When Two Intelligent Individuals Reach the Opposite Conclusion…

Posted on May 11, 2014 by Russ

…You know there’s a problem. Welcome to the brave new world of signature documents.

Jason Dinesen has a post where he believes that I am wrong about the conclusions I’ve drawn on signature documents. Jason might be right or I may be correct.

What’s a fax? Is it a handwritten signature document or an electronic signature document? What’s a scan of a handwritten signature document? Consider that many tax professionals now scan every document they receive; we don’t keep paper. IRS policies allow for the keeping of scanned documents (as long as there’s a system to track them and as long as you can print them). Let’s assume that the IRS audits us and wants copies of all the “handwritten” signature documents. We print them all out. How can the IRS tell which ones were scanned and which ones were handwritten in my office? Mind you, if the IRS tells me that scanned signature documents are electronic signature documents, I’ll note that.

Jason and I reached the opposite conclusion on what this new policy means. The only way to know for sure which of is right is for the IRS to issue guidance on the questions I asked in my original post. As Jason said, “But the fact that two smart tax pros like us can have different takes on this just drives home the fact that the IRS needs to clarify this.” On that I agree completely.

Posted in Uncategorized | Tagged , | 1 Comment

A Better Idea on Identity Theft

Posted on May 5, 2014 by Russ

As I wrote yesterday, the IRS announced new rules on tax professionals regarding electronic filing. Based on my reading of these rules, the IRS should expect a significant increase in paper-filed returns. Why? Because the new rules likely violate state laws, they add costs to tax filing, and the simple (and cheapest) solution will be to just paper-file all remote returns. In my case, I may be required to do so as it appears to be illegal under Nevada law for me to run credit checks for the purpose of identifying my clients.

There is another major problem with the new rules: The scamsters will ignore them. Assume for the moment you’re an identity thief who is filing phony tax returns (or are an IRS Electronic Return Orginator who is sending phony returns to the IRS). That’s a crime, of course (probably several felonies). So if you’re such a person, are you going to make sure you follow IRS rules and check IDs of everyone who comes to your office and/or run credit checks on all clients, or are you just going to violate one more rule?

(A few years ago South Carolina passed a law that stated that any terrorist must register with the state. I am not making this up. I suspect that South Carolina has collected exactly $0 from this law. The new policy reminds me of this law. But I digress….)

The new IRS policy will have a minor impact, at best, on identity theft while increasing costs for tax professionals and their clients. It will increase the amount of returns that are paper-filed. Yet the IRS’s goal is laudable. Is there a better solution?

There is. It’s a combination of an idea I floated back in 2012 with a few minor tweaks.

Back in 2012 I wrote a post titled, “A Modest Proposal on Tax-Related Identity Theft.” It appeared to me to be a simple solution that would stop much of the problem of tax-related identity theft at a minimal cost to the IRS. That’s the first part of the plan.

(For those who have not read my initial idea, it’s fairly straightforward. The IRS should check each tax return’s address to verify it matches the address on file for the taxpayer. This should be simple to program into the IRS’s computers.)

The second part is to have a new box on Form 1040 (towards the top of the Form) titled “Change of Address.” If you changed your address from the last tax return you filed, you must check this box. (Many state returns have such a box.) There’s a catch: If you change your address, you must attach a copy of some third-party documentation noting the new address such as a utility bill, a HUD Settlement Statement, an apartment lease, etc. Since the IRS now accepts pdf’s of documents, these could be attached to efiled returns.

There’s a third part to this plan. There would be a second new box at the top of Form 1040 titled “First-Time Filer.” This box would be checked if this is the first tax return the individual has filed or the individual has not filed a tax return in (say) the last three years. The first tax return would need to be paper-filed. (This would be an additional exception to mandatory efiling and would be noted on Form 8948). With a taxpayer’s first return, the IRS computer systems would not be able to readily run identity theft checks; thus, such returns likely need to be paper-filed.

This plan, if implemented, would be a low cost method that should eliminate 90% of tax-related identity theft. It would cost taxpayers very little. Excluding the one-time programming costs for the IRS, this would not cost the IRS very much. (This really does appear to be a simple check. Does “Address” match “Address on File”?)

