Archive for September, 2015

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TIGTA: “IRS Can’t Track International Correspondence.” IRS: “So What.”

Wednesday, September 30th, 2015

The nature of my practice is such that I have a relatively large number of clients who live outside the United States. When one of my expatriate clients gets an IRS notice, I shudder. The IRS offices that handle international issues have issues with correspondence coming from the US. I’ve had to send the same item five times to the ITIN office…where it was lost five times. (At least they were consistent.) It turns out that the IRS doesn’t know what happens to much of the mail the agency sends overseas.

It was no surprise when I read a report issued by TIGTA (the Treasury Inspector General for Tax Administration) today titled, “Planned Improvements Have Not Been Made to Manage and Track Correspondence With International Taxpayers.” Here’s what TIGTA found:

Even though the IRS sent approximately 855,000 notices and letters to U.S. taxpayers living in other countries during Calendar Year 2014, it cannot determine taxpayer response rates. The lack of data on response rates for international taxpayers is problematic because this information is needed to determine the effectiveness of international correspondence on increasing taxpayer compliance and to make program improvements.

IRS data systems are not designed to accommodate the different styles of international addresses, which can cause notices to be undeliverable. Other factors complicate the delivery of international mail, making its delivery less certain than domestic correspondence.

In addition, the IRS generally does not know if international taxpayers receive the tax correspondence sent to them. Without specific controls to monitor and metrics to measure international tax correspondence, the IRS cannot determine the impact of its international tax correspondence on taxpayer compliance.

TIGTA made five recommendations; the IRS disagreed with all but one of them:

While the IRS generally agreed that TIGTA’s recommendations could provide additional insight into the factors contributing to undeliverable international mail, it does not believe this information would permit the IRS to overcome budgetary, statutory, and operational constraints as needed to achieve appreciable improvement in its current processes. TIGTA does not believe that the IRS’s response is adequate because current IRS processes for addressing international mail issues are ineffective or nonexistent.

So what should you do if you’re an international taxpayer? The easiest solution is to have someone in the US designated to receive a copy of your correspondence from the IRS. You can do this by completing Form 8821 and checking box 5a (“If you want copies of tax information, notices and other written communications sent to the appointee on an ongoing basis, check this box”). The instructions for Form 8821 are here.

By the way, I completely agree with what TIGTA wrote–that the IRS’s response is inadequate. But don’t worry, the IRS’s Annual Filing Season Program is continuing….

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Posted in International, IRS | 1 Comment »

How to Wynne Your Money Back in Maryland

Tuesday, September 29th, 2015

Earlier this year the US Supreme Court ruled that Maryland had to issue full tax credits–including the county add-on tax–to individuals facing double taxation (typically, Maryland residents who earned income taxed in other states). Kay Bell in Don’t Mess With Taxes today noted that the Comptroller of Maryland (Maryland’s state tax agency) has created a webpage for those impacted.

The webpage gives the basics on this, and notes that the Comptroller’s office will not be contacting impacted taxpayers. There’s a link within to a web page on the Wynne Case and the Comptroller’s office has a new form (From 502LC) designed for this specific situation. There’s also a detailed FAQ.

I also need to point out this decision likely impacts other states and jurisdictions. Other states with “add-on” local taxes include Indiana, Ohio, Kentucky, Michigan, Missouri, New York, and Pennsylvania. However, where this impacts taxpayers is residing in a state that does not allow a tax credit for local taxes (Indiana, Iowa, Kentucky, Maryland, North Carolina, and Wisconsin are some of the states so identified) and/or residing in a local jurisdiction that does not allow such a credit (jurisdictions in Ohio, Pennsylvania, Michigan, Missouri, Delaware, and Indiana have been so identified). I have not looked at each state/local jurisdiction to see who is impacted. If you think you’re impacted–remember, you would need to live in a jurisdiction that hasn’t been allowing such a tax credit and have taken such a tax credit on a recent tax return–you should contact your tax professional.

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Posted in Indiana, Iowa, Maryland, Michigan, North Carolina, Pennsylvania, Wisconsin | 1 Comment »

Neymar Tax Evasion Investigation Continues; Judge Freezes $48 Million of Assets

Sunday, September 27th, 2015

Neymar is one of the world’s best soccer players. Given an injury to fellow Barcelona player Lionel Messi, there’s pressure on Neymar and his teammates to step up. Earlier this year it was disclosed that Neymar was being investigated for tax evasion. That investigation has apparently continued; a judge froze 188.8 million Reals ($47.6 million) of Neymar’s assets.

