Roni Deutch Tax Center Ready to Help Local Volunteers

Last week a Roni Deutch Tax Center franchisee was featured in a NorthJersey.com news story because of their fundraising effort for their local fire department. I am proud to see the charitable nature of this storeowner, and the enthusiasm their office has for their local community. Checkout the following article from NorthJersey.com.

The Roni Deutch Tax Center located at 24-11 Fair Lawn Ave. in Fair Lawn, will be conducting a fundraiser for the Fair Lawn Fire Department and First Aid Squad. This tax season, from now until April 15, the Tax Center will donate $20 to the fire department and first aid squad for every tax return completed.

"We appreciate everything we can get and it's very nice of them to do something to support our efforts," said Jay Bender, a 39-year fire department volunteer of Company 4.

"The community should be aware and support our fire department and first aid squad," said Roni Deutch Tax Center Manager Lisa Hartensveld.

Last year, the tax center partnered with the first aid squad and raised just over $200. This will be Roni Deutch's second tax season in Fair Lawn, and the company hopes to raise even more money this year.

"The money does add up very fast and this is our way of giving back to the community" said Harensveld.

Every customer who wishes to participate in the fundraiser must mention the fire department or rescue squad when they come in to have their taxes completed. The customer will not be charged the $20 for the donation; it will be donated by the tax center.

For more on the fundraiser, call the Roni Deutch Tax Center at 201-663-9055.

N.J. Business Briefs

A Roni Deutch Tax Center® franchisee was recently featured in a business brief on NorthJersey.com, for giving free tax returns to the unemployed. Check out a snippet of the article below.

Free tax-return work for jobless

Roni Deutch Tax Centers in Bergenfield and Fair Lawn will prepare free tax returns through March 15 for Bergen County residents who show verification of unemployment.

Paul Nuti of Wyckoff, owner of the two new franchises, said he is offering the free help in response to rising unemployment. Nuti said the average cost of tax preparation at the centers is $200 for a married couple itemizing deductions. Roni Deutch, a California tax lawyer, began franchising tax centers last year. The tax centers are at 3 S. Washington Ave., Bergenfield, and 24-11 Fair Lawn Ave., Fair Lawn.

My Open Letter Pleading the IRS to Update Their Expense Standards

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.

Tax Penalties of Foreclosures

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.

Sources:
http://www.lsj.com/apps/pbcs.dll/article?AID=/20070911/OPINION01/709110311/1085/opinion
http://jalopnik.com/cars/frankfurt-auto-show/frankfurt-auto-show-bmw-x6-activehybrid-concepts-298085.php
http://www.signonsandiego.com/uniontrib/20070821/news_1b21taxes.html

New Law Could Drastically Raise Taxes On Multinational Corporations

Pressure is growing in Washington to force a tax on foreign companies with subsidiaries in the United States who move funds back to their parent countries that have more favorable tax rates. These businesses currently pay next to nothing in taxes. In response, the United States House of Representatives has already voted to increase tax rates to as much as 30%. However, business groups are saying the measure could deter firms from investing in the United States. Multiple lobby groups state that about 60 multinational companies have already expressed concern about the proposal, which is likely to be considered by the United States Senate some time next month.

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."

Advice on Internal Revenue Service Audits

With the internal Revenue Service (IRS) making recent headlines about increasing the number of audits, it’s important for taxpayers to do what they can to avoid being audited. Although many experts point to the IRS’s public relations campaign on the new audits as reason to think it’s a scare tactic aimed at increasing voluntary compliance, getting audited by the IRS is never a pleasant experience and avoiding one in the first place is definitely the best option.
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.

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

New Tax Law Changes

On May 25th 2007, President Bush signed into law H.R. 2206 – the "U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007." The bill included a $120 billion emergency war supplemental funding bill for the current wars in Iraq and Afghanistan as well as numerous tax related law changes. Among the numerous provisions contained in H.R. 2206 are the "Fair Minimum Wage Act of 2007," and the "Small Business and Work Opportunity Tax Act of 2007" – a $4.84 billion small business tax relief package. Below are brief summaries of the important tax law changes.

IRS Liability Notices
The new law increases the time from 18 to 36 months in which the IRS has to notify individuals about a tax liability before interest and penalties are enforced. Therefore the IRS must cease charging interest and filing related penalties on a taxpayer’s liability if the IRS fails to notify the taxpayer about a liability within 36 months after the taxpayer filed the return.

