IRS Aims at Non-Filing Businesses

Finally, the IRS gets off its collective duff and go after non-filers:

The IRS plans to take a closer look at businesses that fail to file tax returns, and identify more of themhe agency cannot develop a comprehensive estimate of the number of businesses that do not file returns because it lacks data about the population of all businesses, but it could use the inventory of business non-filers it already has on hand to determine noncompliance, according to a new report by the Government Accountability Office, which noted that the IRS identifies several million potential business non-filers each year, more than it can thoroughly investigate.

Why is this news? Because the IRS would rather spend its budget on terrorizing the compliant - the fish in this barrel over here who are easy to shoot - than going after the non-compliant - the fish in that other barrel way over there, who are too hard to shoot and aren't much fun to shoot at anyway.

The IRS thinks it spends too much time and effort hunting down the non-compliant and the potential payback is negligble, dollar-wise - most non-compliant taxpayers are non-compliant for a reason: they're off the grid because they don't earn that much money anyway; you won't see a company like GM not filing a tax return but the handy-person down the street who works for cash has more incentive to underreport his income or not file at all. After the chase, these kinds of cases rarely give up a lot of tax dollars and when they do, the taxpayer is rarely in a position to pay. That kind of budget expenditure requires the IRS to do a lot of 'splainin' to Congress and there's one thing the IRS doesn't like to do and that's 'splain itself.

No, rounding up non-filers won't make a significant dent in the deficit but the sense of fairness - you're filing your returns and paying your taxes, why isn't the IRS going after that guy who isnt? - will go a lot farther in promoting voluntary compliance with the tax laws than disallowing reasonable deductions. Taxpayers may grumble about paying taxes but what they grumble about most, and tempts them to cheat even more, is perceived unfairness in the system. It's not fair you should try to play by the rules of the game when others don't even show up to play.

So if you haven't been filing, the IRS will be looking for you. Finally. Get caught up. I happen to know a pretty good CPA who can help you out.

Hold On To Your Paycheck!

Or the IRS might, if they follow the lead of the tax collection agency for the UK:

The UK's tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer.

The proposal by Her Majesty's Revenue and Customs (HMRC) stresses the need for employers to provide real-time information to the government so that it can monitor all payments and make a better assessment of whether the correct tax is being paid.

Currently employers withhold tax and pay the government, providing information at the end of the year, a system know as Pay as You Earn (PAYE). There is no option for those employees to refuse withholding and individually file a tax return at the end of the year.

Impossible, you say? Withholding tax from your paycheck was probably considered impossible at one time, too, until it was implemented in WWII (Scroll down for the relevant section.) and now it's an innocuous part of working life. Taking your entire paycheck and doling out what the government considers yours may not be far behind. The United Kingdom could lead the way.

IRS Visits Sacramento Carwash in Pursuit of 4 cents

This has been making the rounds:

It was every businessperson's nightmare.

Arriving at Harv's Metro Car Wash in midtown Wednesday afternoon were two dark-suited IRS agents demanding payment of delinquent taxes. "They were deadly serious, very aggressive, very condescending," says Harv's owner, Aaron Zeff.

The really odd part of this: The letter that was hand-delivered to Zeff's on-site manager showed the amount of money owed to the feds was ... 4 cents.

Inexplicably, penalties and taxes accruing on the debt – stemming from the 2006 tax year – were listed as $202.31, leaving Harv's with an obligation of $202.35.

Yep, the IRS is capable of being heavy-handed and they certainly come across that way in this case but things may not appear as they seem. There's no procedural requirement to hand-deliver a final notice - that's what this notice was, according to the picture accompanying the article - but a final notice is required before the IRS can take enforced collection action. Likely there there are other delinquencies out there and the Revenue Officer learned this was one period that had yet to have a final notice. The hand-delivery? Hard to determine from the article but the worst case scenario is the IRS was using the trip as a prelude to shut the business down. Sort of casing the joint. Or they were just getting out of the office for the afternoon.

Regardless, it's a dumb move by the IRS to play it this way. They come across comically brutal and hurt their mission of encouraging voluntary compliance. Regardless, I hope the car wash owner paid this piddling amount. Otherwise, maybe he oughtta give me a call.

