Archive for October, 2010

IRS Auditors Begin Accepting QuickBooks and Peachtree Records (fromWebCPA)

Thursday, October 28th, 2010

The Internal Revenue Service has started accepting taxpayer records in electronic format from small businesses using Intuit’s QuickBooks and Sage’s Peachtree accounting software for audits and examinations.

Business owners and tax professionals have been advocating that the IRS begin accepting taxpayer records in electronic format instead of continuing to use traditional paper books and records for audits, the IRS noted. The IRS Small Business/Self-Employed Examination Division is responding to those wishes expressed in tax practitioner focus group interviews conducted at the 2008 Nationwide Tax Forums and from other stakeholders.

The IRS has recently completed training for revenue agents on QuickBooks Premier Accountant Edition 2010 software. Approximately 1,100 agents were trained and are now being encouraged to request and accept taxpayers’ QuickBooks files, as appropriate. The IRS is also able to accept electronic records from Peachtree accounting software.
Electronic files should be provided on a CD, DVD, or flash/jump drive to ensure security of the files. E-mail should not be used to transmit the electronic records.

The IRS said that obtaining a taxpayer’s accounting records in electronic format provides significant advantages, including reducing the burden on taxpayers because taxpayers don’t have to print records stored electronically. The electronic files also provide a complete set of the taxpayer’s accounting records, decreasing the number of items included in the initial document request and follow-up requests. The IRS said the electronic accounting records also increase the efficiency of a revenue agent’s analysis and testing of the books and records, resulting in faster audit resolution.

The legal authority for requesting a taxpayer’s QuickBooks backup files and accounting records in electronic format is based on IRC Section 6001, Regulation 1.6001-1(a) and -1(e), Revenue Ruling 71-20 and Revenue Procedure 98-25. Rev. Proc. 98-25 does not prevent or exempt a taxpayer from providing electronic records, if such records exist.

“Electronic information management has become the standard in business and will now be used to enhance the examination process,” said the IRS. “The ability to conduct audits using these software options will be available on an increasing basis as revenue agents begin to work with the new software. It is anticipated that this new audit tool will increase the speed and efficiency of field examinations, reduce taxpayer burden, and be a positive development for taxpayers, their representatives and the IRS.”

The IRS added that it is not endorsing, recommending or favoring any specific commercial products.

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IRS May Let Taxpayers ‘Lock’ Their Accounts (from WebCPA)

Thursday, October 28th, 2010

The Taxpayer Advocacy Panel, a federal advisory committee of 101 citizen volunteers across the country, has released its annual report, with recommendations that include calling for the IRS to protect against identity theft by allowing taxpayers to “lock” their accounts when no tax returns are required.

The IRS endorsed the idea of letting taxpayers lock their accounts when no tax returns are required. The panel also proposed adding a section to Form 9452, “Filing Assistance Program,” to allow individuals to notify the IRS of their desire to block the use of their Social Security numbers.

This revision would include current address information, a perjury statement and two check-a-box options to allow individuals to block or unblock the use of their SSNs on tax returns. Once the form has been processed, the IRS would notify the individual the action has been taken to block their SSN and provide instructions on how to unblock their SSN before a return can be filed, but the IRS’s response was somewhat cautious.

“This recommendation does represent a complex undertaking which would involve multiple operational divisions and functions,” wrote Joseph D. O’Leska, deputy director of the IRS’s Identity Protection Office of Privacy and Information Protection. “As a proactive approach to implementation of this recommendation we have already requested the creation of a new identity theft indicator which would specifically indicate the taxpayer has no filing requirements and has requested their account be locked. Additional associated programming would utilize the presence of this indicator to reject any returns received using the Social Security number of an individual who had ‘locked’ their account. The returns would be rejected prior to acceptance of electronically filed returns, thereby maintaining the integrity of taxpayer account information. Paper returns will require a different treatment stream, though will be similar in functionality. We will continue to work with other operational divisions to determine the best methods for complete implementation.”

He added that the IRS would also pursue revisions to Form 9452 and instructions to provide a means to notify the agency that taxpayers have no filing requirements and wish to have their accounts locked.

