enjoy each other’s company in the late 1990s, also a dark period for the service. Congressional Republicans held hearings in which IRS employees were depicted as jackbooted thugs. Schickel, who’s writing a book about the agency, concedes there was some truth to the characterization. But he takes issue with the government’s response. In an effort to make the IRS more accountable, President Bill Clinton signed a sweeping reform bill that reconfigured the agency into four national divisions serving different types of taxpayers—individuals, small businesses, large corporations, and nonprofits. “Your boss might be in San Francisco, but you were in New Jersey,” Schickel says. “How did that happen?”

It wasn’t all bad. During the eight years of George W. Bush’s presidency, the IRS had enough money to send employees with various specialties to training sessions where they’d sharpen their skills and trade war stories. “We were in Chicago one year,” says Sharyn Phillips, an IRS estate tax lawyer in New York. “We were in Kansas City one year. The good thing about it was that you could share your experience. Every year, Congress is tinkering with the tax code. Estate taxes have changed dramatically.” It helped make up for the lack of office pantries with free coffee. Workers might not have had the newest computers, but the service provided them with adequate tech support.

It looked as if the IRS would be funded at previous levels, if not higher, when Obama took office in 2009. In the first year of his presidency, the Democratic-controlled Congress approved a $12 billion budget for the following year. It also gave the agency more work to do when the Affordable Care Act and another law increased filing requirements for Americans overseas. Then, in 2011, Republicans settled into the House, and the cutbacks started. According to the U.S. Government Accountability Office, the IRS reduced technology spending that year by $165 million. Schickel says it became almost impossible to get people from tech support to help with a computer problem. This was when the agency was finally going through a difficult upgrade from Windows XP to Windows 7. “A lot of people in the office had laptops. Every time they loaded Windows 7, it completely crashed,” he says. “They didn’t have enough memory. It’s like Congress is against you, the computer system is against you, and you are just fighting to get your job done.”

Many IRS veterans have similar stories about the software switchover. “It’s been really tough,” says Jenny Brown, a tax examiner in an IRS facility in Ogden, Utah, and president of the local National Treasury Employees Union (NTEU) chapter there. “There were times when I actually called my sons and

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Some Republican leaders seem more interested in exploiting the scandals. The investigations into the Tea Party affair continue after almost two years and more than $20 million spent on them. Congressional investigators are pursuing missing e-mails sent by Lois Lerner, who oversaw the agency’s nonprofit division before she was nudged out in 2013. (William Taylor, her attorney, declined to comment.) “The public’s lost faith in the IRS,” says Senator John Boozman, an Arkansas Republican and chairman of a subcommittee that has jurisdiction over the service. “It’s really important to have faith in institutions. Now we’re [Congress] at an 18 percent approval rate, so it’s hard to pick on them.” Perhaps, but that isn’t stopping anybody on Capitol Hill.

IRS employees dread the political theater more than the budget cuts. “Every time one little thing is found, it’s blown up to some big conspiracy,” Dorothy Taylor says. “It’s disheartening to the employees in the organization, and that’s why a lot of people like myself have left. You get tired of being beaten down and having resources withheld. I was there when the tax-exempt [Tea Party] thing started. It had nothing to do with the examinations where I was, but it affected the whole organization.”

David Carrone, a revenue agent in New Orleans and president of the NTEU chapter in Louisiana, is similarly disgusted with the never-ending cycle of hearings and castigations. “That’s the No. 1 downer as far as morale is concerned,” he says. “I shouldn’t have to say this, but the IRS brings in approximately 93 percent of the revenue of this country. We’re not soldiers here, but we are serving our country.”

Schickel says the political attacks made his job more difficult and potentially more dangerous. Throughout his career, he

service was nervous that employees would say something controversial and embarrass it after the scandals of 2013. “I remember one time I was invited to attend a meeting at a hotel in San Francisco about four blocks from my office,” says Cerruti, who also retired last year. “There would have been no travel costs. I couldn’t get permission to go. They were afraid of what we were going to say in front of an audience of external people.”

“We were on a gag order,” says Taylor. “I mean, it was ridiculous. We couldn’t talk outside of the organization.”

IRS employees give Koskinen high marks for his efforts to rejuvenate morale. An unwaveringly upbeat 75-year-old with an oval face, high cheekbones, and large blue eyes, he never misses a chance to extol his workforce. Koskinen spent much of his early months as commissioner meeting with employees around the country and listening to their gripes. Managers told him they hadn’t seen their team members in person for ages. Employees frequently brought up the gutted tech support operation. “I had people stand up and talk about how there used to be 12 people on the help desk in their area and now there were three,” Koskinen says. “I told employees, ‘Now you know what it’s like to be a taxpayer trying to contact us.’”

Koskinen has tried to restore some of the IRS’s funding, but it hasn’t been easy. In December, Obama signed a 2015 federal spending law that lowered the IRS budget by 3 percent, to $10.9 billion. The same month, Koskinen said the agency would halt most overtime payments and answer fewer than half of incoming telephone calls from taxpayers during this year’s filing season. The IRS now tells customer service reps they can no longer spend time on the phone answering complicated tax questions. Instead, they urge people to go to the IRS website or hire an accountant.

Frank Spadea manages an IRS call center in Philadelphia, where employees sit in a cubicle farm and field questions from Americans in foreign countries. His group used to have 51 employees; it’s down to 17. Of those, he expects at least two to retire this year, and they won’t be replaced. “It’s been seven or eight years since I’ve been able to hire,” he says. Meanwhile, his staff has been overwhelmed with calls this year from Americans overseas who are confused about extra information they’re supposed to furnish under the 2010 law combating tax cheating abroad. “They are calling like crazy about that,” says Donna White, a customer service representative in the office. “You kind of get burnt out.”

Koskinen has asked for more money in 2016, but it doesn’t look good. In March he made his case before a House subcommittee that oversees the IRS’s budget. “I thought it was a good discussion,” he said afterward. “It wasn’t contentious in the sense of, ‘Have you stopped beating your wife lately?’” But Representative Ander Crenshaw, a Florida Republican and the subcommittee chairman, was unmoved. He says the IRS has enough money to carry out its mission. Asked about the lamentations of its employees, Crenshaw says, “We’re not out to punish them. We’re out to make them more efficient, and I want them to keep working on that.”

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be told the agency has run out of the forms — and even the paper to print more.

At the office in downtown Manhattan, hundreds of would-be filers snaked down Broadway, waiting an hour outside — and another hour once they got through the door. “It’s incredibly inconvenient that I have to stand in line for hours just to file my taxes,” griped Vaib Sager, 32, a Manhattan software project manager. “I just can’t believe this.”

The headaches come after the agency has lost 13,000 employees and $1.2 billion in funding since 2010.

Bronx resident T.C. Rice said he’s been scrambling from location to location in hopes of finding a 1040EZ form.

He said he first went to six public libraries — which no longer provide the forms — and when he finally got into the IRS’s Harlem office after waiting nearly 90 minutes, they were out of tax forms.

“It’s more than frustrating. It means I’m going to be late in filing my taxes because the government can’t give me the wherewithal to do it,” grumbled Rice, who works insecurity.

He ventured to the 290 Broadway office Wednesday after his overnight shift wrapped up at 8 a.m. — only to wait two hours, even though the office had just opened for the day.

Workers there told Rice they’d run out of copy paper — and couldn’t print off more tax forms.

“They cannot handle the crowds. The IRS has bungled it again,” he scoffed.

An IRS spokeswoman declined to comment, instead sending a press release that warned of “possible long lines . . . and long hold times on the phone.”

The IRS release advised using its Web site for tax-related issues — which is fine for those with computers who can slog through the forms without help. “The line they feed you every time is, “Well, you can just go online.’ If I could go online, I wouldn’t be here,” said Rice, who doesn’t have Web connection on his computer at home.

Last week, IRS Commissioner John Koskinen called this year’s tax-season blunders “abysmal.”

Responses to phone queries has plummeted to 40 percent — meaning six out of 10 people who call the IRS won’t be able to get through because of lack of workers, he said.

