Friday, December 21, 2007
The IRS announced yesterday that it will immediately begin taking the necessary steps for its income-tax processing systems to prepare for the upcoming tax season following final passage of the Alternative Minimum Tax "patch" Wednesday by the House of Representatives.
"Our people will do everything they can to quickly update our systems for this major change and make this filing season as smooth as possible for everyone," said Linda Stiff, IRS Acting Commissioner. "Our goal is to process tax returns accurately and to issue refunds to taxpayers as quickly as possible."
The IRS will post more information on the AMT patch on their website as it becomes available.
Tuesday, December 18, 2007
Monday, December 17, 2007
"We do not yet see an end to the current long economic expansion," said UH economist Carl Bonham. The outlook "is a little bit weaker, but not much. The tone of the report is a little more pessimistic."
Tourism and construction are expected to remain stable next year, which could translate into continued income and job growth and low unemployment, though at less favorable levels than in recent years. So far, Hawaii is expected to sidestep a US real estate slowdown that has hobbled home prices in many Mainland markets.
Slower growth also means Honolulu residents are expecting to get relief from rising prices. Honolulu's inflation rate is expected to drop from 5 percent this year to 3.8 percent next year. Honolulu's inflation rate hit a 15-year high of 5.8 percent in 2006 because of booming real estate prices.
According to the IRS’ news release, “the program was designed to expedite IRS case resolution. It allows taxpayers under examination with issues in dispute work with IRS representatives from SB/SE’s examination unit and the Appeals Division to resolve those issues. Fast Track employs various techniques to facilitate case resolution. A taxpayer or IRS examination representative may initiate the Fast Track process after an issue is fully developed, and preferably before a 30-day letter is issued. The Fast Track process is designed to be completed within 60 days of acceptance of the application.”
However, taxpayers retain the right to have their issue addressed through the traditional appeals process.
Thursday, December 13, 2007
TaxGuru has made an interesting post on an Indian firm that emailed him in regards to their American income tax preparation services. According to the email the Indian firm was hired by over 35 different American CPA firms last year and prepared over 3,500 tax returns. They charge a very low rate per return allowing a healthy profit to be made by the large CPA firms outsourcing these duties. This company is just one out of dozens that are already offering Indian outsourcing services. According to The CPA Journal some estimate that nearly 200,000 American income tax returns were prepared in India in 2004. Outsourcing these services allows the large CPA firms to lower their hourly expenses by over 50%, while sustaining their high fees.
As this practice becomes increasingly common, I recommend that everyone be cautious when dealing with a firm that outsources to any country. Although the individuals might be trained and might be qualified to prepare taxes, I would still be cautious. Having 100% accurate data in your income tax returns is extremely important. If something is wrong in your return it could result in massive IRS problems, including audits and even owed back taxes. With so much at steak you want to make sure you seek tax help from a reputable company, and outsourcing services to low-paid Indian workers does not exactly scream quality in my eyes. I suggest you ask any firm your considering point-blank if they outsource and where they outsource income tax preparation. If their response is no then you have nothing to worry about. However, if they do outsource I would be very cautious about using their services unless they provide some sort of guarantee.
Friday, December 07, 2007
Thursday, December 06, 2007
Last week, Alexander D. Smith, an Augusta, Georgia resident, was charged with disorderly conduct and two counts of forgery after he walked into a bank and attempted to open a new account by depositing a fake $1 million bill. Not only did he try to deposit the bill, but when the teller refused to accept the fake bill Alexander began cursing at the bank employees. Within a few minutes the police arrived and took the man into custody. Upon investigation the police discovered that Alexander had previously purchased cigarettes from a nearby grocery store using a stolen check, thus the second forgery charge.
It amazes me that some one would be dumb enough to even consider using a fake million-dollar bill. But, at least this time he was trying to deposit the money, unlike the woman a few months ago who tried to break a million dollar bill at Wal-Mart.
The picture below, supplied by the Aiken County Sheriff's Office, shows what the fake $1 million bill looked like.
Friday, November 30, 2007
The Roni Deutch Tax Center Tax Help Blog recently posted an interesting article on the tax views of the top ten presidential candidates. The entry include summaries of each of the candidates proposed tax plans as well as voting records for those who served in Congress. You can check out the article by checking out "Tax Views of Top 10 Presidential Candidates" on the Tax Help Blog.
Recently the IRS’s website announced that the next Tax Talk Today will be on "getting Ready for the Filing Season 2008." It will broadcast on Tuesday December 11th and will "focuses on individual tax return issues, such as changes to forms, the latest tax law changes and IRS processing issues that affect individual taxpayers. Tax preparers also will get tips on how to avoid common errors that can cost them and their clients time and money."