Other recommendations by the panel included the use of e-services to provide taxpayers with ready access to their estimated tax payments and other credits; clarification of instructions to include representation by grandparents and grandchildren for tax matters; additional user-friendly services for senior citizens at www.irs.gov; and improved instructions allowing domestic partners to more accurately report joint state tax income tax refunds.

In response to the last question, the IRS commented on a recent IRS private letter ruling and memorandums affecting same-sex couples in California (see IRS Backs California Domestic Partner Property Law and Tax Guide Released for California Same-Sex Couples).

“We think the answer to the above question depends on whether the same-sex couple resides in a community property state that extends its community property laws to same-sex couples (e.g., California),” wrote an unnamed representative of the IRS Chief Counsel and Tax Forms & Publications offices. “If the same-sex couple resides in California, a state that extends its community property laws to registered domestic partners (same-sex couples who register with the state), one-half of the refund should be allocated to each registered domestic partner. In California, as of Jan. 1, 2007, the earned income of a registered domestic partner must be treated as community property for state income tax purposes (unless the couple executes an agreement to opt out of the community property system). Thus, for state income tax purposes, each partner is generally considered to have earned one half of the income that generates the state income tax liability and should get credit for one half of the state tax withholdings or other payments. Consequently, each should be treated as receiving one half of any state tax refund for purposes of determining whether the refund should be included in gross income on a partner’s separately filed federal income tax return.

“In contrast, if the couple is receiving a state income tax refund from a non-community property state, the refund should be allocated to each person in proportion to the amount of state income tax that he or she paid,” the IRS added, giving examples of how the allocation might be done.

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FTC Cracks Down on Tax Debt Relief Companies (from WebCPA)

Friday, October 22nd, 2010

The tax debt relief industry is searching for loopholes in a Federal Trade Commission rule that could eliminate its main source of revenue.
Earlier this month, the FTC closed down American Tax Relief, claiming the company bilked consumers out of more than $60 million by falsely claiming it could reduce their tax debts (see FTC Puts American Tax Relief Out of Business).

Under a new Telemarketing Sales Rule, starting October 27, the FTC will ban tax debt resolution firms from collecting advance fees that keep many of them afloat. The legislation also cracks down on deceptive practices, such as making false promises about debt reduction, and requires firms to adhere to strict disclosure standards.

Sources interviewed by easyIRS.com, a provider of technology for dealing with IRS debts, agree that promoters of “pennies on the dollar” IRS settlements are facing an uphill battle if they try to ignore or skirt the FTC ruling.

Law firm Loeb & Loeb LLP represents companies affected by FTC actions. The firm argued in a recent article that the FTC didn’t have power to create the new rules, but it urged industry compliance—and warned strongly against exploiting loopholes.

“While we understand the desire of industry members to find enticing ‘loopholes’ that may exist in the TSR, these should be viewed as potential traps for the companies that attempt to exploit them,” wrote Michael Mallow and Michael Thurman in an article for Loeb & Loeb. “There is no doubt that these loopholes will soon be the ‘test cases’ for the FTC’s TSR regulatory enforcement efforts. … That loop may turn out to be a noose.”

Companies in the industry may try to use several loopholes to change their business models, Mallow and Thurman said in the article.

Because the FTC rule doesn’t regulate legitimate nonprofit agencies, some debt relief firms may try to change their for-profit status to become exempt from the advance-fee ban, Mallow and Thurman said. But simply changing status to a nonprofit, without changing fundamental operations and goals, would likely only attract FTC enforcement, they said.
Because the FTC rule covers only interstate telemarketing, some firms may try to limit their calls to within their state, limit customer interaction to face to face or online, or partner with attorneys who meet in person with their clients, Mallow and Thurman said. But questions that will arise from exploiting these types of loopholes would likely be decided by the courts, they said.

“The FTC wields a broad range of enforcement powers under Section 5 of the FTC Act, which directs the agency to prevent ‘unfair or deceptive acts or practices,’” Mallow and Thurman wrote. “It is important to recognize that the FTC will scrutinize such efforts very closely and will likely focus its early regulatory enforcement efforts on these issues.”
The FTC spells out its interpretations in the TSR ruling itself and in guidance documents for businesses covered under the rules.