IRS Warns Oklahoma Residents of Tax Refund Scam

I already tweeted about this so you have my permission to not click the link and see my powerful quote in this story. Oh, heck, why click through and scroll down? Here's the money quote right here:

The IRS impersonation e-mail is a half-step up in sophistication from the common e-mails purportedly from an old Nigerian dictator who has chosen to bequeath the reader with his millions, said Peter Terranova, a certified public accountant based in Oklahoma City.

Some of Terranova’s clients have received the fake IRS refund e-mail. One client clicked on it and landed on a page that looks just like an IRS page, he said.

"It was utterly convincing,” he said. "These guys are that good.”

Brilliant. Incisive. Brief. You were expecting something else?

It talked to this reporter a few weeks ago and had almost forgotten about it. News stories come and go and I'd thought this one had came and went but it popped up over the last weekend. Glad to lend a small, but unforgettable, hand.

The Geithner Effect on Taxpayer Attitudes

I'm not sure that common occurrence equals causaction - I think most people would be hard-pressed to know who Tim Geithner is and why his fumbling of his own personal taxes is such a big deal - but it could be the reason behind the results of the IRS Oversight Board's 2009 Taxpayer Attitude Survey:

* How much, if any, do you think is an acceptable amount to cheat on your income taxes? A little here and there, 9% (highest in 6 years)

* How important is it to you, as a taxpayer, that the IRS does each of the following to ensure that all taxpayers honestly pay what they owe -- Ensures high-income taxpayers are reporting and paying their taxes honestly? Very important, 83% (all-time high)

* How important is it to you, as a taxpayer, that the IRS does each of the following to ensure that all taxpayers honestly pay what they owe -- Ensures small businesses are reporting and paying their taxes honestly? Very important, 76% (all-time high)

* How much influence does each of the following factors have on whether you report and pay your taxes honestly -- Fear of an audit? Great deal of influence, 39% (all-time high)

* How much influence does each of the following factors have on whether you report and pay your taxes honestly -- Belief that your neighbors are reporting and paying honestly? Great deal of influence, 17% (all-time low)

Count on the IRS to forget about how the behavior of their leadership shapes the public's attitude and focus on how the fear of an audit does.

One thing the Taxpayer Attitude Survey tells us: taxpayer's attitudes need adjusting. So adjust your attitude before the IRS does it for you, misters and missies. And wipe that smirk off your faces. And go clean your rooms, too.

Snow Won't Stop the IRS

In case you were worried:

The IRS says its ability to process tax returns and pay refunds in a timely manner will not be hampered by back-to-back snowstorms that crippled Washington and much of the U.S. Northeast this week.

Federal agencies including the IRS were in their third day of weather-related closure as blizzard conditions swept through Washington Wednesday. That came at an inconvenient time for the tax agency, with the 2010 filing season coming into full swing. But with all individual return processing now performed outside of the northeast at centers in places like Fresno, Calif., Atlanta, and Kansas City, taxpayers need not fear that refund checks or answers to questions through IRS toll-free services will be delayed, said IRS spokeswoman Michelle Eldridge.

Yes, the relentless machinery of the IRS grinds on. To paraphrase some dialogue from a certain movie 25 years ago:

Listen, and understand. Th(e) (IRS) is out there. It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are (taxed).

IRS '10,000 Letters' Program Angers CPAs

No kidding:

CPAs are complaining about an intrusive and intimidating Internal Revenue Service (IRS) initiative that began in early January when the IRS started sending “over 10,000” letters to tax return preparers (commercial and professional), with follow-up visits to “thousands” of letter recipients. This is part of an IRS program to be sure that preparers are “assisting clients appropriately” and part of Commissioner Shulman’s overall effort to increase oversight of return preparers. The IRS may intend this as an encouragement to do a better job, but CPA practitioners see this as poorly timed and intimidating during the busy tax season as they seek to apply the tax law correctly to client situations.

No, the IRS doesn't see this as encouragement; that's only the lipstick they put on this pig, the thing they tell themselves as they pat themselves on the back and give each other performance awards for coming up with such a brilliant scheme of harassment and intimidation. As always, the IRS' focus is on the those who are in compliance, and why not? The IRS already has the compliant right where they want them: filing tax returns, paying taxes, duly reporting the returns for which they were paid to prepare. It's too much trouble, and too expensive, to put together a task force to root out and discipline those who aren't in compliance. Better to send out letters and visit offices - in the middle of filing season! - and talk in general terms about "errors" - codespeak for intentional fraud and said with a smile - found on the returns of other preparers. They're like the mob, visiting a business: nice little tax practice you've got here. It'd be a shame if anything should happen to it.