Tax Return Preparer Penalties
This provision broadens and toughens tax return preparer penalties for returns prepared next year. It expands the scope of the penalty to include all types of tax returns and increases the penalty for irresponsible tax return preparation to a $1,000.00 fine or 50% of the income derived by the tax preparer for preparing the claim.

Levies to Collect Federal Employment Tax
The act provides that the rules requiring notice and a hearing opportunity before the IRS can issue a levy do not apply to disqualified employment tax levies, which are any levies to collect employment taxes for any period if the taxpayer requested a hearing for unpaid employment taxes.

Erroneous Refund Claims
The new law adopts a new penalty for filling erroneous refund claims and applies to all claims filed for the 2007 tax year. The act establishes a punishment for taxpayers claiming a refund for an excessive amount, and establishes a penalty of 20% of the excessive amount.

Bad Checks and Money Orders
The provision changes the penalty for bad checks and money orders and goes into effect for all checks and money orders received after May 25, 2007. The new penalty for passing bad checks or money orders less then $1,250.00 is a $25.00 fee or the amount of the check or money order whichever is less.

"Kiddie Tax" Changes
The new law expands the impact of the "kiddie tax" by raising the age for which it applies from under 18 to under 24 if a student.

Spouse Partnership May Elect Out of Partnership
The new rule allows unincorporated businesses owned jointly by a married couple to file their tax returns individually and not be treated as a partnership for tax purposes. All items in the taxpayer’s returns are divided between the spouses according to their respective interests in the venture, and each spouse’s share of income or loss from the business is taken into account in determining the spouse’s net earnings.

FICA Tip Credit
The new law modified the FICA Tip Credit so that the credit is determined based on a minimum wages of $5.15 per hour, allowing employers to receive the full tip credit despite of the Federal minimum wage increase. The provision also states that as the minimum wage increases, the amount of the credit will not be reduced.

Corporate Estimated Tax
The act increases the corporate estimated tax payment due in July, August, and September 2012 from 106.25% to 114.25% of the payment otherwise due.

Work Opportunity Credit
The passage of the new bill extends the credit by forty-four months. Now the credit is valid through August 31, 2011 for most targeted groups.

Disabled Veterans
There is an enhancement in the Work Opportunity Credit for employing certain disabled veterans who begin working for an employer after the passage of the bill.

WOTC and Tip Credit Offset by AMT
This new provision allows for use of the Work Opportunity Credit and the FICA Tip Credit to offset the Alternative Minimum Tax.

Section 179 Expensing
In addition to extending it through 2010, the provision increases the minimum amount a taxpayer can deduct annually as a Section 179 expense from $100,000.00 to $125,000.00. It also increases the $400,000.00 phase-out level to $500,000.00.

For more information on the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007 you can read the Senate Finance Committee’s summary, the House of Representatives’ technical explanation, or the Senate’s legislative text.

IRS Tax Fraud

According to the Internal Revenue Service (IRS), every person is responsible for filing his or her own tax return when required to do so through a duty known by the IRS as voluntary compliance. Fortunately the majority of Americans comply by determining and paying the correct amount of taxes to the government. However, there are many that willfully and intentionally violate their legal duty of voluntary compliance by failing to pay the correct amount of income, employment, or excise taxes. The IRS claims these individuals "pose a serious threat to tax administration and the American economy," and has teams dedicated to tracking down and prosecuting these violators.

Millions of Americans live in fear of the IRS because they owe back taxes to the IRS. However, there’s a big difference between owing a few hundred dollars because of mistakes on your previous tax return and committing tax fraud. In committing tax fraud you deliberately break the tax law by providing incorrect information on your tax returns for the purpose of some type of gain. Activities the IRS determines as breaking the tax laws include but are not limited to:

• deliberately underreporting income
• deliberately omitting income
• overstating the amount of deductions
• keeping two sets of books
• making false entries in books and records
• claiming personal expenses as business expenses
• claiming false deductions
• hiding assets or income
• transferring assets or income

In order to combat these abuses the IRS created the Criminal Investigation Division. It strives to correct the issues of improper tax filing and payment. The Criminal Investigation Division of the IRS investigates a wide array of individuals and industries including business owners and self-employed wage earners. It is the main component of the IRS’s efforts to directly influence taxpayer compliance.