The agency is also aware of several more nuanced attempts to find loopholes using language in the legislation, said Jim Buttonow, a 19-year IRS veteran and cofounder of tax software firm easyIRS.com. Buttonow said easyIRS’s legal team spoke with an FTC attorney about the rules.

“The FTC is well alerted to the tactics of these tax resolution firms,” Buttonow said. “It seems clear that the actions of the seller—such as providing representation to change, alter or renegotiate the terms of the tax debt—are going to be the deciding factors on whether a company is subject to the TSR.”

Tax debt relief companies are scrambling to find a way out.
The National Policy Group, a lobbying firm that is representing some tax debt relief companies, is trying to pull together an industry effort to challenge the TSR ruling. The group announced its upcoming “Super-Advanced Tax Problem Resolution Seminar” in Las Vegas from Thursday to Saturday—just days before the advance-fee ban becomes effective, according to an e-mail announcement from Ron Perrino, marketing director for the American Society of Tax Problem Solvers.

The announcement touched on industry worries: “Here are just a few of the many questions that are on many practitioners’ minds: Who is and isn’t covered? Will you be able to collect upfront fees? Are you exempt because you meet clients face to face?”

Because of the legislation, industry insiders think that taxpayers with IRS problems will turn away from tax debt relief firms in favor of more reliable alternatives, such as the IRS, local tax professionals or online tax software providers.

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IRS Highlights Roth Rollovers in Small Business Bill (From WebCPA)

Thursday, October 14th, 2010

The Internal Revenue Service is getting the word out to employers about a provision in the recently passed Small Business Jobs Act that allows them to amend their 401(k) or 403(b) plans to allow participants to transfer an eligible rollover distribution into a Roth 401(k) or 403(b) account.

Participants can transfer the eligible rollover distribution into a designated Roth account in the plan as long as the transfer is of an ERD

1. made after Sept. 27, 2010;
2. from a non-designated Roth account in the same plan;
3. because of an event that triggers an ERD from the plan; and
4. otherwise meets the rollover requirements.

The new law also permits sponsors of governmental 457(b) plans to add designated Roth accounts to their plans in taxable years beginning after 2010, and then these plans can be amended to allow in-plan ERD transfers to participants’ designated Roth accounts if the ERD meets conditions 2 through 4 above.

If a participant rolls over an ERD into a designated Roth account, he or she must include any previously untaxed portion of the ERD in gross income. However, the rolled over amount is not subject to the additional 10% early withdrawal tax.

For 2010 only, if a participant rolls over an ERD into a designated Roth account in a 401(k) or 403(b) plan, he or she can include:

1. half of the taxable amount of the rollover in 2011 gross income and half in 2012 gross income; or
2. the entire taxable amount of the rollover in 2010 gross income.

A participant that elects to include the rolled over amount in his or her 2010 gross income may not revoke that election after the due date, including extensions, of his or her 2010 federal income tax return. The participant may also owe estimated taxes on the taxable amount of the rollover for the year or years it is included in gross income or may incur an underpayment penalty.

“If people are still working and if they have substantial wealth in their retirement plan at work, this new legislation will be extremely important to them,” said James Lange, CPA/JD, the author of “Retire Secure!“ (Wiley, Feb, 2006 and 2009) “This new legislation will essentially allow employees to convert their traditional 401(k) or 403(b) to a Roth designated account that would still be part of their employer retirement plan. Before, if retirement plan employees were working and their retirement plan was tied up in a 401(k), even if they wanted to make a large conversion, they weren’t allowed to because they didn’t have access to their retirement plan. Now, assuming that employers already have or will add Roth designated accounts to their plans, employees can make, in effect, a Roth IRA conversion of whatever amount is appropriate.”

“For retirement plan owners in the top tax brackets, it will be more advantageous to make a 401(k) or 403(b) conversion to a Roth 401(k) or Roth 403(b) in 2010 than waiting until 2011 because we expect tax rates to go up at least for the upper income taxpayers in 2011,” he added. “Making a conversion while tax rates are lower is more advantageous because you will have to pay a lower tax on the conversion.”