CPAs go through a rigorous training program and examination to be licensed, as well as an extensive continuing education program. Further, they're subject to stringent ethical requirements to maintain their license. Sure, there are lots of bad CPAs, just like there are lots of bad attorneys and bad doctors; the certification process isn't perfect. But the greatest number of tax returns that are being prepared erroneously - whether intentionally or not - aren't being prepared by CPAs. (And what's a correctly prepared tax return anyway? Look for the inevitable stories this filing season of the accuracy rate of the IRS' own help hotline; they'll seldom give you the same answer twice. The Internal Revenue Code is a vast and complicated piece of legislation, open to a great number of interpretations. Even the IRS doesn't know what it means. They don't win every case in Tax Court.)

If the IRS knows enough about CPAs to send out letters and make office visits, I say formalize your charges and bring 'em forward. Otherwise, stop this nonsense. You don't see the Department of Justice sending letters or making visits to attorney offices "encouraging" attorneys to argue more "accurate" cases. The IRS has no business doing the same with CPAs.

IRS Is Overburdened

Just in time for the filing season comes this report from the National Taxpayer Advocate:

An expanding slate of duties is stretching the Internal Revenue Service too thin, leading to poor customer service and undermining its ability to collect taxes owed, a government watchdog warned Wednesday.

The IRS's goal of responding to 71% of taxpayer calls in 2010 is "unacceptable," said Nina E. Olson, the National Taxpayer Advocate, in her annual report to Congress.

"In other words, the IRS is planning to be unable to answer about three of every 10 calls it receives," she wrote. Ms. Olson identified the IRS lack of responsiveness to telephone calls as the number-one problem currently facing taxpayers.

She also said the IRS lacks a successful strategy for collecting debts owed. One key problem is that the IRS uses an automated system to file liens against taxpayers, even when there are no assets for the lien to attach to and little chance of collecting the debt, Ms. Olson wrote.

Another problem is a preference for correspondence audits, which can produce more errors than face-to-face exams, she said.

At the root of some of these problems, Ms. Olson said, is that Congress keeps piling duties on the IRS through temporary stimulus programs and new social programs administered through the tax code.

The IRS is tasked with an impossible, thankless job. I'll be the first to point out its many failures but I'd like to see aany other massive government agency that has to carry out what it does - the enforcement of a labyrinthine tax code - half as well.

GAO: IRS Should Improve Sole Proprietor Loss Deduction Compliance

Hey there, sole-proprietor, Mr/Ms Risk-Taker-Because-I'm-Running-My-Own-Business. Enjoying those losses that are inevitable as a startup or because of the slack economy? Well, the IRS isn't. They're miserable about it. Tax revenues are down. The "tax gap" is huge. They think they're not doing their job well enough. Know what'll make them feel better? That's right, a crackdown on you:

One approach for limiting sole proprietor loss noncompliance would impose a rule that limits losses that could be deducted from other income. The tax code has a number of such limitations. A loss limitation could reduce noncompliant losses but would also limit the ability of sole proprietors to claim legitimate losses. Another approach would improve IRS’s estimates of the extent to which activities not engaged in for profit, such as hobbies, are contributing to noncompliant sole proprietor losses. Expenses associated with these activities are not deductible, but IRS’s research on the causes of sole proprietor noncompliance has not used available data to estimate the extent of this type of noncompliance. Without such an estimate, IRS could be missing an opportunity to reduce noncompliant sole proprietor losses.

Once again, the IRS' solution for closing the "tax gap" is to endlessly harass those who actually file and pay timely. Forget those other scofflaws who don't bother to file. Tracking them down and getting them in compliance takes too much time and effort. Not when these fish are in this barrel.

How to Lose $7 Billion in Taxpayer Money Without Really Trying

The IRS makes it easy:

How did the IRS manage to pay out $7 billion in improper child tax credits in the tax years, 2004-2007? That's the question that the Treasury Inspector General for Tax Administration (TIGTA) wanted to answer.