According to the news report, the judge froze assets of Neymar and his parents. The judge froze three times the value of the alleged evasion ($18 million). His parents dispute the evasion.

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Posted in International, Tax Evasion | 1 Comment »

Cash & Carry Your Way to Tax Evasion

Sunday, September 27th, 2015

Kasia’s Bakery is a very successful bakery in New Britain, Connecticut. Its owner, Marian Kobryn, emigrated from Poland to the US to escape political oppression. He opened the bakery, and it’s been a great success.

The bakery operates on a cash-only basis. Mr. Kobryn was determined to lower his tax burden. Instead of making sure all expenses were noted on his tax returns and perhaps contributing to a SEP IRA, he decided to not deposit all of the cash into his business bank account. He knew about the currency transaction reporting (CTR) rules, so he made his cash deposits just under $10,000 and deposited them into several branches of his local bank.

While neither the Department of Justice report or the news report note what caused the initial IRS investigation, it’s a virtual certainty that it was his multiple deposits of cash. Mr. Kobryn apparently didn’t know about Suspicious Activity Reports (SARs). All financial institutions in the US are required to have programs to detect evasions of CTR rules. Additionally, the IRS investigates nearly all SARs while they don’t investigate many CTRs.

Mr. Kobryn’s evasion was of $730,000 of receipts, for a tax loss of $243,000. The penalties and interest totaled an additional $192,000. Mr. Kobryn was sentenced last week to time served (he is in poor health) and to make full restitution of the tax. He has already paid back all the tax and $50,000 of the penalties and interest. It’s a whole lot easier to simply pay the tax due in the first place…but that rarely occurs when you’re developing that perfect tax evasion scheme.

Posted in Connecticut, Tax Evasion | 1 Comment »

Are Turf Rebates Taxable?

Wednesday, September 23rd, 2015

The Los Angeles Times has an article asking this question. Because of the drought in California, the Metropolitan Water District had a $340 million incentive program so that homeowners would replace grass (which takes a lot of water) with bark, rocks, and other drought tolerant (xeriscape) landscapes. (The Southern Nevada Water Authority has a similar program.) The MWD has no idea if they have to issue 1099s to rebate recipients under federal law. (It is exempt from California taxation, though.) The article notes that the MWD suggests talking to a tax professional, so I’ll helpfully give an answer.

Any accession to wealth is taxable unless Congress has exempted that from taxation. One such exception are rebates on purchases. If you buy, say, a new car for $25,000 and receive a $1,000 rebate, you really bought the car for $24,000. A car rebate isn’t taxable income. Is the MWD (or SNWA) program a rebate?

No, it’s not. There’s nothing being purchased from the water agency. Instead, you’re tearing out grass, and replacing it with something else. The agency paying the “rebate” isn’t the same agency that’s doing the work. You might do it yourself, or you might higher a landscaping firm to do the work. The landscaping firm isn’t giving you a rebate.

If this isn’t a rebate (for tax purposes), then what is it? Well, the IRS could rule it’s not taxable since it is a lowering of the cost of doing the grass replacement and this is good for the environment. However, that’s not likely. There’s nothing in the Tax Code that says if something is done that’s good for the environment it’s not taxable. Instead, this looks like income–“Other Income” that would be reported on line 21 of Form 1040. You’re receiving a reward (income) for doing something. It’s not a rebate of a purchase. It’s not exempt from taxation under any other of the exemptions under the Tax Code. Thus, it’s taxable income.

Posted in California, Nevada | 23 Comments »

Kiplinger’s Tax-Friendly and Least Tax-Friendly States: Bring Me (Mostly) the Usual Suspects

Monday, September 21st, 2015

Kiplinger has come out with their list of most tax-friendly and least tax-friendly states. There aren’t many surprises on the list, and readers of this blog definitely won’t be shocked with the least friendly state. The most friendly state was a little different. Do note that Kiplinger looked at all the taxes in a state, not just income tax.

Most Tax-Friendly States:
1. Delaware
2. Wyoming
3. Alaska
4. Louisiana
5. Alabama
6. Mississippi
7. Arizona
8. New Mexico
9. Nevada
10. South Carolina

Why Delaware? It has a relatively low income tax, no sales tax, low property taxes, and low a excise tax on alcohol. My state, Nevada, is noted for its non-existent income tax.

Here is Kiplinger’s least tax-friendly states:

1. California
2. Connecticut
3. New Jersey
4. Hawaii
5. New York
6. Rhode Island
7. Vermont
8. Maine
9. Minnesota
10. Illinois

Why California?

If you’re moving to the Golden State, plan to take short showers (to conserve water) and to pay the highest state income tax rates in the U.S. Worse, capital gains are taxed as regular income.