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SBA releases final women-owned small business rule (From AccountingWeb)

Thursday, October 14th, 2010

With the publication recently of a final rule in the Federal Register, the U.S. Small Business Administration will begin implementation of its women-owned small business (WOSB) contracting program. The agency expects the program to be available for WOSBs in early 2011.

The rule is part of the Obama Administration’s overall commitment to expanding opportunities for small businesses to compete for federal contracts, in particular those owned by women, socially and economically disadvantaged persons, and veterans. This rule identifies 83 industries in which WOSBs are under-represented or substantially under-represented in the federal contract marketplace. In addition to opening up more opportunities for WOSBs, the rule also is another tool to help achieve the statutory goal that 5 percent of federal contracting dollars go to women-owned small businesses.

“Women-owned businesses are one of the fastest growing sectors of our nation’s economy, and even during the economic downturn of the last few years, have been one of the key job creation engines in communities across the country,” SBA Administrator Karen Mills said in a statement.

“Federal contracts provide critical opportunities for owners of small firms to take their business to the next level and create good-paying jobs,” Mills said. “Despite their growth and the fact that women lead some of the strongest and most innovative companies, women-owned firms continue to be under-represented in the federal contracting marketplace. This rule will be a platform for changing that by providing greater opportunities for women-owned small businesses to compete for and win federal contracts.”

With the publication of the final rule, SBA, in conjunction with the Federal Acquisition Regulatory Council, will begin a 120-day implementation of the WOSB contracting program, including building the technology and program infrastructure to support the certification process and ongoing oversight.

With implementation expected to take several months, the agency expects that federal agencies’ contracting officers will be able to start making contracts available to WOSBs under the program in early 2011.

The creation of a rule to increase federal contracting opportunities for WOSBs was authorized by Congress in 2000. Since that time, SBA took a number of steps to study and analyze the market, including looking at participation by women-owned small businesses across all industries. Various draft rules were made available for public comment in prior years, but shortly after taking office, the Obama Administration drafted a new, comprehensive rule based on the analysis of the prior studies and on all the questions and comments previously received. The proposed rule was published for public comment on March 2, 2010, for 60 days. SBA received more than 1,000 comments during that time.

Some of the components of the WOSB rule include:
To be eligible, a firm must be 51 percent owned and controlled by one or more women, and primarily managed by one or more women. The women must be U.S. citizens. The firm must be small in its primary industry in accordance with SBA’s size standards for that industry. In order for a WOSB to be deemed economically disadvantaged, its owners must demonstrate economic disadvantage in accordance with the requirements set forth in the final rule.
Based upon the analysis in a study commissioned by the SBA from the Kauffman-RAND Foundation, the final rule identifies 83 industries (identified by NAICS codes) in which women-owned small businesses are under-represented or substantially under-represented in federal procurements.
The SBA has identified eligible industries based upon the combination of both the “share of contracting dollars” analysis, as well as the “share of number of contracts awarded” analysis used in the RAND study. This differs from an earlier proposed version of the rule which identified only four industries in which women-owned small businesses were under-represented. This earlier version proposed to identify eligible industries based solely on the “share of contracting dollars” analysis used in the RAND study.
In accordance with the statute, the final rule authorizes a set-aside of federal contracts for WOSBs where the anticipated contract price does not exceed $5 million in the case of manufacturing contracts and $3 million in the case of other contracts. Contracts with values in excess of these limits are not subject to set-aside under this program.
The final rule removes the requirement, set forth in a prior proposed version, that each federal agency certify that it had engaged in discrimination against women-owned small businesses in order for the program to apply to contracting by that agency.
The proposed rule allows women-owned small businesses to self-certify as WOSBs or to be certified by third-party certifiers, including government entities and private certification groups.
The final rule requires WOSBs which self-certify to submit a robust certification verification, to complete the certifications at the federal Online Representation and Certification Application (ORCA) Web site, and also to submit a core set of eligibility-related documents to an online document repository to be maintained by the SBA. Each agency’s contracting officers will have full access to this repository.
The SBA intends to engage in a significant number of program examinations to confirm eligibility of individual WOSBs.
In the event of a contract protest or program review, the SBA has the authority to request substantial additional documentation from the WOSB to establish eligibility.
SBA intends to pursue vigorously punitive action against ineligible firms which seek to take advantage of this program and in so doing to deny its benefits to the intended legitimate WOSBs.