Panelists will be Kathleen Collins, principal of her own Savannah, Georgia-based tax practice, and president of the Georgia Association of Enrolled Agents; William Stevenson, president of National Tax Consultants, Inc., a tax preparation and taxpayer representation firm for individuals and businesses; Pamela J. Walker, IRS deputy director for Submission Processing at Cincinnati and Carole Barnette, IRS acting chief for Individual Tax Forms and Publications.
For more information check out TaxTalkToday.tv
Wednesday, November 28, 2007
Mark Everson, the former Commissioner of Internal Revenue, was recently fired from his position as President of the Red Cross. The reason? According to a Red Cross press release Everson was released after "engaged in a personal relationship with a subordinate employee." The release continues to state that "the situation reflected poor judgment on Mr. Everson's part and diminished his ability to lead the organization in the future."
Those of us in the tax industry know Mr. Everson as the 46th commissioner of the Internal Revenue. President George W. Bush appointed him to the position in 2003 and left the IRS in May of 2007 when deputy commissioner Kevin Brown took the position of Acting Commissioner. After his departure, the Board of Governors unanimously approved Everson as President of the Red Cross.
Everson’s departure from the Red Cross comes less then six months after being approved for the position. Everson also released his own statement on the issue, which has no mention of his personal relationship with a subordinate employee and cites "personal and family" reasons for his departure.
Recently, the IRS announced that they would be lowering interest rates for the first quarter of 2008, beginning on January 1, 2008. According to IRS codes the interest rate is determined on a quarterly basis and can either be changed or kept the same. This upcoming quarter the rates will drop by 1% and be set as follows:
- seven (7) percent for overpayments [six (6) percent in the case of a corporation]
- seven (7) percent for underpayments
- nine (9) percent for large corporate underpayments, and
- four and one-half (4.5) percent for the portion of a corporate overpayment exceeding $10,000.
Monday, November 26, 2007
The IRS recently announced that Honda has reached the 60,000 vehicle limit during the calendar quarter ending Sept. 30, 2007. Therefore, the credit for buying any Honda hybrid vehicle begins will begin to phase out beginning January 1, 2008. Vehicles purchased before that date, however, will still qualify for the full credit. For Honda hybrid vehicles bought on or January 1, 2008, the credit is 50 percent of the otherwise allowable credit amount.
The new credit amounts will be as follows:
- Honda Accord Hybrid AT, Model Year 2007 — $650
- Honda Accord Hybrid Navi AT, Model Year 2007 — $650
- Honda Civic Hybrid CVT, Model Year 2007 —$1,050
- Honda Civic Hybrid CVT, Model Year 2008 — $1,050
Yesterday Chrysler released sketches of their next concept car, which is expected to be unveiled at the January 2008 Detroit auto show. Check out the sketch below, thanks to Auto Green Blog.
Wednesday, November 21, 2007
The death tax, also known as the Federal Estate Tax, has been getting a lot of media attention lately. For those unfamiliar with the death tax, it is essentially a tax levied on the transfer of a taxable estate usually following a person’s death. As part of President’s 2001 tax cuts, the death tax was set to slowly die off and eventually be completely removed by December 31, 2010. However, unless the next President renews Bush’s tax cuts the prior law will reassert itself the next day, January 1st, 2011. Therefore theoretically some one who dies in December 2010 would pay no estate taxes whatsoever, while some one who passes away 24 hours later could have as much as a 55% tax levied on their estate.
Warren Buffet has been one of the strongest supporters of continuing the estate tax, even appearing before the Senate. Which seems odd considering Buffet is worth an estimated $52 billion, meaning when he dies his estate will be hit with some sort of estate tax. So why would he support the estate tax? The truth lies in Buffet’s business dealings. He has major investments in companies that sell life insurance and directly profits from the continued estate taxes.
When people want to avoid loosing large portions of their estate to the death tax, they often put their wealth into life insurance policies. Therefore once they pass the designated heirs are paid the life insurance funds without having to pay any taxes. Therefore Mr. Buffet has a huge conflict of interest and his insurance companies stand to directly profit from a continued death tax. I hope that the Senate will consider this information the next time Mr. Buffet testifies.
Monday, November 19, 2007
Thursday, November 15, 2007
In the motion Snipes attorneys claim the Federal government’s lawyers are trying to get an "all-white Southern jury" to hurt Ms. Snipes chances at a fair trial. But, as if the motion alone wasn’t enough, Mr. Snipes also conducted a public opinion roll comparing racial attitudes in both Ocala and New York. This is Snipes second attempt to get the venue for his trial changed; a federal judge rejected the first.
