IRS Hacked.

Of all the targets available, it really isn’t surprising that hackers would try to gain access to the substantial database of financial information at the IRS.  Unfortunately, a successful breach of the security protocols was accomplished by such hackers beginning in February and into mid-May through the “get transcript” function of the IRS website. 

Ordinarily, for someone to get a transcript through the IRS website, they must enter such personal information to authenticate their identity.  It appears the hackers already had the information needed to satisfy the existing authentication protocols and simply used the system that existed to access the transcripts.  The IRS believes that the needed personal information for the compromised tax accounts was already in the hands of the hackers through the hacking of other databases or identity theft efforts.  As a result, the hackers were able to gain access to social security numbers, dates of birth and home addresses on the IRS system.  Income information would also have been vulnerable. 

Hackers attempted access to approximately 200,000 accounts but only gained access on about half of those attempts. In the next several days, the IRS will be notifying taxpayers that were the subject of the hack attacks by letter and offering one year of free credit monitoring to the 100,000 who had their information compromised.  These letters will not request personal information.  If you receive a letter that does request additional personal information, it may be a further effort at fraud by unscrupulous scam artists. 

Unfortunately, the authentication process in the IRS system is similar to (or even more complex than) that used by various other financial databases with online access.  If the hackers had the information needed to access the IRS system, they can likely get into other systems as well.  If you receive a letter from the IRS that your information was compromised, you should monitor any other online financial accounts and consider changing your login credentials.    

The IRS announcement about the hack can be found here:  IRS statement on data breach.  

Planning ahead - 2015 Forms 1040 will be due on April 18,2016 (for most)

You get an extra weekend to file your tax returns in 2016 thanks to an uncommon mix of holidays and weekends.  Ordinarily an unextended Form 1040 Individual Income Tax Return is due on April 15th of any given year.  However, when the 15th falls on a weekend or legal holiday, the due date of the tax return is the day after the weekend or legal holiday.

April 15, 2016 is a Friday.  Without more, your income tax return would be due that day.  Yet, the District of Columbia observes Emancipation Day on April 16.  Where Emancipation Day falls on a Saturday, it is observed the day before.  Where Emancipation Day falls on a Sunday, it is observed on the day after.   Because Emancipation Day 2016 falls on Saturday, April 16, it will be observed in Washington D.C. of Friday, April 15.  This makes the 15th a legal holiday.  Altogether, this pushes the Form 1040 due date to Monday April 18th.

If, however, you live in Massachusetts or Maine, you will have until April 19th due to the statewide observance of Patriot's Day on Monday April 18, 2016.

For greater detail see IRS Revenue Ruling 2015-13.

“The IRS is calling…and threatening to arrest me!”

A few days ago, I received a call from a panicked former client.  Two years back we had gone through an IRS tax audit and worked out a reasonable payment plan to resolve the remaining tax debt.  The client had been honoring all obligations of that payment plan: paying on time, filing on time and not incurring any new debts.

 

The client’s immediate fear, however, was triggered by a call from a “US Treasury agent.”  That “agent” was instructing my client to pay a fictional the balance due by cashier’s check before the end of the day. A failure to do so would mean that local law enforcement would come to his home to arrest him. 

My client is sophisticated.  In the past, we had spoken about what the IRS can do and what it cannot.  He suspected it may be a scam, but was still worried that the “agent’s” threat to arrest him might be true.  It wasn't.  The IRS does not act this way.

The IRS will NEVER call and threaten you with arrest for the non-payment of taxes. 

The IRS doesn't have the power or authority to arrest someone for being unable to pay.  Sure, if you commit tax fraud you can go to jail after a thorough investigation.  But, being unable to pay is not fraud.

  

What my client was dealing with was a pervasive telephone scam that remains on the IRS “Dirty Dozen” list of tax scams.  Someone pretending to be from the IRS calls to demand payment of taxes.  The caller may even have certain personal information that appears to lend credibility to any threats they make.  On occasion the victim follows the instruction and sends money.  