California also has the highest statewide sales tax, at 7.5% (it’s scheduled to drop to 7.3% at the end of 2016). The average state and local combined rate is 8.4%; in some cities, the combined rate is as high as 10%.

There’s actually more bad news about California’s taxes noted in the short article.

Kiplinger also has a tax map so you can find your state and whether it is tax-friendly or not.

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Posted in California, Delaware, Nevada | 1 Comment »

We Don’t Need No Stinkin’ Phone Calls

Monday, September 21st, 2015

The Treasury Inspector General for Tax Administration (TIGTA) released this morning an analysis of the 2015 filing season. There is both good news and bad news in the report.

First, some good news. The IRS has improved the detection of fraudulent tax returns and identity theft returns. In 2012, the IRS processed 9.11% of fraudulent returns (311,717 of 3,422,505); in 2014, it only processed 5.24% (114,219 of 2,180,613). (Note that this is based on the processing year, so this statistic relates to 2011 returns processed in 2012 and 2013 returns processed in 2014.) The IRS has also made strides in detecting identity theft returns. There were 382,398 such returns processed in 2013, but that number decreased to 236,313 in 2014 and 141,214 in 2015. That’s still too many, but stopping two-thirds of such returns is a significant step forward.

Of course, for every step forward there’s usually a step backwards. And for the IRS that’s been in customer service on the phone. In the 2013 fiscal year, the IRS answered 15,609,615 calls with a 69.8% “Level of Service” and an average speed of answer of 14.1 minutes. In the 2015 fiscal year, the IRS answered 8,277,064 calls with a 37.6% “Level of Service” and an average speed of answers of 23.5 minutes. (“Level of Service” is defined as, “The primary measure of service to taxpayers. It is the relative success rate of taxpayers who call for live assistance on the IRS toll‑free telephone lines.”)

So let’s translate this into reality. In the 2013 fiscal year, 22,363,345 phone calls were attempted to various IRS toll-free lines; 15,609,615 were answered (69.8%). In the 2015 fiscal year, 22,013,468 phone calls were attempted to various IRS toll-free lines; 8,277,064 were answered (37.6%). As for the time on hold allegedly decreasing to 23.5 minutes, perhaps that’s after excluding all the time some of the 7 million people who called but whose calls were dropped or who hung up spent on the phone. I’d love to see an average time of 23.5 minutes when I call the IRS Practitioner Priority Service.

Unfortunately, the volume of IRS notices hasn’t changed from year-to-year, but the “Service” part of the name Internal Revenue Service is falling away. This has negative consequences; it is likely that Americans’ compliance with tax laws will decrease because they’re guessing on what to do rather than being able to talk to the IRS.

Posted in IRS | 1 Comment »

A 0% Chance of Success Didn’t Deter Him!

Sunday, September 20th, 2015

Ronald Reagan said, “Facts are stupid things.” Well, one fact that I’ve mentioned in the past is that IRS Criminal Investigations looks at all allegations of employment tax fraud. The reason is obvious: The IRS doesn’t like the idea of people stealing from them. I’ve been saying this for the ten-plus years that I’ve been writing this blog.

Andrew Parish of Chillicothe, Ohio apparently doesn’t read this blog, and also apparently didn’t consider how his scheme would fail. Mr. Parish hired a firm to prepare his payroll and send the reports to the IRS and Ohio–all well and good so far. He then decided to issue paychecks directly. That wouldn’t have been an issue if Mr. Parish had told his payroll company. I’m sure you’re a couple steps ahead of me: He didn’t, nor did he issue his own payroll reports. But he did include the withholding on the paychecks.

The employees naturally included this withholding on their tax returns. That withholding wasn’t going to match IRS records, and sooner or later the IRS was going to investigate. When the amount missing matched the amount of those paychecks, it wasn’t going to take a genius to figure out where the error occurred.

(An interesting digression: This past April one of my clients received an IRS notice because the withholding on his return didn’t match IRS records. I looked at the W-2’s (my client had multiple employers) and they matched perfectly. It turns out that the error is exactly the amount of the withholding from one employer, and that money apparently hasn’t made it to the IRS. My client is a pack-rat, and had all of his paychecks and his W-2’s, and everything tied perfectly. The IRS requested a copy of those records; it is a near certainty that IRS Criminal Investigations is looking into this. But I digress….)

As for Mr. Parish, he pleaded guilty earlier this year to failing to account for and pay over employment taxes to the IRS. He was sentenced to 18 months at ClubFed and must make restitution of $341,336. A helpful hint to those thinking of not remitting employment taxes: This had a zero percent chance of success in 2005 and the odds haven’t improved in the last ten years.

