Archive for the ‘Taxes’ Category

IRS Workers Got $1.1 Million in Bonuses Despite Owing Back Taxes

Thursday, April 24th, 2014

originally posted on latimes.com on April 23, 2014

WASHINGTON — The IRS paid a total of about $1.1 million in bonuses over about two years to more than 1,100 employees who had been disciplined for failing to pay their own taxes, according to an inspector general’s report.

Those employees also received awards of more than 10,000 hours of extra time off and 69 faster-than-normal pay grade increases. They were among more than 2,800 IRS employees during that period who got performance awards within one year of disciplinary action, such as suspensions or written reprimands, the report found.

This is bad news for the Internal Revenue Service’s image, “which already has taken some very serious hits over the past couple of years,” said Pete Sepp, executive vice president of National Taxpayers Union.

The Treasury’s inspector general for tax administration noted that the performance awards did not violate the law.

But he said that “providing awards to employees who have been disciplined for failing to pay federal taxes appears to create a conflict with the IRS’ charge of ensuring the integrity of the system of tax administration.” The IRS’ contract with the National Treasury Employees Union says disciplinary action or investigations do not preclude an employee receiving a bonus or other performance award unless it would damage the integrity of the agency.

The inspector general’s report, released Tuesday, found that the more than two-thirds of IRS employees received performance awards in the 2011 and 2012 fiscal years.

The audit was done because new federal guidelines in 2011 required agencies to reduce spending on bonuses and other awards.

IRS spending on bonuses went down in 2012 compared to 2011.

In 2011, the IRS paid $91.6 million in bonuses and granted almost 520,000 hours of extra time off to a total of 70,500 of the agency’s approximately 104,400 employees, the report said. That amounted to awards for 67.5% of employees.

The following year, spending on cash bonuses dropped to $86.3 million and time off awards fell to about 490,000 hours. But the percentage of employees receiving performance awards increased. The agency gave awards to 67,870 of its 98,000 employees in 2012 — or 69.3%.

Throughout that time, many employees who had been the subject of disciplinary action received performance awards.

From Oct. 1, 2010, to the end of 2012, more than 2,800 employees who had been disciplined received more than $2.8 million in cash bonuses and more than 27,000 extra hours of time off, the report said.

Those included 1,146 employees with tax problems, the report said.

The IRS has been under fire since agency officials said last year that employees improperly targeted applications from conservative groups seeking tax-exempt status.

IRS employees disciplined for failing to pay back taxes should not be denied bonuses, but the money should be diverted to pay the penalty, said Sepp of the Taxpayers Union.

“If we’re assuming that the awards are given out on true merit … then say, ‘Sorry you owe $800 on a lien and you’ve exhausted all your appeals your reward is reduced accordingly,’ ” he said.

The inspector general, however, recommended the IRS consider a policy requiring managers to consider disciplinary actions, especially those for failure to pay taxes, before deciding on bonuses and other performance awards.

The agency issued a statement saying that it already was making changes to its bonus policy.

“The IRS takes seriously our unique role as the nation’s tax administrator. We strive to protect the integrity of the tax system, and we recognize the need for proper personnel policies,” the agency said.

The IRS said it had developed a policy linking conduct to performance awards for executives and senior-level employees.

Even without such a policy, during the previous four years “the IRS has not issued awards to any executives that were subject to a disciplinary action,” the agency said.

The IRS said it is considering a similar policy for the rest of the agency’s workforce, but that would have to be negotiated with the National Treasury Employees Union.

A spokesman for the union did not immediately respond to a request for comment.

Sepp said he had broader concerns about the large percentage of IRS employees receiving bonuses. “It just doesn’t’ seem in tune with the reality of any workforce, public or private, that more than half of them would get some kind of merit-based award,” he said.

IRS Reiterates Warning of Pervasive Telephone Scam

Tuesday, April 15th, 2014

Sent In the IRS Newswire

WASHINGTON – As the 2014 filing season nears an end, the Internal Revenue Service today issued another strong warning for consumers to guard against sophisticated and aggressive phone scams targeting taxpayers, including recent immigrants, as reported incidents of this crime continue to rise nationwide. These scams won’t likely end with the filing season so the IRS urges everyone to remain on guard.

