Jan
 
6

IRS Taxpayer Advocate Service Employee Charged in Identity Theft Scheme

Originally Published in ACCOUNTINGTODAY.COM

An employee who worked in the IRS’s Taxpayer Advocate Service at a job assisting identity theft victims has instead been charged with running a $1 million identity theft tax fraud scheme.

Federal officials announced arrests and charges last month against four people accused of participating in the scheme, including Nakeisha Hall, 39, an IRS employee who worked in the Taxpayer Advocate Service office in Birmingham, Ala., from July 2007 to November 2011. She has since worked in Taxpayer Advocate Service offices in Omaha, Neb., New Orleans, La., and Salt Lake City, Utah. Federal agents arrested her on December 22 in Holly Springs, Miss.

Federal agents also arrested another participant in the scheme, Jimmie Goodman, 37, of Birmingham. A third participant, Abdulla Coleman, 37, formerly of Birmingham, was already in state custody in Wisconsin on unrelated charges. All three were indicted by a grand jury earlier in December.

In conjunction with the arrests of Hall and Goodman, federal officials also unsealed charges relating to another participant in the scheme, Lashon Roberson. Prosecutors filed a five-count information in October charging Roberson, 36, of Pelham, Ala., with conspiracy to commit mail fraud affecting a financial institution and four counts of mail fraud affecting a financial institution.

According to the indictment, Hall obtained individuals’ names, birth dates and Social Security numbers through unauthorized access to IRS computers. She then used the information to prepare fraudulent income tax returns and submitted them electronically to the IRS. Hall asked the IRS to pay the refunds to debit cards and directed that the cards be mailed to addresses that she controlled, according to prosecutors. Hall solicited and received the drop addresses from Goodman, Coleman and the other co-conspirators, who also collected the refund cards from the mail.

Hall then activated the cards by using stolen identity information, according to the indictment. She, Goodman, Coleman and others involved in the scheme took the money off the debit cards at ATMs or used the cards for purchases. If the fraudulent returns generated U.S. Treasury checks rather than the requested debit cards, Hall and the others used fraudulent endorsements in order to cash the checks. Hall allegedly compensated Goodman, Coleman and other co-conspirators by giving them a portion of the refund money, or by giving them refund cards for their own use.

According to the indictment, Hall, Goodman, Coleman and others conspired to defraud both the IRS and financial institutions, including Bancorp Bank, between January 2008 and November 2011, and used the U.S. mail to execute the fraud. Hall, Goodman, Coleman and others also conspired to obtain money from Bancorp Bank and other financial institutions. Bancorp Bank and other financial institutions issue stand-alone debit cards for the purpose of accepting tax refunds.

“Taxpayers trust, and expect, that IRS employees, as a whole, will safeguard their most sensitive personal information,” said Joyce White Vance, U.S. Attorney for the Northern District of Alabama, in a statement. “Taxpayers also must trust that IRS employees in the Taxpayer Advocate Service will not only protect their sensitive information but will actively assist them when it has been compromised by others. An IRS taxpayer advocate who exploits that trust, and with full knowledge of the significant impacts of identity theft, uses her IRS access to compromise taxpayers’ identities and steal a million dollars from the U.S. Treasury is committing a particularly egregious crime that will not go unpunished. I thank the TIGTA and IRS-CI investigators who worked diligently with my office to bring this case forward.”

The December indictment charges Hall, Goodman and Coleman with conspiring with others known and unknown to the grand jury to commit bank fraud and mail fraud affecting a financial institution. The indictment also charges Hall with one count each of theft of government funds, aggravated identity theft and unauthorized access to a protected computer.

The theft, aggravated identity and unauthorized access counts relate to two specific taxpayers’ information that Hall accessed and used in 2010.

The conspiracy charge carries up to 30 years in prison and a $1 million fine. The maximum prison penalty for theft of government funds is 10 years in prison. Aggravated identity theft carries a mandatory two-year prison term, and unauthorized access to a protected computer carries a maximum five-year prison term. All three charges carry a maximum $250,000 penalty.

Jan
 
5

Beyond the Extenders: The Tax Legacy of 2015

Originally Published in ACCOUNTINGTODAY.COM

With so much attention being paid to the end-of-the-year passage of the tax extenders legislation, it is important to remember that an array of federal tax legislation was passed earlier in 2015 that will affect tax return preparation and advising of clients this busy season. Additionally, there were several key court cases in 2015 that will potentially affect clients’ returns moving forward.

Key federal tax legislation

In May of 2015, the Don’t Tax Our Fallen Public Safety Heroes Act (PL 114-14) was passed into law and provides that a certain level of compensation paid under Sec. 1201 of the Omnibus Crime Control and Safe Streets Act of 1968 will be excluded from gross income for tax purposes. This 1968 act established federal programs that provide death and education benefits to survivors of fallen law enforcement officers, firefighters, and other first responders as well as disability benefits to officers permanently disabled in the line of duty. The amounts are excluded from gross income and are not subject to any information reporting requirements, therefore payers should not file Form 1099 MISC to report the payments.

The Defending Public Safety Employees’ Retirement Act (PL 114-26) was passed in June of 2015 and provides extended exemption from the 10 percent penalty on retirement plan withdrawals for certain public employees in the year or after the year they turn 50. The exemption from the 10 percent penalty for early withdrawals from a retirement plan includes: certain federal law enforcement officers, federal firefighters, customs and border protection officers, and air traffic controllers. The act is effective for distributions after Dec. 31, 2015, so public safety employees contemplating a 2015 withdrawal who would otherwise be impacted by the 10 percent tax may want to defer such withdrawals to 2016.

Also, in June of 2015, the Trade Preferences Extension Act of 2015 (PL 114-27) was passed into law. This act impacts education tax credits and deductions and affects tax years after 2014. If taxpayers do not possess a valid Form 1098-T from the educational institution, they will no longer be allowed to claim the American Opportunity Tax Credit, the Lifetime Learning Credit, or the tuition and fees deduction under Section 222. Form 1098-T should accompany Form 8863, which is used to claim education credits.