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FTC Puts American Tax Relief Out of Business

Thursday, October 7th, 2010

At the request of the Federal Trade Commission, a federal judge has halted the business operations of American Tax Relief, a company that heavily advertised its ability to help taxpayers who were in trouble with the IRS and allegedly bilked consumers out of more than $60 million by falsely claiming it could reduce their tax debts.

The company’s California state business license was suspended last year for not paying its own taxes, the FTC noted. The FTC is seeking to make the defendants pay restitution to victims.

“We’ve made it a top priority to go after scammers who try to exploit the financial hardship of others,” said FTC Bureau of Consumer Protection director David C. Vladeck in a statement. “For people having a tough time paying their taxes, the last thing they need is to lose more money to a fraud.”

According to the FTC, American Tax Relief LLC falsely claims in TV, radio and Internet ads that it can settle consumers’ delinquent federal and state taxes for a fraction of the amount they owe. The company also falsely claims that it can remove tax liens and stop wage garnishments, bank and tax levies, property seizures, and “unbearable monthly payments.”

For example, the company’s Web site states, “The IRS is currently accepting a fraction of back taxes owed to them for those who qualify. The IRS is allowing the people with delinquent tax liabilities a ONE-TIME opportunity to settle the debt ONCE AND FOR ALL. But at the same time, the IRS does not advertise, promote or even voluntarily suggest this program.”

A visit to the American Tax Relief Web site now displays a simple message from the FTC: “The Federal Trade Commission has filed a lawsuit against American Tax Relief LLC alleging that it has engaged in deceptive practices relating to the advertising, marketing, promotion, offering for sale, or sale of tax relief services. The United States District Court for the Northern District of Illinois has issued a temporary restraining order prohibiting the alleged practices. You may obtain additional information directly from the FTC at www.ftc.gov.”

The FTC alleges that the company has continued its deceptive practices even after federal agents executed a criminal search warrant on the operation’s Beverly Hills business premises in April 2010. At that time, criminal authorities seized money from bank accounts and a Ferrari from the company’s owner, and placed liens on two residences, including a $3.4 million house. At the time, one of the company’s owners was leasing six other vehicles, including a Rolls-Royce, a Bentley, two Porsches, and two Mercedes-Benzes, according to exhibits the FTC filed in court.

American Tax Relief charges up-front fees ranging from about $3,200 to $25,000 for the purported tax relief services. The company’s ads include a toll-free number for consumers to call for a “free consultation.” After speaking briefly with commission-based sales people who are supposedly “tax consultants,” virtually all consumers are told that they “qualify” for a tax relief program, and that American Tax Relief can help them significantly reduce their tax debts, the FTC complaint alleges.

In reality, very few of the company’s customers qualify for the promised tax relief programs, which are available only in very limited circumstances. Most people who hire the company would qualify at most for installment payment plans, which still require payment of the full amount owed, and which many taxpayers can easily arrange by themselves.

Many consumers are told that they qualify for an “offer in compromise,” which the Internal Revenue Service states is its only program that allows people to avoid paying the full amount of back taxes, and is available only in limited circumstances; taxpayers are eligible only after other payment options have been exhausted and the person’s ability to pay has been reviewed.

Other consumers are told that they qualify for a “penalty abatement,” which the company claims will eliminate both accumulated penalties and interest stemming from late payments. However, a penalty abatement is considered by the IRS only in very limited circumstances for people who have “reasonable cause” for the late payments, such as death, serious injury, natural disaster or the like. The FTC alleges that the company does not gather sufficient information from consumers to know whether they would be likely to qualify for either an offer in compromise or a penalty abatement.

The FTC’s complaint names Alexander Seung Hahn, Joo Hyun Park and American Tax Relief LLC. Park’s parents, Young Soon Park and Il Kon Park, are named because they are allegedly holding funds obtained from the defendants’ customers. On Sept. 24, 2010, a federal judge in Chicago entered a temporary restraining order prohibiting deceptive claims, freezing the defendants’ assets, and appointing a receiver to manage the company.