A big part of the problem is the mystery surrounding the power of the IRS and the procedures that must be followed before the IRS can do something.  It’s true that the IRS can file liens, garnish wages, levy bank accounts and even seize property when trying to collect a tax debt.  However, there are a number of notices that have to be issued and appeal opportunities that exist before they are able to do so.  You will receive letters (some by certified mail) before they can take anything from you. They must follow these notification procedures.  Putting you in jail for non-payment is not one of those procedures.

If you receive a call from someone claiming to be from the IRS, know that the IRS will never:

·         Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.

·         Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.

·         Require you to use a specific payment method for your taxes, such as a prepaid debit card.

·         Ask for credit or debit card numbers over the phone.

·         Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

If you do receive a call, you can file a complaint with the FTC through the FTC Complaint Assistant. You can also contact the IRS or a tax professional to discuss whether you do owe an unpaid tax debt.

The IRS is working to get out information on this scam and have posted the following on their website:

Phone Scams continue to be Serious Threat.  

IRS Warns of Pervasive Telephone Scam   

The IRS is also on YouTube  and addresses the scam here: Tax Scams.  

Go Team USA!

Private Debt Collectors to Chase Delinquent Taxes?

As Washington DC legislators in the U.S. Congress consider the provisions of what would become part of the EXPIRE Act of 2014, they are mulling over the institution of a twice failed program to collect past due tax debts – the use of private debt collection agencies.  In each of the last two decades the attempts to use private debt collectors to chase tax liabilities have defied projections and lost more money than was collected.  Recently, the National Taxpayer Advocate has written a letter to the senate (found here) to reiterate that problem and to outline the numerous other concerns with any such program.  These are:

1.  The private debt collection initiative is premised on the mistaken belief that the IRS does not collect taxes on cases that are inactive or awaiting assignment.
2. The private debt collection program will require the IRS to incur significant start-up costs, jeopardizing taxpayer service and other IRS operations that are already suffering from budget cuts. 
3. The government’s objective of maximizing long-term compliance without causing financial hardship for taxpayers is fundamentally different from the profit-maximizing objective of a private collection agency.
4. The provision appears to target low income taxpayers.
5. Providing taxpayer identifying information to private companies creates risks that taxpayer data will be misused.
6. Strict penalties on IRS collection employees who are abusive to taxpayers do not apply to private collection agency employees who are abusive to taxpayers.
7. IRS employees are openly instructed to be straightforward in dealing with taxpayers, while employees of private collection agencies confidentially instruct their employees to use “psychological” techniques to pressure taxpayers to agree to payments.
8. Use of “psychological” tactics often results in financially struggling taxpayers feeling pressured into making commitments they ultimately cannot keep.
9. The proposal would require IRS to send taxpayer cases to private collection agencies where the sole or primary reason for the liability is the Patient Protection and Affordable Care Act (ACA) (either the penalty for not getting coverage or owning back an advance premium credit), which, in turn, could make it more difficult for the IRS to administer the ACA.
10. The private debt collection program will raise little revenue and is more likely to be another revenue loser.
11. The proposal would require the IRS to continue the program even if it loses money and does not give the IRS sufficient discretion to make modifications.
12. The National Taxpayer Advocate is uncertain about what the proposal is intended to accomplish.

It is my hope that this potential program does not make its way into any form of final legislation.  A program that has previously proven to cost more than it makes is simply a bad idea.  Moreover, the Taxpayer Advocate outlines the clear problems that are likely to arise.  The targeted low income taxpayers are less likely to know what their legal options are in contesting asserted liabilities.  Those that do may not be able to afford to hire adequate representation to assist them.  Given the significant budget cuts faced by the IRS, agents are already unable to spend enough time on a file to make sure all rights are protected.  An unrepresented low income taxpayer will be at a greater disadvantage because they may not even know that these rights exist. 