The Tax Fraud Program is the Criminal Investigation Division's largest enforcement program that covers a variety of tax fraud and tax and money laundering crimes. According to IRS statistics there were 1,863 investigations initiated by the Tax Fraud Program in 2006, leading to nearly 700 people being sentenced and incarcerated for breaking the tax law.

The Tax Fraud Program classifies tax fraud crimes into two basic programs, legal source tax crimes and illegal source financial crimes. Legal source tax crimes involve people who earn wages legally but choose to evade taxes by violation of tax laws. These cases involve behaviors that threaten the tax system, such as questionable claimed refunds, unscrupulous tax return preparers, and persons who challenge the legality of income taxes. The prosecution of these cases is essential in supporting the IRS’s overall compliance goals, encouraging voluntary compliance with the tax laws, and promoting fairness and equity in the American tax system.

The second program, illegal source financial crimes, focuses on money gained through illegal sources of income, such as illegal gambling. According to the IRS, these underground operations threaten our "voluntary tax compliance system and undermine the overall public confidence in our tax system." The IRS demands that taxes be paid on money earned through any means, therefore many recipients of illegal income attempt to legitimize their income. This process of "cleaning" the illegally obtained money is known as "money laundering." The IRS deems money laundering as "tax evasion in progress."

Nowadays, money launderers use various schemes and transactions to conceal income and assets. This includes manipulation of currency reporting requirements and the layering of transactions. Since money laundering and currency violations are often intertwined with tax violations, the illegal source financial crimes program encompasses many tax and tax related violations.

The punishments and penalties for tax fraud issues vary from cases to case. However, according to the US tax code (sections 18 and 26) some violations of tax law carry penalties of up to five years in prison with fines up to $250,000.00 for individuals and $500,000.00 for corporations. According to IRS statistics, the average incarceration sentence for tax fraud crimes in 2006 was 26 months.

Recently some tax fraud issues have been making headlines. On May 25th a federal grand jury in Fresno indicted 21 California residents for bank fraud and filing false federal income tax returns. The accused were involved in a tax scheme where they filed false tax returns with the IRS then obtained bank loans from those false tax returns. According to the indictments, the accused acquired false W-2 forms that listed their real name and Social Security number. What was false was the employer, wages, and withholdings. The accused then took their forms to a tax preparer where they had their tax returns filed claiming refunds based on the Earned Income Credit. "Tax refund schemes of this magnitude will not be tolerated and will be vigorously prosecuted," claimed U.S. Attorney McGregor Scott. "These schemes undermine the tax collection process for all of those who pay their taxes."

Earlier in May, a New Mexico resident pleaded guilty to defrauding the United States government of thousands of dollars through a tax refund scheme. Between February and April of 2007, the individual prepared tax returns for taxpayers brought to him/her by a recruiter who supplied taxpayers' names, Social Security numbers, bank account information, and W-2 Forms. The individual then falsely filed the returns claiming the Earned Income Credit. The individual then took a percent of the refund amount. Over the two-month period, the individual prepared approximately 39 tax returns, with a resulting in a loss to the United States of over $100,000. "The days of not being held accountable, for unscrupulous tax returns preparers who peddle false hopes and dreams in the form of fraudulent tax refunds, are numbered," said IRS special agent Kenneth Hines.

The important thing to remember is to be completely honest when preparing your income tax returns. Alternatively, you should seek a competent professional to prepare your returns for you. If you follow your legal duty of voluntary compliance and pay your taxes without hiding income then there is never a reason to worry.

IRS Looking To Collect Personal User Data From Internet Firms

The Internal Revenue Service (IRS) is backing the U.S. Treasury Department’s efforts to include a proposal in the 2008 budget requiring many Internet businesses to collect personal data from their users. The proposal is part of an effort to close the ever-present gap between what Americans should pay in income taxes and what they actually do. This amounts to an estimated $300 billion per year. However, collecting the targeted data is going to be a difficult task for the site-operators and small business owners. Furthermore, the process will create security issues for millions of users in a time when online identity theft is rampant.