In addition, the child tax credit, known as the additional child tax credit, is refundable if the credit exceeds the income tax due by the taxpayer. Beginning in 2015, the additional child tax credit is not refundable if the taxpayer has claimed a foreign earned income exclusion. This is particularly important for any U.S. expat clients.

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (PL 114-41) was passed into law in July 2015 and is of significance because tax return due dates were impacted. The good news is that the individual filing deadline was not changed and remains April 15. There was also no change to S corporations, as their return due date will remain at March 15. For partnerships, the return due date changes to March 15 or the fifteenth day of the third month after year-end (a six-month extension can be requested). The corporate return due date shifts forward one month to April 15. All changes to tax return due dates are for tax years beginning after Dec. 31, 2015. Special note should be given to the fact that due dates for estimated tax payments will not change.

Reviewing the latest status on key tax legislation initiatives can be a key component of ensuring that your clients are able to take advantage of every credit and refund opportunity available.

Critical court decisions in 2015

Other pieces of critically important information to monitor are verdicts of key judicial proceedings that will ultimate affect how tax law is interpreted moving forward. The following insights are summaries of key cases decided in the courts that will inform how certain tax laws are understood in the future.

One Supreme Court case, King v. Burwell, 135 S. Ct. 2480 (6/25/2015), is related to Premium Tax Credits provided under the Patient Protection and Affordable Care Act. The issue in question was if a federal tax credit could be applied whether the insurance was acquired via a state-run or federal-facilitated exchange. The IRS has now issued a regulation confirming that the federal tax credit is available to qualifying individuals regardless of whether they purchase insurance on a state-run or federally facilitated exchange.

In the case of Obergefell v. Hodges, Supreme Court No. 14-556, 2015-1 USTC 50,357, the Supreme Court ruled on June 26, 2015, that same-sex marriage is a constitutional right under the Equal Protection Clause and all states should allow same sex couples to file their taxes as married couples. Also, the IRS issued Proposed Regulations on Oct. 21, 2015, to clarify the treatment of same-sex spouses for federal tax purposes.

In one recent case, unmarried co-owners of a property were allowed to apply the mortgage interest deduction on a per-taxpayer basis, rather than on a per-property basis. The decision in Voss v. Commissioner, 116 A.F.T.R.2d 2015-5529 (9th Cir. 8/7/15), specified that two unmarried individuals purchasing a residence together can each deduct interest on a mortgage up to $1 million and home equity debt up to $100,000.

In Holden v. Commissioner, T.C. Memo. 2015-83 the outcome affects how a taxpayerís education deduction expenditures are viewed. In this case, the taxpayer is a medical doctor and claimed flight lessons as a business deduction, noting he was taking flight lessons to be able to fly to locations for charitable medical work. The regulations under Section 162 allow a taxpayer to deduct expenditures for education if that education either maintains or improves skills that are required by an individual in his employment, trade or business, or meets express requirements set by the individualís employer or by a law or regulation as a condition of continued employment, status, or compensation. The court found that the taxpayer failed to demonstrate that his flying lessons improved or maintained his skills as a doctor, and the deduction for flight lessons was disallowed.

Another case to review is Muniz v. Commissioner, T.C. Memo. 2015-125 (7/9/2015), in which it was determined that lump-sum alimony payments that were not scheduled to terminate at the death of the payee were determined to not be alimony as defined in Section 71 and were not deductible as alimony. This case serves as a good reminder to help the taxpayer clearly define what payments are considered alimony, child support or another portion of the settlement in relation to divorce proceedings.

And finally, in the case of Pacific Management Group v. Commissioner, T.C. Memo. 2015-97, the ruling clarified that the proper substantiation is required to assert attorney-client privilege. In this case, they noted proper substantiation was an appropriate log that is kept to track why documents can be withheld from IRS request for information. The Tax Court held in this case that the privilege log provided by taxpayer was not adequate to sustain claims of privilege.

With these key takeaways from 2015 legislation and judicial proceedings in mind, tax professionals can leverage these insights to better serve their clients and ensure proper filings on their behalf.

Dec
 
1

Year-End Tax Tips for Individuals

Originally Published in ACCOUNTINGTODAY.COM

The National Society of Accountants has released some suggested year-end tax tips for individuals, courtesy of Wolters Kluwer Tax & Accounting US.

Individual income tax rates of 10, 15, 25, 28, 33, 35 and 39.6 percent remain in place for filing next April. (The more you made, the greater your percentage.) The standard deduction for 2016 income will stay the same: $6,300 if you file your taxes using the status single or married filing separately. Married joint filers still receive a $12,600 deduction; head of household filers’ deduction jumps $50, to $9,300.

Year-end tax-saving tactics include spreading recognition of your income between years by postponing year-end bonuses and maximizing both deductible retirement contributions and allowable retirement distributions for this calendar year, coordinating capital losses against the sale of appreciated assets, postponing redemption of U.S. Savings Bonds, and delaying your year-end billings and collections.

You may also want to defer corporate liquidation distributions (full cash-value payment for all a company’s stock you hold) until 2016, pay your last state estimated tax installment in 2015 and pre-pay real estate taxes or mortgage interest.

Life changes: Did you get married or divorced? Have a child? Buy a home? Change jobs or retire? A change in employment, for example, may bring severance pay, sign-on bonuses, stock options, moving expenses and COBRA health benefits, among other changes that affect your taxes.

Additionally, try to predict any life events in 2016 that might trigger significant income or losses, as well as a change in your filing status.

Retirement savings: You can contribute up to $5,500 to an individual retirement account or Roth IRA for 2015 and, if you’re 50 or older, $1,000 more in catch-up contributions. You also have until April 15, 2015, to make an IRA contribution for 2015. One tax move in this area: Delay until 2016 converting your traditional IRA to a Roth IRA, which incurs taxes.

Giving: You can still make tax-free gifts of $14,000 per recipient (a total of $28,000 in the case of married couples).