Friday, November 09, 2007
Thursday, November 08, 2007
Tuesday, October 30, 2007
Last week the IRS added a new page to their site offering links and help for victims of the California wildfires. You can check the page out here.
According to the IRS’ release, if you own property damaged by fire in the presidential disaster area, you can either claim uninsured or unreimbursed disaster losses by filing an amended 2006 tax return or you may wait and claim any losses on your 2007 return. Both individuals and businesses are eligible for these options. For more information, check out the IRS website.
After months of using three-year-old data to calculate taxpayers living expense standards, the IRS has finally issued new standards. These standards, also known as collection financial standards, are used when reviewing a taxpayer's account to determine their ability to pay federal tax liabilities. Essentially the IRS uses this data to determine the type and amount of tax debt relief each taxpayer qualifies for during settlement negotiations. The new standards went into effect October 1.
According to an IRS news release the standards have been designed to incorporate the following items:
- A new category for out of pocket health care expenses
- The elimination of income ranges for national standards for food, clothing and other items
- A nationwide set of tables for national standard expenses, eliminating separate tables for Alask and Hawaii
- An expanded number of household categories for housing and utilities
- An allowance for cell phone costs in housing and utilities
- Equal allowances for first and second vehicles under transportation expenses
- Fewer Metropolitan Statistical Areas for vehicle operating costs
- A separate nationwide public transportation allowance
A little over a month ago I drafted an open letter to the Secretary of the Treasury urging for changes to the IRS standards as they had not been updated since last year. I am glad to see the IRS has finally decided to update these standards as using three-year-old data to calculate a person’s expense standards was making things unnecessarily difficult on taxpayers hoping to find IRS tax relief.
Friday, October 26, 2007
On October 23, the United States House of Representatives voted with a massive 405 – 2 majority to extend the current ban on Internet taxes for the next four years. This is a small victory, as many from the tech industry lobbied to extend the ban indefinitely. First enacted by Congress in 1998, the Tax Freedom Act Amendments Act was set to expire on November 1, 2007.
Although the legislation passed through the House with flying colors, it stalled in the Senate. In order to extend the ban the act would need to pass the Senate and be signed by the President.
"Every day, broadband technology changes the way Americans live, from how they do business to how they learn and communicate to how they access medical treatment," claims Walter McCormick Jr., president and CEO of the United States Telecom Association. "An Internet access tax penalizes that way of life. In essence, we're talking about a tax on economic opportunity, on knowledge, and on finding one's voice in the democratic process."
Thursday, October 25, 2007
Friday, October 19, 2007
On October 11th, 2007 the California Franchise Tax Board published their annual list of the top 250 taxpayers with back taxes owed to California. Included in this list of delinquent taxpayers is three celebrities, one of which claims to have no regular income whatsoever.
The publishing of this information is part of the California government’s attempt to use publicity to get the money they are owed. As with all persons owing back taxes, everyone on this list have been contacted numerous times by the Franchise Tax Board in effort to collect the debts. Specifically, before publishing the list they notify each taxpayer via certified letter reminding them of the liability. But I guess when you owe the IRS millions of dollars it’s probably going to take more then just a letter to get the money.
Out of the list of 250 delinquent taxpayers there are three celebrities that stand out. Firstly there’s singer Dionne Warwick who owes California over $2.6 million, and she’s been dodging the tax collectors for over ten years. Maybe she’s hoping the statute of limitations will run out, but if I were her I wouldn’t hold my breath.
Next on the list of celebrities is 90’s comedian Sinbad, who hasn’t had a hit anything for years but still managed to rake up a tax debt of over $2.1 million dollars. His liability has been outstanding since December of 1993. When I see numbers like this it makes me wonder… How in the world did Sinbad manage to get so far in debt to the California government? He had a few hits back in the early 1990’s but in order to get that far in debt he probably never paid taxes in full. It constantly amazes me when I see these celebrities who think they don’t have to pay their taxes. Too bad he didn’t have a better tax lawyer, or at least a decent advisor to tell him to pay his taxes. I’m betting he doesn’t have the extra cash just lying around to pay in full. But can you imagine his lawyer calling into the IRS to negotiate an offer in compromise and telling the IRS agent it’s for Sinbad? What I’d give to listen into those negotiations.
The last celebrity on the list owes the least out of all the celebrities, but for some one who claims in court to have no income what so ever he sure has a pretty high income tax liability. The star in question? The notorious O.J. Simpson, who owes California over $1.4 million in personal income taxes that have been outstanding since 1999. I wonder if he even intends to pay that debt down? I doubt it. He’ll probably just ignore it and let it add on to the millions of dollars he owes countless other people.
