Robert E. McKenzie Audio Discussion: Avoiding Offshore Penalties by Voluntary Disclosure
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2014 IRS REPRESENTATION UPDATE ©2014 By: Robert E. McKenzie 1. A CHANGING IRS
IRS Workforce1.10 Because of Congressional cuts in IRS budgets its workforce continued to shrink until 2008. In 2009 and 2010 the IRS had its budgets grow and its workforce grew. In 2011 the IRS budget was frozen and its workforce shrank. In 2012 and 2013 Congress stupidly cut the IRS budget and its workforce shrank again.
IRS Staffing for Key Enforcement Personnel
Preparer Regulation1.20 In January of 2010, based on the results of the Return Preparer Review, the IRS recommended several steps it planned to implement for future filing seasons. These steps were not in effect for the 2010 filing season. As of the 2011 filing season, all paid preparers had to register for a PTIN.
IRS’ Tax Preparer Regulation Overruled By Courts1.30 In 2011, the IRS began its new regulations mandating certain tax-return preparers—those who were not licensed attorneys, CPAs, enrolled agents, enrolled actuaries, or enrolled retirement plan agents—complete 15 hours of continuing education each year and pass an initial qualifying exam before they may lawfully prepare and file federal income tax returns for clients. However, a recent court decision out of the United States District Court for the District of Columbia, Loving v. IRS, No. 12-385 (JEB) (D.D.C. Jan. 18, 2012), threatens the IRS’ ability to continue preparer regulation.
IRS Barred From Enforcing Preparer Regulation1.40 The court in Loving enjoined the IRS from enforcing this specialized education mandate because the United States Department of the Treasury (the administrative body that oversees the IRS) did not have the statutory authority to create such a regulation. The IRS had justified its new examination and education requirements through a statute that allows the IRS to “regulate the practice of representatives of persons before the Department of the Treasury.” 31 U.S.C. § 330(a) This statute allows the IRS to require such representatives to meet certain levels of character, reputation, qualifications, and competence. Id. The IRS’ position was that “practice” included “preparing and signing tax returns and claims for refund.” See, e.g., 31 C.F.R. §10.3(f); id. § 10.2(a)(4) (noting that “practice” includes preparing and filing documents). Yet the Loving court turned that approach on its head by concluding tax preparers do not “practice” before the IRS by filing, signing, and sending tax returns. The court reasoned that applicable statutes themselves insist the term “practice” cannot include simply preparing tax returns; the court found the above statutory language not permissive of the IRS’ education requirements Loving, No. 12-385 (JEB), *10-12.
Additional Opinion1.50 The Loving court issued an additional opinion and order on February 1, 2013, clarifying and modifying its previous injunction. Loving v. IRS, No. 12-385 (JEB) (D.D.C. Feb. 1, 2013) This order denied the IRS’ attempt to stay the injunction pending its appeal; however, the court modified the injunction such that the PTIN application and assignment system, at its core, is not implicated (citing 26 U.S.C. § 6109(a)(4) for support that the IRS’ preparer numeration system is congressionally supported), and that the injunction has no relation to tax preparers not previously required to complete the IRS education requirements.
Appeal1.60 In February, 2014 an appeals court upheld the Loving decision. As it stands today, the IRS’ “registered tax return preparer” regulatory scheme developed by Circular 230 of 76 Fed. Reg. 32,286 is invalid because the IRS lacks the statutory authority to create it, and the IRS is also permanently enjoined from enforcing the scheme against any tax preparers. Loving, No 12-385 (JEB), *21-22. The decision focused only on the regulations over tax preparers required to complete continuing education credits, but the court’s reasoning suggests that aspects of the IRS’ regulation overall tax preparers might be invalid. The Loving decision suggests that anyone, by simply preparing and filing tax returns, is not “practicing” before the Department of the Treasury such that the IRS can require application or fee requirements before that individual may submit tax returns, which means aspects of the PTIN application and renewal process could be at risk.
E-file Mandate1.70 Tax return preparers who prepare 100 or more individual or trust returns in 2011 will be required to e-file. Tax return preparers who prepare 10 or more individual or trust returns in 2012 will be required to e-file. The IRS has created Form 8948, Preparer Explanation for Not filing Electronically, to state reasons a form must be filed in paper format.
2. TAXPAYER ADVOCATE
National Taxpayer Advocate Releases Report to Congress2.10 In January 2014 National Taxpayer Advocate Nina E. Olson released a report to Congress. Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(III) requires the NTA to describe at least 20 of the most serious problems encountered by taxpayers. Each of the most serious problems includes the NTA’s description of the problem, the IRS’s response, and the NTA’s final comments and recommendations. This format provides a clear picture of which steps have been taken to address the most serious problems and which additional steps the NTA believes are required. The problems described in the report are: 1. TAXPAYER RIGHTS: The IRS Should Adopt a Taxpayer Bill of Rights as a Framework for Effective Tax Administration 2. IRS BUDGET: The IRS Desperately Needs More Funding to Serve Taxpayers and Increase Voluntary Compliance 3. EMPLOYEE TRAINING: The Drastic Reduction in IRS Employee Training Impacts the Ability of the IRS to Assist Taxpayers and Fulfill its Mission 4. TAXPAYER RIGHTS: Insufficient Education and Training About Taxpayer Rights Impairs IRS Employees’ Ability to Assist Taxpayers and Protect Their Rights
5. REGULATION OF RETURN PREPARERS: Taxpayers and Tax Administration Remain Vulnerable to Incompetent and Unscrupulous Return Preparers While the IRS is Enjoined from Continuing its Efforts to Effectively Regulate Return Preparers
Problems Facing Vulnerable Taxpayer Populations
6. IDENTITY THEFT: The IRS Should Adopt a New Approach to Identity Theft Victim Assistance that Minimizes Burden and Anxiety for Such Taxpayers 7. HARDSHIP LEVIES: Four Years After the Tax Court’s Holding in Vinatieri v. Commissioner, the IRS Continues to Levy on Taxpayers it Acknowledges Are in Economic Hardship and Then Fails to Release the Levies 8. RETURN PREPARER FRAUD: The IRS Still Refuses to Issue Refunds to Victims of Return Preparer Misconduct Despite Ample Guidance Allowing the Payment of Such Refunds 9. EARNED INCOME TAX CREDIT: The IRS Inappropriately Bans Many Taxpayers from Claiming EITC 10. INDIAN TRIBAL TAXPAYERS: Inadequate Consideration of Their Unique Needs Causes Burdens
Problems Relating to IRS Collection Policies and Practices
11. COLLECTION STRATEGY: The Automated Collection System’s Case Selection and Processes Result in Low Collection Yields and Poor Case Resolution, Thereby Harming Taxpayers 12. COLLECTION PROCESS: IRS Collection Procedures Harm Business Taxpayers and Contribute to Substantial Amounts of Lost Revenue 13. COLLECTION STATUTE EXPIRATION DATES: The IRS Lacks a Process to Resolve Taxpayer Accounts with Extensions Exceeding its Current Policy Limits 14. COLLECTION DUE PROCESS HEARINGS: Current Procedures Allow Undue Deference to the Collection Function and Do Not Provide the Taxpayer a Fair and Impartial Hearing Problems Causing Increased Taxpayer Burden
15. EXEMPT ORGANIZATIONS: The IRS Continues to Struggle with Revocation Processes and Erroneous Revocations of Exempt Status 16. REVENUE PROTECTION: Ongoing Problems with IRS Refund Fraud Programs Harm Taxpayers by Delaying Valid Refunds
17. ACCURACY-RELATED PENALTIES: The IRS Assessed Penalties Improperly, Refused to Abate Them, and Still Assesses Penalties Automatically 18. ONLINE SERVICES: The IRS’s Sudden Discontinuance of the Disclosure Authorization and Electronic Account Resolution Applications Left Practitioners Without Adequate Alternatives 19. IRS WORKER CLASSIFICATION PROGRAM: Current Procedures Cause Delays and Hardships for Businesses and Workers by Failing to Provide Determinations Timely and Not Affording Independent Review of Adverse Decisions
Problems Facing International Taxpayers
20. INTERNATIONAL TAXPAYER SERVICE: The IRS Is Taking Important Steps to Improve International Taxpayer Service Initiatives, But Sustained Effort Will Be Required to Maintain Recent Gains
21. INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS (ITINS): Application Procedures Burden Taxpayers and Create a Barrier to Return Filing
22. OFFSHORE VOLUNTARY DISCLOSURE: The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Make Honest Mistakes 23. REPORTING REQUIREMENTS: The Foreign Account Tax Compliance Act Has the Potential to Be Burdensome, Overly Broad, and Detrimental to Taxpayer Rights Problems Requiring Additional Guidance
24. DIGITAL CURRENCY: The IRS Should Issue Guidance to Assist Users of Digital Currency 25. DEFENSE OF MARRIAGE ACT: IRS, Domestic Partners, and Same-Sex Couples Need Additional Guidance
The Most Litigated Tax Issues2.20 IRC§7803(c)(2)(B)(ii)(X) requires the NTA to identify the ten tax issues most often litigated in the federal courts and to classify those issues by the category of taxpayer affected. The following is a table the most litigated in 2013 as determined by TAS: TABLE 3.0.2, Outcomes For Pro Se and Represented Taxpayers Pro Se Taxpayers Represented Taxpayers
Source: IRS
3. ENFORCEMENT
Highlights of 2013 Enforcement3.10 Fiscal Year 2013 Enforcement Results
Enforcement Revenue Collected
Individual Enforcement3.20 The total number of audits of individual returns decreased in 2013. Those who earned less than $200,000 had less than a 1 percent chance of being audited. Those with incomes of $200,000 and more had more than a 3 percent chance of being audited.