9 Assets Seized and Put Up for Auction by the IRS

1. Contents of a Hair Salon

At least the winning bidder will be sporting a stylish ‘do from

dealt with antigovernment tax avoiders in Arizona, but once the Tea Party scandal broke, his encounters with otherwise law-abiding ranchers became more hostile. “I used to work Tombstone,” he says. “They hate the IRS down there. It’s a hard enough thing to drive out, bang on somebody’s door, and make a legal demand on them for money. It’s even harder when the person is wearing a gun on his hip and says, ‘I saw on TV that you people are discriminating against the Tea Party.’ That’s when I decided, the hell with this!”

The fear in the IRS is that vilification of the service will hurt Americans’ high voluntary compliance, which makes the country more financially stable than, say, Greece, where much of the population declines to pay taxes altogether. Beleaguered IRS workers worry that citizens will test the system to see what they can get away with. “Once you go in that direction, it’s not an off/on switch,” Koskinen says. “You can’t turn it around the next day by saying, ‘Whoops, I take it back. It’s a really good agency, and they are doing good work.’”

Koskinen says he hasn’t seen any evidence of compliance erosion, but he could be in the dark. In 2012 the IRS estimated that it collected 83 percent of the taxes it was owed from people who had paid on time and without prodding, but that number was extrapolated from 2006 data, before the funding crisis began. “Historically it’s stayed at a good level,” Koskinen says. “But we have 5,000 fewer revenue agents, revenue officers, and criminal investigators than we had five years ago. That has an impact.” Which is why Ficco, in West Nyack, continues to do her job, even if she has to purchase her own supplies. She doesn’t want to see the U.S. go the way of Greece. “Absolutely,” she says. “It is the ultimate goal, and it’s sad that we have people out there trying to do the right thing, and we’re putting up roadblocks in front of them.”

IRS Runs Out of Forms as Furious Taxpayers Wait In Line for Hours

It’s taxpayer torture!

With a week to go before Tax Day, frustrated New Yorkers spent hours waiting in line Wednesday for IRS help, only to

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to pay up to $3.1 million in federal employment taxes for a number of years.

7. Rapper’s Assets Sold Back to Rapper

Young Buck seemed to be at the end of his career when the IRS was slated to auction off several of his luxury belongings after the rapper declared Chapter 7 bankruptcy. The seized items, which included some jewelry, recording equipment, and a personalized 615 Cashville necklace (named after his record label), all sold for $53,000, but here’s the catch: Young Buck later claimed that he bought back many of the items himself, reports HotNewHipHop.com. As for rumors that his identity would also be up for IRS grabs, the rapper later tweeted, “They Haven’t, Can’t, and will not SELL MY NAME!!! (sic)”

8. A Ponzi Schemer’s Bugatti Veyron

Like conventions, IRS auctions are advertised as big, three-ring events where there’s at least one big-ticket item up for grabs. One such valuable that made it to the front page of an IRS specialty auction brochure was a Bugatti Veyron previously owned by, and seized from, a convicted Ponzi schemer named Scott Rothstein. The luxury sports car went for the bargain price of $858,000, roughly half of its original $1.7 million MSRP. According to CNET, Rothstein, a former attorney in Florida, “used other people’s money to curate a large stable of specialty vehicles, including a 1967 Corvette and a 208 Ford Expedition Limousine.”

9. Delinquent Debts from Children

If someone owes back taxes or other funds to the government, the IRS doesn’t stop pursuing the money if the person is deceased — they’ll collect it from the decedent’s estate or surviving children. “The government is now going through old records to see if it overpaid people on Social Security,” said Jake Novak of CNBC. “If it thinks it did, it can now seize the IRS tax refund checks of the children of those people it thinks it overpaid.” A Washington Post report notes that in the first quarter of 2014 alone, The Treasury Department managed to collect $1.9 billion in said tax refunds, leaving these next of kin financially weakened because of mistakes they had nothing to do with.

What the IRS Can’t Seize

Justin Timberlake would probably prefer that everyone forget about that time in 2003 when he was tricked on TV show “Punk’d” into thinking that his home was being seized, since a house is one of the first pieces of property the Treasury may repossess. Thankfully, there are a number of assets that are exempt from seizure by the IRS:

• Unemployment, and certain pension and annuity, benefits • Specific service-connected disability payments • Workers compensation • Limited public assistance payments

here on out. As of last week, the IRS was auctioning off a salon’s worth of equipment and products from a high-end hair cutter in Birmingham, Ala. Up for grabs were a series of salon, manicure and pedicure chairs; a dermabrasion machine; a massage table; assorted tables and chairs; and a full supply of Aveda hair care products. Bidding was slated to begin at $13,452. According to the IRS report, the property was seized from the owner for tax nonpayment.

2. A Pair of Parking Spaces

Finding parking in any city can get expensive, but this is ridiculous. Two private parking spots in Boston sold at a 2013 auction for a whopping $560,000 ($280,000 each), reports The Boston Globe. The owners had originally purchased the spaces just over 20 years ago for $50,000, and the IRS seized the spaces from the owner to cover $600,000 owed in back taxes.

3. A Luxury Airplane

Though this bird was born to fly, it was grounded after its owner failed to pay back taxes. Now, its wings belong to someone else. According to Business Insider, a nearly-new 1976 Beechcraft 58TC-Baron, equipped with a piston turbo engine and carrying less than 6,500 flight hours, went up for auction in Arkansas in 2013 at a starting bid of $30,000 — a steal compared to the aircraft’s original $170,750 price tag.

4. Darryl Strawberry’s New York Mets Salary

In January, a lucky bidder “became” Darryl Strawberry when he successfully made a $1.3 million bid for the former New York Mets slugger’s deferred salary from the 1980s, according to ESPN. The unidentified man will receive a monthly check from the team of $8,891.82 for the next 18 years, which will amount to a total of $2 million. Originally the deferred pay had belonged to Strawberry’s ex-wife, but when she filed for bankruptcy the judge ordered that the annuities belonged to the IRS for taxes owed from 1989, 1990, 2003 and 2004.

5. A Gold Mine of Art and Antiques

They say a picture is worth a thousand words, but how much does it go for at auction? Another IRS sale earlier this month was slated to recoup some unpaid back taxes by selling off an Illinois individual’s collection of art and antiques, including some Baroque-styled chairs and tables; a Japanese vase; vintage rugs; and needlepoint paintings of Eduard Jean Baptiste and George Washington. Low bids, according to the IRS, were due to start at $9,681.

6. Native American Land

It’s part of an ongoing, culturally-sensitive debate — but in the end, what the government gives, the government can take away. In 2009, 7,100 acres of South Dakotan Crow Creek Sioux land was auctioned off to a private bidder for more than $2.5 million. An unfortunate loss for the tribe, the IRS, according to Color Lines, had alleged that the Crow Creek Sioux had failed

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• Minimum weekly exempt income • Assistance under the Job Training Partnership Act • Income for court-ordered child support payments • Schoolbooks and clothing • Undelivered mail • Certain amounts worth of fuel • Provisions • Furniture and personal effects for a household • Designated amounts worth of books and tools for trade, business, or professions

The IRS also notes that it actually can’t seize property unless it expects the net proceeds to help pay off a person’s tax debt. But that’s where the exemptions end. The biggest components of a person’s livelihood, like their earnings, bank account and property, are all fair game for IRS seizure after failure to pay taxes. The lesson? File your taxes honestly and on time, and don’t hesitate to seek help if you’re in financial trouble and unable to pay them. The agency encourages calling 1-800-829-1040, visiting a local IRS office to speak with a representative in person, or visiting www.irs.gov.

IRS Won’t Penalize People for Failing to Say They Have Health Insurance on Tax Form

The penalty went into effect last year, but taxpayers will pay for it in their 2014 tax returns.

For the first time, a majority of taxpayers will have to check a box on their tax return attesting they have health insurance either through their job or Medicare or Medicaid.

But what happens if they miss it, which can easily happen on the complex form?

The Internal Revenue Service told the Washington Examiner it will not penalize anyone who has insurance but neglected to check the box.

However, a taxpayer may be asked by the agency if they have health insurance if their return is flagged during a routine check.

