IRS Hacked

             It won’t be long before hacking is accepted as an Olympic sport. The IRS has had its own website hacked and financial information of taxpayers stolen by who knows who. IRS says this information is used by hackers to file bogus tax returns requesting refunds. The unsophisticated IRS programs simply punch out the refunds to these crooks. Well the agency now has another concern. At least two individuals have begun lawsuits against the IRS filing a class action claiming their personal tax information was stolen by hackers when the IRS’ “Get Transcript” web application was hacked. In making out their case, it seems the individuals are alleging that the IRS knew that its security system was not up to the task of preventing easy access to this confidential information. The failure to implement adequate security measures amounted to negligence by the agency. The agency is certainly feeling the heat. Recently IRS issued temporary regulations that ends the availability of automatic extensions for filing forms W-2. It has also proposed regulations that would end the availability of automatic extensions for other information returns as well. This is being done to combat fraud and to limit the ability of hackers to file fraudulent tax returns requesting refunds. When hackers file these false returns they do so early in the filing season. If IRS has not as yet received W-2 forms from employers it is not possible for the agency to check the accuracy of items listed on the return. The longer these forms are unavailable to the service the more likely that hackers will be successful in their quest for these refunds. It is certainly not a very sophisticated approach to stopping tax hackers but for an agency plagued by lack of funding it may be the best it can do right now. Sort of bringing the wagons into a circle as they did in the old western movies. But these bad guys are better at being bad than those back then.

Is the IRS Going Out of Business?

         I got on the elevator at my office this morning with a little white dog. It was pouring rain and it had a tiny blue raincoat on. I tried to decide whether it was a service dog but it didn’t look like it was doing anything except shaking off the rain. The owner was a young guy who was trying to shed the rain off his coat as well. I couldn’t resist asking him what the dog was doing here. “It’s for morale” he said. “Oh, well that’s important” I said. I was dripping wet also. I had come in with the intention of dictating this bar bulletin. That tiny dog gave me my intro. In the last few months the Commissioner of Internal Revenue has been telling Congress that the agency is basically going broke. Audit examinations are declining quickly. Last year’s overall exam rate was a tiny .86% which means one out of every 116 tax returns. The IRS performed less than 160,000 fewer audits in 2014 than they did in 2013. And it gets worse. The IRS audit staff has been reduced by more than 600 revenue agents. That’s where the little dog came in. What is it like these days to be working for an agency that doesn’t seem to have the support of the U.S. Congress? When staff is reduced the remaining agents are expected to pick up the slack. Of course human nature drives down morale when this happens. By the way the drop in examination coverage applies to all income classes. For tax filers with income under $200,000 it’s a drop of 12%. With no statistics it’s clear that the audit rate for business returns has also declined. It’s hard to imagine that audit rates have been significantly lower in prior years. Back in 2000 only .49% of all individual tax returns were examined that’s less than one in 200. When IRS does the calculation of its audit rates however it only counts in person exams and correspondence audits by service centers. Many more taxpayers get notices from IRS about mismatches in their 1099s and W-2 information. But the reality is the morale at the service must be terrible. Should you have occasion to discuss a client’s tax case with an agent, you’ll see for yourself. What it means is agents will most likely not have as much heart in their job and that smaller cases will probably not be pursued. The agency is requesting an additional $2 billion for fiscal year 2016 but given the Republican controlled House and Senate it doesn’t look like the IRS will be getting much of an increase. I wonder if that little dog would mind commuting to Washington DC. You know morale is important.

What to Consider if You are Hiding from the IRS: Voluntary Disclosure

Revised IRS Voluntary Disclosure Practice

 