Collection Enforcement3.30 Overall, some of our most common enforcement tools at the IRS also showed decreases.
Criminal Enforcement3.40 Criminal enforcement went up even though the IRS had fewer Special Agents. Criminal Investigation
State Information Sharing3.50 The IRS is engaged in extensive information sharing with state tax authorities which allows it to more effectively discover nonfilers and other tax omissions. The IRS Fed/State Program saves government resources by partnering with state government agencies to enhance voluntary compliance with tax laws. This includes facilitating the exchange of taxpayer data, leveraging resources, and providing assistance to taxpayers to improve compliance and communications.
Federal Tax Returns and Return Information.3.60 “Tax returns” include Form 1040, U.S. Individual Income Tax Return, and other income tax and information returns, such as Form 941, Employer’s Quarterly Federal Tax Return; Form 730, Tax on Wagering; Form 1120, U.S. Corporation Income Tax Return; various Forms 1099, U.S. Information Returns; and Form W-2, Wage and Tax Statement. The states share similar return information with the IRS. States have extensive information on business revenue from sales tax returns, which is a valuable resource to the IRS for discovering non-filing and underreporting.
Return Information3.70 “Return information” includes everything else that has anything to do with a person’s potential tax liability. Examples are any information extracted from a return like names of dependents, business location, or bank account information; the taxpayer’s name, mailing address, or identification number; information on whether a return has been or will be examined or subject to any other investigation; information on transcripts of accounts or on IRS computer systems; the fact of filing a return; and whether a taxpayer has a balance due account.
IRS Study Provides Tax Gap Estimate3.80 Internal Revenue Service officials previously announced their estimates of the Tax Year 2001 tax gap based on the National Research Program (NRP). The estimate of the overall gross tax gap for Tax Year 2001 – the difference between what taxpayers should have paid and what they actually paid on a timely basis – comes to $345 billion
On January 6, 2012, the Internal Revenue Service released a new set of tax gap estimates for tax year 2006. The tax gap is defined as the amount of tax liability faced by taxpayers not paid on time.
The new tax gap estimate represents the first full update of the report in five years, and it shows the nation’s compliance rate is essentially unchanged from the last review covering tax year 2001.
The tax gap statistic is a helpful guide to the scale of tax compliance and to the persisting sources of low compliance, but it is not an adequate guide to year-to-year changes in IRS programs or to year-to-year returns on IRS service and enforcement initiatives.
Study Summary3.90 The following table summarizes the new estimates released in 2011, as compared to the 2001 estimates, with the total tax liabilities in each year.
(billions)Tax Year 2006 (billions)Total Tax Liabilities$2,112$2,660Gross Tax Gap$345 (83.7% compliance)$450 (83.1% compliance)Enforcement and Late Payments$55$65Net Tax Gap$290 (86.3% compliance)$385 (85.5% compliance)
The voluntary compliance rate – the percentage of total tax revenues paid on a timely basis — for tax year 2006 is estimated to be 83.1 percent. The voluntary compliance rate for 2006 is statistically unchanged from the most recent prior estimate of 83.7 percent calculated for tax year 2001.
In Line With Total Tax Liabilities3.100 Relatively, the tax gap is largely in line with the growth in total tax liabilities. Some growth in the tax gap estimate is attributed to better data and improved estimation methods. For example, the IRS developed a new econometric model for estimating the tax gap attributable to small corporations which was then applied to newer operational data. Also, large corporation tax gap estimates for 2006 are based on improved statistical methods and updated data. Finally, the data related to individual income taxpayers continues to improve based on improved estimation techniques and newer data.
Tax Gap Components3.110 The tax gap can be divided into three components: non-filing, underreporting and underpayment.
As was the case in 2001, the underreporting of income remained the biggest contributing factor to the tax gap in 2006. Under-reporting across taxpayer categories accounted for an estimated $376 billion of the gross tax gap in 2006, up from $285 billion in 2001. Tax non-filing accounted for $28 billion in 2006, up from $27 billion in 2001. Underpayment of tax increased to $46 billion, up from $33 billion in the previous study.
Overall, compliance is highest where there is third-party information reporting and/or withholding. Most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. A net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.
2013 Budget3.120 The Administration’s Fiscal Year (FY) 2013 Budget request for the IRS was approximately $12.8 billion, a $944.5 million increase (8%) over the FY 2012 enacted level but only a $639.3 million increase (5.3%) from the level enacted for FY 2011. A significant portion of the increase from FY 2012 represented the Administration’s request to restore lost revenue resulting from reductions in IRS funding made over the past two years. Since we have an ineffective Congress, no 2013 budget was enacted and the IRS had cutbacks as a result of the sequester. Because of Congressional incompetence, the IRS once was unable to engage in as much enforcement.
2014 Budget3.130 The Internal Revenue Service was one of the biggest losers in the 2014 budget deal agreed to by House and Senate negotiators. Under the agreement, the service would get just $11.3 billion, which is $526 million below its 2013 budget and $1.7 billion less than President Obama requested. Those ill-advised cuts have led IRS to cease assisting taxpayers with their returns, reduced telephone service and fewer enforcement activities directed at non-compliant taxpayers. Most commentators have suggested that the cuts would reduce IRS collections by $5.2 million.
According to the House Appropriations Committee, the funding level would be lower than agency spending in 2009. The agreement would also require the IRS to spend more time and energy reporting to Congress on a range of activities
Overview – Abusive Return Preparer3.140 The IRS continues to expand and enhance its abusive preparer program. The program was developed to enhance compliance in the return-preparer community by engaging in enforcement actions and/or asserting appropriate civil penalties against unscrupulous or incompetent return preparers. Bad preparers are a significant problem for both the IRS and taxpayers.
Return preparer fraud involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. This includes inflated requests for the special one-time refund of the long-distance telephone tax. Preparers may also fraudulently manipulate income figures to obtain tax credits, such as the Earned Income Tax Credit.
Abusive Preparer Prosecutions3.150
Audits of 30 Clients3.160 Another aspect of the IRS preparer program is identifying suspect preparers and auditing their clients. If, during an examination, a revenue agent suspects that some deficiencies on a return were caused by the preparer, he/she can refer the matter to an area coordinator. After review the coordinator can initiate a project on the preparer. The preparer is sent a letter notifying her that she has been selected for a project and 30 of her client’s returns are audited. If significant deficiencies are found, then the IRS may choose one of several courses of action including:
Promotion of Form to Report Abusive Preparers3.170 The IRS website now directs taxpayers and others who spot abusive preparers to file Form 3949-A with the Service.
4. EXAMINATION
Examination Using Social Media4.10 News outlets reported in the spring of 2010 that the IRS is now training its revenue agents to gather information on Facebook and other social media sites. The IRS documents state that employees may not use false identities to scour social networking accounts while conducting a probe into a taxpayer. Social networks can also be used to “provide location information,” to “prove and disprove alibis” or to “establish crime or criminal enterprise.” Some people disclose a surprising amount of information about their finances on the sites including employment and income info.
IRS Guidelines4.20 The IRS has set up the following guidelines for internet research on taxpayers:
You are required to conduct internet searches to determine taxpayer ecommerce activities.
Generally, you are allowed to review information from publicly accessible, unrestricted websites.