“The IRS routinely follows-up on the accuracy and completeness of tax returns, and in this situation, taxpayers should be prepared to respond to correspondence,” said Ubon Mendie, a spokesman for the IRS.

He added that taxpayers who already filed their returns don’t need to amend the returns solely to indicate they neglected to check the box.

TIGTA Addresses IRS Action on Excess IRA Contributions

A new Treasury Inspector General for Tax Administration (TIGTA) report finds that IRS hasn’t done enough to address the problem of taxpayers making excess contributions to IRAs. The report suggests ways the agency could improve its outreach program for IRA custodians and its methodology for identifying noncompliant taxpayers.

Traditional and Roth IRA contributions are reported by IRA custodians on Form 5498, IRA Contribution Information.

An individual has made an excess contribution for:

• any amounts contributed to traditional or Roth IRAs for the year that exceed the annual contribution limit (e.g., for 2015, $5,500 ($6,500 if age 50 or older));• any amount contributed to a traditional IRA by an individual who has reached age 70½; or• any amount contributed by an individual who does not earn eligible compensation.

Individuals who discover they have made excess IRA contributions can withdraw the excess amount out of their IRAs by the due date of the tax return without penalty.

Distributions resulting from excess contributions are reported by IRA custodians on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., which includes a requirement to provide an appropriate distribution code explaining specific details surrounding the distribution. There is a 6% excise tax associated with excess contributions not withdrawn by the due date of the tax return, including extensions. This 6% tax is reported by individuals on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

IRA custodians must report information on Forms 5498 and Forms 1099-R to IRS and provide copies to IRA owners. A separate Form 5498 should be filed for each IRA held by an individual, and a separate Form 1099-R should be filed for distributions from each IRA or account held by an individual.

A TIGTA audit for fiscal year 2010 found that approximately 300,000 individuals potentially contributed more than $3.9 billion of unreported excess contributions to IRAs in tax years (TYs) 2006 and 2007.

The new TIGTA report assesses the corrective steps IRS took to address the excess contributions problem and makes suggestions of its own. Here’s a summary of the report’s findings.

IRS did develop and provide educational materials to

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individuals and tax return preparers explaining IRA rules and providing guidance if an individual is noncompliant with IRA rules. However, IRS did not develop education materials for IRA custodians, who serve a key function to assist individuals, return preparers, and IRS in identifying excess IRA contributions by providing Forms 5498 showing contributions made to IRAs by individuals.

When analyzing TY 2011 Forms 5498 for excess contributions, TIGTA found that approximately 834,000 (7%) of 11.9 million Forms 5498 filed by IRA custodians appeared to be inaccurate. For example, TIGTA found instances in which the IRA custodian appeared to mistakenly include rollovers from other IRAs in the “IRA contribution” box on Form 5498. Without outreach to IRA custodians, TIGTA said erroneous Forms 5498 may continue to be submitted to IRS.

As part of its broad-based strategy to address noncompliance with retirement plan provisions, IRS implemented processes to send so-called “soft notices” to a sample of individuals whom IRS identified as having potentially made excess IRA contributions in TY 2011. Soft notices do not require that the individual pay more tax, provide documentation, or even respond to IRS. Although the notice requests that the individual file an amended tax return if appropriate, it is not required. Instead, the notices are designed to serve as an educational tool, encourage self-correction, and improve voluntary compliance.

While IRS’s evaluation of the results of the TY 2011 soft notice sample is not complete, TIGTA says it has taken positive steps toward testing its strategy by adding controls to identify and address retirement provision noncompliance. However, TIGTA found IRS’s methodology for identifying noncompliance could be improved. TIGTA identified a significant number of individuals that IRS did not identify who potentially made excess contributions.

IRS said that it planned to continue to inform IRA custodians of issues and errors affecting IRA administration. It also agreed to identify a more complete and accurate universe of individuals who potentially made excess contributions. This was a logical step in expanding the IRA soft notice program from its current state.

TIGTA: How IRS Should Better Control Third-party Payroll Service Providers

The Treasury Inspector General for Tax Administration (TIGTA) has issued a report concluding that IRS must improve the safeguards that it has in place to protect employers and the government when third-party payroll providers are not compliant with payment and filing requirements.

An employer can appoint or enter into an agreement with a third party to take over some or all of its federal employment tax withholding, tax return preparation, reporting, and tax payment responsibilities. A survey completed by the National Small Business Association found that approximately 40% of small firms use a third-party payer for tasks ranging from

paying employees to Federal employment taxes.

There are four types of third-party payer arrangements that are the most common:

(1) Payroll service provider (PSP). A PSP typically prepares employment tax returns for signature by the employer and processes the withholding, deposit, and payment of associated employment taxes. An employer’s use of a PSP does not relieve the employer from its responsibility of ensuring that all of its federal employment tax responsibilities are met.

(2) Reporting agent. A reporting agent is a type of PSP. An employer and a third party file Form 8655, Reporting Agent Authorization, with IRS, to designate a PSP as a reporting agent. An employer may authorize a reporting agent to sign and file certain tax returns. The reporting agent files separate employment tax returns for each employer and may also deposit and pay taxes on the employer’s behalf.

(3) Section 3504 agent. An employer and a third party file Form 2678, Employer/Payer Appointment of Agent, with IRS, to authorize the third party as an agent of the employer under Code Sec. 3504 . A Section 3504 agent performs acts such as withholding, reporting, and paying of employment taxes. The aggregate tax is paid under the Section 3504 agent’s EIN, unlike with a PSP or reporting agent where the tax is paid under the employer’s EIN.

(4) Professional employer organization (PEO). A PEO, sometimes referred to as an employee leasing organization, enters into an agreement with an employer to perform some or all of the employment tax withholding, reporting, and payment activities related to workers performing services for the employer. The aggregate tax is paid under the PEO’s EIN.

TIGTA found that processes have not been established to link employers with all third-party payers. Of the four most common types of third-party payer arrangements, only reporting agents and Section 3504 agents are required to submit an authorization form that discloses the relationship between an employer and a third-party payer. IRS does not require a similar authorization for employers that use a PSP or a PEO.

In addition, IRS does not always accurately process authorization forms. TIGTA’s review of 85 agent authorization forms that were processed in 2013 identified 11 forms with errors. Because of these errors, authorizations provided by employers to their reporting agents were incorrectly reflected in IRS systems.

The report also notes that IRS has not established an effective process to ensure that indicators are accurately assigned to Section 3504 agent and employer tax accounts. In some instances, agents were incorrectly identified as employers and vice versa.

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Tax Pros in TroubleAlton Woman Sentenced to Prison for False Tax Returns

Aisha Wright, 33, of Alton, Illinois, was sentenced to serve forty-six months in federal prison, followed by three years supervised release, as a result of her convictions for two counts of making false claims against the United States, Stephen R. Wigginton, United States Attorney for the Southern District of Illinois, announced.

Wright operated A W Mobile Taxes, in Alton, Illinois. Potential fraud was detected by the Scheme Development Center of the I.R.S. Two undercover agents went to Wright to have their tax returns prepared and Aisha Wright prepared fraudulent returns for both of the undercover agents.

Further investigation revealed that Wright was systematically preparing false returns for taxpayers that falsified Schedule A deductions, Schedule C self-employment income, and falsified education expenses for receipt of the education tax credit.

The court determined that over a three year period Wright filed 492 federal income tax returns that caused a total actual loss to the United States in excess of $1,000,000.

Wright was ordered, as part of her sentence, to pay restitution in the amount of $1,052,302.86. She was also ordered to serve 450 hours of community service as a condition of supervised release, following her release from prison.

The successful prosecution is the result of an investigation conducted by the Internal Revenue Service/Criminal Investigations, the U.S. Postal Inspection Service, the U.S. Secret Service, and the Shelby County Sheriff’s Office. The case was prosecuted by Assistant United States Attorney Norman R. Smith.

Justice Department Sues San Francisco Enrolled Agent to Bar Promotion of Abusive Tax Avoidance Schemes

San Francisco, California - The United States filed a complaint to bar a San Francisco enrolled agent and tax return preparer from implementing, facilitating and promoting allegedly abusive tax shelters and tax avoidance schemes, the Justice Department announced..