The lesion to be learned from all of this? As the old saying goes the only things in life that are certain are death and taxes. Every one has to pay income taxes, even has-been celebrities who haven’t worked in decades.
Tuesday, October 16, 2007
Friday, October 12, 2007
Wednesday, October 10, 2007
Monday, October 08, 2007
Friday, October 05, 2007
Friday, September 28, 2007
Thursday, September 27, 2007
Last week I sent an open letter to Henry M. Paulson, Jr., Secretary of the U.S. Treasury Department seeking changes to the Internal Revenue Service’s allowable standards policies. Their current practice of using outdated allowable standards, refusing to update those standards, and failing to accommodate in the face of clear and convincing evidence to the contrary is making the tax relief process unnecessarily difficult for taxpayers seeking IRS settlement.
The IRS has numerous relief programs available to help taxpayers that find them selves with large back tax liabilities. These programs, such as the Offer in Compromise or Installment Agreement, allow taxpayers to resolve their debt without having to pay down the entire amount at once. But when negotiate with the IRS you must complete a detailed financial analysis, which usually requires the help of a professional.
The financial analysis compares your gross monthly income with monthly allowable expenses to determine what, if any, payments you can reasonable afford. These allowable expenses do not include all monthly expenses, but only include expenses that the IRS deems necessary. The IRS sets these maximum allowable expenses include limits for food, housekeeping, clothing, personal care, entertainment, housing, utilities, vehicle, and vehicle operating expenses. A person’s household size, income, and geographical location all have an effect in determining each individual’s allowable amounts.
Unfortunately, the IRS calculates the allowable expenses for any given calendar year using statistical data gathered two years prior. Therefore, in any given year, the IRS uses two-year-old data to determine a taxpayer’s current and future allowable expenses, which in my opinion is flawed in the first place. Consider how much has the price of milk gone up over the past two years, constantly rising cost of gasoline. Using outdated statistics is unacceptable and I strongly suggest the IRS revisit the idea of this practice in the first place.
Then, as if using two-year-old data wasn’t bad enough, the IRS chose not to update its allowable expenses for 2007 whatsoever. The IRS is using statistical data from 2004 to determine the maximum amount taxpayers can claim as expenses in 2007, which is 100% unacceptable in my opinion. The IRS needs to update these requirements, which is why I have drafted a letter pleading that the IRS immediately update their allowable standards. Using three-year-old data to calculate a person’s allowable expenses is like kicking a taxpayer when they are down. This data needs to be updated.
With the letter I would also like to suggest that the U.S. Treasury Department reprimand the IRS Automated Collection Service Unit for its refusal to deviate from the allowable standards even in the face of strong evidence to support it. When a taxpayer can demonstrate that they are living within the average of their community, and the allowable standard is no longer reflective of that average, then the IRS employee must deviate to the taxpayer-requested amount. Failure to do so is in complete contradiction to the IRS’ own Internal Revenue Manual, which states, "National [and] local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer's basic living expenses, allow a deviation."
In addition to drafting the letter, and sending it to various influential members of the government, my firm has also put out a press release on the issue, see Roni Deutch Sends Open Letter Urging the IRS to Update the Allowable Standards for Living Expenses. Hopefully my letter, and the issue in general, receives enough attention to convince the IRS to update their old standards.
Friday, September 21, 2007
Tuesday, September 18, 2007
As everyone in the country knows, the real estate and mortgage industry has been in trouble over the past few years. Thousands of families find themselves in financial trouble due to drastic rate increases in adjustable rate or interest only mortgages. Most people failed to consider the possibility of the huge increases upon entering the agreements. Only now, they find themselves with mortgage payments that they cannot afford to pay. Often, foreclosure is the only option available to these struggling families. However, there is one important aspect of a foreclosure that people forget – the resulting tax liability.
Foreclosure is always the last resort for someone struggling to make mortgage payments. People usually think it will be the end of their problems. However, the IRS considers debt canceled through foreclosure to be part of a taxpayer’s income. The IRS feels that it is entitled to the appropriate income taxes on that money. It also has access to every taxpayer’s financial information so it can ensure the appropriate taxes are paid. And as most of the country already knows, the IRS is very aggressive in collecting taxes that they know are outstanding and feel they deserve.
Forecasts indicate that over 20% of the loans made sine 2005 to people with weak credit using interest only or sub prime loans will end in foreclosure. Typically, these loans require little or no down payment and begin with extremely low payments that quickly rise with rate adjustments. Due to paying so little toward the principal amount and the lowering value of homes across the nation, people are increasingly finding themselves upside down in debt with huge mortgage payments.