To read the full text of the Taxpayer Advocate’s letter objecting to the use of Private Debt Collectors, click here.  

Did you expense the lap dances?

Not long ago, I came across this online gem that has been floating around for while.  The spoof of the most well known scene of the movie "A Few Good Men" questions the whether lap dances at a strip club can be reimbursed as a business expense.  

The video is entertaining, but a more substantive discussion on the issue can be found at Bloomberg.com. The article correctly identifies the questions as whether a lap dance is an ordinary and necessary business expense under Internal Revenue Code section 162 and whether the expenses can be adequately substantiated.  The article generally concludes that a claimed lap dance deduction will not likely hold up on audit.  However, it is a fact based inquiry that will depend on the circumstances.    

 Link to the video: http://youtu.be/xJ_roB9j_B4 

Can the IRS do more with less?

President Obama has signed the Omnibus Spending Bill which will fund the U.S. Government through fiscal year 2014.  This bill gives the IRS $11.3 billion to fund its operations.  This is a reduction in IRS funding levels by $526 million compared to the previous year.  While the reduction is small in comparison to the total funds allocated to the IRS (only 4.4 percent decrease), it is still a substantial decrease in the funding levels.  

What does this mean?  The IRS will be forced to do more with less.  In addition to undertaking additional responsibilities under the Affordable Care Act, the IRS has been committing substantial resources to combating identity theft.  Of course, they will still be involved in tax audits, collections and enforcement of the tax laws.  

Responsibilities are growing, but the budget has been cut, so where will the sacrifices be made?  

Hiring will likely be at a minimum and some employees may be reassigned to cover the growing responsibilities of the agency.  As a result, the problem will likely be seen heavily in IRS "customer service." If the IRS cannot absorb the reduced funding through increased efficiency, it will mean that IRS auditors, collection agents and other representatives will not be able spend enough time to adequately work a case. Trying to do so would result in an increasing backlog such that tax cases could draw to a virtual standstill. Therefore, IRS employees will be forced to spend less time on cases than before. Don't misunderstand however, this is not a good thing.  It may become more difficult to thoroughly get to the bottom of complicated legal or factual issues.   

Someone dealing with an IRS problem will have to watch their case to make sure that it is getting the attention it requires.  In doing so, make sure to comply with deadlines set by the IRS agents and follow up regularly to ensure that your case is not being sidelined in favor of a squeakier wheel.  You won't be able to overcome all delays, but letting the IRS know that you are paying attention to your case will help ensure that they pay attention to it as well.  If you run into obstacles, the Taxpayer Advocate Service may be helpful as well.  Of course, they are also facing the budget cuts and will have delays of their own. 

Waking the Government

Restarting the government after a two and one half week shutdown is like waking up on a weekend after you found the time to sleep in.  It doesn't happen quickly.  The websites of each the IRS and Tax Court have each posted notices about what to expect from them as they wake up and the wheels start turning again. 

The IRS has issued news releases concerning the resumption of operations following the shutdown.  They can be found here and here. The IRS is substantially backlogged.  They continued to receive returns, correspondence and information from people during the shutdown, but there was nobody to look at any of it.  As a result, they are telling taxpayers to expect substantial delays and to wait to call the IRS “if their issue is not urgent.”

The tricky part is that there is no clear explanation of what is urgent.  The IRS likely takes the position that questions concerning your refund are not urgent, but, those concerning liabilities… probably should be treated as urgent.  As the IRS resumes operations, they will resume issuing liens and levies.  Those that owe tax and wish to avoid liens or levies, should get in touch with the IRS regardless of how long they might have to wait to get through to someone.  It may take a while to get a response, but being proactive is better than having to deal with an empty bank account because you and the IRS disagreed about whether the case was urgent.