You are not permitted to:
Disclose sensitive information, such as a TlN, without authorization from your manager.
Misrepresent your identity or obtain information from a website using a fictitious identity to register.
Sign contracts on behalf of the government by assenting to online agreements. IRS Use of Correspondence Exams4.30 The IRS has significantly increased the use of correspondence exams over the last decade. It has achieved its higher audit rate of individual taxpayers primarily through expansion of correspondence exams. Between fiscal year (FY) 2000 and FY 2011, face-to-face audits increased by 56 percent, from 251,108 to 391,621. Correspondence exams increased by 220 percent, from 366,657 to 1,173,069.
Impact of ACE on Individual Tax Return Examinations Note: ACE stands for Automated Correspondence Exam.
Campus Correspondence Examination (CCE)4.40 Tax professionals responding to Campus Correspondence Examination (CCE) telephone calls and/or correspondence can take advantage of a new service which began on April 2, 2013. Tax professionals can access the CCE Practitioner Priority Service by calling the PPS toll-free number and selecting the Correspondence Examination option.
Additional prompts, based on the telephone number on the letter they are calling about, will direct the call to the Small Business/Self Employed Examination or Wage & Investment Examination line. CCE PPS will address up to five clients per call and transfer or refer issues outside the CCE scope to the appropriate IRS functions.
The PPS prioritizes calls to improve tax professionals’ experiences.
CCE PPS toll-free number: (866) 860-4259 Small Business/Self-Employed: M – F, 7:00 a.m. – 7:00 p.m., local time Wage & Investment: M – F, 8:00 a.m. – 8:00 p.m., local time Alaska and Hawaii – Pacific time
The CCE PPS number is for tax professional use only.
The Dirty Dozen4.50 Each year the IRS announces its Dirty Dozen and urges people to avoid these common schemes: The 2014 list is:
Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund. The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.
The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.
These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department. Characteristics of these scams can include:
After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.
In another variation, one sophisticated phone scam has targeted taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.
If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.
Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.
If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.
Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.
Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.
Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person’s name and that person never knows that a refund was paid.
Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.
While honest tax preparers provide their customers a copy of the tax return they’ve prepared, victims of scam frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before cutting a check to the victim, a practice not used by legitimate tax preparers.
Taxpayers should take care when choosing an individual or firm to prepare their taxes. Honest return preparers generally: ask for proof of income and eligibility for credits and deductions; sign returns as the preparer; enter their IRS Preparer Tax Identification Number (PTIN); provide the taxpayer a copy of the return. Beware: Intentional mistakes of this kind can result in a $5,000 penalty.
About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.
Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task. You report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer.
Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.
The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.
Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters. Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.
They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:
Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.
Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes.
10. Falsely Claiming Zero Wages or Using False Form 1099 Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.
Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.
Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.
11. Abusive Tax Structures Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.
IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI’s primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers). Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.
12. Misuse of Trusts Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.
5. APPEALS
Appeals Judicial Approach and Culture Project5.10 On July 18, 2013, the IRS director of Policy, Quality and Case Support issued a memorandum (Control No. AP-08-0713-03) to Appeals employees regarding the first phase of the implementation of the Appeals Judicial Approach and Culture (AJAC) Project. The goal of this project is to promote a quasi-judicial approach in how the Appeals office handles its cases. It is part of an effort to improve internal and external customer perceptions of a fair, impartial, and independent Appeals office.
The memo provides interim guidance to Appeals employees on implementing the AJAC Project and is effective for actions taken after July 18. It contains updated Internal Revenue Manual (IRM) provisions related to the various work flows within Appeals, including examination cases, Collection Due Process (CDP), offers in compromise (OICs), and the Collection Appeals Program (CAP). Although many of the AJAC changes have already taken effect, the memo states that updated provisions not yet incorporated in the IRM will be incorporated within a year. Although the guidance contains numerous changes to the IRM, the most significant change is the updated general policy statement in the IRM. Policy Statement 8-2 (formerly P-8-49) provides:
Significant Change5.20 This updated policy marks a significant change from the previous policy, under which Appeals officers could raise a new issue if the grounds were substantial and the potential impact on the tax liability was material.
The memo provides updated IRM provisions related to various Appeals functions. One example is in Conference and Issue Resolution—General Guidelines: “Appeals will not raise new issues and will focus dispute resolution efforts on resolving the points of disagreement identified by the parties. The Appeals process is not a continuation or an extension of the examination process.” IRM §8.6.1.6.2.
Although Appeals may not raise new issues, it may consider alternative or new legal arguments that support the parties’ positions for purposes of hazards-of-litigation analysis. The new guidance also provides that the discussion of new or additional cases (or other authorities) that support a previously raised theory or argument does not constitute a new issue. However, Appeals may only use evidence within the case file to evaluate such theories. It should be noted that this new policy does not preclude a taxpayer from raising new issues.
The following summaries highlight some of the modifications to various case assignments within Appeals that taxpayers and practitioners should be aware of.
Examination5.30 Although Appeals is prohibited from raising new issues in docketed tax cases, IRM Section 8.4.1.15.3 provides that Appeals will consider new issues that the government raises in its formal pleadings and may consider new evidence developed by Compliance or the Office of Chief Counsel to support the government’s position. Additionally, if Counsel determines that Appeals may consider a new issue without formal amendment to the proceedings or the petitioner raises a new issue in a formal amendment to the proceedings, the Appeals officer may refer the issue to Compliance for review and to make a determination.
IRM Section 8.6.1.6 provides that although Appeals may not raise new issues, Appeals officers may notify their managers of systemic issues that may affect more than one taxpayer. The memo provides:
A systemic issue is an issue that requires a change or modification to an established procedure, process or operation (e.g., training issues, computer program, campus procedure for processing claims).
Although these issues may be identified, they cannot be raised in the disposition of the pending case.
Reopening a Closed Case5.40 Regarding the reopening of closed cases by Appeals, IRM Section 8.6.1.6 now provides that mutual concession cases will not be reopened based on action initiated by the IRS except when the disposition involved fraud, malfeasance, concealment, or misrepresentation of a material fact; or an important mistake in mathematical calculations or discovery that a return contains unreported income, unadjusted deductions, credits, gains, losses, etc. resulting from the taxpayer’s participation in a listed transaction. Any reopening initiated by the IRS based on these exceptions will still require the approval of the Appeals director.
New Issues5.50 Furthermore, the definition of a “new issue” has been updated. IRM Section 8.6.1.6.1 provides that the restrictions on raising new issues or reopening a closed case do not apply to new issues raised by taxpayers. It also states that the term means issues identified by Appeals in non-docketed cases. The IRM makes clear that a new issue is one not raised during Compliance consideration and that a new theory or alternative argument is not a new issue.
IRM Section 8.6.1.6.2, which provides general guidelines for the Appeals process, has been substantially revised. It states that the Appeals process is not a continuation or an extension of the examination process but focuses on resolving disputes. Appeals may consider new theories and/or alternative legal arguments that support the parties’ positions when evaluating the hazards of litigation in a case. However, the Appeals officer should not develop evidence that is not in the case file to support the new theory or argument.
Collection Due Process and Equivalent Hearing Cases5.60 IRM Section 8.22.4.2.1 has been updated to provide that in CDP cases, Appeals is responsible for making a determination based upon the facts and the law known to it during the time of the hearing, as a judge would do in a court of law. Furthermore, files sent to Appeals in CDP cases should contain sufficient documentation for Appeals to make a determination. If the file does not contain sufficient documentation, Appeals cannot return the case to Collection due to statutory requirements, and instead, the Appeals officer must decide whether to request relevant information from the taxpayer, issue an appeals referral investigation for Collection to secure or verify information, or make a determination based on the available information.
Offers in Compromise5.70 Updated IRM Section 8.22.7.10.6.5 directs Appeals in making a final determination on an OIC not to investigate to identify new assets but to consider only assets documented by Collection and to accept previously agreed-upon values. Appeals cannot revise the value of an asset to an amount higher than determined by Collection, unless the taxpayer voluntarily provides new information to Appeals, and may only correct errors in determining reasonable collection potential that are strictly computational in nature. The IRM also is being updated to make it clear that an Appeals OIC case is not an extension of the Collection OIC process. The memo emphasizes that the role and mission of Appeals are different from those of Collection and that the role of Appeals is not to rework the offer that Collection rejected. Appeals, however, will consider the items that were in dispute at the time of the rejection. For example, updated IRM Section 8.23.2.4 provides that appeals will not return a case as a premature referral where Collections did not fully develop the case. Instead, Appeals is directed to weigh Collection’s development of the issue against the taxpayer’s information and testimony to make a decision on the case.