"The tax laws are far too complex for borrowers to understand," claims Kurt Eggert, a professor at Chapman University Law School. "There are distinctions between selling a house for less than the loan amount and losing the house in foreclosure. It is crucial to get expert tax advice to sort through the bewildering complications. The whole concept can be counterintuitive – your home has declined in value and you lose it. Then the IRS says you owe tens of thousands in taxes because you got a windfall when the debt was forgiven."
Foreclosures are not the only way to end up with this type of tax liability though. The other is when a homeowner sells his or her house for less than the value of the mortgage and the bank will just forgive the difference. In those situations the homeowners is technically supposed to report that amount as income. This is known as a "1099 shortfall" which is an IRS policy that treats forgiven debts as income, even if a taxpayer has nothing to show for it.
So many people across the country are finding themselves in serious financial trouble. Lenders encouraged hundreds to refinance their houses for more than the home's fair-market-value. This was the case with Agnes Mouser. She is a 65-year-old widow who was hoping to pay off her credit card debt by taking out money with a refinance. "A real nice young man came out to see me," Mouser noted. "He could have been my grandson." The appraiser her bank sent out valued her mobile home at $43,500 in 2000 by using two new standard homes as benchmarks for calculating the value. The bank then agreed to let her borrow $34,730 against the value of her house. She paid the bank over $2,500 in closing costs and her loan carried an interest rate of nearly 15%.
When Mouser realized she could not meet her monthly payments in 2003, she contacted a lawyer who informed her that the county valued her home at less then half of what the bank had – only $19,970. Fortunately for Mouser, her bank forgave the difference. Unfortunately, the IRS did not. Soon thereafter, Mouser got a tax bill for over $10,000.
Thousands of taxpayers across the country are facing massive IRS tax liabilities with little chance of relief. With all the attention this issue is getting, Congress is finally beginning to consider legislation to help lower the burden on these people who are facing such huge financial problems. Senator Debbie Stabenow and Senator George Voinovich sponsored a bill to eliminate the federal rule that considers mortgage relief taxable income. The White House has already indicated support for Stabenow’s bill and President Bush claimed he hopes to include Stabenow’s ideas in his home ownership relief initiative. However, before a bill can go to the White House, Congress must approve it. Currently, no progress has been made on Stabenow’s bill, which has been sitting in Congress since May.
Friday, September 14, 2007
Just a few weeks after the new school year started, the IRS is already putting out a press release reminding teachers, parents, and student alike about the valuable education related tax deductions. The IRS warns that it’s important to save your receipts and to keep detailed records so that it will be easier to take advantage of the valuable deductions on your next income tax returns.
"The start of the school year is a good time to remind parents, students and teachers to save all receipts related to tax-advantaged education expenses," said IRS Acting Commissioner Linda Stiff. "Good recordkeeping makes sense because it can help avoid missing a deduction or credit at tax time."
For more information on the education related expenses available to you, check out IRS Publication 970, Tax Benefits for Education. According to the IRS it can "help eligible parents and students understand the special rules that apply and decide which tax break to claim."
Thursday, September 13, 2007
Tax Foundation has released the newest version of their bimonthly tax policy newsletter, Tax Watch. The newsletter contains research and analysis on many current tax issues. Some of the featured articles include:
Paying for Public Schools: What's the Cost of Judicial Mandates?
U.S. Corporate Taxes Still Among World's Most Punitive
Fixing AMT without Raising Tax Rates
Study Finds Income Redistribution between Young, Middle-Age and Elderly
You can download the PDF of the newsletter for free by heading over to Tax Foundation.org, or if you are a member of the Tax Foundation you can request a hard copy version.
Wednesday, September 05, 2007
Wednesday, August 29, 2007
Democrats in Congress are regarding the proposal, known as the Doggett law, as a legitimate crackdown on cooperate tax avoidance. They are hoping the tax could raise an estimated $7 billion per year.
The goal of the proposal is to stop multinational corporations from going "treaty shopping" to find countries with more friendly tax laws. If approved by the Senate, the proposal could see firms paying a tax of up to 30% on interest payments and other capital flows between US operating countries and their parent businesses. This tax would be enforced even if the funds were being transferred to affiliates in the United Kingdom and the Netherlands. This would disrupt a historically tax fee practice that was based upon existing "tax-free" treaties between the United States and these countries. Yet, experts claim that firms based in countries without treaties such as South Korea and Singapore would be hit even harder by the new tax.
The new tax was added as an amendment to a farm appropriations bill drafted earlier this year by a Texas congressman. The practice of adding new legislation as an amendment to another popular bill is common in Congress as a way of negotiating the approval of a law. When making such an amendment to a popular bill members of Congress can dramatically improve their chances of getting a controversial new law passed.
