IRS to Begin Increasing Amount of Audits

Because of increasing pressure from Congress and the Executive Branch, the IRS has began an effort the drastically increase the number of audits they perform to help lower the ever growing tax gap. Eliminating the tax gap – estimated to be $312 billion to $353 per year – would provide enough money for the federal government to pay for Medicaid’s entire 2007 budget. Montana Senator Max Baucus, the top tax writer in Congress, has publicly demanded the IRS conduct more audits in order to continue to help lower the tax gap.

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."

Sources
IRS to start auditing more tax returns?
Congress Instructs IRS to Conduct More Audits
More Audits Are Coming; How Can You Cope?
IRS targeting certain deductions in effort to close tax gap
They're back! IRS resurrects random audits

Group of Tax-Exempt Firms Owe Over $1B in Taxes

According to a new Government Accountability Office (GAO) report, nearly 55,000 tax-exempt organizations owed over $1 billion in unpaid federal taxes at the end of September 2006. However, the report said the $1 billion figure is likely understated because "some exempt organizations have understated tax liabilities or did not file tax returns." The GAO investigated 25 exempt organizations and found abuses and possible criminal activity, including failures to remit payroll taxes withheld from employees. Some of these companies’ leaders diverted money to their own bank accounts, which they spent on million-dollar homes and luxury vehicles. You can read the full report at the Washington Post Blog.

New Audi R8 Spider Sketch

Yesterday CAR Online got ahold of a new official sketch of an Audi R8 Spider. The car features a pair of speedster humps and in lieu of a folding top, the car will feature a removable targa-style roof to reduce complexity. According to CAR, Audi expects most Spiders to be sold in warm-weather areas where the top is likely to come off and stay off for extended periods.

5 Mistakes That Can Tax Your 401(k)

These day’s it is essential to put into a 401(k), or some other type of retirement plan, if you want to be able to comfortably retire. The problem, however, is that people don’t take the time or effort to fully understand their plan to ensure maximum benefits. "Too many workers set up their 401(k) plan and then just forget about it," claims Glenn Kautt, a financial planner. USA Today.com has an interesting article on the five most common mistakes people make with their 401(k) that can result in a tax liability. The five mistakes include: rejecting free money, loading up on company stock, chasing performance, investing too conservatively, and failing to fine-tune.

New IRS Electronic PIN Signature Requirement

Starting in the 2008 tax filing season, the Internal Revenue Service (IRS) will simplify the signature process for e-filed tax returns submitted by tax practitioners. The simplification will eliminate the need for a paper document to be sent to the IRS by having tax practitioners e-file individual income tax returns only when they are signed electronically using one of two methods: a Self-Select Personal Identification Number (PIN) or a Practitioner PIN. "Nearly 90 percent of tax professionals already use electronic signatures to sign returns," Acting IRS Commissioner Kevin M. Brown claimed. "It’s the right time to take the next step toward truly paperless filing." According to the IRS’s website, out of the 55 million e-filed returns that have come from tax professionals this year, more than 49 million used the Self-Select PIN or the Practitioner PIN.

National Taxpayer Advocate Releases Report on Tax Issues

"National Taxpayer Advocate Nina E. Olson today delivered a report to Congress that identifies the priority issues the Office of the Taxpayer Advocate will address in the coming fiscal year. Among the key areas of focus will be improving taxpayer services, ensuring that taxpayer rights are protected in the IRS’s private debt collection initiative, and making the IRS’s offer-in-compromise program more accessible for taxpayers who are unable to pay their tax debts in full." You can see the detailed report at the IRS’s website.

U.S. Honda Open of Surfing Begins

Today the Honda U.S. Open of Surfing will begin. The competition will begin with the men's and junior competitions at the Huntington Beach Pier. This competition is in it’s 49th year and is the North America's only six-star World Qualifying Series event. It will feature over 600 surfers competing for prize of $175,000.00. The men's competition begins on Monday and the women's competition begins Wednesday. The women's finals will be held July 28 and the men's finals July 29.

New Ferrari F430 Scuderia Announced

Ferrari recently announced their newest vehicle to be produced, the F430 Scuderia. It weighs about 220 lbs. and has a Ferrari 4.3L V8 engine that produces 510 horsepower, which gives the Scuderia a power-to-weight ratio of 1 horsepower for every 5.4 lbs. Michael Schumacher will officially unveil the new car in Frankfurt this September. You can see move pictures at AutoBlog.com.

Roni Deutch Tax Center Offering Incentive To Veterans

My tax center recently put out a new press release on the financial incentives being offered to veterans. "Roni Deutch Tax Center, the nation's leading tax preparation franchise, built from the success of its founder Roni Deutch in saving American's millions of dollars in back tax liabilities, announced today it will participate in a national program designed to help military veterans become franchise owners." You can read the full release at Franchise.com.