Additionally, updated IRM Section 8.23.3.3 provides that in OIC cases, Appeals may no longer attempt to identify additional taxpayer assets or revise any asset values from what Collection had previously determined.
Collection Appeals Program5.80 The memo clarifies case procedures related to the CAP and states that Appeals will not consider alternatives to the issue under appeal, only the appropriateness of that issue. New IRM Section 8.24.1.1.1(9) provides several examples. Taxpayers and practitioners should be aware of the changes relating to Appeals cases and their potential impact on various Appeals activities. Taxpayers and practitioners who have, or may have, issues in front of Appeals should look to the memo for interim guidance on the first phase of implementation. It is anticipated that the IRS will continue to implement changes under the AJAC Project and that additional guidance from Appeals will be forthcoming.
Campus Appeals Program5.90 The campus appeals program diminishes taxpayer rights. Any appeal from a compliance generated notice is assigned to the campus appeals program. The campus appeals personnel are poorly trained and lack field experience. Their incompetence starkly contrasts with the well trained experienced former revenue agents and revenue officers assigned to the local appeals offices. When your client receives a notice from a campus allowing an appeal your protest should always request your client be given a face to face conference in your local office.
In October, 2010 TIGTA issued the following findings:
Campus Strategies – The shifting of work from field operations to campus operations appears to affect the quality of Appeals decisions due to the reduced number of face-to-face conferences, a campus environment is less conducive to a careful, candid assessment of the case, and taxpayers assigned to Appeals campus sites might perceive they are receiving second-class treatment.
Arbitration5.100 Arbitration is available for certain cases within Appeals jurisdiction that meet the operational requirements of the program. This program is available for cases in which a few factual issues remain unresolved following settlement discussions in Appeals. Appeals and the taxpayer will be bound by the arbitrator’s findings. The arbitration procedure uses the services of an arbitrator either from Appeals or from an outside organization.
Refer to the following for more information:
IRS Formalizes Appeals Arbitration Process Revenue Procedure 2006-44 Announcement 2008-111 IRM 8.26.6 IRM 35.5.5 Publication 4167 – Appeals – Introduction to Alternative Dispute Resolution
6. USEFUL INFORMATION FOR PRACTITIONERS
Whistleblower Reforms6.10 The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax they owe. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.
Who can get an award?6.20 The IRS may pay awards to people who provide specific and credible information to the IRS if the information results in the collection of taxes, penalties, interest or other amounts from the noncompliant taxpayer. The IRS is looking for solid information, not an “educated guess” or unsupported speculation. The IRS is also looking for a significant Federal tax issue – this is not a program for resolving personal problems or disputes about a business relationship.
What are the rules for getting an award?6.30 The law provides for two types of awards. If the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000. If the whistleblower disagrees with the outcome of the claim, he or she can appeal to the Tax Court. These rules are found at Internal Revenue Code IRC Section 7623(b) – Whistleblower Rules.
Awards for Lower Dollar Amounts6.40 The IRS also has an award program for other whistleblowers – those who do not meet the dollar thresholds of $2 million in dispute or cases involving individual taxpayers with gross income of less than $200,000. The awards through this program are less, with a maximum award of 15 percent up to $10 million. The awards are discretionary and the informant cannot dispute the outcome of the claim in Tax Court. If you submit information and seek an award for doing so, use IRS Form 211.
Largest Award Ever6.50 In fiscal 2012, the last year for which the tax agency made data public, it collected $592.5 million from taxpayers under the whistleblower program and paid a record $125.3 million to 128 informants who helped break cases. The largest of these awards went to Bradley Birkenfeld who received an award of $104 million. Birkenfeld provided crucial evidence against UBS, a Swiss bank that entered into a plea bargain in 2009 that resulted in it paying a $780 million fine for its illegal assistance to Americans hiding money in secret Swiss accounts. . It also admitted to assisting 17,000 clients evade their taxes through the use of offshore accounts between 2000 and 2007. In July 2009, to avoid additional fines, UBS agreed to provide the names of 5,000 Americans who had offshore accounts with UBS. On June 19, 2008, Birkenfeld pleaded guilty to a single count of conspiracy to defraud the United States. On August 21, 2009, although the prosecution recommended 30 months, Birkenfeld was sentenced by U.S. District Judge William Zloch to 40 months in prison. He served his sentence on January 8, 2010. According to Reuters, Birkenfeld was released from prison in August 2012. Soon after his release the IRS announced its whistleblower award.
Whistleblower Submissions
All Amounts Collected and Awards Paid under 7623 FY 2009-2013
Misclassified Workers6.60 Employees working for employers who failed to withhold Social Security and Medicare taxes should use new Form 8919 to report and pay their share of these taxes. This includes section 530 employees — that is, people who work for employers claiming relief from federal payroll taxes under section 530 of the Revenue Act of 1978. It also includes employees treated as independent contractors but who have received a determination letter from the IRS which states they are employees.
Workers who believe they are misclassified as independent contractors can file Form SS-8 with the IRS and request a determination of their worker classification. For employees, the Social Security tax rate is 6.2 percent and the Medicare tax rate is 1.45 percent. Normally, employers withhold these taxes from workers’ pay, match these amounts and turn over the combined amounts to the IRS. Workers, properly classified as independent contractors, should not use Form 8919 but instead, continue to use Schedule SE. IRS Publication 1779 has further details on employee versus independent contractor status.
NRP Audits6.70 In February 2010, the Internal Revenue Service began its first Employment Tax National Research Project in 25 years. Business practices regarding employment tax issues may have changed significantly since the last IRS employment tax study in the 1980s, necessitating the need for this study. Examinations comprising the study were conducted to collect data that will allow the IRS to understand the compliance characteristics of employment tax filers. The results will allow the IRS to gauge more accurately the extent to which businesses properly comply with employment tax law and related reporting requirements. When completed, this information will help the IRS select and audit future employment tax returns with the greatest compliance risk. The main goals for the ET NRP:
Under the program, the IRS randomly selected 2,000 taxpayers to audit each year for three years. The examinations were comprehensive in scope. The IRS reviewed employee compensation issues, employee and executive benefits, backup withholding and the proper characterization of employees versus independent contractors.
Voluntary Classification Settlement Program6.80 The Voluntary Classification Settlement Program (VCSP) is a voluntary program described in Announcement 2011-64 (PDF) that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this new voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS. The VCSP allows eligible taxpayers to obtain relief similar to that available through the Classification Settlement Program for taxpayers under examination.
Eligibility6.90 The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and wants to prospectively treat the workers as employees.
A taxpayer must have consistently treated the workers as nonemployees, and must have filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate in VCSP. The taxpayer cannot currently be under audit by the IRS and the taxpayer cannot be under audit concerning the classification of the workers by the Department of Labor or by a state government agency.
If the IRS or the Department of Labor has previously audited a taxpayer concerning the classification of the workers, the taxpayer will be eligible only if the taxpayer has complied with the results of that audit.
Exempt organizations and Government entities may participate in VCSP if they meet all of the eligibility requirements.
VCSP Agreements6.100 A taxpayer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer:
As part of the VCSP program, taxpayer will agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.
Applying for VCSP6.110 To participate in the VCSP, a taxpayer must apply using Form 8952, Application for Voluntary Classification Settlement Program. The application should be filed at least 60 days prior to the date the taxpayer wants to begin treating its workers as employees.
Eligible taxpayers accepted into the VCSP will enter into a closing agreement with the IRS to finalize the terms of the VCSP, and will simultaneously make full and complete payment of any amount due under the closing agreement.
December 2012 Modifications6.120 The VCSP, originally released in Announcement 2011-64, has been modified in Announcement 2012-45 to:
•Permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP •Clarify the current eligibility requirement that a taxpayer who is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit •Clarify a taxpayer is not eligible to participate if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or Department of Labor; and •Eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.
Announcement 2012-45 (2012-51 I.R.B. 724) provides notice and information about the revised program.
Offshore Accounts6.130 On February 18, 2009, UBS AG, Switzerland’s largest bank, IRS announced it had entered into a deferred prosecution agreement on charges of conspiring to defraud the United States by impeding the IRS. The IRS investigation into hidden foreign bank accounts has exploded since that time, reaching many other countries which are now cooperating with the United States in ongoing investigations.