TAX CRIMES - GENERAL IRM 9.5.11.9 Voluntary Disclosure Practice (1)  It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended.  This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel.  Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution. (2)  A voluntary disclosure will not automatically guarantee immunity from  prosecution; however, a voluntary disclosure may result in prosecution not being recommended.  This practice does not apply to taxpayers with illegal source income. (3)  A voluntary disclosure occurs when the communication is truthful, timely, complete, and when: a.  the taxpayer shows a willingness to cooperate (and  does in fact cooperate) with the IRS in determining his or her correct tax liability; and b.   the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. (4) A disclosure is timely if it is received before: a.  the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation; b.  the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance; c.  the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or d.  the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena). (5)  Any taxpayer who contacts the IRS in person or through a representative regarding voluntary disclosure will be directed to Criminal Investigation for evaluation of the disclosure.  Special agents are encouraged to consult Area Counsel, Criminal Tax on voluntary disclosure issues. (6)  Examples of voluntary disclosures include: a.  a letter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above.  This is a voluntary disclosure because all elements of (3), above are met. b.  a disclosure made by a taxpayer of omitted income facilitated through a barter exchange after the IRS has announced that it has begun a civil compliance project targeting barter exchanges; however the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intention to do so.  In addition, the taxpayer files complete and accurate amended returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.  This is a voluntary disclosure because the civil compliance project involving barter exchanges does not yet directly relate to the specific liability of the taxpayer and  because all other elements of (3), above are met c.  a disclosure made by a taxpayer of omitted income facilitated through a widely promoted scheme regarding which the IRS has begun a civil compliance project and already obtained information which might lead to an examination of the taxpayer; however, the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so.  In addition, the  taxpayer files complete and accurate returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.  This is a voluntary disclosure because the civil compliance project involving the scheme does not yet directly relate to the specific liability of the taxpayer and because all other elements of (3), above are met. d.  A disclosure made by an individual who has not filed tax returns after the individual has received a notice stating that the IRS has no record of receiving a return for a particular year and inquiring into whether the taxpayer filed a return for that year.  The individual files complete and accurate returns and makes arrangements with the IRS to pay the tax, interest, and any penalties determined by the IRS to be applicable in full.  This is a voluntary disclosure because the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so and because all other elements of (3), above, are met. (7) Examples of what are not voluntary disclosures include: a.  a letter from an attorney stating his or her client, who wishes to remain anonymous, wants to resolve his or her tax liability. This is not a voluntary disclosure until the identity of the taxpayer is disclosed and all other elements of (3) above have been met. b.  a disclosure made by a taxpayer who is under grand jury investigation.  This is not a voluntary disclosure because the taxpayer is already under criminal investigation.  The conclusion would be the same whether or not the taxpayer knew of the grand jury investigation. c.  a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted gross receipts from a partnership, but whose partner is already under investigation for omitted income skimmed from the partnership.  This is not a voluntary disclosure because the IRS has already initiated an investigation which is directly related to the specific liability of this taxpayer.  The conclusion would be the same whether or not the taxpayer knew of the ongoing investigation. d.  a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted constructive dividends received from a corporation which is currently  under examination.  This is not a voluntary disclosure because the IRS has already initiated an examination which is directly related to the specific liability of this taxpayer.  The conclusion would be the same whether or not the taxpayer knew of the ongoing examination. e.  a disclosure made by a taxpayer after an employee has contacted the IRS regarding the taxpayer's double set of books.  This is not a voluntary disclosure even if no examination or investigation has yet commenced because the IRS has already been informed by the third party of the specific taxpayer's noncompliance.  The conclusion would be the same whether or

The Plight of the Tax Non-Filer

                                                     The Tax Non-Filer

Tax filing season which these days runs from January 1 through October 15 is a time of real suffering for some people. All the advertisements about getting tax refunds and using the found money for lots of things that one enjoys only makes things worse. For these people it is more sleepless nights, sweaty palms and upset stomachs that can be triggered by the most off hand remark. A coworker or friend mentions having gotten their juicy tax refund early. Dizziness, depression, anxiety follow. These are the hallmarks. This is the plight of the tax return non-filer.

Like most of our human problems the non-filer has put himself in a box he can't seem to break out of. His dreams are about being detected and spending hard time in a federal prison in an orange jumpsuit breaking big rocks into small rocks and small rocks into sand. The real shame of all this is that barring a business life which generates illegal income the dream is not even remotely related to the reality.

In fact, in the vast majority of cases IRS and our system of tax administration is more anxious to have the non-filer join the system then to spend their lives in a restless tax purgatory. Most of the fears that a non-filer harbors are baseless. Of primary concern may be criminal prosecution which is reserved  for the most part to illegal behavior or for those cases IRS had to use its less than abundant resources to detect. Coming forth voluntarily is the best advice to avoid this part of the nightmare.

Secondly, is the actual cost of coming forward. It is true that the IRS code provides for interest and penalties, but no one goes to jail, loses reputation and is held to community scorn for simply owing the IRS money. Do a Google search of celebrities that have found themselves owing tax bundles. What should come as relief to these non-filers is that the code provides methods for paying back tax liabilities. These methods allow ordinary life to continue as usual while still satisfying IRS tax law compliance. Foremost among these is the installment agreement which simply gives time, in some cases up to 10 years to pay off tax liabilities. The taxpayer must fully disclose his available resources to IRS and a payment plan can most often be worked out. Where payments are not possible, the code also allows an Offer in Compromise to be made. This procedure allows taxpayers to offer to pay an amount in exchange for being released from any unpaid balance which can include tax, penalty and 

interest. In dire cases, if certain other conditions are met, bankruptcy may also discharge income taxes and allow a taxpayer a fresh start.