Tax-free distributions, up to a maximum of $100,000 per taxpayer each year from IRAs to public charities, have been allowed as an alternative to reporting the income and taking an itemized deduction. You must be 70½ or older to do this.

High Earners
If your income is six figures or more, you should anticipate possible liability for the 3.8 percent net investment income (NII) tax calculated on net investment income in excess of your modified adjusted gross income (MAGI). Threshold MAGIs for the NII tax are $250,000 in the case of joint returns or a surviving spouse, $125,000 for a married taxpayer filing a separate return, and $200,000 in any other case.

Keeping income below the thresholds is worth exploring, as is spreading income out over a number of years or offsetting the income with both above-the-line and itemized deductions. Of course, planning for the NII tax requires a very personalized strategy.

The tax rate on net capital gain is no higher than 15 percent for most taxpayers. Net capital gain may not be taxed if you’re in the 10 or 15 percent income tax brackets. A 20 percent rate on net capital gain can apply if your taxable income exceeds the thresholds set for the 39.6 percent rate ($413,200 if you file single, $464,850 for married filing jointly or as a qualifying widow[er], $439,000 for head of household and $232,425 for married filing separately).

Wash sale rules: These cover sales of stock or securities in which your losses are realized but not recognized for tax purposes because you acquire substantially identical stock or securities within 30 days before or after the sale.

Alternative minimum tax: The AMT is now “patched,” which permanently increases the exemption amounts and indexes those amounts for inflation. For 2015, the exemption amounts are $53,600 for single individuals and heads of household, $83,400 for married couples filing a joint return and surviving spouses and $41,700 for married couples filing separate returns.

You can take several steps to reduce the AMT’s effect on your tax liability. Avoid certain deductions, including the accelerated depreciation deduction on real property or expensed research, among others. You might also avoid exercising incentive stock options in a year in which you’re subject to AMT.

Pease limitation: This reduces a higher-income taxpayer’s allowable itemized deductions by 3 percent of the amount (up to 80 percent), with the reduction kicking in after certain income thresholds. For 2015, Pease thresholds are $309,900 for married couples and surviving spouses, $284,050 for heads of households, $258,250 for unmarried taxpayers and $154,950 for married taxpayers filing separately.

Related to the Pease limitation is the personal exemption phase-out (PEP). The threshold income amounts for the PEP are the same as those for the Pease limitation.

Health Insurance
The Affordable Care Act requires that you have minimum essential health coverage or make a shared responsibility payment, unless you’re exempt. On 2014 returns filed in 2015, taxpayers reported if they had minimum essential coverage; that reporting requirement will again be on 2015 returns filed in 2016.

If you may be liable for a shared responsibility payment, carefully review the significant number and variety of exemptions available. You may also be able to project the amount of any payment. Closely related are changes to the medical expense deduction, health flexible spending arrangements (and similar arrangements), insurance coverage for children, and more.

Potential Legislation
As of mid-November, tax bills pending in Congress included a package of tax extenders, revisions to the Affordable Care Act and more. Lawmakers might renew them either before year-end or early in 2016. Incentives include:

Exclusion of cancellation of indebtedness on principal residence: Allows you to exclude from income the cancellation of mortgage debt of up $2 million on a qualified principal residence.

Higher education tuition and fees deduction: Provides a maximum $4,000 deduction for qualified tuition and fees at post-secondary institutions of learning, subject to income phase-outs.

Classroom expense deduction. Primary and secondary education professionals may take an above-the-line deduction for qualified unreimbursed expenses up to $250 paid during the year.

Stay tuned to see which of these and other extenders continue or end. In the meanwhile, planning for their potential renewal is key.

Dec
 
1

Year-End Tax Tips for Businesses

Originally Published in ACCOUNTINGTODAY.COM

The National Society of Accountants is offering some year-end tax tips for businesses, courtesy of Wolters Kluwer Tax & Accounting US.

Consider several general strategies, such as use of traditional timing techniques for income and deductions and the role of the tax extenders, as well as strategies targeted to your particular business. As in past years, planning is uncertain because of the Affordable Care Act and the expiration of many popular but temporary tax breaks.

Filing Changes

Recent legislation changed filing deadlines for some entity tax returns for 2016: Partnership tax returns will be due on March 15, not April 15 (for calendar year partnerships), and c-corporation returns will be due on April 15, not March 15 (for calendar year C Corporations). Returns for s-corporation will continue to be due on March 15.

Expensing and Bonus Depreciation
Many businesses use enhanced Code Sec. 179 expensing as a key component of year-end tax planning. Sec. 179 property is generally defined as new or used depreciable tangible property purchased for use in a trade or business. Software was also recently included, as was qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.

(Congress has not renewed the enhancements to Sec. 179 expensing for 2015, but they likely will be renewed. Year-end planning should reflect both the likely extension and the possibility of no extension.)

Similarly, bonus depreciation has been a valuable incentive for many businesses. Fifty percent bonus depreciation generally expired after 2014 (with limited exceptions for certain types of property).

Qualified property for bonus depreciation must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less for a wide variety of assets.

Year-end placed-in-service strategies can provide an almost immediate cash discount for qualifying purchases.

Although you should factor a bonus-depreciation election into year-end strategy, you don’t have to make a final decision on the matter until you file a tax return. Also, bonus depreciation isn’t mandatory: you might want to elect out of bonus depreciation to spread depreciation deductions more evenly across future years.

Another potentially useful strategy involves maximizing benefits under Sec. 179 by expensing property that doesn’t qualify for bonus depreciation, such as used property, and property with a long MACRS depreciation period.

Section 199 Deduction
Year-end planning benefits from the release of guidance on the Code Sec. 199 domestic production activities deduction is an often under-utilized potential break. The guidance provides many examples of what business activities qualify; recent Internal Revenue Service guidance highlights manufacturing, construction, oil-related work, film production, agriculture, and many other pursuits.

Work Opportunity Tax Credit
If your business is considering expanding payrolls before 2015 ends, take a look at the Work Opportunity Tax Credit (WOTC). (Although the WOTC, under current law, expired after 2014, Congress is expected to renew the WOTC for 2015 and possibly for 2016).