The IRS will always send taxpayers a written notification of any tax due via the U.S. mail. The IRS never asks for credit card, debit card or prepaid card information over the telephone. For more information or to report a scam, go to www.irs.gov and type “scam” in the search box.

People have reported a particularly aggressive phone scam in the last several months. Immigrants are frequently targeted. Potential victims are threatened with deportation, arrest, having their utilities shut off, or having their driver’s licenses revoked. Callers are frequently insulting or hostile – apparently to scare their potential victims.

Potential victims may be told they are entitled to big refunds, or that they owe money that must be paid immediately to the IRS. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.

Other characteristics of this scam include:

• Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.

• Scammers may be able to recite the last four digits of a victim’s Social Security number.

• Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.

• Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.

• Victims hear background noise of other calls being conducted to mimic a call site.

• After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

• If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.

• If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.

• If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.

The IRS encourages taxpayers to be vigilant against phone and email scams that use the IRS as a lure. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts. Recipients should not open any attachments or click on any links contained in the message. Instead, forward the e-mail to phishing@irs.gov.

More information on how to report phishing scams involving the IRS is available on the genuine IRS website, IRS.gov.

You can reblog the IRS tax scam alert via Tumblr.

Tax Season Unleashes Cyberscams

Thursday, March 20th, 2014

Originally Posted on CNN Money

As if tax season isn’t stressful enough, cybercriminals are also out in full force, looking to unleash attacks against unsuspecting small businesses.

Cybercrooks often use current events to disguise their attacks, said Kevin Haley, director of Symantec Security Response.

In 2011, for example, the royal wedding triggered a huge spike in spamming emails. Similarly, the annual tax filing season creates a perfect storm for cyberschemes.

“Not only do criminals exploit its anxiety and fear factor, but the tax season also gives them the opportunity to generate a variety of social engineering tricks,” Haley said.

These typically take the form of (fraudulent) tax-themed messages from the IRS that are actually phishing scams and ransomware.

Related: Most dangerous cyberattacks against small businesses

Small businesses are targeted more than large firms because they’re more vulnerable and the schemes are more lucrative.

“Large companies are better protected,” said Haley. “Cybercriminals know that smaller firms are more lax with their security and probably keep more money in their bank accounts.”

Alex Watson, director of security research at Websense Security Labs, said his firm has tracked a sharp increase in tax-related cyberscams this year against businesses.

“We’re seeing about 100,000 IRS-themed email scams circulating every two weeks in the U.S.,” said Watson. “They started in late December and it’s going strong now.”

Related: Cybercrime’s easiest prey: Small business

Here are the three most dangerous cyberattacks:

Financial Trojans: This type of attack uses names of popular tax-prep programs like Turbotax. Haley said targets receive an email with an attachment disguised as an important tax document from Turbotax.

“In most cases, the attachment looks like a spreadsheet or a document file,” he said.

If you open it, it launches malware on to your computer or phone. Once it’s installed, the malware allows scammers to steal login information and bank account credentials.

Tax-themed phishing scams: Haley said these scams use HTML files that capture personal data and company information and then send it to a server controlled by the cybercrooks.

In its annual list of “Dirty Dozen” tax scams, the IRS highlighted this particular attack, which is carried out through a fraudulent email or website.

The IRS emphasized that it never uses email to request personal or financial information.

IRS-disguised ramsonware: This attack mimics a Cryptolocker threat, meaning the virus seizes control of your computer files and threatens to erase them unless you pay a ransom.

During tax season, Haley said the Cryptolocker virus is disguised in an email that purports to have important tax-related information.

“This is a particularly vicious attack,” he said. “It will not only lock your personal files but also encrypt them and hold them for ransom.”

Some businesses feel they have no choice but to pay, he said.

Want to outsmart the cybercriminals? Regularly back up important files or encrypt sensitive data, Haley said.

There are other steps small businesses can take to protect themselves from cyberscams.

Good security software is a must, said Haley, as is password protection. Just don’t use the same password everywhere! Also, be very careful about clicking on links in an email.

Finally: “Be suspicious,” Haley said. “Scammers are quite good at making emails and links look legitimate. Know that the email ‘from’ the IRS will never be from the IRS.” To top of page

What do I need to know about the Health Care Law for my 2013 Tax Return?