The point of all this is that tax filing season need not be torture for the non-filer. Many of their worst nightmares will not materialize. The time to act is before IRS makes contact.  

Voluntary compliance and full disclosure with cooperation with IRS will put most non-filers back on track and perhaps even getting refunds, just like the adverts say or at least getting a decent night’s sleep.

Theodore M. David, Esq. is the chairman of the Bergen County Bar Association’s tax committee. He is a former IRS agent and IRS lawyer who practices exclusively in the IRS tax dispute area in Hackensack New Jersey. He is the author of the ALI-ABA tax text “Dealing With The IRS: Law, Forms and Practice”.

IRS Summons to Find Tax Cheats

The federal district court can authorize IRS to issue “John Doe” summons. This is a summons directed to an entity to disclose records of yet to be determined taxpayers who may have tax due the IRS. This type of summons has been issued to eight entities that may have connection to Sovereign Management & Legal Services. The aim at issuing the summons is to obtain records of taxpayers who may have used the services of Sovereign “to establish, maintain, and/or conceal foreign accounts, assets and entities.” The companies that will be producing records include: Federal Express, FedEx Ground Package System, DHL Express, United Parcel Service Inc.,Western Union Financial Services Inc.,The Federal Reserve Bank of NY, Clearing House Payments Company and HSBC USA National Association.
 The summons is intending to identify taxpayers who used Sovereign services from 2005 through 2013. According to DOJ, Sovereign offers services including formation and administration of anonymous corporations, mail forwarding, virtual offices, re-invoicing and professional “managers” who act for true owners. These activities it is alleged are designed to assist the evasion of US taxes.  The IRS has had a huge success with the offshore account program resulting in billions of collected taxes and penalties and will most likely continue this type of enforcement activity. Criminal allegations are starting to rumble against some of the entities as well.  HSBC is currently on the rack with others sure to follow.

How Big Companies Beat US Taxation

The President’s State of the Union address in January is always fun to watch. It is entertaining to see our elected officials acting like school boys and girls snickering beneath their breath at the whole show. It’s an opportunity for any President to grandstand and propose those things that everyone knows we need and at the same time understand that the proposals are just for fun and don’t stand a snowball’s chance in Hades of passage. The tax part of the speech has led many commentators to use the phrase DOA( Dead on Arrival). Taxing the rich will not happen in the now House and Senate republican controlled houses. That is nothing new. The Proposal to have a one time tax of 14% on domestic corporations that have been stuffing overseas coffers with billions without paying a dime in federal taxes is of course more offensive to those well heeled congress persons. Companies like G.E. ($110 billion), Microsoft ($74 billion), Pfizer ( $69 billion) and Apple ($54 billion) have been doing it for years and it is all above board and legal. Consider a little old lady who inherited a foreign account with $50, 000.00 in it when a great aunt died. She is taxed on the income from that account in the USA even if she spends not one cent. She may also end up doing hard time in a federal prison if she did not declare on her tax return both the income from that account and the fact she had an interest in such a foreign account. In light of the games corporations like the giants above seem to be allowed to play the old lady in a striped orange jumper seems unfair if not down right hypocritical. But that one time tax on corporate overseas stockpiles is also for the rubbish can and was just for our viewing pleasure. The country does need tax reform in the corporate area and the big companies want it. They’d like a simpler system just not anything that could in any way raise their tax bill and lower their bottom line.

IRS Audit Rates Down

     Nobody loves the IRS it seems. Poor folks over there ask, but do not receive. The stats show that money used to fund IRS activities is a solid investment returning a bunch of otherwise hidden dollars to the US treasury. But alas, ours is a political system and congress must answer to the public and to the private interests that butter its bread so…IRS will have its budget cut again and in some cases  to what it was in 2008. So while being asked to do more it will get fewer dollars to do it with. The added burden of policing the health care penalties will be a challenge. A five percent reduction in enforcement in the budget will result in a further drop in audits across the board and will bring the average audit rate to below 1% again. Lawyers who practice before IRS, moi included, will still be holding forever on calls and seeking agents who are working fewer hours. Matters will be more dicey as real questions about health care penalties hit the IRS which will be less than prepared for them. How is IRS dealing with a shrinking budget? The answer is to make tax preparers deputy agents. By leaning on them they get at the source of some filing and return issues. Creating new penalties and monitoring the preparers lets the IRS save budget dollars and still get some of the job done. Fraudulent claims on returns for earned income credit contribute as the #2 ranking source for improper payments made the government. The total of these improper payments amounts to a whopping $105.8 billion. That fact alone would seem to argue for increased IRS enforcement activity and a bigger budget.