After an investigation, a report from TIGTA shows that the problem lies mostly in the inappropriate issuance of individual taxpayer identification numbers (ITINs). ITINs are assigned to people who are not eligible for Social Security numbers, but who need to comply with tax laws. ITINs are not valid for employment purposes. Even so, in 2006 nearly 293,000 employers allowed individuals without proper identification to work, and issued over 790,000 W-2s using only ITINs. The wages reported on these W-2s equaled more than $9.5 billion.

That's odd. The ITIN is a unique number issued by the IRS; it's pre-fix tells you right away it's an ITIN and not a Social Security Number. There should be no trouble programming the great IRS computer in the sky to recognize that any returns or claims filed under an ITIN should be held up and examined closely. How could the IRS let $7 billion get out before being noticed?

GAO: Information Reporting for Charitable Cash Contributions Won't Close Tax Gap

Well, duh:

Individual taxpayers who misreport charitable cash contributions they deduct on their tax returns contribute to the tax gap. ... One approach that tends to result in high levels of taxpayer compliance is information reporting to IRS by third parties on taxpayer transactions. GAO was asked to (1) provide information on characteristics of individual taxpayer misreporting of charitable cash contributions, (2) provide information on actions that IRS takes to address misreporting, and (3) evaluate potential benefits and challenges associated with requiring information reporting for charitable cash contributions. ... In email comments on a draft of this report, IRS agreed with GAO's overall conclusion that requiring information reporting for charitable cash contributions may not be an effective way to improve compliance.

The IRS continues with its bright idea that to close the tax gap, it's better to harass the compliant rather than go after the non-compliant.

Your faith in the IRS continues to grow, doesn't it?

(Via, once again, TaxProf Blog. What would I do without that guy?)

Why Are Tax Forms Blue?

Ever wonder why tax forms are blue? Me neither. But apparently form color is important to the Treasury Department's Inspector General (TIGTA), the branch of the Treasury department whose job it is to worry about such things:

TIGTA also recommended that the IRS seek congressional approval to use additional colors on tax returns and instructions to highlight important warnings and information. Congressional approval would be needed because the IRS used multiple colors on the cover of of its 1995 tax packet and received some negative publicity. After that happened, Congress mandated in the Treasury Department Appropriations Act of 1997 that the IRS could use only two ink colors on tax packages. ...

The IRS Plan to Close the Tax Gap

I mentioned the "tax gap" yesterday so it might be good to tell you a little of what that is. It's the difference between taxes actually paid and taxes that oughtta be paid. I don't know where the number stands but it's huge. Heck, tt's always huge, trust me. If it weren't, the IRS would have no reason to be.

Each year, then, the IRS rolls out its plan to close that gap. Most of the time the plan is a rehash of the plans before it: increase enforcement, upgrade computers, reach out to taxpayers, be kinder and gentler or be more forceful and cruel. It depends on which way the pendulum swings. The IRS take its plans to Congress and Congress funds those plans, giving them little more than the year before, or maybe a little less - it may be an election year, after all - and the IRS goes about its business.

This year, besides the mind-blowing scheme to tax your employer-provided cell phone usage, the IRS has come up what it thinks is another brilliant idea: register all tax preparers.

Internal Revenue Commissioner Doug Shulman announced on June 4, 2009, in congressional testimony before the House Ways and Means Oversight Committee that the Internal Revenue Service plans to make recommendations by the end of the year to ensure that tax preparers adhere to high ethical standards. At the hearing on the tax filing season and 2010 IRS budget, Commissioner Shulman said the IRS has to ensure “all preparers are ethical, provide good service and are qualified.” The announcement follows IRS National Taxpayer Advocate Nina E. Olson’s recommendations to Congress over the past several years that a registration program needs to be created for unlicensed tax return preparers.

Yes, that's what the problem is. Unscrupulous tax return preparer's are draining the government's coffers dry. Crack down on them and Congress will be using $100 dollar bills to light cigars.

Gosh.

It's the usual fish-in-a-barrel approach for the IRS. They'd rather spend their resources on taxpayers who are in compliance and picking apart the returns they've voluntarily filed than go after the non-files and cash-only economy that, though expensive to hunt down, would increase the confidence of the public of the mission of the IRS.

The press-release from the OSCPA at the link above makes the argument for me about the tools already in the hands of the IRS to regulate tax return preparers so I won't make them here. Let's just say it's overkill on the IRS' part. A move to seem like they're moving to do something when they aren't. No other agency has the authority it does to regulate, and punish, the advocates that represent customers the IRS serves. And make no mistake, the IRS serves taxpayers and not the other way around.