According to the complaint, which was filed in the U.S. District Court for the Northern District of California, one of the abusive tax avoidance schemes that Timothy Conn Vu promoted was a scheme that illegally avoided corporate income taxes on gains received from the sale of corporate assets, a so-called intermediary transaction tax shelter. Additionally, Vu promoted a scheme that illegally avoided taxes on the gains from selling transferrable state tax credits (the State Tax Credit tax shelter), which real estate project owners typically sell to raise money

The TIGTA report included the following recommendations:

• IRS should partner with the Bureau of the Fiscal Service to develop a plan to use the Electronic Federal Tax Payment System (EFTPS) to link a PSP with an employer. IRS agreed with this recommendation.

• IRS should establish a program in which employers can inform IRS of the PEOs they authorize to file and pay employment taxes. IRS partially agreed with this recommendation; it is working on establishing a voluntary certification program for PEOs. However, IRS said it does not currently have the budget or resources to establish a compliance program for PEOs that do not voluntarily agree to be certified. As a result, IRS says it will continue to be unable to readily identify noncompliance with payment and filing requirements by non-certified PEOs.

• PEOs with a service agreement should be required to attach Form 941, Schedule R, Allocation Schedule for Aggregate Form 941 Filers, to employment tax returns. IRS noted that it does not have the authority or ability to require non-certified PEOs to attach a Schedule R to their Form 941 tax return listing the employers on whose behalf the PEO is filing.

• The Commissioner, Wage and Investment Division, should develop processes and procedures to ensure that Form 8655 authorization information captured in IRS’s systems is accurate, and that the errors associated with the 11 Forms 8655 that TIGTA identified are corrected. IRS agreed with this recommendation and issued a Servicewide Electronic Research Program Alert to reinforce the procedural requirements for processing Form 8655. It will coordinate with affected stakeholders to explore systemic or procedural changes that may result in improved accuracy of posted data.

• IRS should develop processes and procedures to ensure authorization information and Section 3504 agent indicators are accurate. IRS agreed with this recommendation and issued a Servicewide Electronic Research Program Alert to reinforce the procedural requirements for processing Form 2678.

Editor’s Note: When many Fellowship Members reported receiving “change of address” notices for their clients,, the Fellowship contacted the National Taxpayer Advocate who reported that this was an attempt to keep payroll administrators from changing the taxpayers address without their permission. It was noted that the tax professional community should have been advised in order to eliminate the angst of the taxpayer, keep multiple communications from inquiring of the IRS about the notice and to allow the tax professional community to partner with the IRS on such important issues. Thank you to our members who responded with their examples.

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to develop real estate projects, according to the suit.

According to the complaint, in many instances Vu served as the sole officer, director and/or manager of the five companies that were used to carry out these schemes and he signed many of the documents on behalf of those companies.

In one version of the intermediary transaction described in the complaint, a company that Vu managed allegedly bought all of the stock of a closely held corporation shortly after that corporation had sold its assets to a third party. The asset sale generated capital gains tax. The complaint alleges that, once it owned the stock, the company that Vu managed allegedly offset the tax liability from the asset sale using a purported bad debt deduction based on bogus losses from a distressed asset debt (DAD) and/or distressed asset trust (DAT) tax shelter.

According to the suit, Vu, as an officer of the companies perpetrating these schemes, also signed and then filed with the Internal Revenue Service (IRS) many of the corporate income tax returns that claimed bogus losses to offset the income on which the corporations should have paid substantial federal taxes.

The complaint alleges that Vu’s participation in these abusive tax schemes has generated more than $515 million in bogus tax deductions that have led to federal income tax deficiencies of at least $129 million. For his role in the abusive transactions, Vu allegedly earned $3 million in compensation, according to the complaint. The lawsuit seeks to stop Vu from promoting these schemes in the future and to permanently bar him from preparing tax returns for others.

The promotion of tax schemes is one of the IRS’ Dirty Dozen Tax Scams for 2015. The IRS has some tips on its website for choosing a tax preparer, and has launched a free directory of federal tax preparers. In the past decade, the Tax Division has obtained injunctions against hundreds of unscrupulous tax preparers and tax scheme promoters. Information about these cases is available on the Justice Department’s website. An alphabetical listing of persons enjoined from preparing returns and promoting tax schemes can be found on this page. If you believe that one of the enjoined persons or businesses may be violating an injunction, please contact the Tax Division with details .

Broward Tax Preparers Get Prison Time For Tax Fraud

Tarmarac resident Steven Tidas was sentenced to 2.5 years, Lauderdale Lakes resident Sylvanie Junior Pierre was sentenced to 1.5 years, and Parkland resident Stenor Prosper was sentenced to six months followed by six months home confinement, according to the U.S. Attorney’s Office for the Southern District of Florida. Each sentence is followed by three years of supervised released.

Sunrise-based Value Financial Group was incorporated in Florida in 2005. Tidas was the registered agent and president

and Pierre and Prosper were directors of the company at the time of incorporation. A second company, Values Tax Services, was incorporated in 2008 at the same address. Tidas was again the registered agent and president of Value Tax and Propser was later added as an officer and director, according to a court document.

Tidas prepared taxes for clients and, between 2008 and 2010 when the federal government offered credits for first-time home buyers, he would claim his clients qualified for the credit when they did not. Pierre and Prosper also prepared tax returns for clients claiming the first-time home buyer credit to inflate the tax refund amount, according to court documents. The trio also falsely claimed that clients received household help income to increase refunds.

The three were ordered to pay almost $150,000 in total restitution.

Fort Worth Judge Spars with Tax Fraudster Over her Hysterectomy, Prison Date

Tax preparers Jacqueline and Gladstone Morrison were convicted of fraud and sentenced to 15 years.

A Cedar Hill woman wants her federal fraud conviction and sentence overturned after calling the judge over her case insensitive for saying that her hysterectomy surgery was merely “an excuse.”

Jacqueline Morrison, 46, was sentenced to 15 years in prison

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medication as well as medication for the infection that she would not be able to receive while in federal custody. She attached a note from Morrison’s doctor, who said her recovery period was four to six weeks.

“I respectfully request that she be permitted to recover for a minimum of 1 month” the doctor wrote, adding that he’d like her to return for follow-up care on March 31.

But McBryde denied the request for a reporting extension.

Judge’s view

“The court did not intend for Jacqueline to delay her reporting date by undergoing a surgical procedure between the sentencing date and the reporting date,” he said in his order. “She on three prior occasions had attempted to interfere with the judicial process by claiming a need to have her surgery.”The judge added that if Morrison continued to delay, he might have U.S. marshals pick her up and make arrangements to have her taken to federal prison.

Records show she is currently at a minimum-security federal prison camp in Bryan.

Local physicians specializing in obstetrics and gynecology told The Dallas Morning News that in most cases, the recovery period from a hysterectomy lasts six weeks.

McBryde said he already gave Morrison a “level of recovery” from her surgery.

McBryde, 83, is no stranger to controversy since he was appointed to the federal bench by President George H.W. Bush in 1990. He has had several high-profile run-ins with the 5th U.S. Circuit Court of Appeals in New Orleans and has developed a reputation among the local legal community for being stern and temperamental.

The 5th Circuit issued a rare public reprimand of McBryde in 1995 over what it called his “intemperate, abusive and intimidating treatment of lawyers, fellow judges and others.” He was suspended from receiving new cases for a year. McBryde sued and the battle dragged on for several years before the suspension was upheld.

Four El Pasoan Women Indicted in Connection with $90,000 Tax Return Fraud Scheme

An El Paso tax service business owner and three of her employees were arrested Thursday on suspicion of running a fraudulent income tax return scheme that resulted in about $90,000 in government losses, officials said.

Belia Mendoza, 60, Margarita Hernandez, 36, Denise Duchene, 46, and Anna Montez, 47, were indicted last week on one count each of conspiracy to defraud the United States.All four also were charged with multiple counts of aiding and assisting in the preparation of a false income tax return. In total, the four women were indicted on 22 counts.

last month by U.S. District Judge John McBryde in Fort Worth. She and her husband ran a tax preparation business that prosecutors said scammed the government out of millions of dollars by filing fraudulent returns. Her husband, Gladstone Morrison, also is appealing his conviction and sentence.