Those individuals and businesses dealing with a specific IRS agent might expect to receive a phone call to discuss the timing of any future action.  In the meantime, any previous deadlines set by the IRS should be respected unless otherwise discussed with the agent.

The United States Tax Court has posted detailed guidance on its website.  Those with trials that were scheduled during the shutdown will hear from the Court about rescheduling.  Those trials that were to start this week and later will begin as scheduled unless there was an inability to discuss the cases with the IRS.  In such cases, the Court should be advised and it will consider how best to proceed.  The notice also identifies the deadlines for taking certain actions that were/are impacted by the shutdown. 

The Tax Court notice advises, however, that any statutory filing deadlines provided in the Internal Revenue Code are not impacted by the shutdown.  That is, if you have a fixed 90 day deadline in which to file a case with the Tax Court, the 90 days still stands.  If that 90 days would have expired during the shutdown, the postmark date of any filed Petitions will govern whether the time period was satisfied.  If a Petition to the Tax Court is outside of the 90 days, it will likely mean that the case will be dismissed as filed late.

Wisconsin's Solo and Small Firm Practitioner Conference

On October 24^th, I will be speaking at the State Bar of Wisconsin’s 8^th Annual Solo and Small Firm Conference: http://www.wssfc.org/  

My talk, entitled: "The Tax Man Cometh: What are the IRS, Wisconsin Department of Revenue and Local Authorities Up to in Audits, Appeals and Collections" will provide information on current developments in tax controversies at each level of government.  

The conference aims to help solo and small firm practicing attorneys build their business while improving their life.  There is still time to sign up!

Start Your Engines…the Internal Revenue Service is Back to Work.

October 17^th marks the end of the lapse in appropriations that caused the Federal Government Shutdown.  The Shutdown kept IRS employees home from work for the past 16 workdays.  Because the IRS has now returned to work, it is time to put the taxlawforum.com back to work as well. 

With approximately 91 percent of IRS employees returning to work, we should expect that operations will be back to full swing in the next few days.   During the shutdown, individuals and business owners were unable to move forward with the resolution of any tax matters (audits, collections, appeals, etc.)  Those with outstanding tax liabilities were able to breathe a sigh of relief as the shutdown meant no new liens or levies. 

Now that the IRS is returning to work, audits will be resumed and collection activity will start again.  Of course there will be a 16 day backlog that has to be dealt with.  Unfortunately, however, this likely means that less time will be spent on each account.  While at first blush this may sound as though it will increase the number of favorable results, it may well mean the opposite.  Taxpayers should be prepared to make sure that their rights are safeguarded and that proper procedures are followed.  Overwhelming workloads may mean that corners are cut and that matters may not receive the attention that they require.  It is simply a question of workload vs. time available.  Therefore, whether working with a professional, or dealing with a tax matter alone, individuals and business owners should make sure that their matter is dealt with thoroughly and that the proper outcome of any case is achieved.  

The Rules Still Matter

There has been a rash of scandals plaguing the Internal Revenue Service over the past many weeks. These scandals include the targeting of conservative groups seeking tax exemption, the disclosure of confidential information to opposition groups, the appearance of a cover up and even allegations of targeted federal tax audits. Regardless of how these issues play out, who was involved and what consequences befall those responsible, the fact is that the tax laws, rules and regulations will still apply to the taxpaying public.

The credibility that the IRS may have had concerning its even-handedness has been significantly damaged by these scandals. Collectively, these actions are as bad as those which caused a complete reorganization of the IRS with the 1998 Restructuring and Reform Act. That act still has ripple effects through the agency today. It will take years before the IRS is able to overcome the shadow of these scandals and it will have to work hard to counteract the likely effect on the voluntary compliance of our tax system.

The taxpaying public should be offended by the IRS’ failure to follow the rules and apply the law equally to all who come before it. The unfortunate, but understandable, question that will pervade the minds of many taxpayers at tax time is whether they need to follow the rules if the IRS has failed to do so itself. The answer is yes. The rules still matter and the tax laws still apply.