Tuesday, March 18th, 2014

Originally shared via the IRS Tax Tips Mailing List

For most people, the Affordable Care Act has no effect on their 2013 federal income tax return. For example, you will not report health care coverage under the individual shared responsibility provision or claim the premium tax credit until you file your 2014 return in 2015.

However, for some people, a few provisions may affect your 2013 tax return, such as increases in the itemized medical deduction threshold, the additional Medicare tax and the net investment income tax.

Here are some additional tips:

Filing Requirement: If you do not have a tax filing requirement, you do not need to file a 2013 federal tax return to establish eligibility or qualify for financial assistance, including advance payments of the premium tax credit to purchase health insurance coverage through a Health Insurance Marketplace. Learn more at HealthCare.gov.

W-2 Reporting of Employer Coverage: The value of health care coverage reported by your employer in box 12 and identified by Code DD on your Form W-2 is not taxable. Learn more.

Information available about other tax provisions in the health care law: More information is available on IRS.gov regarding the following tax provisions: Premium Rebate for Medical Loss Ratio, Health Flexible Spending Arrangements, and Health Saving Accounts.

More Information

Find out more tax-related provisions of the health care law at IRS.gov/aca.

Find out more about the Health Insurance Marketplace at HealthCare.gov.

Taxpayers Plan to Use Tax Refunds for Necessary Expenses

Thursday, February 27th, 2014

Originally Published in Accounting Today

About 52 percent of Americans intend to spend their annual tax refund on necessary expenses such as loans, credit cards and other household expenses, while another 30 percent plan to put the money into savings and only 8 percent plan to invest the tax refund money, according to a new survey.

The survey, released Tuesday by the financial services firm Edward Jones, contrasts with a similar survey released Monday by TD Ameritrade, which found greater interest in investing tax refunds, at least among the investors who were polled (see Many Plan to Invest Their Tax Refunds).

The Edward Jones survey polled over 1,000 taxpayers in general. It found that the respondents between the ages of 55 and 64 are most likely to save their refund (43 percent). Respondents who are just a few years younger had a much different opinion, with only 25 percent of those between 45 and 54 years of age planning to save their tax refunds. The survey’s youngest respondents, those between the ages of 18 and 34, are most likely to spend their refund checks on “fun” things such as clothes, entertainment and restaurants (12 percent). This compares to just 5 percent of those 65 and older who would do the same.

Household income has the most influence on the decision to save, spend or invest a tax refund in 2014. Survey respondents with the lowest household income (those making less than $35,000 a year) are the most likely to spend their tax refund on necessary expenses (61 percent). This compares to just over one-third (37 percent) of those with the highest household income ($100,000 or more). The wealthiest respondents are not the most likely to invest their refunds, the survey found. Instead, those with household incomes between $50,000 and $75,000 were the most likely to invest the tax refund money.

In general, households with children are the most likely to spend their tax refunds on everyday expenses, and those with older children are even more likely. Following that point, Americans with no children are the most likely (10 percent) to spend their tax refund on something “fun,” whereas only 1 percent of those with children ages 13 to 17 are willing to splurge.

Americans living in the Northeast are the most likely to invest their tax refunds (11 percent). Those who live in the West are the most likely simply to save their tax refunds (35 percent).

Cities with highest (and lowest) taxes

Monday, February 24th, 2014

Originally Published on Yahoo!

Although a little late this year, due largely to the federal government’s 17-day shutdown in 2013, tax season is here. And, according to a new report, what you owe in taxes could be largely determined by where you live.

The report, released by the Office of Revenue Analysis of the government of the District of Columbia, reviewed the estimated property, sales, auto and income taxes for a hypothetical family at various income levels in 2012 in the largest city within each state. City tax burdens vary widely. A family of three earning $75,000 in Cheyenne, Wyoming, paid just $3,475, or 4.6% of its income, in state and local taxes. In Bridgeport, Connecticut, a family of three earning $75,000 paid $16,333, or 21.8% of its income — a total that does not even include federal taxes.

ALSO READ: Ten U.S. Cities Where Violent Crime Is Soaring

Not surprisingly, tax rates influence overall tax burdens significantly. This is especially true for property taxes. Seven of the cities with the highest tax burdens also had among the 10-highest property tax rates, according to the Office of Revenue Analysis. Homeowners in Columbus, Ohio, which had the fifth-highest tax burden in the nation, paid an effective rate of $3.57 for every $100 in home value, the highest such rate in the U.S.