Let’s compare this to the costs involved with what the IRS announced in Publication 1345. This will directly cost tax professionals; we’ll have to subscribe to services to do this. This will increase the public’s cost; tax professionals will pass the additional costs on to the public. This will increase the IRS’s costs. A low-cost solution for tax professionals is to force clients to paper-file. Indeed, in some states that will be the only choice as the IRS’s new policy appears to violate state laws. Even if there’s a work-around for that, there appears to be no method for expatriates to now efile returns. They will be forced to paper-file.

The IRS’s policy is almost guaranteed to raise the ire of the tax-paying public. Under my proposal, it would be mostly seamless. More importantly, the IRS’s proposal will likely do nothing to stop the scamsters. These miscreants are not obeying numerous laws and are committing multiple felonies. Does anyone actually expect them to obey these new rules?

Had the IRS asked tax professionals who deal with remote clientele about the proposal, they would have heard about this prior to revising Publication 1345. Someone told me today that what has happened was unsurprising given how the IRS acts. That’s a shame, because there are better solutions.

Posted in IRS | Tagged | 2 Comments

Yes, Mom, I Need to See Your ID

Posted on May 4, 2014 by Russ

UPDATE: The IRS released a new version of Publication 1345 on November 18th that clarified that a Form 8878 or 8879 signed in ink and hand delivered, faxed, mailed, emailed, or uploaded via a web portal is not an electronic signature.

OK, I’ve known my mother for all of my life. But as of now I must check her ID when I file her tax return.

The IRS released a new version of Publication 1345 this past week. This is the publication that guides electronic return originators (EROs) in how we accept electronic returns. The changes might be called good ideas, questionable implementation, bad results.

If you come into our office to file your tax return, we must check your identification. We also must record the identification we checked. From Publication 1345 on “In-Person Transaction[s]”:

The ERO must inspect a valid government picture identification; compare picture to applicant; and record the name, social security number, address and date of birth. Verify that the name, social security number, address, date of birth and other personal information on record are consistent with the information provided through record checks with the applicable agency or institution or through credit bureaus or similar databases. For in-person transactions, the record checks with the applicable agency or institution or through credit bureaus or similar databases are optional…If there is a multi-year business relationship, you should identify and authenticate the taxpayer.

Yes, it doesn’t matter how long I’ve known you, I must see your ID and record it.

Note also I’m supposed to do a record check with the applicable agency or credit bureaus on remote returns (it’s optional on in-person returns). There are major problems with this in some states. You need a valid reason in some states under state law to run a credit check. I will be checking with my attorney on the legality of my running such checks. (I don’t think it’s legal here in Nevada.) So do I violate state law, or federal rules?

There are other issues with remote transactions. I assume a faxed signature document or a scanned document is considered an electronic signature. Let’s see what the IRS says about this:

Electronic signatures appear in many forms, and may be created by many different technologies. No specific technology is required. Examples of currently acceptable electronic signature methods include:
– A handwritten signature input onto an electronic signature pad;
– A handwritten signature, mark or command input on a display screen by means of a stylus device;
– A digitized image of a handwritten signature that is attached to an electronic record;
– A typed name (e.g., typed at the end of an electronic record or typed into a signature block on a website form by a signer);
– A shared secret (e.g., a secret code, password or PIN) used by a person to sign the electronic record;
– A digital signature; or ,
– A mark captured as a scalable graphic.

The software must record the following data:
– Digital image of the signed form;
– Date and time of the signature;
– Taxpayer’s computer IP address (Remote transaction only);
– Taxpayer’s login identification — user name (Remote transaction only);
– Identity verification: taxpayer’s knowledge based authentication passed results and for in-person transactions, confirmation that government picture identification has been verified; and,
– Method used to sign the record, e.g., typed name; or a system log; or other audit trail that reflects the completion of the electronic signature process by the signer.

This will add to the cost of tax preparation. If I have to run credit checks, this cost will be passed on to the customer directly (I’ll call it exactly what it is: “Required IRS Credit Check”). There is no means for a private party to verify a driver’s license or other government issued identification today, so I have been told by the IRS I must run a credit check on every client. There’s the additional time to write this information down and scan it into each client’s record (1-2 minutes per client, but if you consider 500 clients, that’s 750 minutes, or another 18.75 hours of work–time I don’t have in the middle of tax season).