In 2001, the "tax gap" – difference between what the IRS should collect in taxes and what it actually does collect – was over $345 billion. Underreporting on individual income tax returns accounted for $197 billion of the gap. Underreporting on business tax returns accounted for $88 billion. This left the IRS collecting only about 85% of owed taxes. Since taking over the White House, the Bush Administration has seen this gap as an opportunity to increase the federal government’s revenue without raising taxes.

At the behest of the Bush Administration, the IRS has implemented a variety of new enforcement and collections measures to reduce the gap over the last five years. The efforts have paid-off: the IRS increased its enforcement revenues by nearly 44 percent from $33.8 billion in 2001 to $43.1 billion in 2004 to $48.7 billion in 2006. "Clearly, more work needs to be done by the IRS to improve service and enforcement," states IRS Commissioner Mark W. Everson. "But we are clearly making progress, and these numbers underscore that point."

Now, more enforcement and collection measures are on the table. As part of its ongoing campaign to close the tax gap, the Bush administration has allocated over $400 million of next year’s budget for these new measures. A main goal of the proposed measures is to increase the taxes paid by many sole-proprietors and small businesses. Currently, sole proprietors and small businesses report most of their income to the IRS through an "honor" system. The IRS claims some of these small businesses report only half of their total income, leaving millions of dollars in unpaid taxes. One specific target of the proposal is to collect taxes from income generated through online auction sites such as eBay and Ubid.com. Recent studies show over 700,000 Americans making their sole income from auction sites like eBay, and without any formal method to monitor these sales the government is assuming most of this income is being underreported.

Specifically, the new proposal would force auction sites acting as online brokers to file income statements for all customers using their sites to conduct 100 or more transactions or generating more than $5,000.00 per year in income. In order to comply, the sites would need to collect personal data from their users including name, address, and taxpayer identification or social security numbers (SSNs). Essentially, the IRS is forcing the collection of the data under the threat of liability and further legal consequence.

Typically, people generating income form auction sites are small businesses and self-employed individuals who do not have taxpayer identification numbers. Therefore, they will have to provide the sites with their SSNs, which will be stored and maintained by the individual sites in massive data banks of personal information. Although the IRS claims the sites will only need to collect data from high volume users, it is very likely that the sites will have to collect data from all of their users.

Having the proposed amount of personal data exchanged over the Internet could prove to be very problematic. Illegal phishing scams already target sites collecting personal data. Phishing is already problematic for eBay, where scammers create fake re-direct sites that retrieve users' personal data.

With so many issues of identity theft online, many people are going to be reluctant to provide their SSNs to sites like eBay. According to the Center for Democracy and Technology, "forcing businesses to collect SSNs could have a chilling effect on legitimate e-commerce if consumers balk at providing their SSNs for simple transactions -- something most people are not accustomed to doing."

In addition, the government is putting the entire financial burden on the Internet businesses. Collecting and safely maintaining this confidential data could cost millions of dollars. These large costs might not be a problem for huge companies like eBay, but it might be too much to bear for small businesses. More than likely, they will have to take on an additional and sizeable expense to store and secure the data.

Scott Weber, owner of GunrunnerAuctions.com, a site that auctions about 400 guns per month, said the additional paperwork would be a huge burden and additional cost. "I'm pretty much a one-horse operation here," Weber said. "I do everything myself. I would have to hire a whole bunch of people. I would have to hire someone full-time to do this. You'd need to track people all over the country, and you'd have to get their SSNs."

Some sites are already beginning to make changes with anticipation of this new proposal. Just a few days after the IRS’s announcement, Yahoo! Auctions announced they would close their auction sites in the United States and Canada effective June 16, 2007. Though Yahoo! Auctions only account for under 1% of total online auctions and they recently established an alliance with eBay, many are still wondering if Yahoo’s decision had anything to do with the IRS’s recent announcement.

Currently no lawmaker has come out for or against the new proposal. However, it is likely to go unnoticed as part of the President’s 2008 budget plans. As part of a representative democracy, it is the job of the citizen to notify their member of Congress when they disagree with an important issue. If you want your voice heard, you can write your representative through House.gov.

For more information on this topic, please see the following suggested readings:

News.com -Selling stuff online? Here comes the IRS
Center for Democracy and Technology
Yahoo! US Auction Sites Are Retiring
Written Statement of Nina E. Olson