Generally, the WOTC rewards employers that hire individuals from certain groups, including veterans, families receiving certain government benefits, and individuals who receive supplemental Social Security Income or long-term family assistance. The credit is generally equal to 40 percent of the qualified worker’s first-year wages up to $6,000 ($3,000 for summer youths and $12,000, $14,000, or $24,000 for certain qualified veterans). For long-term family-aid recipients, the credit is equal to 40 percent of the first $10,000 in qualified first-year wages and half of the first $10,000 of qualified second-year wages.

Repair-Capitalization Rules
Currently, a de minimis safe harbor under the so-called “repair regs” allows you to deduct certain items costing $5,000 or less that are deductible in accordance with your company’s accounting policy reflected on your applicable financial statement (AFS). IRS regulations also provide a $2,500 de minimis safe harbor threshold if you don’t have an AFS.

Routine Service Contracts
If you’re an accrual-basis taxpayer (meaning you have a right to receive income as soon as you earn it), you have a new tool for planning. The IRS has provided a safe harbor under which accrual-basis taxpayers may treat economic performance as occurring on a ratable basis for ratable service contracts—perhaps particularly useful in connection with your regular services that extend into 2016. If your business meets the safe harbor for ratable service contracts, you may be able take a full deduction in the current tax year for certain 2015 payments even though you may not perform the services until next year.

Affordable Care Act
For large businesses, the ACA imposes many new requirements, including the employer shared responsibility provision (also known as the employer mandate). Small businesses, although generally exempt from this mandate, need to review how they deliver employee health insurance.

Many small businesses have provided a health benefit to employees through a health reimbursement arrangement (HRA). Following passage of the ACA, the IRS described certain types of HRAs as employer payment plans – therefore subject to the ACA’s market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Failure to comply with these reforms triggers excise taxes under Code Sec. 4980D.

Pending legislation in Congress would allow small employers (that is, those with fewer than 50 full-time and full-time equivalent employees) to have stand-alone HRAs and reimburse expenses without violating the ACA’s market reforms.

Small employers also should review the Code Sec. 45R credit. If your business has no more than 25 full-time equivalent employees, you may qualify for a special tax credit to help offset your costs of employee health insurance. You must pay average annual wages of no more than $50,000 per employee (indexed for inflation) and maintain a qualifying health care insurance arrangement. (Generally, health insurance for employees must be obtained through the Small Business Health Options Program, part of the Health Insurance Marketplace.)

Sep
 
1

IRS Flouted Procedures When Selling Seized Property

Originally Published in ACCOUNTINGTODAY.COM

The Internal Revenue Service did not always follow its own procedures when selling some of the property it seized for unpaid taxes, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, found that over the past four fiscal years from 2011 through 2014, the IRS has received approximately $114 million in proceeds from the sale of seized taxpayer assets. However, personal items were not always properly documented when they were returned, and personal information such as GPS navigation data and garage door opener settings weren’t always removed from the systems installed in seized vehicles, posing a potential security risk.

The IRS Restructuring and Reform Act of 1998 required the IRS to implement a consistent process for the sales of seized property in order to protect taxpayers whose property is being sold to satisfy delinquent debts. The IRS’s property appraisal and liquidation specialists are supposed to ensure that taxpayers’ rights are protected when property is seized for unpaid taxes.

TIGTA auditors attended six IRS auctions of seized assets and reviewed a sample of 44 seizure cases. The report found that for the cases they sampled, the seized assets in general were properly inventoried, safeguarded and handled professionally.

However, the written sale plans developed by the specialists provided varying amounts of detail for the actions to be performed on the date of the sale. More consistent and specific sale plans could improve managerial oversight and ensure consistent treatment of seized assets, TIGTA noted.

Personal items found in seized assets were not always properly documented when they were returned to taxpayers. In addition, TIGTA found there is no requirement for removing taxpayer information from installed systems in vehicles. Such information could present a security risk if a third-party purchaser gained access to it.

If procedures are not followed, there is an increased risk that the completed sales will not be in the taxpayers’ or the IRS’s best interest, TIGTA cautioned.

TIGTA also identified several strategies that the IRS should consider to potentially increase the number of bidders when selling seized assets.

“The IRS Restructuring and Reform Act of 1998 (RRA 98) requires the IRS to implement a consistent process for the sales of seized property,” said TIGTA Inspector General J. Russell George. “The IRS needs to fully comply with this provision of RRA 98.”

TIGTA recommended that the IRS require the property appraisal and liquidation specialists, or PALS, to consistently prepare a detailed sale plan once custody of the seized property has been accepted, and ensure that the return of all personal items from seized vehicles is documented.

The IRS should also require the PALS to follow requirements in the Internal Revenue Manual for conducting a sale adjournment and recalculating the minimum bid, as well as ensure that any adjustments are supported by the facts of the situation and properly documented, said the report. IRS employees should also take the necessary actions to remove taxpayers’ personally identifiable information from seized vehicles such as resetting any navigation, garage door and similar installed systems, according to TIGTA.

In response to the report, IRS officials agreed with seven of the nine recommendations and said it has hired a consulting team to improve its procedures.

“We have engaged a lean six sigma to review and evaluate all aspects of our seizure and sale program and present proposals for improving the program,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division. “Our goal is to further clarify our seizure and sales procedures while continuing to protect taxpayers’ rights.”

IRS officials disagreed with two recommendations to add guidance in the Internal Revenue Manual for indirect expenses of seizure sales that can be charged to the taxpayer and return of license plates from seized vehicles that are sold. Schiller pointed out that the IRM currently requires the return of personal items, which include license plates and documentation on Form 668-E if a taxpayer seeks personal items. She also pointed out that the manual and Treasury regulations already provide that the expenses allowed include the “actual expense incurred with the sale” in addition to expenses for the “protection and preservation of the property.” The expenses in TIGTA’s report related to expenses incurred at seizure sales for the safety and convenience of bidders.

TIGTA, however, maintains that the appropriate IRM sections should be updated to provide clear guidance for IRS managers and employees to follow.