I have the following questions for the IRS:

1. What do you consider a faxed signature to be? Given that some fax machines have headers while others don’t, what information do I record when Mr. & Mrs. Smith fax their signature document to me? Do I need Mr. & Mrs. Smith to also fax me copies of their government issued IDs?

2. What do you consider a scanned signature to be? I assume that’s an electronic signature. Most scans do not record IP addresses and the other information that you are requesting. If I have the clients mail me a copy of the scanned signatures afterwards, is that sufficient? How do I explain to my older clients what an IP address is? (For my younger clients who are chuckling, ask your grandparents what an IP address is.)

3. What do I do to verify the signatures for my long-time clients Mark & Mary Smythe of London [United Kingdom]? They scan their signatures through our secure web portal. I can’t run a credit check (I have no means to run a credit check on non-US residents). I can have them scan copies of their passports, I suppose.

4. Is the IRS going to provide me a system where I can check government issued IDs such as driver’s licenses and passports? (See #5 below on why this might be necessary.)

5. Given that state law may not allow me to run credit checks (because the purpose of my running the credit check is not to issue/verify credit/credit-worthiness but to verify identification), must I paper-file all returns?

6. When a credit check is run on an individual, it generally causes that individual’s “credit score” to drop. I suspect consumer advocates are unaware of this new IRS policy. How are you (the IRS) going to respond to this? Additionally, there has been a hue and outcry among many about having identifications checked for various activities (such as voting). What will your response be to civil libertarians (e.g. ACLU) when they hear about this policy?

7. Buried in the publication is that we must implement a “Web site Challenge-Response Test” when we “…own or operate a Web site through which taxpayer information is collected, transmitted, processed or stored. These Providers shall implement an effective challenge-response protocol (e.g., CAPTCHA) to protect their Web site against malicious bots.” Is a password system (requiring a log-in) sufficient or is CAPTCHA required?

8. Given that this publication was issued on or about May 1st, is it effective for the remainder of the 2014 tax filing season or the 2015 tax filing season?

9. What about corporate, partnership, and fiduciary returns? I assume I need to check IDs for the officers of those returns. Do I also need to verify their positions? For corporations, do I need to see a copy of the minutes so that I know that John Doe is authorized to sign the return? Do I need to see paperwork that identifies John Doe as the Tax Matters Partner for a partnership? What do I do when these returns are signed remotely?

There are likely many more questions that need to be answered by the IRS. While I understand the reasoning behind this new policy (to cut down on identity theft), as of today I am unsure on whether I can efile any returns except for clients who come into my office. Our practice has many remote clients, including clients who live on other continents (where it is impossible for me to check their credit or verify their identifications). Some of my clients are young individuals who don’t yet have credit. How do I verify Joe in Maine’s ID when this is the first tax return he’s ever filed? From my vantage point these new rules look like good intentions, questionable implementation with much in the way of unintended consequences.

I happen to be heading to Washington, DC this week for a meeting with the National Association of Enrolled Agents. I will definitely be letting them know of this situation.

Posted in IRS | Tagged , | 12 Comments

Once Again, Bring Me the Usual Suspects: 2014 Small Business Tax Index

Posted on May 1, 2014 by Russ

The Small Business & Entrepreneurship Council recently released their “Small Business Tax Index 2014.” You may remember that last October I wrote about their “Small Business Policy Index 2013.” Congratulations are in order for my home state, the Silver State, for leading the way. Here are the top ten states:

1. Nevada (9.677)
2. South Dakota
3. Texas
4. Wyoming
5. Washington
6. Florida
7. Alabama
8. Ohio
9. Colorado
10. Alaska

Bringing up the rear are these ten states:

41. Connecticut
42. Oregon
43. Vermont
44. Maine
45. New York
46. Iowa
47. Hawaii
48. New Jersey
49. Minnesota
50. California (82.695)

The numbers in parentheses are the total score for all factors. Why is California so far behind Nevada?
– Nevada has no personal income tax; California has the highest personal income tax in the country.