Posted in Payroll Taxes, Tax Evasion | 1 Comment »

The NAEA Won’t Like This Post

Monday, September 14th, 2015

I’m a member of the National Association of Enrolled Agents. Generally, I’m supportive of their policies. However, I am not a fan of mandatory preparer regulation. Other than giving the IRS more money and getting rid of the lowest hanging of the bad preparers, preparer regulation won’t accomplish many positives for the general public. Unfortunately, the Senate is about to include preparer regulation in a bipartisan tax bill.

Joe Kristan noted this earlier today.

In June 2011, the IRS issued final regulations that established a new class of tax practitioners known as “registered tax return preparers” that it sought to regulate for the prepared by these now unregulated tax return preparers. There is substantial evidence indicating that incompetent and unethical tax return preparers are harming both their clients and the government. Most of the tax returns that involve refundable tax credits are prepared by unregulated tax return preparers.

Since 2011, the D.C. District Court (and the D.C. Circuit affirming on appeal) has prevented the IRS from enforcing these regulations on the grounds that the IRS’ authority to regulate practitioners is insufficient to permit regulation of tax return preparers who do not practice or represent taxpayers before an office of the Treasury Department.

The provision provides the Treasury Department and the IRS with the authority to regulate all aspects of Federal tax practice, including paid tax return preparers, and overrides the court decisions described above. [Joe’s emphasis]

So let’s consider what preparer regulation does:

1. “It stops identity theft.” Do you really think identity thieves will go away just because preparers are regulated? The TurboTax crew (thieves who buy TurboTax and prepare multiple phony returns) aren’t going away (until they get caught). And earlier this year the IRS itself contributed to identity theft.

2. “The IRS will now be able to put a stop to bad preparers.” Well, yes, but the IRS currently has means of going after bad preparers. They can get court orders, and they do.

3. “Bad preparers won’t register.” Preparer regulation will get rid of two classes of preparers: the lowest of the low-hanging bad preparers who can’t pass a multiple choice exam and preparers who either can’t afford to take the classes/exam or decide to retire and not deal with a bureaucracy. Look at who were plaintiffs in Loving v. IRS. The crooks who violate one law won’t care about violating another.

4. “The NAEA and the AICPA are for it, so it must be good.” Well, it will eliminate some competition, so it will increase the number of tax returns that will be prepared for members of both professional societies. Of course, what’s good for professional societies (and their members) will be bad for the general public; prices are certain to increase. Supply (of tax professionals will decrease), so price will increase.

The above are the most common arguments for regulation. None of them are, imho, persuasive. As Joe Kristan alluded to, the real winners will be H&R Block and other chains.

I’ve been asked by members of the NAEA why I’m against preparer regulation. All it does is increase a bureaucracy, decrease consumer choice, increase prices to the general public, and uses limited IRS resources instead of where they could be better used. I don’t mind competition, and the IRS currently has means of going after bad preparers.

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Posted in IRS | 2 Comments »

Defalcations Send Randolph Scott to ClubFed

Sunday, September 13th, 2015

When I hear the name Randolph Scott, I think of the late actor. He played leading men (generally heroes in Westerns) during his long and illustrious career. This Randolph Scott is anything but a hero.

Randolph Scott of Doylestown, Pennsylvania (near Philadelphia) was an estate and probate attorney. He represented an estate, one valued at more than $6 million (at date of death in 2005), so an Estate Tax Return needed to be filed. Estate tax of $520,351 should have been paid to the IRS. That didn’t happen.

Instead, Mr. Scott diverted “approximately $2,317,917.67” from the estate to his tax office. That’s theft. In 2009, the executor of the estate died. From the Department of Justice press release:

Scott failed to disclose the executor’s death so that Scott could continue to receive money intended for the estate at his law firm. Scott would then forge the deceased executor’s signature and deposit funds intended for the estate into accounts under his control. Scott had the successor executor sign a document renouncing the position of successor executor so that Scott could continue to forge the signature of the deceased executor and divert money belonging to the estate.

Mr. Scott pleaded guilty back in March to mail fraud, tax evasion, attempting to interfere with administration of internal revenue laws, and three counts of failure to file income tax returns. He was sentenced on Thursday to four years at ClubFed and must make of the $2.3 million he stole. Unlike a Randolph Scott movie, the only happiness with this ending is that this Randolph Scott won’t be doing this to anyone else.

Posted in Estate Tax, Tax Evasion, Tax Fraud | 2 Comments »

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