Agreement6.140 As part of the deferred prosecution agreement and in an unprecedented move, UBS, based on an order by the Swiss Financial Markets Supervisory Authority (FINMA), has agreed to immediately provide the United States government with the identities of, and account information for, certain United States customers of UBS’s cross-border business. Under the deferred prosecution agreement, UBS agreed to expeditiously exit the business of providing banking services to United States clients with undeclared accounts. As part of the deferred prosecution agreement, UBS further agreed to pay $780 million in fines, penalties, interest and restitution.
Many Taxpayers and Bankers Criminally Charged6.150 Since the announcement of the UBS plea bargain, the IRS has indicted many taxpayers from all parts of the country for not reporting their offshore accounts. Most have pleaded guilty and been sentenced. Taxpayers with unreported foreign accounts continue to face prosecution absent a voluntary disclosure of the accounts to the IRS. Latest IRS reports assert that over 80 individuals have been indicted as a result of the new offshore enforcement initiative.
Offshore Voluntary Disclosure Initiative6.160 Since 2009, 47,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.
2012 Offshore Voluntary Disclosure Program (OVDP)6.170 At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. IRS has collected over $7 billion through the programs.
In June, 2014, changes and new guidelines for disclosure were put into place by the IRS. The implication of these changes is still under consideration. See, Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers, at IRS.gov, updated June 18, 2014.
Avoid Criminal Charges6.180 In exchange for participating in the OVDP, taxpayers with undisclosed offshore accounts avoid criminal prosecution for their unpaid taxes and were required to pay significant penalties. [Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5).]
Penalties6.190 Under the 2012 OVDP, taxpayers are subject to a 27.5 percent penalty on the highest aggregate account balance on their undisclosed account(s) between the 2004 and 2011. If the value of the undisclosed account(s) was less than $75,000 at all times during the tax years in question, the penalty is reduced to 12.5 percent. In limited situations, a penalty of 5% may be imposed. Taxpayers who believed they could establish they were not willful may opt out of the penalty regime but if their arguments are not accepted by the IRS they face higher penalties.
Opt Out Option6.200 A taxpayer who opts out of OVDP will be taking a risk. Upon opting out of OVDP the taxpayer’s case will be assigned to another unit of the IRS. That unit will review the taxpayer’s explanation of her failure to file and report foreign accounts. If the IRS finds the taxpayer was merely negligent in her failure to report the accounts, it will assert a much lower negligence penalty. If it finds that the taxpayer willfully failed to report the account the IRS will assert a much higher 50% fraudulent failure to file FBAR penalty. It might also assert the 75% fraud penalty on the underreported income taxes due on the return. Therefore a taxpayer should not opt out without first reviewing all of the facts and circumstances that gave rise to her omission with your tax professional. If there is any danger that the IRS might assert fraud the taxpayer should not opt out.
Eligibility6.210 The OVDP is open to taxpayers, including individuals, corporations, partnerships and trusts. Taxpayers under examination or under criminal investigation, however, are ineligible to participate in the program. Unlike its two prior disclosure programs the IRS has not set a deadline for the 2012 OVDP.
Quiet Disclosures6.220 Taxpayers that have made “quiet disclosures” by filing amended returns and paying related tax and interest for previously unreported offshore income without otherwise notifying the IRS are encouraged to participate in the OVDI. Taxpayers that make quiet disclosures without seeking the protection of the OVDI risk being examined and potentially criminally prosecuted for all applicable years.
Streamlined Program for Non-Resident U. S. Nationals6.230 The Service has announced a streamlined procedure for current non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns to file their delinquent returns. This procedure went in to effect on September 1, 2012.
Description of Streamlined Procedure6.240 Taxpayers utilizing the procedure must file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years. All submissions are reviewed, but, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the process is expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the procedure and are subject to a more thorough review and possibly a full examination, which sometimes may include over three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program. Tax, interest and penalties, if appropriate, are imposed under U.S. federal tax laws based on a review of the submission.
Compliance Risk Determination6.250 The IRS will determine the level of compliance risk presented by the submission based on certain information provided on the returns filed, and based on certain additional information required as part of the submission. Low risk determinations are predicated on simple returns with little or no U.S. tax due. Absent high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they are treated as low risk. The risk level will rise as the income and assets of the taxpayer rise, if there are indications of sophisticated tax planning or avoidance, or if there is material economic activity in the United States. Additional risk factors include any additional history of noncompliance with United States tax law and the amount and type of United States source income. Additional information regarding the specific factors the IRS will use to assess the level of compliance risk, and how information regarding those factors should be in the submission, are released prior to the effective date of the new procedure.
Procedure for Streamlined Program6.260 Taxpayers wishing to use the procedure must submit:
(1) delinquent tax returns, with appropriate related information returns, for the past three years,
(2) delinquent FBARs for the past six years, and
(3) any additional information regarding compliance risk factors required by future instructions. Payment of any federal tax and interest due must accompany the submission. More information about the application process including where submissions should be sent, are provided prior to the effective date.
Any taxpayer claiming reasonable cause for failure to file tax returns, information returns, or FBARs must submit a dated statement, signed under penalties of perjury, explaining why there is reasonable cause for previous failures to file. See IRS Fact Sheet FS-2011-13 (December 2011) for examples of reasonable cause. Any taxpayer seeking relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty must submit:
a statement requesting an extension of time to make an election to defer income tax and identifying the pertinent treaty position;
for relevant Canadian plans, a Form 8891 for each tax year and description of the type of plan covered by the submission; and a statement describing:
Other Considerations:6.270 Taxpayers in a situation where they are concerned about the risk of criminal prosecution should be advised this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution. Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the Offshore Voluntary Disclosure Program (OVDP), announced on January 9, 2012. Taxpayers ineligible to participate in OVDP are also ineligible to participate in this procedure.
Identity Theft6.280 Identity theft is becoming a huge problem for the tax system. The IRS has established additional screening to reduce identity theft. Many taxpayers’ refunds were delayed. The IRS has established an office for reporting identity theft using stolen SSN’s. Their employers report that income to the IRS on W-2’s and the income is attributed to the theft victim. Two scenarios are most common:
The IRS website now gives taxpayers who are the victims of identity theft the following advice:
Identity Theft and Your Tax Records The IRS does not initiate communication with taxpayers through e-mail. Before identity theft happens, safeguard your information.
What do I do if the IRS contacts me because of a tax issue that may have been created by an identity theft?
If you receive a notice or letter in the mail from the IRS that leads you to believe someone may have used your Social Security number fraudulently, please respond immediately to the name, address, and/or number printed on the IRS notice.
Be alert to possible identity theft if the IRS issued notice or letter:
If your Social Security number is stolen, it may be used by another individual to get a job. That person’s employer would report income earned to the IRS using your Social Security number, making it appear you did not report all of your income on your tax return. If you have previously been in contact with the IRS and have not achieved a resolution, please contact the IRS Identity Protection Specialized Unit, toll-free at 1-800-908-4490.
What do I do if I have not been contacted by IRS for a tax issue but believe I am a victim of identity theft?
If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity, credit report, or other activity, you need to provide the IRS with proof of your identity.
Submit a copy, not the original documents, of your valid Federal or State issued identification, such as a social security card, driver’s license, or passport, etc, with a copy of a police report or Federal Trade Commission Identity Theft Affidavit. If the FTC Affidavit is not notarized, a witness (non-relative) must sign it.
Please send these documents using one of the following options:
Mailing address: Internal Revenue Service P.O. Box 9039 Andover, MA 01810-0939
FAX: Note this is not a toll-free FAX number 1-978-247-9965
Use Form 14039 as a cover sheet for submitting your documentation.
You may also contact the IRS Identity Protection Specialized Unit, toll-free 1-800-908-4490 for guidance.
Hours of Operation: Monday – Friday, 8:00 a.m. – 8:00 p.m. your local time (Alaska & Hawaii follow Pacific Time).
Redress number6.290 Taxpayers who report an identity theft will be given a redress number by the IRS to be used with filing future tax returns.
More Resources Dedicated to Identity Theft6.300 By late 2012, the IRS assigned over 3,000 IRS employees — over double from 2011 — to work on identity theft-related issues. IRS employees are working to prevent refund fraud, investigate identity theft-related crimes and help taxpayers victimized by identity thieves. The IRS has trained 35,000 employees who work with taxpayers to recognize identity theft indicators and help people victimized by identity theft.
8938 Statement of Specified Foreign Financial Assets6.310 Form 8938 (Statement of Specified Foreign Financial Assets) must be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply. The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory. Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year. Preparer Complaint Form6.320 In 2011IRS released a preparer complaint Form 14157.