Aug
 
6

Senate Committee Report Accuses IRS of Mismanagement in Tax-Exempt Scandal

Originally Published in ACCOUNTINGTODAY.COM

Leaders of the Senate Finance Committee have released a bipartisan investigative report on the scandal involving the extra scrutiny the Internal Revenue Service’s gave to applications for tax-exempt status from political groups, finding evidence of mismanagement at the agency.

Members of the committee were briefed by staff with authority to review private taxpayer information in a number of closed-door briefings on the findings and recommendations of the report before a vote to release the long-anticipated report.

The report found that from 2010 to 2013, IRS management failed to provide effective control, guidance and direction over the processing of applications for tax-exempt status. Top IRS managers did not stay informed about the applications involving possible political advocacy, thereby forfeiting the opportunity to provide the leadership that the IRS needed to respond to the legal and policy issues presented by these applications.

Lois Lerner, who was then the director of the Exempt Organizations unit, became aware of the Tea Party applications in early 2010, but failed to inform her superiors about their existence, according to the report. While under Lerner’s leadership, the Exempt Organizations unit undertook seven botched initiatives to make a decision on the escalating number of applications from Tea Party and other groups for tax-exempt status.  Every one of those initiatives ended in failure, resulting in months and years of delay for the organizations awaiting decisions from the IRS on their applications for tax-exempt status.

The committee also found that the workplace culture in the Exempt Organizations Division placed little emphasis or value on providing customer service.  Few of the managers appeared to be concerned about the delays in processing the applications, delays that possibly harmed the organizations ability to function for their stated purposes.

“This bipartisan investigation shows gross mismanagement at the highest levels of the IRS and confirms an unacceptable truth: that the IRS is prone to abuse,” said Senate Finance Committee chairman Orrin Hatch, R-Utah, in a statement Wednesday.  “The committee found evidence that the administration’s political agenda guided the IRS’s actions with respect to their treatment of conservative groups. Personal politics of IRS employees, such as Lois Lerner, also impacted how the IRS conducted its business. American taxpayers should expect more from the IRS and deserve an IRS that lives up to its mission statement of administering the tax laws fairly and impartially—regardless of political affiliation. Moving forward, it is my hope we can use this bipartisan report as a foundation to work towards substantial reforms at the agency so that this never happens again. ”

Sen. Ron Wyden, R-Ore., the ranking Democrat on the committee, disagreed with Hatch that the report found evidence of the administration’s political agenda influencing the IRS’s actions. “The results of this in-depth, bipartisan investigation showcase pure bureaucratic mismanagement without any evidence of political interference,” said Wyden. “Groups on both sides of the political spectrum were treated equally in their efforts to secure tax-exempt status. Now is the time to pursue bipartisan staff recommendations to ensure this doesn’t happen again.”

The report describes how the Exempt Organizations unit used not only terms associated with conservative groups such as “Tea Party” and “Patriots” to screen applications, but also terms associated with liberal groups such as “Progressive,” “Occupy” and “ACORN.”

The committee made a number of recommendations to address IRS management deficiencies. It said the Hatch Act should be revised to designate all IRS, Treasury and Chief Counsel employees who handle exempt organization matters as “further restricted.”  “Further restricted” employees are precluded from active participation in political management or partisan campaigns, even while off-duty.

The report also said the IRS should track the age and cycle times of applications for tax-exempt status to detect backlogs early in the process and allow management to take steps to address those backlogs.  In addition, the Exempt Organizations Division should track requests for assistance from both the Technical Branch and the Chief Counsel’s office to ensure the timely receipt of that assistance.

A list of overage applications should be sent to the IRS Commissioner on a quarterly basis, the report recommended. Internal IRS guidance should also require that employees reach a decision applications no later than 270 days after the IRS receives that application.  Employees and managers who fail to comply with these standards should be disciplined. Minimum training standards should be established for all managers within the EO Division to ensure that they have adequate technical ability to perform their jobs, the report suggested.

The IRS responded to the report Wednesday, saying it planned to make improvements in response to the recommendations. “We appreciate the work of the Senate Finance Committee on this extensive report, and we look forward to reviewing it along with the recommendations,” said a statement emailed by an IRS spokesperson. “The IRS is fully committed to making further improvements, and we want to do everything we can to help taxpayers have confidence in the fairness and integrity of the tax system. We have already taken many steps to  make improvements in our processes and procedures, and we are pleased to have other suggestions from the committee to help us in our continuing effort. Throughout this, the IRS has cooperated with Congress and other investigators. The agency has produced more than 1.3 million pages of documents in support of the investigations, provided 52 current and former employees for interviews and participated in more than 30 Congressional hearings on these issues.”

Issuance of the report was delayed for more than a year after the IRS belatedly informed the committee that it had not been able to recover a large number of potentially responsive documents that were lost when Lois Lerner’s hard drive crashed in 2011, the committee noted.

The report acknowledged that the IRS functioned in a politicized atmosphere following the Supreme Court’s Citizens United decision in 2010, which put pressure on the IRS to monitor political spending. Employees in the Tax Exempt and Government Entities Division, including Lerner, were aware that the IRS had received an increasing number of applications from organizations that planned to engage in some level of political advocacy. “Yet senior IRS executives, including Lerner, failed to properly manage political advocacy cases with the sensitivity and promptness that the applicants deserved,” said the report. “Other employees in the IRS failed to handle the cases with a proper level of urgency, which was symptomatic of the overall culture within the IRS where customer service was not prioritized.”

As a result of these failings, a number of Tea Party and other political advocacy groups waited as long as five years to receive a decision from the IRS, according to the report. These delays negatively affected applicants in many ways, including inability to gain tax-exempt status within their state until the IRS issued a determination letter; significant time and financial cost to respond to lengthy and burdensome IRS questions; ineligibility for grants and other financial support that require IRS documentation of tax-exempt status; decreased donations; and financial uncertainty about whether the organization would owe a tax liability if the IRS determined that it did not meet the criteria for tax-exemption.

