12/31/14 IRS ISSUES. IRS Scam Alert p. 45. Circular 230 Update p. 45. Chapter 04 Pages Section 10.35: 1. Call IRS at

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1 IRS ISSUES Chapter 04 Pages IRS Scam Alert p Call IRS at Complain to FTC at 3. Forward scam s to: Circular 230 Update p. 45 Section 10.35: 1. Practioner practicing before IRS must be competent. 2. Competence requires having the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter at hand. No need to add a footnote to an warning about reliance and imposition of penalties. OPR Chief Hawkins: stop using those disclaimers effective June 2014! 1

2 Top Areas of Malpractice Claims AT November Failure to include all forms when filing a tax return (omitting a schedule, forgetting a special return required by one or more states, etc.) 2. Technical misapplication of the rules (mileage logs, appropriate business expenses, employee misclassification, other documentation, etc.) 3. Violation of Ethical Codes of Conduct (acceptance of commissions or referral fees, representing both sides in a transaction, such as a return for the Trust and then a tax return for the Trust s beneficiaries.) Circular 230, Part B, Section 10.34(d) Relying on Information Furnished by Clients A practioner advising a client to take a position on a tax return generally may rely in good faith without verification upon information furnished by the client. The practioner may not, however, ignore the implications of information furnished to, or actually known by, the practioner. Circular 230, Part B, Section 10.34(d) Relying on Information Furnished by Clients [The practioner] must make reasonable inquiries if the information furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete. 2

3 Revenue Procedure The penalty under section 6694(a) of the Code will generally not apply when a preparer in good faith relies without verification upon information furnished by the taxpayer. Thus, the preparer is not required to audit, examine, or review books and records, business operations, or documents or other evidence in order to verify independently the information furnished to the preparer or which was actually known by the preparer. Revenue Procedure Additionally, some sections of the Code require the existence of certain facts and circumstances, such as the maintenance of specific documents, before a deduction may properly be claimed. The preparer shall make appropriate inquiries to determine the existence of facts and circumstances required by a Code section or regulations as a condition to claiming a deduction. Revenue Procedure However, the preparer: 1. May not ignore the implications of the information 2. Shall make reasonable inquiries if the information as furnished appears to be incorrect or incomplete 3

4 Karen Hawkins, OPR, 2010 You may reasonably rely on information provided by your client but there is a second piece to [10.34(d)] that everybody doesn t seem to read that essentially says if you ve got information that you know is incorrect or that you think is inconsistent then you don t get to just rely on your client. You have to ask some questions. IRS Stricter on Preparer Penalties AT Nov TIGTA report: a. IRS is weak enforcing IRC 6694 tax preparer penalties. b. Enforcement penalties have been a priority as intended. c. Per IRS October 2014, 47% of complaints logged against preparers 10/01/2012 and 9/13/2013 not started. 2. TIGTA recommends and IRS agrees that: a. Evaluating tax preparer performance is a priority. b. IRS manual should be updated to require that IRS managers and field agents pay more attention to tax preparer performance. Return Preparer Visitation 1. IRS sends 10,000 letters annually to preparers to insure adherence to professional standards. 2. Publication 1345 for Electronic Return Originators. 3. Improper Earned Income Tax Credit: $ 500 penalty. 4. Office Visitations: a. Approximately 2,500 visits; mostly unannounced. b. Review of operating procedures. c. Review of EITC diligence. [25% claims fraud; $ 13 Bill] d. Requests for specific Forms [Electronic file] e. Copy of fee schedule/engagement letter. 4

5 False Credit Returns TGTA Report for 2012 Year Additional Child Tax Credit: -- Estimated 25% to 31% of claims -- Estimated $ 5.9 billion to $ 7.1 billion in dollars Earned Income Tax Credit: -- Estimated 24% of claims -- Estimated $ 14.5 billion in dollars Return Preparer Visitation 5. Data Driven Visitations to firms with: a. Large percentage of EITC returns. b. Greater than average ERO error rate. c. Consumer complaints. d. Statistically larger IRS adjustments. e. Association with problem tax return preparers. 15 Special Topics IRS Guidance on Marijuana Retailers 1. Colorado and Washington have legalized recreational marijuana use. 2. California, Washington D.C., and others have decriminalized or decided medical use allowed. 3. But: marijuana sales are illegal under federal law. 4. OPR Director Karen Hawkins on 11/19/2014 promised to give practioners Circular 230 guidance by 04/01/15. 5