7. COLLECTION
Higher User Fees7.10 Prior to 2014, the fee for an Installment Agreement was $105, a reduction to $52 for a direct debt agreement, and $45 to restructure or reinstate a defaulted agreement. The new fees beginning January 1, 2014, are: $120 for an installment agreement and $50 to restructure/reinstate a defaulted agreement. The direct debit agreement fee does not change.
Prior to 2014 the fee for an Offer in Compromise was $150. The new fee beginning January 1, 2014, for an Offer in Compromise is $186. The “no fee” for low-income taxpayers continues to apply.
Revisions to Collection Procedures7.20 On February 24, 2011, IRS announced new policies and programs to help taxpayers pay back taxes and avoid tax liens. IRS’s stated goal is to help individuals and small businesses meet their tax obligations, without adding an unnecessary burden to taxpayers.
Over the past several years, as taxpayers have endured the Great Recession the IRS has escalated the number of federal tax liens filed against delinquent taxpayers. The IRS aggressive use of liens has been criticized by the National Taxpayer Advocate in her annual report to congress, as well as the IRS Advisory Council in its annual report to the Commissioner.
More Flexible Attitude7.30 The newly announced policy represents a more flexible attitude by the IRS. The IRS has made important changes to its lien filing practices that will lessen the negative impact on taxpayers. The changes include:
Higher Lien Thresholds7.40 The IRS stated it will significantly increase the dollar thresholds when liens are filed. The new dollar amount is in keeping with inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances. The new lien thresholds raise the amount from $5,000 to $10,000.
Easier Lien Withdrawals7.50 The IRS will also modify procedures that will make it easier for taxpayers to obtain lien withdrawals. Liens will now be withdrawn once full payment of taxes is made, if the taxpayer requests it. The IRS has determined this approach is in the best interest of the government. To speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.
Direct Debit Installment Agreements and Liens7.60 The IRS is making other fundamental changes to liens where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:
Liens will be withdrawn after a probationary period demonstrating direct debit payments will be honored. Taxpayers can use the Online Payment Agreement application on IRS.gov to set-up with Direct Debit Installment Agreements.
Relaxed Rules For Installment Agreements For Small Businesses7.70 The IRS will also provide streamlined Installment Agreements to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate. Small businesses with $25,000 or less in unpaid tax can participate. Previously, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.
The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.
Offers in Compromise7.80 The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. Participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.
OICs are subject to acceptance based on legal requirements. .An offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to determine the taxpayer’s ability to pay.
IRS Revised Rules for Streamlined Installment Agreements7.90 In January 2012, the IRS relaxed its rules for payment of smaller tax liabilities. The revised procedures now allow taxpayers up to 72 months to pay their tax obligations. The new procedures also increase the maximum amount subject to the relaxed streamlined agreements from $25,000 to $50,000. You could request a monthly installment plan by submitting Form 9465-FS if your liability was greater than $25,000 but not more than $50,000. The Form 9465-FS was meant to be used by taxpayers with liabilities greater than $25,000 but not more than $50,000. It could be used by all taxpayers to request an installment agreement for any amount less than $50,000. A taxpayer may request up to 72 months to pay. In certain circumstances, you can have longer to pay or your agreement can be approved for an amount less than the tax you owe. In April, 2013 the IRS eliminated Form 9465-FS and replaced it with a revised Form 9465 for any liability less than $50,000. If you have already filed your return and you are sending in Form 9465 on its own, mail it to the address shown below for the type of return filed. However, before requesting an installment agreement, consider other less costly alternatives, such as getting a bank loan or using available credit on a credit card. Applying Online For a Payment Agreement.7.100 If your balance due is not more than $50,000, you can also apply online for a payment agreement instead of filing Form 9465. To do that, go to IRS.gov and click on “More…” under Tools.
The new rules for revised Form 9465 only to individuals who:7.110
Do not use revised Form 9465 if:7.120
Guaranteed installment agreement7.130 Your request for an installment agreement cannot be turned down if the tax you owe is not more than $10,000 and all three of the following apply.
Caution7.140 A Notice of Federal Tax Lien may be filed to protect the government’s interests until you pay in full.
How the Process Works7.150 IRS will usually let you know within 30 days after IRS receive your request whether it is approved or denied. However, if this request is for tax due on a return you filed after March 31, it may take us longer than 30 days to reply. If IRS approves your request, IRS will send you a notice detailing your agreement and requesting a fee of $120 ($52 if you make your payments by electronic funds withdrawal). However, you may qualify to pay a reduced fee of $50 if your income is below a certain level. The IRS will let you know whether you qualify for the reduced fee. If the IRS does not say you qualify for the reduced fee, you can request the reduced fee using Form 13844, Application For Reduced User Fee For Installment Agreements. You will also be charged interest and may be charged a late payment penalty on any tax not paid by its due date, even if your request to pay in installments is granted. Interest and any applicable penalties will be charged until the balance is paid in full. Current interest rates are 3% per annum and you also will be charged a late payment penalty of ¼% per month. By approving your request, IRS agrees to let you pay the tax you owe in monthly installments instead of immediately paying the amount in full. In return, you agree to make your monthly payments on time. You also agree to meet all your future tax liabilities. This means you must have enough withholding or estimated tax payments so your tax liability for future years is paid in full when you timely file your return. Your request for an installment agreement will be denied if all required tax returns have not been filed. Any refund due you in a future year will be applied against the amount you owe. If your refund is applied to your balance, you are still required to make your regular monthly installment payment. Payment Methods7.160 You can make your payments by check, money order, credit card, or one of the other payment methods shown next. Beginning January 1, 2014, the fee for each payment method is also shown.
After IRS receives each payment, IRS will send you a notice showing the remaining amount you owe, and the due date and amount of your next payment. But if you have your payments automatically withdrawn from your checking account, you will not receive a notice. Your bank statement is your record of payment. IRS will also send you an annual statement showing the amount you owed at the beginning of the year, all payments made during the year, and the amount you owe at the end of the year.
If you do not make your payments on time or do not pay any balance due on a return you file later, you will be in default on your agreement and IRS may take enforcement actions, such as filing a Notice of Federal Tax Lien or an IRS levy action, to collect the entire amount you owe. To ensure your payments are made timely, you may make them by electronic funds withdrawal
Requests to Modify or Terminate An Installment Agreement.7.170 After an installment agreement is approved, you may submit a request to modify or terminate an installment agreement. This request will not suspend the statute of limitations on collection. While the IRS considers your request to modify or terminate the installment agreement, you must comply with the existing agreement. An installment agreement may be terminated if you provide materially incomplete or inaccurate information in response to an IRS request for a financial update.
Past Promises7.180 In 2009, the IRS announced lien relief for people trying to refinance or sell a home. In 2010, the IRS announced new flexibility for taxpayers facing payment or collection problems. Those announced changes did not result in a relaxation of IRS enforced collection efforts. During both 2009 and 2010, the IRS increased the number of liens and levies it served against taxpayers.
Help for People Who Owe Taxes7.190 With many people facing additional financial difficulties, in February 2009, the IRS took several additional steps to help people who owe back taxes.
On a wide range of situations, IRS employees have flexibility to work with struggling taxpayers to assist them with their situation. Depending on the circumstances, taxpayers in hardship situations may adjust payments for back taxes, avoid defaulting on payment agreements or possibly defer collection action.
Flexibility7.200 Among the areas where the IRS can provide assistance:
Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in certain hardship cases where taxpayers cannot pay. This includes instances when the taxpayer has recently lost a job, is relying solely on Social Security or welfare income or is facing devastating illness or significant medical bills. If an individual has recently encountered this type of financial problem, IRS assistors may suspend collection without documentation to minimize burden on the taxpayer.
Added Flexibility for Missed Payments: The IRS is allowing more flexibility for previously compliant individuals in existing Installment Agreements who have difficulty making payments because of a job loss or other financial hardship. The IRS may allow a skipped payment or a reduced monthly payment amount without automatically suspending the Installment Agreement. Taxpayers in a difficult financial situation should contact the IRS.
Additional Review for Offers in Compromise on Home Values: The equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to assess ability to pay may not be accurate. So where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new second review of the information to determine if accepting an offer is appropriate.
Prevention of Offer in Compromise Defaults: Taxpayers unable to meet the periodic payment terms of an accepted OIC can contact the IRS office handling the offer for available options to help them avoid default.
Expedited Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases for levies to an employer or bank should contact the IRS number on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy.