After experiencing these problems, numerous organizations withdrew their applications for tax-exempt status, while some organizations ceased to exist altogether.

“The consequences of the IRS’s actions in singling out organizations based on their name and subjecting them to heightened scrutiny, substantial delays, and to burdensome and sometimes intrusive questions are far reaching and troubling,” said the report. “Undoubtedly, these events will erode public confidence and sow doubt about the impartiality of the IRS. The lack of candor by IRS management about the circumstances surrounding Lois Lerner’s missing emails may only serve to reinforce those doubts.”

Aug
 
6

Tax Cut Pays Part of Its Way in Test of Republican Scoring

Originally Published in ACCOUNTINGTODAY.COM

(Bloomberg) A bipartisan U.S. Senate bill that would revive and extend dozens of lapsed tax breaks would spur economic growth and cover about 11 percent of its own costs, according to Congress’s nonpartisan scorekeeper.

The analysis released Tuesday is an early test of Republicans’ focus on what’s known as dynamic scoring. It refers to the principle that legislation can be significant enough to change the size of the economy and affect the U.S. budget.

Republicans say that’s a more accurate way to study bills, and they’ve changed budget rules to include the analyses. Democrats are dubious, citing the uncertainty of projections.

The bill in question was approved 23-3 by the Senate Finance Committee last month. It would extend lapsed tax breaks through 2016, including 50 percent bonus depreciation, the research and development break and the production tax credit for wind energy.

Without dynamic scoring, the bill would cost the government $96.9 billion in lost revenue over the next 10 years. The tax breaks cause production and tax revenue to grow by 0.1 percent over the first five years, according to the analysis from the Joint Committee on Taxation.

The analysis says the bill would create $10.4 billion in tax revenue by increasing economic growth, after subtracting the increased cost of federal debt stemming from higher interest rates. The result would be a net cost of $86.6 billion.

The estimate, unlike previous attempts to use dynamic scoring, produces a single number, though one that the scorekeepers say is “subject to some uncertainty.” It’s not likely to settle the partisan dispute over dynamic scoring.

“We have in hand a good start for our new scoring rule approved as part of the balanced budget resolution earlier this year,” Republican Mike Enzi of Wyoming, chairman of the Senate Budget Committee, said in a statement. “This is something from which we can build upon as we go forward in this new era of better legislative scoring and honest accounting.”

Jul
 
28

Tax Strategy: The ACA Marches On

Originally Published in ACCOUNTINGTODAY.COM

The Supreme Court’s recent King v. Burwell decision upheld the availability of the Code Sec. 36B refundable credit for premiums paid for health insurance purchased on Federal Exchanges. In doing so, the decision not only helps preserve the immediate viability of Federal Exchanges, but also the necessary mechanisms that make the continued imposition of the so-called individual mandate feasible. Indirectly, it also helps small businesses and their employees better cope with health care costs, although possessing some traps of their own.

In many ways, the fate of the Sec. 36B credit, the individual mandate, and small businesses in coping with health care costs are now more intertwined than ever, with certain tensions among them becoming more readily apparent. In this month’s column, we review some of the fundamentals of those relationships, as well as some recent developments, with a particular focus on small businesses and their employees.

INDIVIDUAL MANDATE

While the employer mandate is phased in based upon workforce size, the individual mandate has been in place for everyone since 2014. And although a small business with fewer than 50 employees may never be subject to the employer mandate, its employees are generally nevertheless subject to the individual mandate.

Enforcement of the individual mandate is accomplished through an incremental penalty structure. The amount of the penalty is generally the greater of a flat dollar amount or a percentage of the taxpayer’s income, but it cannot exceed the annual average premium the taxpayer would pay for health insurance.

The flat dollar amount and the applicable percentage associated with computing the individual mandate are both phased in during 2014 through 2016. The flat dollar amount is $95 for 2014, $325 for 2015, and $695 for 2016; it is then adjusted each year for inflation. The percentage of income is a phased-in percentage of the amount of the taxpayer’s household income that exceeds the taxpayer’s filing threshold (1 percent in 2014, 2 percent in 2015 and 2.5 percent thereafter). The penalty is imposed on applicable individuals for each month that they fail to have minimum essential health coverage for themselves and their dependents.

  • Payment. The individual mandate penalty is paid with the taxpayer’s tax return, but the Internal Revenue Service cannot use liens, levies or criminal prosecutions to collect it. The penalty is coordinated with the premium assistance credit, which is intended to help defray the cost of health insurance purchased on the individual market by taxpayers with household incomes between 100 percent and 400 percent of the federal poverty line.
  • Grandfathered plans. Grandfathered plans are generally unaffected by health care reform. A grandfathered health plan is generally any group health plan or health insurance coverage in which an individual is enrolled on March 23, 2010 (the date the Patient Protection and Affordable Care Act was enacted). The covered individual’s family members can generally continue to enroll in the grandfathered plan, and an employer’s grandfathered plan can continue to enroll new employees.

CODE SEC. 36B CREDIT

The penalty that enforces the individual mandate is coordinated with the Code Sec. 36B premium assistance credit, which is intended to help defray the cost of health insurance purchased on the individual market by taxpayers with household incomes between 100 percent and 400 percent of the federal poverty line. The Sec. 36B credit allows those who cannot otherwise “afford” premiums on a basic ACA-compliant health plan a way to do so.

An employee who qualifies for the Sec. 36B credit to buy insurance on an exchange may trigger an employer-mandate penalty, but only if the employer is an applicable large employer (generally, a business with 50 or more full-time and full-time-equivalent employees).

For 2015, employers with at least 50 but fewer than 100 full-time employees, including full-time-equivalent employees, may be eligible for transition relief (TD 9655). The IRS imposed a number of requirements that employers must satisfy before they may be eligible for the transition relief. Under the transition relief employers with 100 or more full-time employees, including full-time-equivalent employees, may only be required to provide coverage to 70 percent, instead of 95 percent, of qualified employees in 2015.