The FTC vote to file the complaint was unanimous at 5-0. The complaint was filed in the U.S. District Court for the Northern District of Illinois, Eastern Division.

To help consumers who may be having trouble meeting their tax obligations, the FTC created “Owe Back Taxes? Tax Relief Companies Can Result in More Pain than Gain,” which is available on the agency’s Web site.

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IRS to Clamp Down on Tax-Dodging Businesses (From WebCPA)

Thursday, October 7th, 2010

The IRS plans to take a closer look at businesses that don’t file their tax returns, and identify more of them.

The IRS cannot develop a comprehensive estimate of the number of businesses that do not file tax returns and the tax gap associated with them because it lacks data about the population of all businesses, but the IRS could use the inventory of business nonfilers it already has on hand to determine noncompliance, according to a new government report.

The report, by the Government Accountability Office, noted that the IRS identifies several million potential business nonfilers each year, more than it can thoroughly investigate. The “IRS could take a random sample of its inventory, thoroughly investigate those cases, and use the results to estimate the proportion of actual nonfilers in its inventory of potential nonfilers,” said the report.

Until recently the IRS has not had a way to prioritize the cases in its large inventory. But the IRS modernized its business nonfiler program last year by incorporating income and other data in its records indicating business activity. Active businesses generally have an obligation to file a return. The IRS’s Business Master File Case Creation Nonfiler Identification Process, or BMF CCNIP, now assigns each case a code based on this data. The IRS uses the code to select the cases to work with the goal of securing tax returns from nonfilers and collecting additional revenue.

This is a significant modernization, but the IRS lacks a formal plan to evaluate how well the codes are working. The IRS has performance information on its individual nonfiler program, but less on its business nonfiler program. Key management reports needed to provide program data are under development, but no deadline has been set. The IRS could also use more information on why many nonfiler cases are unproductive. This could potentially lead the IRS to identify actions that could reduce IRS resources used on these cases and the associated taxpayer burden.

The GAO identified several opportunities to enhance the IRS’s identification and pursuit of business nonfilers. For example, the new BMF CCNIP selection codes provide a quick way to verify taxpayer statements that a business has ceased operations and does not need to file a tax return. IRS collections staff have been instructed to use the codes when making case closure decisions. They were previously instructed to use other income data, but the GAO’s analysis indicated this may not have been done in all cases.

Non-IRS data on various businesses, including federal contractors, could be used to verify taxpayer statements about whether a tax return should have been filed. The GAO’s analysis of cases in two states that were closed as not liable to file a return found 7,688 businesses where non-IRS data showed business activity as measured by sales totaling $4.1 billion.

The GAO also found cases closed as not liable to file a return involving 13,852 businesses on the federal contractor registry. The GAO’s analyses illustrated the potential value of non-IRS data, but the GAO did not assess which non-IRS data would be most useful nor examine the capacity of IRS’s systems to use such data on a large scale

The GAO recommended in the report that the IRS should develop a partial business nonfiler rate estimate and set a deadline for developing performance data. The IRS should also develop a plan for evaluating the selection codes, and reinforce the need to use income data and selection codes in verifying taxpayer statements. In addition, the report recommended that the IRS study the feasibility and cost-effectiveness of using non-IRS data to verify taxpayer statements.

In response, the IRS agreed that identifying and pursuing active business nonfilers is key to its enforcement efforts and acknowledged that the GAO’s recommendations could assist these efforts. The IRS agreed with four of the GAO’s recommendations and indicated some steps it would take to address the other four. “We agree that identifying and pursuing business nonfilers who remain in business is a key component of our enforcement efforts and that your recommendations may assist us in those efforts,” wrote IRS deputy commissioner of services and enforcement Steven T. Miller.

He noted that the IRS has looked into the possibility of purchasing private data from information resellers, but the IRS concluded that it was difficult to quantify the benefits because the IRS could not be assured that it was not buying duplicative records or that the data purchased would produce revenue-generating casework.

However, with regard to using federal contractor data to make a determination for filing tax returns, the IRS will evaluate the effectiveness of data mining using the Central Contractor Registration database maintained by the General Services Administration.

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