2010 IRS Outlined Additional Steps to Assist Unemployed Taxpayers and Others7.210 The Internal Revenue Service announced on March 9, 2010, several additional steps it was taking to help people having difficulties meeting their tax obligations because of unemployment or other financial problems.
Online Payment Agreement (OPA)7.220 The Internal Revenue Service introduced several new features to the interactive Online Payment Agreement application, which will make it easier for taxpayers and their authorized representatives to change existing installment agreements. The system now permits:
Practitioners with valid authorizations to use the signature date found on their approved Form 2848, Power of Attorney and Declaration of Representative, or the caller ID as an alternate way to authenticate when requesting agreements for clients.
http://www.irs.gov/individuals/article/0,,id=149373,00.html
Onerous Allowable Expense Standards7.230 In March, 2012, the IRS again revised the standards. Instead of establishing national standards which recognized the need for higher living expense for higher income families, it began a system of one size fits all. It continued to fail to recognize the varying cost of living in different regions and communities and eliminated differentials for Hawaii and Alaska. It also added a new category of expenses for out-of-pocket health care expenses.
Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s and his or her family’s health and welfare and/or production of income. The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family must live.
There are four types of necessary expenses:
National Standards: These establish standards for reasonable amounts for five necessary expenses. Four of them come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey: food, housekeeping supplies, apparel and services, and personal care products and services. The fifth category, miscellaneous, is a discretionary amount established by the Service. It is $116 for one person up to $300 for 4 persons. The IRS allows $281 per month for each member of the household above 4.
Note: All five standards are included in one total national standard expense.
Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. The number of persons allowed should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return. The out-of-pocket health care standard amount is allowed besides the amount taxpayers pay for health insurance.
Local Standards: These establish standards for two necessary expenses: housing and transportation. Taxpayers will be allowed the local standard or the amount actually paid, whichever is less.
The utilities include gas, electricity, water, fuel, oil, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner’s or renter’s insurance, homeowner dues and condominium fees. Usually, this is considered necessary only for the place of residence. Any other housing expenses should be allowed only if, based on a taxpayer’s individual facts and circumstances, disallowance will cause the taxpayer economic hardship. [IRM 5.15.1.9]
Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required inspection, parking fees, tolls, driver’s license, public transportation. Transportation costs not required to produce income or ensure the health and welfare of the family are not considered necessary. Consider availability of public transportation if car payments (purchase or lease) will prevent the tax liability from being paid in part or full. Public transportation costs could be an option if it does not significantly increase commuting time and inconvenience the taxpayer.
Note: If the taxpayer has no car payment, or no car, question how the taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is only allowed the operating cost or the cost of transportation. [IRM 5.15.1.9]
Five Year Test 7.240 The amount allowed for necessary or conditional expenses depends on the taxpayer’s ability to full pay the liability within five years and on the taxpayer’s individual facts and circumstances. If the liability can be paid within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses for up to one year in order to modify or eliminate the expense. (See IRM 5.14, Installment Agreements) [IRM 5.15.1.10]
8. OFFER IN COMPROMISE
2012- New Fresh Start Initiative For Offers in Compromise – Higher User fee8.10 The 2013 fee for an Offer in Compromise was $150. IRS has determined that the full cost of processing an Offer in Compromise is $2,718. The new fee beginning January 1, 2014, for an Offer in Compromise is $186. The “no fee” for low-income taxpayers continues to apply.
Expansion – Fresh Start Initiative8.20 On May 21, 2012, the Internal Revenue Service announced another expansion of its “Fresh Start” initiative by offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers clear up their tax problems and often more quickly than in the past. In 2013, the IRS created a new website for taxpayers and their representatives to review and compute eligibility for an OIC. The IRS’s new Offer in Compromise Pre-qualifier tool helps tax professionals determine a taxpayer’s eligibility for an offer in compromise and calculates a preliminary offer amount before they start on the paperwork. It is at: http://irs.treasury.gov/oic_pre_qualifier/faces/OIC_Screen4_IntroQuestions.jsp
Criticism of OIC Policies8.30 Over the years, the IRS offer in compromise program has been the subject of much criticism by Congress, the National Taxpayer Advocate and taxpayer representatives. The new initiative represents the most dramatic liberalization of IRS settlement policies ever announced. It represents a welcome change from an agency which has always placed substantial roadblocks to those seeking to compromise their tax obligations. The announcement focused on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past. IRS announced that its 2013 OIC acceptance rate was over 40%.
Changes8.40 The changes announced included: • Revising the calculation for the taxpayer’s future income. • Allowing taxpayers to repay their student loans. • Allowing taxpayers to pay state and local delinquent taxes. • Expanding the Allowable Living Expense allowance category and amount.
Can Liability Be Paid8.50 In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the amount owed. An OIC is not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to determine the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements.
Past Reluctance to Accept OIC’s8.60 In the past, IRS strictly applied its rules regarding taxpayers’ budgets and valuation of assets. Most taxpayers who sought a compromise received a rejection from the Internal Revenue Service. Below are the statistics for offer acceptances during the past several years:
Reasonable Collection Potential8.70 Under the new policy, when the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years; and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The prior policy resulted in IRS demands for large compromise payments even when the taxpayer had few assets. The revisions will cause a 75% reduction in the amount required to settle tax obligations in five or fewer months. They will cause a 60% reduction in the amount required to be fully paid within 24 months.
Dissipated Assets8.80 Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. Over the past several years, the IRS has used the concept of dissipated assets to demand substantial amounts in compromise of taxes even after the taxpayer had lost assets. For example, in one matter, a taxpayer had lost substantial amounts of money in the 2008 and 2009 stock market collapse. Notwithstanding that loss the IRS offer in compromise examiner claimed that the taxpayer would have to include the value of those losses in his total assets to receive a compromise. The IRS also aggressively claimed that taxpayers who lived an upper-middle-class lifestyle after their tax problems arose would be subject to its draconian dissipated asset theory.
Exclusion of Income Producing Property8.90 The IRS also announced that equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.
Allowable Living Expenses8.100 When reviewing a taxpayer’s budget the IRS applies Allowable Living Expense standards to determine a taxpayer’s ability to pay. The standard allowances impose strict budgets upon a taxpayer in collection determinations by incorporating average expenditures for basic necessities. Notwithstanding substantial criticism of the IRS over the years it is insisted upon applying the same standards for food and clothing in all areas of the country whether high cost locales like Alaska, Hawaii, and New York City or lower cost Midwestern areas. These standards are used when evaluating offer in compromise requests.
Expanded Allowable Expenses8.110 In response to criticisms from the national taxpayer advocate and taxpayer representatives the IRS expanded the National Standard miscellaneous allowance to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges. In the past, the IRS refused to recognize taxpayer obligations to pay student loans and state tax delinquencies. The new guidance now allows payments for loans guaranteed by the federal government for the taxpayer’s post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.
Expanding Universe of Eligible Taxpayers8.120 The new offer in compromise policies should dramatically expand the universe of taxpayers eligible to compromise their outstanding tax obligations. In the past, taxpayers had to pay the IRS the total value of all their assets plus 60 times their net monthly income after using the IRS strict allowable expense standards. The greater flexibility of the new policies will reduce the valuation of taxpayer assets and reduce the value of the future income component used to determine acceptable offers.
Future Income for Offers in Compromise8.130 The Internal Revenue Service on March 10, 2011, revised its guidance to employees on figuring the value of a taxpayer’s future income in evaluating an offer in compromise, with specific instructions to consider a variety of issues for unemployed or underemployed workers. The memorandum (SBSE 05-0310-012) noted future income is defined as an estimate of the taxpayer’s ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. As a general rule, the guidance said, the taxpayer’s current income will be used in the analysis of future ability to pay. “Consideration should be given to the taxpayer’s overall general situation, including such factors as age, marital status, number and age of dependents, level of education or occupational training, and work experience,” the document said.
Agency Notes Variety of Situations8.140 IRS noted some situations may warrant placing a different value on future income than on current or past income. Such situations include those where income will increase or decrease, or current necessary expenses will increase or decrease, the agency said.
Other situations may include those where a taxpayer:
Income Averaging Addressed8.150 IRS told its field personnel that judgment should be used in determining the appropriate time to apply income averaging on a case-by-case basis. “All circumstances of the taxpayer should be considered” in making this decision, the agency said.
Further, IRS said, where the taxpayer’s income does not appear to meet stated living expenses, the difference should not be included as additional income to the taxpayer. Such inclusion should only be done if there are clear indications that the taxpayer is receiving, and will continue to receive, additional income not included on the collection information statement, according to the document.