McBryde denied Jacqueline Morrison’s request to delay her sentencing so she could undergo the hysterectomy. Her attorney, Meagan Temple, filed a motion on the eve of sentencing asking McBryde to recuse himself on the grounds that he was insensitive toward women’s health issues, in addition to other reasons.

Temple said McBryde’s comments about Morrison’s “very serious women’s health problems” were “patently offensive.” She added that McBryde made “disparaging, gender-discriminatory remarks” toward her client.

“A hysterectomy is one of the most invasive and emotionally tolling procedures a woman can endure,” Temple wrote.

McBryde denied the recusal request.

The U.S. attorney’s office, which did not oppose the delays, declined to comment.

Tax case

Jacqueline Morrison, a certified public accountant and internal auditor, was charged with 17 counts, including wire fraud, in connection with the filing of fraudulent tax returns. The Morrisons increased their clients’ tax refunds by claiming fictitious business losses on their income tax returns, prosecutors said. In return, they charged higher fees for the additional paperwork. They earned more than $2 million in fees during the scheme, prosecutors said.

She and her husband went to trial in October and were found guilty by a jury. She rescheduled her Feb. 18 surgery and filed a notice of appeal two weeks after her Feb. 20 sentencing, in which she was ordered to pay $17.8 million in restitution.

“The court’s attitude towards Ms. Morrison’s women’s health issues is also problematic and, candidly, surprising coming from a jurist who has served so much distinguished time on the federal bench,” Temple said in her filing.

McBryde ordered Morrison to begin her sentence on March 13.

Medications

But Morrison asked for more time so she could recover from her March 2 surgery, which had been delayed further because of bad weather. McBryde granted her request and reset the reporting date to March 20. Morrison then asked for more time due to pain from scar tissue and an infection following her surgery.

Temple said in a motion that Morrison was taking pain

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According to the indictment, the women are all related, but the document did not say how.

The alleged scheme, headed by Mendoza and her home business Mendez Tax Service, ran from February 2009 to June 2011, officials said. The falsified tax documents included returns for 2008 to 2010.

According to the indictment, Mendoza told the three other women to “prepare tax returns containing inflated or fabricated figures.”

Some of the information the women allegedly falsified included unreimbursed employee business expenses, child and dependent care expenses, education credits and dependents and personal exemptions, according to the indictment.

The women would include the false information in order for the client to get a higher earned income credit return. They would then charge the client a higher fee or take a portion of the money from the income tax return, officials said.

IRS officials estimate that the alleged scheme resulted in about $90,000 in government loss.

According to the indictment, in one incident Mendoza falsely claimed more than $8,000 on a tax return, while Hernandez once claimed more than $14,000 on a client’s claim. Duchene and Montez both allegedly claimed more than $4,000 on two different client’s forms.

The women face up to five years in federal prison on the conspiracy charge and up to three years on each of the false tax return preparation charges, officials said.

“While most return preparers provide excellent service to their clients, a few unscrupulous tax preparers file false and fraudulent returns to defraud the government and their own clients,” Internal Revenue Service-Criminal Investigation Special Agent in Charge William Cotter said in a statement. “Our special agents use their investigative and financial expertise to identify and hold accountable abusive tax return preparers who knowingly prepare tax returns containing false tax credits and deductions that they are not entitled to receive.”He added that the “arrests should send a strong signal that we are putting those dishonest tax return preparers on notice that we are watching their activities closely to ensure compliance with the law.”

Federal Complaint Filed Against Mother-daughter Tax Return Preparers

The Justice Department filed a complaint against a Detroit-area woman, her daughter, and the tax preparation business they operate seeking to permanently bar them from preparing federal tax returns for others.

The civil injunction complaint was filed in U.S. District Court of the Eastern District of Michigan against Denise Pope

and Janise Jones. The complaint alleges that Pope and Jones prepare federal income tax returns for customers that understate their correct tax liabilities.

Denise Pope, also known as Denise Miller, operates CDP Tax Services Inc., CDP Accounting Service, PC, dba CDP Tax and Uneek Business Solution. Each was named as a defendant in the suit.The suit alleges that credits and deductions were claimed for customers despite lack of any supporting documentation.

The Internal Revenue Service estimates that the defendants have prepared more than 3,000 tax returns since 2011. The IRS has completed examinations of 87 of those returns stating that the total tax deficiency for those returns alone exceeds $460,000.

New York City Tax Return Preparer Indicted for Aiding or Assisting in Preparation of False Tax Returns

A federal grand jury in the Eastern District of New York returned an indictment today charging a Brooklyn, New York, tax return preparer with 31 counts of aiding and assisting in the preparation of false federal income tax returns, announced Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division.

According to the indictment, between 2008 and 2010, Phillip Baynes operated a tax preparation business called Small Mans Accounting and Tax Service in Brooklyn. During that time, Baynes allegedly prepared false individual income tax returns for taxpayer clients. On the returns, Baynes falsified business expenses and losses, charitable contributions and unreimbursed employee expenses.

If convicted, Baynes faces a statutory maximum sentence of three years in prison and a fine of $250,000 on each count.

Acting Assistant Attorney General Ciraolo commended the special agents of IRS-Criminal Investigation, who investigated the case, and Trial Attorneys Mark Kotila and Brittney N. Campbell of the Tax Division, who are prosecuting the case.

An indictment is not a finding of guilt. An individual charged

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by indictment is presumed innocent unless and until proven guilty at some later criminal proceeding.

Ragin Cagin

The following came from our good friend and colleague, Lynn Schmidt, who certainly had the right idea about this filing season. Enjoy as I did.

How To Tell Inconsiderate Clients You’ll Be Extending Their Returns

You already know what’s awaiting you over the next few days — inevitably, some lazy client will saunter into your office and drop off their tax information, with the full expectation that you’ll complete their return by April 15th. These people are the worst people on Earth.

In the past, driven by your desire to make people happy, your fear of confrontation, or both, you’ve kowtowed to the demands of these repeat-offender clients and added their return to the already-imposing pile that has become a permanent fixture on your desk since late January.

But not this year. This year, you’re going to stand up for yourself. You’re going to tell those clients exactly where they can stick their tax information.

Of course, you’re far too mild-mannered to do this on your own. That’s what I’m here for (ok, I didn’t write this, I got it from another group I belong too, but I have to admit, I would really LOVE to do this)

Below is a form letter (which was NOT authored by me, but another, after being burned one too many times by clients who have no respect for our personal life or professional sanity. It is my gift to you, to use whenever you see fit, in order to communicate the things your mouth can’t say (ok maybe it could, but we know it shouldn’t)….oh what the hell, go ahead! – You’ll feel better anyway.

The letter is written in a manner that’s easily modifiable to your particular fact pattern. Where you see the blanks, just fill them in. Where you see choices separated by a “/”, simply

select the option that best fits your specifics or your mood.

I hope this letter serves you well.

Dear _________,

I heard you stopped by the office today at noon. Sorry I didn’t get to see you; lately I’ve been spending my lunch hour in the parking lot, sitting in my car and quietly weeping.

Judging by the disorganized pile of unopened envelopes and food-stained receipts on my desk that alerted me to your visit, it looks like you dropped off your tax information. How sweet of you!

But here’s the thing. It’s April ____th APRIL _____th!! The tax deadline is in less than ? days. And you know this. You’ve always known this.

Because unlike Thanksgiving, Easter, and Arbor Day, tax day is always on the same exact day of the year: April 15th. Well, except when it falls on a weekend, in which case it might be the 16th or 17th, but you get the idea.

Yet, despite presumably possessing the ability to comprehend the standard Gregorian calendar, here you are, dropping off all of your information mere days before the deadline — just as you did last year, and the year before that — and leaving me a Post-It note thanking me for “squeezing you in.”

Only I won’t be squeezing you in.

It’s nothing personal, it’s just….OK, maybe it is a little personal.