Largest Tax Fraud Case Ever Thrown Out

Earlier today a federal judge tossed out indictments against 13 former KPMG executives yesterday in the largest criminal tax-fraud case in United States history. The case was brought up to determine if the former KPMG executives intentionally helped clients avoid over $2.5 billion in federal tax liabilities through use of unlawful tax shelters. Judge Lewis A. Kaplan cited "intolerable" prosecutorial abuses that deprived the defendants of their constitutional right to a defense. Federal prosecutors pressured KPMG to stop paying the legal bills of their employees who refused to cooperate with the investigation. "There are limits on the permissible actions of even the best prosecutors," Judge Kaplan claimed. "The responsibility for the dismissal of this indictment . . . lies with the government." However, prosecutors are already considering their options for an appeal.

IRS Claims Electronic Excise Tax Filing Is Coming

The IRS announced they will be adding three excise tax forms to the list of federal tax returns and schedules that can be filed electronically later this year. "Electronic filing is a key component to modernizing our tax system," claims Acting IRS Commissioner Kevin M. Brown. "Expanding e-file opportunities to include excise tax returns will help improve service to taxpayers using these forms." The IRS expects to receive the first electronically-filed excise tax return this summer, when Form 2290, Heavy Highway Vehicle Use Tax Return, becomes the first available excise tax return that can be e-filed.

Courts Decided, Mental Anguish Awards Are Taxable

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.

Further Reading

TaxProf Blog: D.C. Circuit Panel Reverses Itself in Murphy, Upholds Constitutionality of Taxation of Award for Nonphysical Injury

Associated Press: Court: Mental Anguish Awards Are Taxable

NY Times: Nonphysical Injury Awards May Be Taxed, Court Rules

National Whistleblower Center Press Release: Court Reverses Itself On Key Tax Case

Roth & Co.: 'Murpyh' Goes Out With A Whimper

WSJ Law Blog: D.C. Circuit Reverses Itself in Tax Ruling

Congress to IRS, Conduct More Audits!

According to About.com, the Government Accountability Office has directed the IRS to raise revenue by increasing the amount of taxpayer audits they perform. Congress directed the IRS to pay close attention to the following taxpayers: schedule C filers, Partnerships and S-Corporations, especially S-Corporation owners who do not take appropriate salaries, gamblers, part-time farmers, individuals who file Schedule A and claim large amounts of medical deductions, charitable contributions and job-search expenses, and investors who do not properly report sales of investment properties.

California Lawmaker Pushes For Sex Tax

California Assemblyman Charles Calderon introduced Assembly Bill 1551 recently which aims to "assess an 8 percent tax on sexually explicit nightclub acts, items sold by sex shops and pay-per-view movies featuring unprotected sex or X-rated acts in a public place." Although he estimates his bill would generate over $100 million annually, it is extremely unlikely the bill will pass because of California’s 2/3 requirement for any tax increases. "I see this as an attempt by Mr. Calderon to appeal to certain social conservative elements within my party as a way to get more money to spend for his special interest groups," said Republican Assemblyman Chuck DeVore. Read more at SacBee.com.

New Tax Foundation Newsletter

The tax foundation has published a new summer edition of their popular quarterly tax newsletter, Tax Watch. The newsletter gives economic research and analysis in an easy to read format-for any one looking for more information on current tax issues. Some topics covered in the summer edition include: Tax Boom: America's Rising State and Local Tax Burden, Which Cities Pay the Lowest-and Highest-Taxes, Who's Paying for Low-Income Transfer Payments, and Battling Hidden Lottery Taxes in the Courts. You can download the newsletter at the Tax Foundation Blog.

Bugatti Veyron at the 2007 Prescott Hill Climb

Below is a video of the Bugatti Veyron racing through the 2007 Prescott Hill Climb a few months ago. The Bugatti Veyron has a massive price tag at about $1.4 million and features a W16 engine equipped with four turbos which creates 1,000hp.

Source: AutoBlog

Revised Innocent Spouse Form

Earlier today the Internal Revenue Service today announced a new redesigned Form 8857, which is a request form for Innocent Spouse Relief. The goal of the new form is to help reduce follow-up questions to the form and reduce the overall burden on taxpayers. When a taxpayer files a joint return, both spouses are jointly and individually responsible for the tax. Innocent Spouse relief provides an opportunity for a spouse to be relieved from the joint debt under certain circumstances. If a taxpayer believes that only his or her spouse or former spouse should be responsible for the tax, the taxpayer can request relief from the tax liability. According to IRS estimates, the new design will eliminate nearly 30,000 follow-up letters per year, which will result in a reduced burden, quicker responses to taxpayers, and less cost to the government. For more information check out the IRS’s website.

Most States Not Raising Gas Taxes

According to Forbes.com only seven states raised their gas tax rates over the past year. With Washington having the highest increase with an addition 2-cent tax. While Iowa and Nebraska both saw their gas tax rates drop by fractions of a penny. However, most states haven't raised gas taxes in the past year.