6 Itemized Deductions As Percent of AGI AGI Medical Taxes Interest Charitable $ 15,000 $ 30,000 $ 30,000 $ 50,000 $ 50,000 $ 100,000 $ 100,000 $ 200,000 $ 200,000 $ 250, % 10.5% 30.8% 6.8% 12.3% 7.7% 18.1% 4.4% 7.1% 6.1% 10.7% 2.7% 4.6% 5.4% 6.9% 1.9% 8.6% 7.3% 7.4% 2.4% Over $ 250,000 Incomplete Incomplete Incomplete Incomplete Circular 230 Update p. 46 Section 10.31: Practioner cannot deposit IRS check issued to a taxpayer. Section 10.37: No practioner advice without: 1. Knowing facts. 2. Identifying issue. 3. Applying Rule of Law 4. Analysis. 5. Drawing a reasonable conclusion. Delinquent Return Refund Hold Program p IRS can delay a refund for up to six months if it determines there are issues with prior year tax returns. 2. Processing refunds too quickly allowed too many taxpayers to escape detection of unfiled returns. 3. A taxpayer denied a refund is more likely to work with IRS to resolve prior year problems. 4. This form of catch before release has generated more than $ 1.1 billion in delinquent taxes since

7 Identity Theft p If you suspect theft, file Form 14039, Identity Theft Affidavit. 2. If IRS suspects theft, it will send Letters 5071-C or 4883-C to taxpayer. Identity Theft Cost FNC 11/11/2013 To date the IRS has issued more than $ 4,000,000,000 in tax refunds to identity thieves. Identity Protection IPINs p IRS may issue IP PINs issued: a ,200,000 b ,000 c ,000 d , Per TIGTA 10/29/2014 IRS failed to issue IPINS: a. Those with an identity theft indicator 532,637 b. Those with personal information lost or stolen or breached by IRS itself 24, PIN is unique and issued separately for each of four years. 7

8 IRS Identity Verification Service If taxpayer receives Letter 4883C/5071C, the practioner should: 1. Complete Form 2848, Power of Attorney. 2. Assemble copies of tax returns, current and prior. 3. Then: a. Complete IRS questionnaire at idverify.irs.gov. Or, b. Call TPL at IRS Steps to Control Fraud p No more than three tax refund deposits to a single account. a. The purpose is to catch bad tax return preparers. b. More than 4,400 Practioners have been found to have directed multiple refunds to a single account. 2. Check compliance with Form 8867: $ 500 per failure. 3. IRS to Initiate a pilot program to provide e-file PINS in Florida, Georgia, and the District of Columbia. 4. Slow down refunds in general. IRS Advisory Council Recommendation: Identity Theft 11/15/12 p To better control identity theft in tax filings delay refunds until verification of taxpayer identity. 2. Consider: a. Requiring fingerprints or other unique identifiers associated with Social Security numbers. b. Delay issuing early refunds to January filers: (1) Refund 25% of refund in January; (2) Refund remaining 75% upon identity verification. IRS Acting Commissioner Steven Miller responded positively. 8

9 Bar Coding SSN s p IRS is changing the notice format of its letters to refer to taxpayers as XXX-XX Practioners should respond similarly: XXX-XX Victims of Preparer Fraud p Tax return preparers have been stealing their clients identities in order to file fraudulent tax returns. 2. Office of Chief Counsel has complained that IRS is too slow to return refund money to rightful taxpayer. Some have been waiting more than five years. 3. IRS Commissioner John Koskinen: refunds will be issued to those who provide: a. Evidence of the filing of a police report. b. Certain substantiation requirements [undefined]. Electronic Signatures p Modified rules have expanded the current two-pin process to one that uses an electronic signature. 2. Rules apply to Forms 4868, 2350, 8878, and Rules located at: irs.gov/uac/electronic-signature-guidance-for-forms and

10 New Form 2848 p New language at Item 3 as of July 2014: I authorize my representative to receive and inspect my confidential tax information and to perform acts that I can perform with respect to tax matters described below. For example, my representative shall have the authority to sign any agreements, consents, or similar documents. 2. Best way to get Form 2848 to IRS is by FAX. Power of Attorney Update p. 52/53 IRS has promised to update its system to allow for: 1. Revocations and withdrawals. 2. Accommodate business entities. 3. Practioners to manage the CAF by accessing listings of active authorizations. ITIN Issues p. 53 Former ITIN Rules ITINS for aliens are supposed to be valid for five years; alien was supposed to reapply. New ITIN Rules 1. ITIN expires if not used in five consecutive years. 2. If ITIN is used, it remains active. 3. Unused ITINS to be deactivated in