Lori Metcalf, fiscal analyst at the Office of Revenue Analysis, noted in an interview with 24/7 Wall St. that property taxes tended to comprise a higher share of state and local tax burdens. Because of this, “the trend that you see in the property tax should be reflected in the overall burden.”

Another tax that is often important in determining overall tax burden is the income tax. This is especially true for cities with the lowest tax burdens, seven of which are located in states that do not have an income tax. Only one of the five cities with the lowest tax burdens, Billings, Montana, is not located in a state that has no income tax.

Yet the relationship between income taxes and higher tax burdens is not as straightforward. To highlight this, Metcalf noted that higher incomes families usually live in higher-value homes. “This means that when you pay income taxes you’ll have a larger deduction because you’ll have a larger property tax based on a more expensive home and a larger mortgage interest deduction,” Metcalf explained. As a result of this deduction, homeowners’ income tax burdens are often reduced, obscuring the relationship between income taxes and overall tax burdens.

ALSO READ: America’s Fastest Growing (and Shrinking) Economies

Several factors not reviewed by the Office of Revenue Analysis, whose study focused primarily on the characteristics of tax systems, may play a role in determining tax burdens. One such potential factor is unemployment. In many cities with low tax burdens, the unemployment rate was also very low. Sioux Falls, South Dakota, and Billings, Montana, had among the lowest unemployment rates in the nation in 2012. At the other end of the spectrum, Detroit, Michigan and Providence, Rhode Island had both hefty tax burdens and high unemployment.

A number of the cities with the lowest tax burdens were located in states that are considerably less densely populated, such as Alaska, Wyoming, and South Dakota. Even some of the cities themselves are in less densely populated metro areas. Birmingham, Alabama, had one of the lowest tax burdens in the U.S. and was located in the the least densely populated metro area of any reviewed. By comparison, many of the cities with high tax burdens are located in more densely populated parts of the country, such as the Northeast.

While this falls outside the scope of the report, it is possible that the reason areas with low population density have lower tax burdens is because the cost of running these cities is less. Local governments with fewer residents can spend less on government services. As a result, the government does not have to make as much in taxes.

Several low tax burden cities were also located in states that had a relative abundance of fossil fuels, including oil, natural gas, and coal. Houston, Texas, is located in the nation’s top state for oil and natural gas production. Cheyenne is the largest city in Wyoming, which accounts for a large portion of the nation’s coal output. A 2012 study by the National Conference of State Legislators found that Alaska, Montana, and Wyoming, all of which have cities with low tax burdens, relied on taxing oil and gas activity for much of their revenue.

Based on the Office of Revenue Analysis’ report: “Tax Rates and Tax Burdens in the District of Columbia — A Nationwide Comparison,” 24/7 Wall St. reviewed the cities where a hypothetical family of three in different income brackets had the highest and the lowest combined tax burdens. To calculate tax burden, the report identified four different types of taxes: income, property, automobile, and sales. The report examined tax systems in the largest city in each state, as well as in Washington, D.C. All estimates are for the 2012 fiscal year. Median housing value and median income data used by the report to determine property value are for metro areas. When two cities were located within the same metro area, county level data was used. 24/7 Wall St. also reviewed income figures for these areas from the U.S. Census Bureau, as well as area unemployment rates as of 2012 from the Bureau of Labor Statistics.

Cities Paying the Highest Taxes:

5. Columbus, Ohio Taxes for family earning $25,000: $2,953 (17th lowest) Taxes for family earning $150,000: $22,333 (6th highest) Unemployment rate: 6.1%

A family of three earning $25,000 a year in Columbus faced only an 11.8% tax burden, lower than more than half of all cities reviewed. However, tax burdens for families with higher earnings were among the highest in the nation. This is due in large part to the city’s real estate taxes. Although the housing values in the city were not especially high, lower than the average for cities reviewed, residents faced especially high property taxes. At 3.57%, Columbus had the highest effective property tax rate of any city.