I have to know — why are you dropping your stuff off now? I could understand if you were waiting for a K-1 or some other information from a third party that just arrived in the mail, but that’s not the case. You’re a W-2, mortgage interest, charitable contribution kinda’ guy, and you’ve always been that way. Yet, simple as that sounds, you can never manage to get your information to me before the calendar turns to April.

And that’s freakin’ rude. Squeeze you in? When, exactly, would you like me to squeeze you in? Last week I worked ___ hours, and I still have ______ returns to get out the door before April 15th. And every single one of those _____ returns is in the queue ahead of you, because those people had the good sense — nay, the decency – to bring me their information BEFORE THIS WEEK.

So by asking me to squeeze you in, you’re basically saying, “Hey, I know the next ten days of your life are going to be pure hell, but do me a favor…when you mercifully reach the end of the months-long pile of returns you’ve had to complete, just knock mine out real quick.” It’s as if I was asked to run a marathon, only to have you show up with 100 meters left and move the finish line back another mile. And for that, I hope you c0ntract a raging case of pinworms.

Come to think of it, actually, it would be a refreshing change if

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to a single audit and court proceeding binding on all the direct and indirect partners. Only the partners whose tax liabilities will be affected, and generally not the TEFRA partnership itself, are the parties-in-interest in the partnership-level audit or litigation. (Chef’s Choice, (1990) 95 TC 388 )

An indirect partner is a person holding an interest in a partnership through one or more pass-thru partners. ( Code Sec. 6231(a)(10) ) A pass-thru partner is a partnership, estate, trust, S corporation, nominee, or other similar person through whom other persons hold an interest in the partnership.

Under Code Sec. 6231(a)(3) , a partnership item is any item required to be taken into account for the partnership’s tax year for income tax purposes to the extent IRS regs provide that the item is more appropriately determined at the partnership level than at the partner level.

Code Sec. 6224(a) provides that “any partner has the right to participate in any administrative proceeding relating to the determination of partnership items at the partnership level.” Code Sec. 6231(a)(2) provides that the term “partner” means a partner in the partnership and any other person whose income tax liability is determined in whole or in part by taking into account partnership items of the partnership.

Code Sec. 6229(b) states that the period for assessing tax with respect to any person which is attributable to any partnership item (or affected item) for a partnership tax year may be extended with respect to all partners, by an agreement entered into by IRS and the tax matters partner, or any other person authorized by the partnership in writing to enter such an agreement. Reg. § 301.6229(b)-1 sets out what must be in such an agreement.

Code Sec. 6103(e)(1)(c) provides that the return of a partnership will, upon written request, be open to inspection by or disclosure to any person who was a member of such partnership during any part of the period covered by the return. Code Sec. 6103(e)(6) authorizes, upon written request, the return to also be open to inspection by or disclosure to the member’s attorney in fact duly authorized in writing. An attorney in fact is an agent who holds a POA.

Code Sec. 6103(h)(4) states that a return or return information may be disclosed in a federal judicial or administrative proceeding if the taxpayer is a party to the proceeding, or the proceeding arose out of, or in connection with, determining the taxpayer’s tax liability. In Abelein, (CA 9 2003) AFTR 2d 2003-1476, the Court held that a TEFRA partnership audit constituted an “administrative proceeding” for the purposes of Code Sec. 6103(h)(4) and that the partners were parties to that proceeding.

Code Sec. 6103(k)(6) provides that IRS may, in connection with its official duties relating to any audit, disclose return information to the extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably available, with respect to the correct determination of tax. Reg. § 301.6103(k)(6)-1(c)(1) defines “necessary” in this context to

you conceded that you were at the end of my list. Because if memory serves me, every year you drop off your information on the 5th or 6th, and then start calling on the 7th to find out “how things are coming.”

Well, this year, let me tell you in advance “how things are coming.” Since tax season started, I’ve put on _______ pounds. I haven’t seen my kids during daylight hours since _______. My neighbor just told me that the Fed Ex guy’s/Avon lady’s car is often parked outside my house for hours at a time, but whenever I get home, I’ve got no packages/cosmetics but one helluva happy wife/husband. THAT’S how things are coming.

So no, I won’t be “squeezing you in” before April 15th, because that’s a physical impossibility. The only time during the day when I’m not sleeping or preparing a tax return is on my drive to and from work, and careening off the road while trying to prepare your return at 70 mph is not how I intend to die. Although to be honest, right about now the idea of eternal rest sounds pretty damn appetizing.

In short, I’ll be filing an extension for your return. See you in May/hell.

Sincerely,

Lynn was pretty frank and bold, but we have all been here. Thanks Lynn for putting a humorous spin on this for us.

And, congratulations to the Fellowship for 5 fabulous years. Thanks to you for your support. We hope to see you all at The What’s Happening in Tax -2015 Seminar in Las Vegas or Atlantic City - the week of June 8-12.

Jerry

Taxpayer Advocacy

Who is Authorized to Sign a Power of Attorney for a Partnership or LLC?

Legal Advice Issued by Associate Chief Counsel 2015-004 In Legal Advice Issued by Associate Chief Counsel, IRS has provided guidance on who is authorized to sign a power of attorney (POA) appointing a representative for a partnership or limited liability company (LLC) with respect to various situations, including when the entity is being examined in a TEFRA partnership-level examination.

The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) added Code Sec. 6221 through Code Sec. 6232, which provide unified partnership audit and litigation procedures for partnerships (except certain small partnerships) (TEFRA partnerships). Under the unified partnership audit and litigation procedures, the TEFRA partnership return is subject

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to obtaining information to determine partnership items. A POA by an LLC through its manager helps to establish the reasonableness and appropriateness of discussing issues in the partnership-level examination with the individual designated by the entity. Similarly, where reasonable, such designation would also be sufficient in the context of a private letter ruling request from the entity or in the context of proceedings or investigations pertaining to the entity’s filing obligations.

...POAs to extend statutes of limitations. The authorization from a partner or a person with authority to act for the partnership may not be sufficient to provide authority to extend the period of limitations for all of its partners. If the partnership wishes to authorize someone other than the tax matters partner to extend the period with respect to all partners, the partnership should provide a statement in accordance with Reg. § 301.6229(b)-1 .

No Deduction for Restitution Amount Paid to Avoid Criminal Prosecution

Chief Counsel Advice 201513003

In emailed Chief Counsel Advice (CCA), IRS has held that a payment a taxpayer made to the U.S., in lieu of proceedings that would result in criminal and/or civil forfeiture for fraud, was nondeductible as a fine or similar penalty notwithstanding that the payment was earmarked for restitution to the victims of the fraud.

Background. Code Sec. 162(a) permits taxpayers to deduct all the ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business. However, Code Sec. 162(f) denies a deduction for “any fine or similar penalty paid to a government for the violation of any law.” Reg. § 1.162-21(b)(1)(iii) states that a fine or similar penalty includes an amount paid in settlement of the taxpayer’s actual or potential liability for a civil or criminal fine or penalty. Reg. § 1.162-21(b)(2) provides that compensatory damages paid to a government do not constitute a fine or penalty.Facts. The taxpayer and the U.S. Department of Justice (DOJ) entered into a deferred prosecution agreement (DPA) which stated that the taxpayer had violated several criminal statutes and provided for a forfeiture payment in lieu of proceedings that would result in criminal and/or civil forfeiture under 18 USC 981 and 18 USC 982 and 28 USC 2461(c).

IRS says payment isn’t deductible. The CCA concluded that Code Sec. 162(f) precluded a deduction for the payment.IRS said that the DPA was a settlement for purposes of the reg as it was an agreement between the taxpayer and the government that resolved all issues associated with the taxpayer’s criminal conduct in exchange for certain consideration outlined in the DPA, including a payment in lieu of forfeiture. IRS stated that its longstanding position has been that a monetary forfeiture under the U.S. Code sections the taxpayer violated, as well as the sections referenced above, is a civil or criminal fine or penalty for purposes of the reg. As such, the money paid in lieu of forfeiture pursuant to the DPA

mean “appropriate and helpful.”

IRS has now provided guidance on who has the authority to sign a POA in various situations involving partnerships.