The government may pay an advanced Code Sec. 36B credit amount directly to the insurer to reduce the taxpayer’s out-of-pocket premium cost, in which case the advance credit payments and the annual credit amount must be reconciled on the taxpayer’s return. Individuals refer to the information on Form 1095-A to complete Form 8962. On that form, individuals will calculate the amount of their credit and subtract the total amount of advance payments received.

SMALL EMPLOYER TAX CREDIT

The IRS finalized regulations last year on the Code Sec. 45R small-employer health insurance credit (TD 9672), another benefit to small businesses that indirectly helps their employees comply with the individual mandate. Generally, a qualified employer must have no more than 25 full-time-equivalent employees for the tax year; pay average annual wages of no more than $50,000 per FTE (indexed for inflation after 2013); and maintain a qualifying health care insurance arrangement. The tax credit is subject to a reduction (but not reduced below zero) if the employer’s FTEs exceed 10, or if average annual FTE wages exceed $25,000.

The credit is 50 percent of the eligible small employer’s premium payments made on behalf of its employees under a qualifying arrangement (35 percent for small tax-exempt employers).

An employer claiming the Code Sec. 45R credit must obtain coverage through the Small Business Health Options Program Marketplace or be eligible for an exception. Amounts made available by an employer under, or contributed by an employer to, health reimbursement arrangements, health flexible spending arrangements, and health savings accounts are not taken into account for purposes of determining premium payments by the employer when calculating the credit.

INDIVIDUAL MANDATE EXEMPTION

Most individuals are applicable individuals, but there are several exceptions based on the taxpayer’s status, religious objections, and income. Transition relief was available for some individuals for 2014.

The individual mandate applies to applicable individuals, also known as “non-exempt individuals.” Applicable individuals do not include prisoners, foreign citizens and nationals, members of health care sharing ministries, and individuals with religious objections to health insurance. Exceptions also apply to Native Americans, short lapses in coverage, individuals who cannot obtain affordable coverage, and individuals whose household income falls below their tax return filing threshold.

Dependents and certain persons outside the United States are also effectively exempt from the penalty.

The exemptions, whether or not they were received through the Health Insurance Marketplace, are reported or claimed on Form 8965, Health Coverage Exemptions. A partial list of the exemptions includes: unaffordable coverage, short coverage gap, general hardship, income below the filing threshold, certain noncitizens, residents of states that did not expand Medicaid, and members of Indian tribes.

The IRS’s Web site has a complete list of exemptions, including information on how to obtain them, as recently advised in FS-2015-14.

HRAs

A controversy has been brewing over what tax-favored assistance a small employer may provide to employees in maintaining health care benefits. Although not subject to the employer mandate now or in the future as long as the 50-employee-threshold is not crossed, some small employers may be currently unaware of the $100-per-employee-per-day excise tax ($36,500 per year) under Code Sec. 4980D for which they may now be liable for running pre-tax health reimbursement arrangements for employees.

The controversy has its origins in Notice 2013-54, which held that employers’ use of standalone HRAs to reimburse employees for health-care-related expenses may not satisfy the Affordable Care Act’s minimum benefit and annual dollar cap requirements for health insurance plans offered by employers. As a result, the IRS warned that employers that continued to offer such HRAs would be subject to a $100-per-day, per-employee penalty, up to $36,500 for the year per employee. The IRS also implied that reimbursements for premiums to non-ACA-compliant health plans, whether pre-tax or not, would be subject to the penalty if tied to compensation.

Although small businesses were not exempt from this dis-allowance rule, the consensus was that this posed a hidden trap for many small businesses that did not exactly have Affordable Care Act compliance on their radar, especially since the employer mandate did not apply to them. As an accommodation, Notice 2015-17 was issued earlier this year to provide transition relief from the excise tax through June 30, 2015, for employers that were not applicable large employers, or ALEs. Once June 30 rolled by, however, concern continued to be voiced that many small businesses were still unaware of their non-compliance, especially as it involved such a draconian penalty.

A bipartisan group of lawmakers recently introduced companion legislation in both chambers, the Small Business Healthcare Relief Bill (HR 2911; Senate 1697), that would roll back an IRS rule imposing fines on small businesses providing HRAs. The legislation would ensure that small businesses and local municipalities with fewer than 50 employees are allowed to continue using pre-tax dollars to give employees a defined contribution for health care expenses. It would also protect employers from being financially penalized for providing HRAs to employees. In addition, the measure would allow employees to use HRA funds to purchase health coverage on the individual market.

EXPATRIATE HEALTH COVERAGE

Notice 2015-43, issued last month, provides interim guidance and continuation of transition relief issued in March 2013 from the application of the Affordable Care Act with respect to expatriate health plans. Under the guidance, pending the issuance of proposed regulations, employers, plan sponsors, and individuals may apply the requirements of the Expatriate Health Coverage Clarification Act of 2014 using a reasonable good-faith interpretation. At year-end 2014, Congress passed and President Obama signed the EHCCA. Under the new law, expatriate health plans are generally exempt from the ACA. Additionally, the EHCCA treats coverage under an expatriate plan as minimum essential coverage for ACA purposes. The EHCCA applies to expatriate health plans issued or renewed on or after July 1, 2015. This new law applies whether the plan is sponsored by any employer, large or small.

* Minimum essential coverage. Coverage provided under an expatriate group health plan is a form of minimum essential coverage that satisfies the individual shared responsibility requirements under the individual mandate of Code Sec. 5000A. For purposes of the relief, an “expatriate health plan” is an insured group health plan with respect to which enrollment is limited to primary insureds who reside outside of their home country for at least six months of the plan year and any covered dependents, and its associated group health insurance coverage.

CONCLUSION

The Supreme Court decision in King v. Burwell preserves nationwide use of the Affordable Care Act’s Sec. 36B credit. However, it does not end questions of interpretation and applicability of certain rules. Particularly for small businesses and their employees, additional guidance from the IRS is anticipated, both to lessen the negative impact of those provisions and to help coordinate them as Congress intended.