4. Baltimore, Md. Taxes for family earning $25,000: $2,950 (16th lowest) Taxes for family earning $150,000: $24,747 (4th highest) Unemployment rate: 7.2%

Baltimore area residents are fairly well-off compared with most of the country — median household income was nearly $67,000 in 2012, among the nation’s highest. Baltimore’s property tax burden is especially high. Families of three earning $150,000 paid $13,772 in property taxes in 2012. Families earning $25,000 had no income tax burden, but those earning $150,000 paid more than 5% of their income in state and local income taxes alone, the sixth-highest percentage of any city reviewed.

ALSO READ: States With the Best (and Worst) Schools

3. Milwaukee, Wisc. Taxes for family earning $25,000: $3,245 (26th highest) Taxes for family earning $150,000: $26,296 (2nd highest) Unemployment rate: 7.4%

Like a number of other cities with high tax load, Milwaukee residents faced especially high property tax burdens. The effective property tax rate in the city was 3%, higher than all but a few regions reviewed. Also driving up taxes were the especially high income tax burdens in the city. The state used a graduated income tax system, meaning tax rates are higher for families that earn more, although Milwaukee had no local income taxes.In 2013, the state reformed its tax code, lowering the highest rate as well as the number of overall tax brackets. Wisconsin Governor Scott Walker recently pushed the state assembly to cut both property taxes and and the income tax rate for the state’s lowest tax bracket.

2. Philadelphia, Pa. Taxes for family earning $25,000: $3,794 (7th highest) Taxes for family earning $150,000: $25,317 (3rd highest) Unemployment rate: 8.6%

Philadelphia’s poorer families were subject to a much higher tax burden than those in most other large cities. A family of three earning $25,000 in 2012 paid $788 in income taxes that year, more than all but one other large city. The city’s property tax burden was also considerably high for most income levels that year. A family whose earnings fell into the $100,000 tax bracket, for example, paid more than $11,806 in property taxes in 2012, second-most among large cities. After a new property tax valuation system was implemented and some residents’ tax assessments more than tripled, the city introduced a “gentrification relief program” at the end of 2013. Fuel was also heavily taxed in 2012, with gasoline costing an additional 31 cents per gallon due to state taxes, which were among the highest in the U.S.

1. Bridgeport, Conn. Taxes for family earning $25,000: $4,001 (4th highest) Taxes for family earning $150,000: $33,208 (the highest) Unemployment rate: 7.8%

No large U.S. city had a higher tax burden than Bridgeport, where a family of three earning $150,000 a year paid more than 22% of its income in state and local taxes. However, the metro area, which includes affluent Fairfield county, is wealthier than much of the U.S. and was used to calculate home values and property burdens by the Office of Revenue Analysis. More than 20% of households had an annual income of at least $200,000, more than any other metro area reviewed. The city’s high tax burden was due in large part to property taxes, as the area had both high home values and high effective property tax rates. Also propelling the city to the top of the list were Connecticut’s relatively high income tax burden of 5.2% on families earning $150,000 per year as well a high tax burden for car owners.

Click here for the full list of cities paying the highest taxes.

Cities Paying the Least in Taxes:

5. Sioux Falls, S.D. Taxes for family earning $25,000: $2,772 (10th lowest) Taxes for family earning $150,000: $9,425 (3rd lowest) Unemployment rate: 4.1%

The low tax burden in Sioux Falls is partly due to the absence of a state income tax. However, city also had low tax burdens in other categories measured. Families in the area with higher incomes had lower tax burdens than families with lower incomes. This was due to the state’s tax structure, which was criticized by the Institute on Taxation & Economic Policy, a think tank that supports a progressive tax code, for being too reliant on low-income residents. However, even Sioux Falls’ lowest income residents faced a relatively low tax burden.

4. Anchorage, Alaska Taxes for family earning $25,000: $2,366 (4th lowest) Taxes for family earning $150,000: $9,790 (4th lowest) Unemployment rate: 6.0%

Automobile tax burdens in Anchorage were consistently low across all levels of income. Like most American cities, Anchorage did not have a local gasoline tax in 2012, and the state’s gasoline tax of 8 cents per gallon that year was the lowest in the nation. The city also had no excise or personal property tax that it charged to car owners. Sales tax burdens were also considerably lower than in other large cities — families in every tax bracket paid less than $200 in sales taxes in 2012. The median income of city residents was more than $71,000 in 2012, one of the highest nationwide. Alaska, however, taxed none of this income because it is one of few states without any income tax.