A high personal income tax rate raises the costs of working, saving, investing, and risk taking. Personal income tax rates vary among states, therefore affecting crucial economic decisions and activities. In fact, the personal income tax influences business far more than generally assumed because more than 92 percent of businesses file taxes as individuals (e.g., sole proprietorship, partnerships and S-Corps.), and therefore pay personal income taxes rather than corporate income taxes.

– Nevada has no capital gains tax; California has the highest capital gains tax rate in the country. “One of the biggest obstacles that start-ups or expanding businesses face is access to capital. State capital gains taxes, therefore, impact the economy by directly affecting the rate of return on investment and entrepreneurship.”

– Nevada doesn’t tax dividends and interest; California has the top rate on these in the country. “Quite simply, higher tax rates on dividends and interest mean reduced resources and incentives for saving and investment, which in turn, works against entrepreneurship, economic growth and job creation.”

-Nevada doesn’t have a corporate income tax; California does (they rank 41st in this category). The same rankings apply for corporate capital gains taxes.

– California gets a negative for imposing a corporate level tax on S-Corporation, an individual AMT, a corporate AMT, and for having a progressive income tax (Nevada has none of these). California does index tax brackets, so it doesn’t lose a point here.

– On property tax, Nevada ranks 21st and California ranks 28th (they are fairly similar).

– In one category, California ranks significantly above Nevada: sales and gross receipts/excise taxes. California ranks 26th and Nevada ranks 48th.

– California ranks first in one category: unemployment taxes while Nevada is just behind in 6th.

In any case, California ends up at the bottom. Given its ranking at the bottom of the policy index, that’s a daily double that should drive California’s political leaders to make changes…but won’t.

–

Posted in California, Nevada | 1 Comment

The Scamsters Haven’t Stopped

Posted on May 1, 2014 by Russ

One of my clients called me first thing this morning (we’ll call him Joe from Richmond, Virginia; all names and cities have been changed to protect the innocent and guilty). Joe said he got a phone call from David. David identified himself as working for the IRS in Seattle. David accused Joe of not paying his taxes from 2008 – 2011; that Joe had not responded to a threat of a lawsuit that was mailed to him in December 2013; that unless Joe acted that lawsuit would be filed by the IRS. David told Joe Joe’s address and the first five digits of Joe’s social security number to “verify” his story.

Joe hung up the phone on David.

The phone call Joe received was almost certainly a variation of this scam:

TIGTA Warns of “Largest Ever” Phone Fraud Scam Targeting Taxpayers

WASHINGTON — The Treasury Inspector General for Taxpayer Administration (TIGTA) today issued a warning to taxpayers to beware of phone calls from individuals claiming to represent the Internal Revenue Service (IRS) in an effort to defraud them.

“This is the largest scam of its kind that we have ever seen,” said J. Russell George, the Treasury Inspector General for Tax Administration. George noted that TIGTA has received reports of over 20,000 contacts and has become aware of thousands of victims who have collectively paid over $1 million as a result of the scam, in which individuals make unsolicited calls to taxpayers fraudulently claiming to be IRS officials.

“The increasing number of people receiving these unsolicited calls from individuals who fraudulently claim to represent the IRS is alarming,” he said. “At all times, and particularly during the tax filing season, we want to make sure that innocent taxpayers are alert to this scam so they are not harmed by these criminals,” George said, adding, “Do not become a victim.”

Inspector General George urged taxpayers to heed warnings about the sophisticated phone scam targeting taxpayers, noting that the scam has hit taxpayers in nearly every State in the country. Callers claiming to be from the IRS tell intended victims they owe taxes and must pay using a pre-paid debit card or wire transfer. The scammers threaten those who refuse to pay with arrest, deportation or loss of a business or driver’s license.

The truth is the IRS usually first contacts people by mail – not by phone – about unpaid taxes. And the IRS won’t ask for payment using a pre-paid debit card or wire transfer. The IRS also won’t ask for a credit card number over the phone.

“If someone unexpectedly calls claiming to be from the IRS and uses threatening language if you don’t pay immediately, that is a sign that it really isn’t the IRS calling,” he said.