The IRS will still apply the federal tax law and administrative procedures concerning compliance with those laws in the same way. From the perspective of any one individual or business reporting their tax liability, these issues that systemically affect the IRS will not matter.

No taxpayer should take the perspective that just because the IRS didn't follow the rules that they should somehow be excused from doing so. Rather, the failure to obey the tax laws, properly report income and deductions or file appropriate returns will not be forgiven. Tax returns should be accurate and any taxpayer receiving correspondence from the IRS (be it an audit or a matter of tax collection) should address the issues with the IRS as they arise. If documents and information are requested to support certain transactions, those transactions should be supported. Threatened collection action should be addressed. Failing to do so may result in unnecessary tax, penalty and interest being assessed or paid. Those are the rules and the rules still matter.

It is essential, however, that the taxpayers also hold the IRS to following the rules themselves. This is particularly true in light of recent events. That is, where the IRS, under the apparent authority of the federal government, takes action or makes certain requests, those actions should be scrutinized and the requests should only be complied with if they comport with applicable federal laws and regulations. The rules still matter, even for the IRS.

Friday's Tax Quote - August 31, 2012

“By this time fashion had condemned the beard in every other country in Europe, and with a voice more potent than popes or emperors, had banished it from civilized society.  But this only made the Russians cling more fondly to their ancient ornament, as a mark to distinguish them from foreigners, whom they hated.  Peter [the Great], however, resolved that they should be shaven…Wiser, too, than the popes and bishops of a former age, he did not threaten them with eternal damnation, but made them pay in hard cash the penalty of their disobedience.  For many years, a very considerable revenue was collected from this source….Those who were refractory, and refused to pay the tax, were thrown into prison.”

- Charles Mackay

Friday's Tax Quote - August 24, 2012

“The principle is this – that you ought not in a free country to lay a tax on the expression of political opinion – a tax on the diffusion of that information on public affairs which the spirit of our constitution makes the interest and concern of every subject in the State.  Still more, you should not, by means of that tax, create such an artificial necessity for capital that you secure the monopoly of thought upon the subjects that most interest the public at large to a handful of wealthy and irresponsible oligarchs.”

- Edward George Bulwer-Lytton

Friday's Tax Quote - August 17, 2012

“Taxation under every form presents but a choice of evils.”

- David Richardo

Friday's Tax Quote - August 10, 2012

“Was it Bonaparte who said that he found vices very good patriots? –‘he got five millions from the love of brandy, and he should be glad to know which of the virtues would pay him as much.’ Tobacco and opium have broad backs, and will cheerfully carry the load of armies.”

- Ralph Waldo Emerson

Friday's Tax Quote - August 3, 2012

“A use tax is a tax on the enjoyment of that which was purchased.”

- Felix Frankfurter

Friday's Tax Quote - July 27, 2012

“A old tax is a good tax.”

- Old Folk Saying

Friday's Tax Quote - July 20, 2012

“Virtually all persons or objects in this country…may have tax problems.  Every day the economy generates thousands of sales, loans, gifts purchase, leases, wills and the like, which suggests the possibility of tax problems for somebody.  Our economy is tax relevant in almost every detail.”

- Potter Stewart

Friday's Tax Quote - July 13, 2012

“And Samuel told all the words of the Lord unto the people that asked of him a king.  And he said, this will be the manner of the king that shall reign over you…he will take the tenth of your seed, and of your vineyards, and give to his officers, and to his servants.  And he will take your menservants, and your maidservants, and your goodliest young men, and your asses, and put them to his work.  He will take the tenth of you sheep; and ye shall be his servants.  And ye shall cry out in that day because your king, which ye shall have chosen you; and the Lord will not hear you in that day.”

- Old Testament

Friday's Tax Quote - July 6, 2012

“The payment of taxes gives a right to protection.”

- James M. Wayne