I'm registered of course - I'm a CPA and before that, I was an Enrolled Agent - but that registration alone doesn't make me a darn good tax return preparer. And I'm scrupulous not because I'm registered, either, but because that's the kind of guy I am and, besides, the market demands it. Most taxpayers seek out good, honest tax return preparers and good, honest tax preparers seek out clients to prepare tax returns for.

Sounds like commerce to me. Nothing wrong with that.

IRS Scraps New Web Site After Spending $19.5m

Via TaxProf Blog, the IRS gives up on its new website:

In Fiscal Year 2006, the IRS recognized the need to upgrade its existing portal environment and initiated the New Portal Implementation Project. A major concern that led to developing the new portal environment was that a significant amount of portal equipment was nearing or was at the end of its useful life expectancy. In addition, requirements from existing and planned projects that needed portal support could not be met due to technical limitations of existing equipment.

The IRS planned to complete the new portal environment by November 2008; however, in June 2008, the IRS Chief Information Officer cancelled the Project before it was completely developed. Reasons for the cancellation included the lack of a comprehensive enterprise strategy that considered industry best practices or advancements in portal technology, and budget challenges due to the significant expenditure requirements necessary to replace existing equipment. Subsequent to the Project being cancelled, the IRS hired a contractor to assist in developing an enterprise portal business strategy.

To the IRS' credit, they have a massive amount of information they have to manage and keep secure and, for the most part, they do a great job. But credit card companies and banks have massive amounts of information to manage and keep secure, too, and somehow they manage to do it. It shouldn't be a great trick to allow taxpayers online access to their account information but, then, this is politics, isn't it? The IRS Commissioner can't go before Congress and point out the dollar return on such an investment when they'd rather be talking about the number of audits they conducted and the levies and liens they issued.

Did The IRS Really Issued $1B In Bad Refunds In 2007?

The Inspector General seems to think so:

The government sent out more than $1 billion in fraudulent refunds last year and offered this explanation Thursday for the bad checks in the mail: The Internal Revenue Service has too few resources to pursue every tax fraud case.

IRS investigators never even looked at an estimated $742 million in fraudulent refunds, according to a report by the Treasury Department office that monitors the agency. When they did identify an additional $264 million in bad refunds, it was too late to stop them from being issued.

Reading further into the story, it sounds like what the Inspector General is really saying is that that because the IRS lacks the resources to audit every tax return, most tax returns are fraudulently understating income and overstating expenses. Thus, most refunds are larger than they should be.

Well, that's mighty nice of the Inspector General to overreach like that. For my clients, we're accurately reporting income and expenses and taking full advantage of the tax laws to reduce tax burdens. There's nothing fraudulent about that. We're claiming refunds for our clients that our clients are legally entitled to.

This report sounds like just the ammunition the IRS needs to go to Congress to ask for more funding. And it's nothing but hype. It will be troubling if Congress listens to this - and there's no reason to believe they won't - and increases funding, though I doubt they'll do that because of other budget shortfalls. Instead, Congress'll direct the IRS to the priorities Congress chooses and if that means closer scrutiny of tax returns, well, that's what the IRS will do.

Tough times loom ahead for taxpayers, not only with a probable increased tax burden thanks to a new administration but with an ever-increasingly invasive government prying into taxpayers' financial affairs. Look out!

The IRS Job Fair Draws a Crowd

I'm not sure it's because of "bleak times" like the NY Times says but something about a job with the IRS certainly attracted a goodly crowd:

The I.R.S. dangled the possibilities when it held an open house at the federal office building at 290 Broadway in Lower Manhattan on Tuesday. An hour before the fair was scheduled to begin, the crowd began lining up — recently laid-off Wall Street types in charcoal-gray pinstripe suits and trench coats; less formally dressed people; a woman with a new accounting degree on her résumé and a 14-month-old baby in a stroller.

The IRS isn't a bad place to work and some of these people seem earnest in their intentions. I'm just not aware that the IRS is hiring at this time - as automation has taken over, fewer and fewer jobs require human interaction. Add that with a new presidential administration that will likely not want to increase funding for enforcement of the tax laws, the prospects for IRS employment may be dim.