As a general rule, the guidance said, “Employees need to exercise good judgment when determining future income.” The history must be clearly documented and support the known facts and circumstances of the case, and include analysis of the supporting documents, IRS noted.
Facts and Circumstances Approach Directed8.160 The memo directed IRS workers to evaluate each case on the facts and circumstances, and said the history “must clearly explain the reasoning behind our actions.” The agency said there are cases where it may be appropriate to use the taxpayer’s current income and secure a future income collateral agreement, particularly where the future income is uncertain, but where it is reasonably expected that the income will increase.
Tax Increase Prevention and Reconciliation Act of 20058170 The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), section 509, made major changes to the IRS OIC program. These changes affect all offers received by the IRS on or after July 16, 2006. TIPRA section 509 amends IRC section 7122 by adding a new subsection (c) “Rules for Submission of Offers-in-Compromise.”
Payments With Offers8.180 A taxpayer filing a lump-sum offer must pay 20% of the offer amount with the application (IRC 7122(c)(1)(A)). A lump-sum offer means any offer of payments made in five or fewer installments. A taxpayer filing a periodic-payment offer must pay the first proposed installment payment with the application and pay additional installments while the IRS is evaluating the offer (IRC section 7122(c)(1)(B)). A periodic-payment offer means any offer of payments made in six or more installments.
Failure to Make Deposit8.190 Taxpayers can avoid delays in processing their OIC applications by making all required payments in full and on time. Failure to pay the 20 percent on a lump-sum offer, or the first installment payment on a periodic-payment offer, will cause the IRS returning the offer to the taxpayer as nonprocessable (IRC §7122(d)(3)(C) as amended by TIPRA).
Not Refundable8.200 The 20 percent payment for a lump-sum offer and the installment payments on a periodic-payment offer are “payments on tax” and are not refundable deposits (IRC section 7809(b) and Treasury Regulation 301.7122-1(h)).
Failure to Make Installment Payments8.210 Taxpayers failing to make installment payments on periodic-payment offers after providing the initial payment will cause the IRS to treat the offer as a withdrawal. The IRS will return the offer application to the taxpayer (IRC section 7122(c)(1)(B)(ii)).A lump-sum offer accompanied by a payment below the required 20 percent threshold will be deemed processable. However, the taxpayer will be asked to pay the remaining balance to avoid having the offer returned. Failure to submit the remaining balance will cause the IRS to return the offer and retain the $150 application fee.
Taxpayers filing periodic-payment offers must submit the full amount of their first installment payment to meet the processability criteria. Otherwise, the IRS will deem the offer as unprocessable and will return the application to the taxpayer with the $150 fee.
Low Income Taxpayers8.220 Under TIPRA, taxpayers qualifying as low-income or filing an offer solely based on doubt as to liability qualify for a waiver of the new partial payment requirements. Taxpayers qualifying for the low-income exemption or filing a doubt-as-to-liability offer only are not liable for paying the application fee, or the payments imposed by TIPRA section 509. A taxpayer seeking a waiver must submit Form 656-A with the offer. The monthly income levels to qualify are listed below:
IRS OIC Low Income Guidelines
Background8.230 An offer in compromise is a settlement of a delinquent tax account for less than the amount due. Sec. 7122 states that the IRS may compromise any civil or criminal case arising under the Internal Revenue Laws prior to reference to the Department of Justice for prosecution or defense
Supporting Documents8.240 The financial statements require the proponent to supply documentation for each item on the forms, i.e. pay stubs, car payment book, mortgages, pay stubs, charge account statements, and bank statements. The IRS considers smaller liability offers without conducting a field investigation, therefore it is requiring the proponent to supply all the info to decide without field verification.
$150 Processing Fee8.250 The Internal Revenue Service now charges a $150 application fee for the processing of offers in compromise. The law authorizes federal agencies to charge fees to defray the costs of providing certain services. Guidelines encourage such fees for benefits beyond those provided to the general public. The IRS anticipates the fee also will reduce the number of offers that are filed inappropriately — for example, solely to delay collection — enabling the agency to redirect resources to the processing of acceptable offers. Offers based solely on hardship may seek a fee waiver.
Computation of Offer Amount8.260 The IRS uses different methods for determining the adequacy of an offer depending on the time the taxpayer proposes for payment of the offer amount. The methods are:
NOTE: In all cases, the IRS will release any filed Notice of Federal Tax Lien once you have fully paid the offer amount and any interest that has accrued.
Cash Offer8.270 You must pay cash offers in 5 installments or less after acceptance. Offer the realizable value of your assets (quick sale value) plus the total amount the IRS could collect over twelve months of payments represent value of income). When the ten-year statutory period for collection expires in less than twelve months, you must use the Deferred Payment Chart in the instructions to Form 656. The Internal Revenue Service’s method of determining the adequacy of an offer could be best expressed by:
Quick Sale Value Plus Present Value of Income Equals Offer In Compromise (QSV + PVI = OIC)
In applying this formula, the IRS determines the Quick Sale Value of all of the client’s assets and then adds the present value of the taxpayer’s ability to pay. It aggregates the two numbers to arrive at an Offer in Compromise amount.
Show Deferred Payment Offer8.280 This payment option requires you to pay the offer within two years of acceptance. The offer must include the realizable value of your assets besides the total amount the IRS could secure over twenty four months (or the remainder of the ten-year statutory period for collection, whichever is less) through monthly payments. The IRS may file a Notice of Federal Tax Lien on tax liabilities compromised under short-term payment offers.
Corporate Trust Fund Liabilities8.290 The IRS has recently changed its rules regarding in business offers in compromise. It now requires that each potentially responsible officer of the company sign an agreement to assessment of the trust fund recovery penalty in advance of consideration of any corporate or LLC offer. The new system is extremely unfair because the IRS is requiring even those who should not be held liable for the TFRP to agree to liability and assessment. Only after the liability has been assessed against a non-responsible person may she file a claim for refund and defend against the penalty. The system is extremely unfair and represents an attempt to deprive officers of their statutory due process rights.
Promote Effective Tax Administration8.300 As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an offer in compromise should be accepted. Congress explained these guidelines should allow the Service to consider:
Treasury Regulation 301.7122-1 authorizes the Service to consider offers raising these issues. These offers are called Effective Tax Administration (ETA) offers.
Encourage Compliance8.310 The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will:
The Effective Tax Administration (ETA) offer allows for situations where tax liabilities
Rules for Evaluating Offers to Promote Effective Tax Administration8.320 The determination to accept or reject an offer to compromise made because acceptance would promote effective tax administration within the meaning of this section will be based upon consideration of all the facts and circumstances, including the taxpayer’s record of overall compliance with the tax laws.
Factors8.330 Factors supporting (but not conclusive of) determining economic hardship include:
Undermine Compliance8.340 Factors supporting (but not conclusive of) a determination that compromise would not undermine compliance by taxpayers with the tax laws include:
EXHIBITS
National Standards: Food, Clothing and Other Items
Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.
Out-of-Pocket Costs Under 65 $60 65 and Older $144
Transportation Public Transportation
Lease or Car Payments
Utah Housing Standards
Portions Reprinted from
“REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS”
AND
REPRESENTATION BEFORE THE COLLECTION DIVISION OF THE IRS
by
Robert E. McKenzie
WITH PERMISSION FROM
THOMSON WEST Rochester, NY
All Rights Reserved
COPYRIGHT 2014
2015
February 17, 2015 Illinois CPA Society – North Shore Chapter Skokie, IL
February 25, 2015 Illinois CPA Society – Chicago Metro Chapter Chicago, IL
March 18, 2015 Chicago, IL
April 23-26, 2015 Chicago, IL National Association of Consumer Bankruptcy Attorneys
May 7, 2015 Chicago, IL
May 12-14, 2015 Las Vegas, NV California Society of Enrolled Agents
May 28-30, 2015 Reno, NV California Society of Enrolled Agents June 19, 2015 Bolingbrook, IL Illinois Society of Enrolled Agents
June 24-26, 2015 Flagstaff, AZ Arizona Society of Enrolled Agents
July 13-14, 2015 Sacramento and San Francisco, CA
July 22-23, 2015 Los Angeles and Burbank, CA
September 25, 2015 Springfield, IL Illinois Society of Enrolled Agents
October 27, 2015 Beverly Hills, CA University of California, Los Angeles
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Copyright © 2015 Robert E. McKenzie | Chicago Tax Attorney - All Rights Reserved |
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