ALSO READ: The 10 Most Hated Companies in America

3. Billings, MT Taxes for family earning $25,000: $2,347 (3rd lowest) Taxes for family earning $150,000: $10,668 (7th lowest) Unemployment rate: 4.4%

Billings families faced some of the lowest sales and property tax burdens in the nation. Montana did not have a general sales tax in 2012. Helping to keep property taxes low, Billings levied real estate taxes on only a small portion of a home’s value, and residents also paid a relatively low effective property tax rate. Billings had one of the nation’s lowest jobless rates as of December as well. Just 4.4% of people in the workforce were unemployed in 2012, and the State has benefitted from the nearby Bakken Shale oil boom. Montana taxes oil and gas production, which can alleviate the tax loads residents face.

2. Las Vegas, Nev. Taxes for family earning $25,000: $3,260 (24th highest) Taxes for family earning $150,000: $8,314 (2nd lowest) Unemployment rate: 11.2%

Unlike most cities with low tax burdens, Las Vegas had an exceptionally high unemployment rate of 11.2% in 2012, nearly the worst compared with other large cities. The median income was also lower than $50,000 that year, less than median incomes in most urban areas. Overall, property taxes were low in 2012. A family earning $150,000 paid slightly more than $5,000 that year in property taxes, one of the lowest amounts nationwide.

1. Cheyenne, Wyo. Taxes for family earning $25,000: $2,476 (5th lowest) Taxes for family earning $150,000: $6,307 (the lowest) Unemployment rate: 6.1%

Cheyenne had the lowest tax burden of any state in the nation, and not only because Wyoming had no state income tax. The total sales tax rate of just 6.0% in Cheyenne, which was lower than in most comparable cities, contributed to the the low sales tax burden in the city. Wyoming residents also paid just 14 cents in state taxes per gallon on gas, one of the lowest rates in the U.S. and a major reason why tax burdens on car ownership were towards the low-end. Additionally, Cheyenne’s effective property tax rate of 0.67% was among the lowest in the nation. Low tax rates on families in the city and the state may be tied to Wyoming’s energy industry. The state is the nation’s largest producer of coal, as well as a sizable producer of oil and natural gas, and taxes from these industries help the state fill its coffers.

Click here for the full list of cities paying the least in taxes.

IRS Provides Safe Harbor for Taxpayers with Discharged Debts for Real Property

Monday, February 10th, 2014

Originally published in Accounting Today

The Internal Revenue Service has issued a revenue procedure to help taxpayers with so-called mezzanine financing in workouts and similar circumstances when they have debts that have been discharged in connection with real property.

Revenue Procedure 2014-20 provides a safe harbor under which the IRS will, under certain defined circumstances, treat indebtedness that is secured by 100 percent of the ownership interest in a disregarded entity that holds real property as indebtedness that is secured by real property for purposes of Section 108(c)(3)(A) of the Tax Code. The revenue procedure will assist taxpayers with mezzanine financing in workouts and similar circumstances.

The IRS noted that borrowers will often incur debt in connection with real property used in a trade or business. If the debt is later discharged, the income from the discharge of indebtedness may be excluded from gross income if certain requirements are met. In some cases, the real property is held by the borrower in an entity that is wholly owned by the borrower, and is, for federal tax purposes, disregarded as an entity separate from its owner. In these cases, the debt may be secured by the borrower’s ownership interest in the disregarded entity holding the real property.

Revenue Procedure 2014-20, will be included in Internal Revenue Bulletin 2014-09 on Feb. 24, 2014.

IRS Flags $1.5M in Improper Claims for Health Care Tax Credits by Tax-Exempt Groups

Thursday, January 30th, 2014

Previously published on Accounting Today

The Internal Revenue Service has generally been able to identify potentially improper claims for Small Business Health Care Tax Credits by tax-exempt organizations and subject them to further review, but improvements are still needed to ensure the claims are being caught in time, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, found that during tax year 2012, tax exempt organizations claimed more than $73 million in Small Business Health Care Tax Credits that were provided for under the Patient Protection and Affordable Care Act. The IRS’s Tax Exempt and Government Entities Division has designed controls that systemically identify questionable credits for potential examination.

Since implementing these processes, the IRS said it has denied more than $1.5 million in credits that it had determined were improper. However, TIGTA noted that additional controls would provide further assurance that potentially improper claims for the tax credits are identified and addressed effectively and efficiently.