The callers who commit this fraud often:

  • Use common names and fake IRS badge numbers.
  • Know the last four digits of the victim’s Social Security Number.
  • Make caller ID information appear as if the IRS is calling.
  • Send bogus IRS e-mails to support their scam.
  • Call a second time claiming to be the police or department of motor vehicles, and the caller ID again supports their claim.

If you get a call from someone claiming to be with the IRS asking for a payment, here’s what to do:

  • If you owe Federal taxes, or think you might owe taxes, hang up and call the IRS at 800-829-1040. IRS workers can help you with your payment questions.
  • If you don’t owe taxes, call and report the incident to TIGTA at 800-366-4484.
  • You can also file a complaint with the Federal Trade Commission at www.FTC.gov. Add “IRS Telephone Scam” to the comments in your complaint.

TIGTA and the IRS encourage taxpayers to be alert for phone and e-mail scams that use the IRS name. The IRS will never request personal or financial information by e-mail, texting or any social media. You should forward scam e-mails to phishing@irs.gov. Don’t open any attachments or click on any links in those e-mails.

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

Given that Joe has paid his taxes without fail every year, that the IRS would send multiple notices about unpaid taxes, and the fact that the IRS doesn’t file lawsuits (the US Department of Justice acts as the legal arm for the IRS when the IRS initiates legal action), the chance that David was telling the truth is about the same as it snowing in Las Vegas in August.

Joe did the right things. He reported this to TIGTA (see above on how to do that), and he has saved (for now) the follow-up phone message where David whined at Joe for hanging up the phone on him and that action “wasn’t professional.” Joe also sent in an Identity Theft Affidavit to the IRS because it appears others do have his confidential personal information. (He’ll also be adding fraud alerts to his credit reports.)

Almost always, the IRS initiates contact through the US mail. If you owe significant money, IRS Collections will sometimes knock on your door and leave a business card. If you file an appeal with the IRS, that conversation may come by phone (but you would first get a letter from IRS Appeals).

If you get a phone call like Joe did, it probably is a scam. If you owe taxes, call the IRS back (800-829-1040); they can tell you if your account has been assigned to collections and whom to contact. If you don’t owe the IRS money, call TIGTA.

I’m hopeful that David and his ilk see the inside of ClubFed for a long, long time.

Posted in IRS, Scams | Tagged | Comments Off on The Scamsters Haven’t Stopped

A Little Housekeeping

Posted on May 1, 2014 by Russ

We’re in the process of updating our website and the look of the blog. For now, we’re using the “default” WordPress format. This may change in the next few weeks as we make other (more important) changes.

Posted in Taxable Talk | Comments Off on A Little Housekeeping

It’s Probably Not Good for Your Case When the Court Considers Sanctioning Your Attorney

Posted on April 28, 2014 by Russ

The Tax Court had a routine decision today in a collection matter. The case itself (Best v. Commissioner) isn’t particularly interesting; the Court upheld the IRS’s collection efforts. It’s the last page and a half of the decision that caught my attention.

The petitioners in the case had filed a previous Tax Court case which they settled back in 2009.

We sustained substantial portions of the deficiencies in tax that respondent determined along with additions to tax for both failure to timely file a return and failure to timely pay tax and for failure to pay estimated tax. We entered decision in docket No. 22241-07 on January 2, 2009. Petitioners were represented in that case by their present counsel, Donald W. MacPherson.

The petitioners lost today, and they also were sanctioned $5,000 for frivolous arguments.

The interesting part is at the end of the decision.

Section 6673(a)(2)(A) empowers us to impose on a taxpayer’s counsel who multiplies the proceedings in any case unreasonably and vexatiously the excessive costs reasonably incurred on account of such conduct. We may sua sponte impose such costs. See Edwards v. Commissioner, T.C. Memo. 2002-169, aff’d, 119 Fed. Appx. 293 (D.C. Cir. 2005); Leach v. Commissioner, T.C. Memo. 1993-215.