However, numerous Republicans fighting in the Democrat controlled Congress have said the proposals flew in the face of existing treaties with other countries, and were based on a misconceived idea that equates tax avoidance with seeking to find a competitive tax position. "These companies are not doing anything illegal," claims Rhian Chilcott, director of a lobbyist group in Washington. "They are taking advantage of a tax treaty that the United States negotiated years ago." He went on to explain that many local subsidiaries are already paying taxes and would effectively be taxed twice on their income.
However, the Democrats who support the law are emphasizing that the law will be specifically focused on preventing tax havens that are used to hide earning. They claim the goal of the law is not to target legitimate companies that are paying their taxes. Rather it will attempt to gain revenue from companies abusing the treaties to pay little or no taxes on their income. Many massive multinational corporations setup offices in locations that have tax-free treaties with the United States for the sole purpose of avoiding tax liabilities.
For example, if the legislation passed, Samsung’s South Korean conglomerate would not be eligible to make tax-free transfers from it’s United States division to it’s United Kingdom financing unit. Currently the company pays a zero tax rate on such transfers because of the Anglo-American treaty. Samsung’s United States subsidiary would instead be forced to pay the 15-cent tax rate that applies to all Korean companies on transfers from the United States. Unfortunately, no representative from Samsung would comment on the new law.
The measure would also dramatically hit Japanese carmakers with large United States operations. Nissan is one automaker that would likely see increased taxes as a result of the legislation. Several international companies are currently lobbying against the legislation including Panasonic, Unilever, Alcatel-Lucent, Swiss Re, and Allianz. An executive from an undisclosed global corporation said, "this is another signal that the United States is not a friendly place to do business. We do not need this. We can go to Canada or Mexico."
Thursday, August 23, 2007
Wednesday, August 15, 2007
Monday, August 13, 2007
Having to pay more money isn’t the only unpleasant part of an IRS audit. Typically audits are a time consuming and aggravating process. An IRS audit isn’t like a criminal trial where some one is presumed to be innocent; the burden of proof lies on a taxpayer to prove there are innocent and filed an accurate tax return.
It is important to note that the IRS computer system selects the returns that are audited. No human employee reviews returns until they are selected for audit by the computer system. The computer system selects returns that are likely to yield the most money to the government. The computer system makes this decision by reviewing returns for “red flag” characteristics. Red flag characteristics are those income, deduction, and credit types that have historically seen the most imprecise calculations and abuse by taxpayers.
A taxpayer is more likely to get audited if he or she generates income from any source other than regular employment wages. Persons who file Form 1099 are up to three times more likely to receive an audit then some one who only files Form 1040. A 1997 IRS press release claimed more then three percent of taxpayers filing Form 1099 reporting between $25,000 and $50,000 of income were audited, compared with under one percent of 1040 returns that were audited.
Although the IRS offers hundreds of possible deductions and credits to help taxpayers lower their income tax liability, taking an excessively large amount will send a very clear red flag to the IRS. But how does a taxpayer know what’s excessive? That’s a tricky question. There is no all-applying rule because the IRS determines the allowable number of deductions for a taxpayer mostly based on their income. For example, if a person making $30,000 per year claims $15,000 in charitable contributions, then this will send a red flag to the IRS.
Although there are many tax laws allowing self-employed individuals to lower their liabilities by using home office deductions, taxpayers taking home office deductions are probably the most frequently contested by IRS because they are easy for a taxpayer to bend the truth on. In order to claim a home office deduction a taxpayer’s home office must be the principal place of business, meaning they perform most of their work in the home office. Also, the space must be used exclusively for running the business and not for personal use as well. Otherwise the space can’t be considered a home office and may not be deducted. The rules for home offices are very specific, so please be sure to read the IRS’s rules and regulations if your considering claiming a home office deduction.
Losses from a business can also be another red flag for the IRS. If an individual starts their own businesses for the purpose of generating excessive tax deductions, the IRS will catch on quickly. Businesses must be profitable in at least three of the past five years in order to be considered a legitimate business for tax purposes. Otherwise the IRS will realize the business is functioning as a tax shelter.
If there are big inconsistencies between your previous tax returns and your current return then you could be sending a red flag to the IRS. The most common examples are name changes (i.e. your name or the name of one of your dependents), claiming new deductions and credits, or a significant change in income. For example, if a taxpayer earned $75,000 one year, then only $15,000 the next, the IRS is going to wonder what happened.
If there are differences in the income you reported to your state treasury and to the IRS then the IRS will investigate as to why the information reported is inconsistent. Not only do federal and state authorities receive records of all sources of income and financial information for every taxpayer – the IRS does as well. If they notice any errors that point to misrepresentation of income then you can expect to receive a letter informing you of an audit.