11 IRS Correspondence Process p An IRS correspondence request is difficult to resolve since it is often hard to locate the assigned examiner. 2. The correspondence exam group struggles when it receives more than pages of documentation. 3. IRS admits that it has no methods in place to insure a timely response. Guidance to Practioner: 1. Document and carefully index your response. 2. Follow-up. Follow-up. Follow up. New Audit Guideline: Jan 2014 p For certain taxpayers, IRS document requests must be satisfied within 49 days. 2. Applicable to: a. Entities with assets of $ 10,000,000 or more; or, b. Individuals with assets of $ 10,000,000 or more. 3. Procedure: a. Initial IRS requests under flexible deadlines. b. If deadline not met, 49-day clock begins. c. Taxpayer to receive 2 warnings during 49 day period. d. Absent compliance, IRS can seek court summons and divulge its audit request to general public. First Time Penalty Abatement Abatement for failure to: 1. File 2. Pay 3. Deposit Available for a single time period if: 1. First time problem; recent three years of clean history. 2. No significant prior penalty. 3. Reasonable cause. Request Abatement By: 1. Letter to the IRS. 2. Telephone call to Practioner Priority Service

12 12 Audit Red Flags 1. Earning more than $ 200,000: Audit rate 3.7% 2. Mismatch of Forms 1099 and W-2 income. 3. Large charitable contributions over norm. [2%-7% of AGI] 4. Improper home office deductions. 5. Improper rental real estate losses. [passive versus active] 6. Improper meals and entertainment deductions. [ S Corp.] 7. Claiming 100% business use of vehicles. 8. Filing Schedule C with large losses. [more than $ 25 k for 3 years] 9. Businesses using the cash method of accounting. 10. Foreign Bank Accounts 11. Improper reporting of cash deposits above $ 10, Itemized deductions beyond parabolic curve. Fresh Start Initiative 1. Make it easier to settle tax debt. 2. Offer-in-Compromise periods: a. Lump Sum settlement within 6 months: RCP: reasonable monthly collection times 36. b. Short Term payments from 5 months to 24 months. c. Discontinued 10 year deferred payment option. Note: effective 1/1/2014 application fee is $ Fresh Start Initiative 1. Installment Agreements (Fee is $ 120 at 1/1/2014): a. Statutory: under $ 10,000. b. Streamlined: from $ 10,000 to $ 50, For obligations of $ 25,000 or less: a. Term up to 72 months. b. No: managerial approval/form 433/Tax Lien. 3. For obligations greater than $ 25,000 up to $ 50,000: a. Term up to 72 months. b. Direct deposit required. c. File Form

13 Comfort Letters Avoid them. But, if a letter is issued, provide historical, factual statements not theoretical, prospective information. Do not confirm self-employed status; rather, say client represents Schedule C is the appropriate form to file. Proprietorship Problem TIGTA STUDY: Sept 7, 2007 Schedule C filers/hobby Loss under IRC 183: 1. Those with income above $ 100K, who also: 2. Filed a Schedule C for the years , who also: 3. Claimed Schedule C losses in all four years --- Avoided $ 2.8 Billion in taxes in 2005 Proprietorship Problem IRS estimates inappropriate Schedule C filings result $ 30 Billion in unpaid taxes annually. in These businesses are really hobbies. 13

14 IRC 183 IRC and Treasury Regulations do not require that the taxpayer have a reasonable expectation of a profit; rather, There need only be the objective of making a profit. No bright line definition of a business: but, there are nine guideline factors 1. Manner the taxpayer carries on the activity. 2. Expertise of taxpayer/his advisors. 3. Taxpayer time and effort. 4. Expectation of asset appreciation. 5. Prior taxpayer success. 6. Profit/loss history of the activity. 7. Amount of occasional profit, if any. 8. Taxpayer s financial status. 9. Elements of personal pleasure in the activity. General guidelines: Was the non-farm business profitable in 3 of last five consecutive years? Was the farm/breeding business profitable in 2 of the last 7 years? Note: in 1969 House Ways & Means Committee felt that a Schedule C reporting losses of more than $ 25K in 3 or more years was a hobby. 14

15 History of IRC 183 Created in 1943 because Marshall Field, owner of the Chicago Sun, used his publications to promote a liberal agenda. Federal Govt. believed that the Schedule C losses were used to offset Field s personal income, thereby enabling him to finance his liberal agenda with lost tax revenues. IRC 183 Continuing Problems In 2003 an IRS correspondence examination [no books/ records] of 148 Schedule C s with continuing losses determined: a. 139 were hobbies.[94%] b. those taxpayers owed $ 372,000. A follow-up study found that 51% of those same tax payers continued to file Schedule C losses in later years. TIGTA Recommendations Establish a bright line definition of a business. Coordinate with tax preparer organizations to encourage compliance with existing provisions under IRC 162 and