The Tax Exempt and Government Entities Division designed computer routines that identify potentially improper credits claimed by tax exempt organizations for possible examination prior to processing the tax returns before a refund is issued.

Between Jan. 1 and July 23, 2012, the Tax Exempt and Government Entities Division initiated pre-refund examinations for 43 percent of the potentially improper credits identified by its computer routines. But because the IRS does not conduct pre-refund examinations on all of the potentially improper credits, the IRS needs to focus its limited resources on the most productive pre-refund examinations.

However, TIGTA found that the Tax Exempt and Government Entities Division’s compliance plan for the Small Business Health Care Tax Credit did not include plans for periodically reviewing its computer routines to determine if any changes are needed based on the pre-refund examination results. In addition, the IRS does not have a post-refund compliance strategy for the tax credit.

After listening to TIGTA’s concerns, IRS officials indicated to the Inspector General that they have begun to analyze the outcomes of pre-refund examinations and initiated post-refund examinations as well.

On top of that, TIGTA determined that amended returns are not always subjected to the same level of review by the IRS as the original returns.

TIGTA recommended that the acting commissioner of the IRS’s Tax Exempt and Government Entities Division complete the work to analyze and document the outcomes of pre-refund examinations, complete post-refund examinations, periodically update the compliance plan for the credit, and ensure that amended returns are subjected to the same reviews as original returns.

In response to the report, IRS officials said they generally agreed with TIGTA’s recommendations and plan to take or have taken corrective actions.

“As explained during the course of the audit, all returns, both original and amended, are subject to examination selection criteria and either accepted as filed or selected for examination,” wrote Michael D. Julianelle, acting commissioner of the IRS’s Tax Exempt and Government Entities unit. “We agree that documenting how we applied the criteria to amended returns should be improved and we have already initiated corrective action as noted in the attached response. Had the documentation occurred as stated in your recommendation, the five amended returns selected as samples which you identified as a potentially improper claim for the credit, would have indicated these were reviewed, considered for examination, and would not have been selected based on the results of the review.”

However, Julianelle added that the IRS did not agree with TIGTA’s outcome measure related to amended returns. “Your methodology implies that if the five identified returns had been systemically reviewed using the same process as original returns, the five returns would have been selected for examination,” he wrote. “However there is no certainty that any of the five would have been selected. In addition, the outcome measure appears to be based on an assumption that if the five returns had been selected for examination, the result would be a one hundred percent denial of the credit amount claimed. However to date, approximately thirty percent of the credit amounts claimed on examined returns are disallowed. Finally, your extrapolation of savings over five years does not take into account future changes to the statutory requirements to claim the Credit, notably the limitation that allows eligible small employers to claim the Credit for only two consecutive tax years beginning in TY14.”

IRS to Begin Accepting Business Tax Returns on Jan. 13

Thursday, December 26th, 2013

orignially posted to www.accountingtoday.com on December 24, 2013

The Internal Revenue Service plans to begin accepting business tax returns on January 13, more than two weeks ahead of the start date for accepting individual tax returns.

The IRS announced last Wednesday that it would begin accepting individual 1040 tax returns on January 31, blaming the 16-day federal government shutdown in October for delaying its annual programming, updating and testing its tax-processing systems (see IRS Sets the Date: Tax Season Starts Jan. 31). However, the IRS posted on its Web site last Thursday that it will also begin accepting 2013 business tax returns on Monday, Jan. 13, 2014. This start date applies to both electronically filed and paper-filed returns.

The business tax returns include any return that posts on the IRS’s Business Master File system. BMF tax returns include a variety of income tax and information returns such as Form 1120 filed by corporations, Form 1120S filed by S corporations, Form 1065 filed by partnerships and Form 1041, the return filed by estates and trusts. It also includes various excise and payroll tax returns, such as Form 720, Form 940, Form 941 and Form 2290. The IRS expects to be able to begin processing any of these business returns on January 13.

The IRS noted that the January 13 start date does not apply to unincorporated small businesses that report their income on Form 1040. The start date for all 1040 filers is Jan. 31, 2014. While the IRS is encouraging these small businesses to begin preparing their returns now, it will not be able to accept these or any other individual returns or begin processing them until January 31. This includes sole proprietors who file a Schedule C, landlords who file a Schedule E and farmers who file a Schedule F.