...POAs from direct and indirect partners. IRS may make inquiries and disclose details of a TEFRA partnership-level examination to any person who is a party to, or has authority to represent a party in, the partnership examination. ( Code Sec. 6103(h)(4) and Code Sec. 6224(a) ) Such parties generally include any direct or indirect partner of the partnership, or member of the LLC treated as a partnership, for the tax year at issue. IRS is also authorized under Code Sec. 6103(e)(1)(C) to allow a partner or member, upon written request, to inspect the items of the partnership. To the extent any partner may inspect or receive return information, that partner’s attorney in fact also has such authority. ( Code Sec. 6103(e)(6) and Code Sec. 6103(h)(4) )

As a result, a POA from a partner of the partnership, including a member of an LLC taxed as a partnership, during the tax year at issue allows IRS to solicit and discuss partnership-level issues with the person appointed. Because the partnership or LLC itself is generally not a party to the partnership proceeding or a member in itself, the POA from the partner should be done in the partner’s individual capacity as a partner.

...Circumstances in which POA must be from someone who can act for partnership. A manager may operate under many potential titles such as president, general partner, tax director, chief executive office, board of directors, etc. However, it is the operating agreement of the partners or members of the entity, as approved under state or foreign law where the entity was formed, that ultimately dictates whether the pertinent titled position has authorization to act for the entity.

A general partner or managing member, if authorized by state law, can execute and sign a POA on behalf of the partnership or LLC. A limited partner or member who is not a manager cannot act for the entity, and may only execute a POA in the partner’s or member’s individual capacity.To the extent that a partner does not have authority to act for the partnership or LLC, he may have limited access to the partnership or LLC books and records. In such circumstances, IRS may want a POA executed in the name of the entity itself. Typically, a general partner or state law manager can act for a partnership or LLC taxed as a partnership, as provided by the governing state law.

...POAs from non-owner LLC managers. To the extent a manager of a LLC has no ownership interest, however, he is not treated as a “partner” to whom partnership return information can be disclosed under Code Sec. 6103(e) . The non-member manager as well as the LLC itself are also not generally considered parties in the TEFRA examination.

Nevertheless, Code Sec. 6103(k)(6) authorizes IRS to solicit documents and discuss details of the partnership-level examination with any individual where an IRS employee reasonably believes such discussion is helpful and appropriate

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(2)(B) )

Notice 2015-33 makes adjustments for housing costs during 2015 in high-cost foreign areas. Specifically, it contains a table that (1) identifies 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 qualified individual incurring housing expenses in one or more specified high-cost localities in 2015 to use (instead of the otherwise applicable annual housing expense limitation of $30,240, or the prorated daily amount) in determining his housing expenses. A qualified individual incurring housing expenses in one or more of the high-cost localities identified in the table for the year 2015 may use the adjusted limit provided in the table (in lieu of $30,240 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 2015-33, Sec. 3 , may be higher than the limitation on housing expenses provided in Notice 2014-29, 2014-18 IRB 991 (for 2014). A qualified individual incurring housing expenses in such a location during 2014 may apply the adjusted limitation on housing expenses provided in Notice 2015-33, Sec. 3 , in lieu of the amounts provided in Notice 2014-29 (and as set out in the Instructions to Form 2555 (2014)).

IRS anticipates that future annual notices providing adjustments to housing expense limits will make a similar election available to qualified individuals that incur housing expenses in the immediately preceding year. For example, when adjusted housing expense limitations for 2016 are issued, it is expected that taxpayers will be permitted to apply those adjusted limitations to the 2015 tax year.

State News of Note

States With the Worst Taxes on Average Earners

State and local tax systems play a significant role in redistributing income.

resolved the taxpayer’s actual or potential liability for a civil or criminal fine or penalty and was not deductible under Code Sec. 162 .

The taxpayer argued that Reg. § 1.162-21(b)(1) and Reg. § 1.162-21(b)(2) do not prohibit it from deducting the forfeiture payment because (1) it had not pled guilty or nolo contendere in any court proceeding and (2) the forfeiture payment was earmarked for restitution to the victims of the fraud.

IRS said that the taxpayer’s first argument requiring a plea of guilty or nolo contendere had no merit, as a settlement of the taxpayer’s actual or potential liability is included under Reg. § 1.162-21(b)(1)(iii) . Likewise, IRS said, the taxpayer’s second argument that the forfeited funds will be used to compensate victims had no merit, as the DPA specifically stated that the payment was in lieu of criminal and/or civil forfeiture.

The DPA was a negotiated settlement between the government and the taxpayer that specifically required a forfeiture payment rather than requiring that part or all of the payment be allocated as restitution. The DOJ has the authority to use forfeited funds at its discretion for various uses including payment to victims. DOJ’s stated intention for the use of the funds does not change the character of the payment from a non-deductible forfeiture to a potentially deductible restitution payment.

Foreign Taxes

IRS Issues Housing Cost allowances for Those Working Abroad in High-cost Areas in 2015

Notice 2015-33, 2015-18 IRB

A new Notice provides adjustments to the limitation on housing expenses under the Code Sec. 911 housing cost exclusion for specific locations for 2015. The Notice further provides that some taxpayers may elect to apply the 2015 limitation for tax years beginning in 2014.

A qualified 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 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 2015, a taxpayer’s allowable housing expenses, assuming he is eligible for the entire year, generally can’t exceed $30,240; subtracting the base amount of $16,128 yields a generally applicable maximum housing amount exclusion of $14,112.

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)

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While a certain degree of income inequality might be expected, the difference between rich and poor Americans has grown dramatically in recent years. As of 2013, the wealthiest 20% of Americans had more income in aggregate than the bottom 80% combined.

State and local tax systems play a significant role in redistributing income among people. The nationwide average effective tax rate for the poorest 20% of Americans was 10.9%, roughly double the 5.4% rate for the top 1%.

When looking at taxes paid as a share of the income earned, all states have a regressive tax system, which means poorer residents are taxed more than the wealthiest ones. The difference in effective tax rates between income groups, however, varies widely between states. According to “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” a report released by the Institute on Taxation and Economic Policy (ITEP), Washington has by far the most regressive tax system nationwide. Based on the index score, a ratio calculated from a range of factors to measure income inequality before and after taxes, these are the states with the most unfair tax systems for the average American.

In fact, the poorest 20% of individuals paid at least 12% of their total incomes in state and local taxes in seven of the 10 states with the most regressive tax systems. In contrast, the wealthiest 1% of residents paid no more than 3% in state and local taxes as a share of income in six of the 10 states. In an interview with 24/7 Wall St., Meg Wiehe, state tax policy director at ITEP, said that in most states, and these 10 especially, “tax distribution looks very much like a staircase going down, where as your income goes up, your effective tax rate goes down.”

State residents earning average incomes also often bore a higher tax burden compared to the richest residents. The middle 60% of earners in all of the 10 states paid at least three times what the wealthiest 1% paid, as a share of income, in state and local taxes — all of these ratios were also among the highest nationwide. Middle earners in Washington and Florida, the two most regressive taxation states, paid as a share of their income more than 400% what the richest 1% of residents paid as a share of their income.

Often, it’s the presence or absence of a particular kind of tax that determines the extent to which state tax systems are regressive. For example, taxing goods and services consumed daily such as food is especially regressive because food makes up a much larger share of poorer Americans’ income. A graduated income tax is far more progressive, on the other hand. Five of the 10 states with unfair tax systems taxed food at the state and local level. Also, all but one of the 10 states had relatively low or flat income tax rates, and four had no personal income tax.

According to Wiehe, these states “rely heavily on taxes that are paid disproportionately by low- and middle-income households, and have very little reliance on taxes that the top 1% or top 5% would be responsible for paying.” In other

words, states have to make up for that revenue in one way or another. Nationwide, personal and corporate income taxes accounted for an average of nearly 18% of state revenue. Yet in five of the 10 states, the contribution to revenue from income taxes was less than 5%. And while sales and excise taxes accounted for less than one quarter of state revenue on average across the nation, they accounted for more than 30% of revenue in six of the 10 states with the most regressive tax policies.

While it is difficult to know the exact degree that these tax policies impact income inequality, the states with the most regressive tax systems also had relatively uneven income distribution even before taxes were applied. In six of the 10 states, the 2013 Gini coefficient — which has values between zero and one, where one means all income belongs to a single person and zero means uniform income distribution — was higher than in the majority of states.