Jul
 
1

Ten Things to Know about Identity Theft and Your Taxes

Originally Published in IRS.GOV

Learning you are a victim of identity theft can be a stressful event. Identity theft is also a challenge to businesses, organizations and government agencies, including the IRS. Tax-related identity theft occurs when someone uses your stolen Social Security number to file a tax return claiming a fraudulent refund.

Many times, you may not be aware that someone has stolen your identity. The IRS may be the first to let you know you’re a victim of ID theft after you try to file your taxes.

The IRS combats tax-related identity theft with a strategy of prevention, detection and victim assistance. The IRS is making progress against this crime and it remains one of the agency’s highest priorities.

Here are ten things to know about ID Theft:

  1. Protect your Records.  Do not carry your Social Security card or other documents with your SSN on them. Only provide your SSN if it’s necessary and you know the person requesting it.Protect your personal information at home and protect your computers with anti-spam and anti-virus software. Routinely change passwords for Internet accounts.
  2. Don’t Fall for Scams.  The IRS will not call you to demand immediate payment, nor will it call about taxes owed without first mailing you a bill. Beware of threatening phone calls from someone claiming to be from the IRS. If you have no reason to believe you owe taxes, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1-800-366-4484.
  3. Report ID Theft to Law Enforcement.  If your SSN was compromised and you think you may be the victim of tax-related ID theft, file a police report. You can also file a report with the Federal Trade Commission using the FTC Complaint Assistant. It’s also important to contact one of the three credit bureaus so they can place a freeze on your account.
  4. Complete an IRS Form 14039 Identity Theft Affidavit.  Once you’ve filed a police report, file an IRS Form 14039 Identity Theft Affidavit.  Print the form and mail or fax it according to the instructions. Continue to pay your taxes and file your tax return, even if you must do so by paper.
  5. Understand IRS Notices.  Once the IRS verifies a taxpayer’s identity, the agency will mail a particular letter to the taxpayer. The notice says that the IRS is monitoring the taxpayer’s account. Some notices may contain a unique Identity Protection Personal Identification Number (IP PIN) for tax filing purposes.
  6. IP PINs.  If a taxpayer reports that they are a victim of ID theft or the IRS identifies a taxpayer as being a victim, they will be issued an IP PIN. The IP PIN is a unique six-digit number that a victim of ID theft uses to file a tax return. In 2014, the IRS launched an IP PIN Pilot program. The program offers residents of Florida, Georgia and Washington, D.C., the opportunity to apply for an IP PIN, due to high levels of tax-related identity theft there.
  7. Data Breaches.  If you learn about a data breach that may have compromised your personal information, keep in mind not every data breach results in identity theft.  Further, not every identity theft case involves taxes. Make sure you know what kind of information has been stolen so you can take the appropriate steps before contacting the IRS.
  8. Report Suspicious Activity.  If you suspect or know of an individual or business that is committing tax fraud, you can visit IRS.gov and follow the chart on How to Report Suspected Tax Fraud Activity.
  9. Combating ID Theft.  Over the past few years, nearly 2,000 people were convicted in connection with refund fraud related to identity theft. The average prison sentence for identity theft-related tax refund fraud grew to 43 months in 2014 from 38 months in 2013, with the longest sentence being 27 years.During 2014, the IRS stopped more than $15 billion of fraudulent refunds, including those related to identity theft.  Additionally, as the IRS improves its processing filters, the agency has also been able to halt more suspicious returns before they are processed. So far this year, new fraud filters stopped about 3 million suspicious returns for review, an increase of more than 700,000 from the year before.
  10. Service Options.  Information about tax-related identity theft is available online. We have a special section on IRS.gov devoted to identity theft and a phone number available for victims to obtain assistance.

For more on this Topic, see the Taxpayer Guide to Identity Theft.

Jun
 
30

Six Tips to Help You Pay Your Tax Bill this Summer

Originally Published in IRS.GOV

If you get a tax bill from the IRS, don’t ignore it. The longer you wait the more interest and penalties you will have to pay. Here are six tips to help you pay your tax debt and avoid extra charges:

1. Reply promptly.  After tax season, the IRS typically sends out millions of notices. Read it carefully and follow the instructions. If you owe, the notice will tell you how much and give you a due date. You should respond to the notice promptly and pay the bill to avoid additional interest and penalties.

2. Pay online.  Using an IRS electronic payment method to pay your tax is quick, accurate and safe. You also get a record of your payment. Options for electronic payments include:

Direct Pay and EFTPS are free services. If you pay by credit or debit card, the payment processing company will charge a fee.

3. Apply online to make payments.  If you are not able to pay your tax in full, you may apply for an installment agreement. Most people and some small businesses can apply using the Online Payment Agreement Application on IRS.gov. If you are not able to apply online, or you prefer to do so in writing, use Form 9465, Installment Agreement Request to apply. The best way to get the form is on IRS.gov/forms. You can download and print it at any time.

4. Check out a direct debit plan.  A direct debit installment agreement is the lower-cost hassle-free way to pay. The set-up fee is less than half of the fee for other plans. The direct debit fee is $52 instead of the regular fee of $120. With a direct debit plan, you pay automatically from your bank account on a day you set each month. There is no need for you to write a check and make a trip to the post office. There are no reminder notices from the IRS and no missed payments. For more see the Payment Plans, Installment Agreements page on IRS.gov.

5. Pay by check or money order.  Make your check or money order payable to the U.S. Treasury. Be sure to include:

  • Your name, address and daytime phone number
  • Your Social Security number or employer ID number for business taxes
  • The tax period and related tax form, such as “2014 Form 1040”

Mail it to the address listed on your notice. Do not send cash in the mail.

6. Consider an Offer in Compromise.  With an Offer in Compromise, or OIC, you may be able to settle your tax debt with the IRS for less than the full amount you owe. An OIC may be an option if you are not able to pay your tax in full. It may also apply if full payment will create afinancial hardship. Not everyone qualifies, so you should explore all other ways to pay before submitting an OIC. To see if you may qualify and what a reasonable offer might be, use the IRS Offer in Compromise Pre-Qualifiertool.

Find out more about the IRS collection process on IRS.gov.