Further details are available on IRS.gov.

IRS Misinterpreted Law Penalizing Erroneous Tax Claims

Monday, November 18th, 2013

From AccountingToday.com

By misinterpreting federal law, the Internal Revenue Service has sharply limited the number of erroneous tax refunds and improper tax credit claims on which it can assess penalties, according to a new study.

The report, released publicly Tuesday by the Treasury Inspector General for Tax Administration, focused on the IRS’s incorrect interpretation of provisions in the Small Business and Work Opportunity Tax Act of 2007, which amended the Tax Code to enhance the IRS’s ability to seek monetary penalties for the growing number of erroneous tax credit and refund claims. Under the law, taxpayers who claim excessive tax credits or refunds can be penalized up to 20 percent of the erroneous tax credit or refund claim. TIGTA conducted its audit to determine whether the IRS is properly assessing the erroneous claim for refund or credit penalty on individual tax accounts.

TIGTA found that the IRS incorrectly interpreted the law, significantly restricting the types of erroneous tax refund or credit claims to which the penalty would apply. The IRS assessed only 84 erroneous refund penalties totaling $1.9 million between May 2007 and May 2012.
In response to concerns raised from various IRS functions, the IRS Office of Chief Counsel subsequently revised its interpretation of the law as to when the erroneous refund penalty could be assessed and issued an updated memorandum in May 2012.

But although the IRS has revised its interpretation of the law, it has not developed processes and procedures to enable its Campus Operations unit to disallow the majority of individual tax credits to assess the penalty. For example, in the year after the IRS revised its interpretation of the law (June 3, 2012, through May 25, 2013), there were 709,123 individual tax credits disallowed by Campus Operations for which the IRS could have potentially assessed erroneous refund penalties totaling more than $1.5 billion.

“I am troubled that even though the IRS has revised its interpretation of this law, it has still failed to establish processes to assess penalties on the majority of disallowed tax credit claims,” said TIGTA Inspector General J. Russell George in a statement. “Taxpayers who seek refunds or credit claims that have no reasonable basis in law must be penalized, for they create unnecessary burden on both the IRS and the American people by straining resources and impeding tax administration.”

IRS management raised concerns about the costs and benefits of establishing processes and procedures for the Campus Operations to assess erroneous refund penalties, but has not provided any documentation and/or analysis to support the validity of these concerns. In view of the significant problem of erroneous claims for credits and refunds and the related costs to the Government, TIGTA said it believes that the IRS should put appropriate procedures and processes in place to comply with this section of law.

TIGTA recommended that the IRS develop processes and procedures to enable Campus Operations to assess the erroneous refund penalty for disallowed credit claims that are excessive and do not have a reasonable basis.

The IRS agreed with the recommendation and stated that a cross-functional team of affected stakeholders will determine the operational and procedural changes needed to integrate assessment of the erroneous refund penalty into the Campus Operations.

The IRS pointed out that its field audit operations have already begun enforcing the law, but added that there are costs associated with expanding enforcement to Campus Operation that could prove less than cost-effective given the budget constraints faced by the agency.

“While the IRS has implemented enforcement of the provisions of Internal Revenue Code section 6676, Erroneous claims for refund or credit, in our field audit operations, we recognize that additional actions can be taken to identify appropriate campus operations where the penalty should be considered,” wrote Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division, in response to the report. “However, as noted in the report, there are significant concerns regarding the costs associated with implementing enforcement of the penalty provisions within the campus environment. The section 6676 penalty may be appealed administratively, but unlike income tax and certain other penalties cannot be considered by the Tax Court in a normal deficiency context. This nuance renders the penalty assessment incompatible with existing automated campus-based compliance processes. The corrective action, whether accomplished manually or through automation, will have associated costs (both direct and opportunity) substantially higher than the estimated direct annual labor costs of $3.4 million cited in the report.”

Bogadi also pointed out that taxpayers can avoid the penalty for any denied claim in which they have a reasonable basis. “The determination of reasonable basis is a judgmental decision based on a review of the position taken on the return and all applicable supporting authorities for the position,” she added. “In a declining budget environment, this will require the reassignment of examiners from other critical compliance work, such as identity theft and refund fraud.”