To identify the 10 states with the worst tax systems for average Americans, 24/7 Wall St. reviewed ITEP’s Tax Inequality Index scores for the 50 states. The index incorporated effective tax rates for the poorest 20%, middle 60%, top 1%, as well as ratios comparing these rates, among other measures. Effective tax rates were based on total state and local taxes as a share of family income for non-elderly taxpayers in all 50 states. ITEP’s model used 2012 income figures, and considered tax laws from 2014 and 2015. Contributions to state revenue by tax type were also provided by ITEP. We reviewed the Gini coefficient from 2013 — which is based on pre-tax income — as well as additional economic data from the Census Bureau’s 2013 American Community Survey.

These are the states with the worst taxes for the average American.

1. Washington ITEP index score: -12.6% Effective tax rate lowest 20%: 16.8% (the highest) Effective tax rate top 1%: 2.4% (5th lowest) 2013 Gini coefficient (pre-tax): 0.46 (19th lowest)

Washington’s score of -12.6% was the worst in the nation. The poorest 20% of families paid nearly 17% of their income in state and local taxes, the highest such rate nationwide. With the wealthiest 1% of state households paying just 2.4% — nearly the lowest such rate — Washington’s tax system helped widen the income gap more than any other state. Washington’s poorest residents paid nearly seven times what the wealthiest 1% paid as a share of income, one of the highest such ratios nationwide. While Washington’s tax code is considered by many to be among the nation’s most unfair, residents are better-off financially than in many other states. A typical household earned $58,405 in 2013, one of the higher household median incomes. And while 15.8% of Americans lived in poverty that year, 14.1% did in Washington.

2. Florida ITEP index score: -9.5% Effective tax rate lowest 20%: 12.9% (4th highest)

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5. IllinoisITEP index score: -8.1%Effective tax rate lowest 20%: 13.2% (3rd highest)Effective tax rate top 1%: 4.6% (19th lowest)2013 Gini coefficient (pre-tax): 0.48 (8th highest)

The poorest 20% of Illinois households paid 13.2% of their incomes in state and local taxes, and the middle 60% of earners paid 10.9% of their incomes, both nearly the highest effective tax rates respectively. Meanwhile, the state’s wealthiest residents paid 4.6% of their incomes in state and local taxes, one of the lower effective tax rates. Looking just at income tax, the wealthiest 1% paid a slightly higher effective income tax rate than the poorest 20% of state households. However, Illinois uses a flat income tax rate, which is widely considered to be a regressive feature. The state’s wealthiest residents had especially high incomes. A typical Illinois household in the top quintile earned more than $200,000 in 2013, the ninth highest compared to the wealthiest households in other states.

Wayne’s World

Supreme Court To Hear Challenge To ACA Subsidies

The Supreme Court Justices have announced they would hear review of King v. Burwell, a Fourth Circuit Court of Appeals case in which judges unanimously upheld an interpretation of the law that allows subsides for residents of states that did not set up their own insurance exchanges.

Critics of the law have interpreted a particular phrase in the law, which says subsides were to be available for those enrolled through an “Exchange established by the State,” to mean those enrolled through federal exchanges did not qualify.

The subsidies go to many low- and middle-income people to sharply reduce the cost of plans available on the individual insurance markets set up under the law. Some 5.4 million people enrolled in insurance plans through the federal exchange, 87 percent of whom received federal subsidies to reduce the cost of premiums by potentially hundreds of dollars each month.

Effective tax rate top 1%: 1.9% (4th lowest) 2013 Gini coefficient (pre-tax): 0.48 (5th highest) As in other states ITEP identified as having state and local tax systems that exacerbate income inequality, the lack of a personal income tax in Florida disproportionately benefits the wealthiest residents of the state. The lack of income tax also means the state relies more heavily on sales taxes for its revenues. In fiscal 2012, sales and excise taxes accounted for 30.8% of the state’s revenue, the 10th highest such share, and well above the average national rate of 23.7%. The wealthiest 1% of Florida families paid an effective tax rate of less than 2%, nearly the lowest rate in that income group.

3. TexasITEP index score: -8.5%Effective tax rate lowest 20%: 12.5% (5th highest)Effective tax rate top 1%: 2.9% (8th lowest)2013 Gini coefficient (pre-tax): 0.48 (9th highest)

Texas is one of a handful of states levying no income tax. While the state collects a gross receipts tax — which is a tax on business transactions — it does not collect a tax on any corporate profits. As is common in states with abundant natural resources, the oil and gas industry in Texas stimulates the economy and helps the state raise revenues from other sources. Yet, this may not be enough, as the state relies heavily on sales and excise taxes. These consumption taxes accounted for nearly 32% of the state’s revenue, the ninth highest nationwide in fiscal 2012. The state also does not provide low-income residents with any tax credits, which help offset sales, excise and property taxes in other states. Partly as a result, the poorest 20% of Texas families paid an effective state and local tax rate of 12.5%, higher than in all but a handful of states, while the wealthiest 1% of families paid less than 3%, one of the lowest rates. 4. South Dakota

ITEP index score: -8.4%Effective tax rate lowest 20%: 11.3% (12th highest)Effective tax rate top 1%: 1.8% (3rd lowest)2013 Gini coefficient (pre-tax): 0.44 (7th lowest)

With an effective tax rate of 1.8%, South Dakota’s wealthiest residents paid less in state and local taxes as a share of their income than their peers in nearly every other state. The poorest 20% of families, on the other hand, paid among the higher effective tax rates. The difference is due in large part to the complete lack of an income or corporate tax in the state. While even states with regressive tax systems often exclude groceries from the sales tax, this is not the case in South Dakota. In fact, the state relies on consumption taxes as an important revenue source. Sales and excise taxes accounted for 35.6% of the state’s tax revenue, higher than the contribution in all but four other states. Unlike many other state tax systems identified as regressive, income inequality in South Dakota — measured before taxes — was not nearly as prevalent compared to most states in 2013.

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Judge Roger Gregory, writing for the Fourth Circuit, agreed with the argument made by the administration that Congress’ intent in writing the law clearly meant to include federal exchanges, an interpretation that is supported by the numerous pubic statements of the lawmakers and aids involved in the process. But the same day, the D.C. District Court of Appeals ruled 2-1 for the opposite conclusion, ruling 2-1 in Halbig v. Burwell that the law should be interpreted more narrowly, the first court to do so.

Following the Halbig ruling, the Obama administration requested an “en banc” hearing, which would have put the case before the entire D.C. Circuit.

The administration asked the Supreme Court to wait to hear King until after Halbig had been heard before the full bench, expecting the liberal-leaning court to side with the broader interpretation of the law.

Instead, at least four Supreme Court justice decided to hear King before the full D.C. Circuit ruled on Halbig. Court watchers have suggested the decision indicates that at least those four justices believe King may have been wrongly decided.

The case, should the Supreme Court side with the challengers, has serious implications on the long-term stability of the Affordable Care Act. Prohibiting those millions of people from receiving subsidies would strike a serious blow to the law, perhaps dooming it all together.

The ACA provided unique situations during the filing season. What’s Happening in the World of Tax - 2015 will address these issues and many more. Bring your unusual and perplexing cases with you to the seminar. See you there.

Wayne

Letters to the Editor

Beanna – this is ahead of the official announcement, but I just got word and wanted to share this with you:

“The Tax Detective” is officially a BEST SELLER!!

We made a total of 4 best sellers lists this week including reaching #1 on three different lists – including

#1 on Small Business Taxation List#1 on Small Business Accounting List#24 on Small Business Skills List

We even had more sales than Tony Robbins’ new book “MONEY Master the Game” and “50 Shades of Grey” and Amazon listed us as #1 on their “Movers and Shakers” list on launch day.

Thanks again for all of your support and the support of the

NCPE Fellowship!

Lynn

Tax Jokes and Quotes

Editor’s Note: Any reference to “depends” in this cartoon has absolutely no relevance to any current NCPE speaker who will remain nameless - “Wayne”.

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