If your reported income seems suspiciously low for your given life style, then the IRS will see this inconsistency and may request an audit. Remember that the IRS has access to all your financial records and will notice if you are making a $5,000 monthly mortgage payment but only receiving $2,000 a month in reported wages. They are going to know you must be receiving income from another source and will investigate.
If your tax returns are incomplete or sloppily prepared then this might also get the attention of the IRS. If there are blanks where there should be numbers or if most of the numbers you claim are round numbers (like $2,500 or $10,000) then this will also send up a red flag to the IRS.
There is no way to guarantee a taxpayer won’t be audited. However, if a taxpayer files an accurate tax return and avoid the IRS’s red flags their chances of being selected for an audit are much lower. Even if they are selected, having a clean and accurate tax return will help make the audit less cumbersome and intrusive.
Friday, August 10, 2007
Thursday, August 09, 2007
Friday, August 03, 2007
Monday, July 30, 2007
As a result, the IRS has announced that it plans to do more random audits in the next few years than it has in the past. In addition, the IRS announced plans to conduct more audits of high-risk groups. The Government Accountability Office recently concluded a detailed study on the tax gap and informed the IRS on which high-risk groups have the highest percent of misreporting on their tax returns.
With help from congress, The Government Accountability Office has identified the following groups of taxpayers to have the highest rates of misreporting on their tax returns:
- Sole proprietors reporting on Schedule C forms
- S corporations where owners aren’t taking enough wages in an effort to minimize payroll taxes
- Taxpayers who gamble and underreport their winnings
- Taxpayers who own a farm or are involved in farming
- Taxpayers who take advantage of the Earned Income Tax Credit when they don’t qualify
- Taxpayers who incorrectly report capital gains from sales of investments
- Taxpayers who take itemized deductions on Schedule A for medical expenses, charitable contributions, and non-reimbursed job expenses
However, being in one of these groups does not mean a taxpayer will necessarily be audited. Based on 2005 statistics, a taxpayer’s average likelihood of being audited was around 1%. But if a taxpayer falls into one of the groups listed above their likely hood of being audited increases to above 5%.
The IRS had discontinued its random audit process five years ago in an effort to be seen as a kinder and gentler agency of the government. However, under pressure to increase revenue to offset the tax gap, the IRS has decided to once again target not only returns that raise red flags, but to also select taxpayers to audit at random. Beginning in October, it’s expected that the IRS will target approximately 50,000 income tax returns from 2006. The IRS is warning that not all taxpayers audited will be subject to a scrupulous line by line audit though. Out of the 50,000 returns the IRS aims to audit, they estimate that 8,000 will just be examined by the IRS requiring no action on the part of the taxpayer, and 9,000 of the taxpayers audited will be able to respond to audit inquiries via mail. The remaining 30,000 taxpayers will be required to make face-to-face meetings though. Many of these audits are to be conducted even if the IRS doesn’t suspect a problem, but the IRS is claiming they hope to use the audits to gather information about taxpayer norms.
Shortly after the IRS’s announcement of their plan to increase audits, National Taxpayer Advocate Nina E. Olson delivered a report to Congress identifying the priority issues the Office of the Taxpayer Advocate will address in the coming year. One important aspect of the report was the battle the IRS is facing because of all the pressure being placed on them to lower the tax gap quickly.
"For fiscal year 2008, both the IRS and the Taxpayer Advocate Service (TAS) face similar challenges," Olson claimed. "The IRS is under scrutiny for its efforts to close the tax gap, while TAS is struggling to address taxpayer difficulties that arise as a result of these very efforts."
In multiple prior reports to Congress, Olson has identified the tax gap as one of the most serious challenges in tax administration. She has put together numerous proposals to try and help address it, but nothing has come from her proposals. She has expressed concern that the pressure on the IRS to reduce the tax gap could result in the IRS excessively cutting corners in it’s treatment of taxpayers. She emphasized that Congress needs to play an important role in helping to achieve an appropriate balance.
"IRS oversight should not just be limited to urging the IRS to collect more tax revenue," Olson continued. "Even as Congress directs the IRS to address specific areas of noncompliance, Congress should require the IRS to adopt a long-term research strategy that focuses not only on "closing the tax gap" but also on understanding what it takes to encourage taxpayers to be voluntarily compliant and how to change taxpayer behavior."
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Thursday, July 26, 2007
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Monday, July 23, 2007
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Tuesday, July 17, 2007
Thursday, July 12, 2007
The day before Independence Day a D.C. federal appellate reversed their decision in the case of Murphy v. IRS. The courts decided that payments made as damages for personal injury are taxable by the United States congress. It’s no coincidence that the decision came the day before a holiday as it is clearly an effort to avoid negative publicity surrounding this milestone case.
Marrita Murphy was awarded damages for emotional distress and loss of reputation after she complained to the whistleblower office about environmental hazards at her job at the New York Air National Guard. After winning her whistleblower case in 1994 she was awarded $70,000.00 by the Department of Labor Administrative Review. Murphy claimed that the Guard blacklisted her and gave her bad references after she made her complaint to the Labor Department about Environmental conditions.
Shortly after receiving the money she found herself paying a hefty tax bill of more then $20,000.00. However Murphy asked for a refund of the tax on grounds that her damages were not income, but compensation for a personal injury which cannot be taxed. She fought the tax bill and eventually found herself in a legal battle against the United States Internal Revenue Service.
On August 22nd 2006, a D.C. federal appellate panel decided in Murphy v. IRS, that Murphy’s award was not income but compensation for the loss of a personal attribute, which could not be taxed. The court noted that Murphy was awarded damages for emotional distress and loss of reputation. The court was essentially treating her award as they would treat awards for physical injuries, which are protected from.
After the decision there was quite a bit of backlash form the government as well as from bloggers and legal experts around the world. The ruling raised the wider issue on the constitutionality of the tax code provisions that allows for taxing of awards from personal injuries. Legal experts around the country claimed the ruling was a significant threat to the IRS’s ability to collect taxes and that it would open the door for other constitutional challenges to the tax code. This case could "launch a thousand constitutionality arguments that people would have thought laughable before," claimed Yale Professor Michael Graetz.
Although the IRS called for a full appeals court to hear the matter, the same three-judge panel decided to rehear the case. On December 22nd, the Friday before Christmas, the panel announced they would rehear the case instead of allowing the entire D.C. Circuit to review the case. Although there is no supporting evidence, it seems likely that the court made this announcement in such proximity to the holiday in order to avoid negative publicity for having to rehear a popular case. This is a tactic known to most political scientists as it often used in political media representation.
During the hearing the IRS urged the court to treat damages to people differently from damages to property. The IRS claimed that compensation awarded for the loss of an arm or leg is not a payment to make the person whole, but rather the payment was part of a "forced sale." According to this logic if a person suffers mental breakdowns because they witnessed the death of their child any payment for the mental illnesses can be taxed because the victim was forced to sell their mental health for the amount of the award. Therefore any money gained from a forced sale would be considered income of the victim and can be taxed.
After hearing both side’s arguments the court agreed with the IRS’s "forced sale" argument saying that "Murphy’s situation seems akin to an involuntary conversion of assets; she was forced to surrender some part of her mental health and reputation in return for monetary damages," –Murphy v. IRS, p. 2. The court announced on July 3rd that Murphy must pay taxes on the income she received from the Labor Department. Again, the courts issued their announcement just before another national holiday, making another obvious attempt to avoid negative publicity by manipulating the media.
"We reject Murphy’s argument in all aspects," claimed Chief Justice Douglas H. Ginsburg. "We hold that a tax upon such damages is within Congress’s power to tax. Murphy no doubt suffered from certain physical manifestations of emotional distress, but the money awarded her was for mental pain and anguish and for injury to professional reputation."
"We conclude (1) Murphy’s compensatory award was not received on account of personal physical injuries, and therefore is not exempt from taxation pursuant to § 104(a)(2) of the IRC; (2) the award is part of her "gross income," as defined by § 61 of the IRC; and (3) the tax upon the award is an excise and not a direct tax subject to the apportionment requirement of Article I, Section 9 of the Constitution. The tax is uniform throughout the United States and therefore passes constitutional muster. The judgment of the district court is accordingly affirmed."
"Murphy intends to seek further review in the courts," said her attorney David Colapinto. "The decision makes a mockery of make-whole remedies under civil rights law. So don’t get hurt, because you’re never going to be made whole. Uncle Sam will take a tax cut."
"The Court’s reversal stands reality on its head. When whistleblowers suffer retaliation, they do not ‘sell’ their mental health," continued Colapinto. "If people are injured in a car accident, they do not ‘sell’ their arms or legs. These are real human losses, and compensation to restore that human loss was never indented to be ‘income’ under our Constitution or the tax code."
"This decision is a terrible setback for all victims of civil rights abuses. It permits congress to enact retaliatory taxes, stripping people from the constitutional protections afforded property. Damages to whistleblowers are not part of a business transaction – forced or otherwise. They are part of harm caused by illegal conduct. This decision threatens fundamental human rights," claimed Setphen Kohn, President of the National Whistleblower Center.
Wednesday, July 11, 2007
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