As to what Judge Halpern saw that led him to this extreme, the opinion notes,

Although we have found petitioners deserving of a section 6673(a)(1) penalty, we believe that Mr. MacPherson’s conduct may be deserving of a sanction for unreasonably and unnecessarily bringing and prolonging these proceedings. Indeed, in his declaration in support of petitioners’ response to respondent’s motion to impose a sanction on petitioners, he acknowledges that, following the earlier deficiency proceeding in this case, petitioners “had a major collection problem and * * * I decided to try the assessment issue believing there is some chance of lack of proper assessment which will result in voiding the assessment and causing the clients to be free of the debt as a result of the statute of limitations”. He concedes, however: “I concluded many years ago that the ’23C issue’ was a ‘dead letter’ in so far as obtaining the 23C.”

The goal of the Tax Court is for the two sides, whenever possible, to settle their cases and to move expeditiously. The only time I can remember an attorney being sanctioned was when an attorney filed a pro se action in his mother’s estate. The Tax Court was not amused by what appeared to be delaying tactics of the probate case in King County (Washington) Superior Court and the Tax Court. In that previous case, the attorney filed a probate action in 1995; he filed a Tax Court action in 2000. Come 2008 and both actions were still ongoing. As I wrote back in 2008, the thirteenth time wasn’t the charm.

In this case, the Court sees an attorney take years on a collection matter, when he (the attorney) admits that his clients have a collection issue, and that the main issue being argued wouldn’t work. I do want to point out that the Court has not sanctioned the attorney today; he is being given an opportunity to show cause as why the Tax Court should not impose a sanction.

Case: Best v. Commissioner, T.C. Memo 2014-72

Posted in Tax Court | 2 Comments

Toyota Living Up to Their Slogan: They’re Going Places (to Texas from California)

Posted on April 28, 2014 by Russ

Toyota’s current slogan is “Let’s go places.” And they are–Toyota is leaving the Bronze Golden State and moving to the Lone Star State. While Toyota isn’t saying anything about why they might move roughly 5,000 employees from Torrance to Dallas, it doesn’t take a genius to know that taxes and regulations are two prime factors.

“The costs of doing business in Southern California are much higher than the costs of doing business in Tennessee,” Nissan Chief Executive Carlos Ghosn said at the time [Nissan announced they were moving their headquarters to Tennessee from Gardena, California]. He cited cheaper real estate and lower business taxes as key reasons for the move.

Fritz Hitchcock, who owns several Toyota dealerships in Southern California, said Toyota’s decision won’t affect local car sales. But he said it represents an “indictment of California’s business climate.”

California ranks at the bottom of almost every comparison of state business climates and taxes. Texas ranks near the top in both categories. Yet I read that the California legislature is considering even more anti-business legislation. (The link goes to an article on a proposal to tie California corporation tax to the differential in pay between a CEO and the average employee.)

When I moved my business from California to Nevada, taxes and regulations were prime reasons. It’s far easier to uproot a one-person business than it is the marketing arm of Toyota. That said, California is giving business owners plenty of reasons to check out neighboring states. The desert sands of Nevada don’t make the world’s best meteorological climate, but the business climate here is day-and-night better in comparison to California.

Posted in California, Nevada, Texas | Comments Off on Toyota Living Up to Their Slogan: They’re Going Places (to Texas from California)

Your Dependents do have to be Your Dependents…

Posted on April 27, 2014 by Russ

One of my clients is expecting their first child at any moment. Their new baby will be their first dependent for their 2014 tax returns. Mahamadou Daffe of Queens, New York had other ideas about dependents.

Mr. Daffe stole identities of various children and then offered, for $1,000 per tax return he prepared, to “give” those children to his clients. That’s one way to grow a family but it’s highly illegal.

But Mr. Daffe had additional means of making money. He stole other identities (presumably adults) and used those to prepare tax returns with phony W-2s and took the profits. We’re not talking peanuts here; he asked for over $4.5 million over four-plus years (and received more than $1.5 million).

The good news is that the IRS caught on to his scheme, and Mr. Daffe was sentenced to 102 months at ClubFed; he was found guilty earlier this year. As a reminder, you are responsible for what is on your tax return. And you can only claim your dependents, not anyone else’s.

Posted in Tax Fraud | 1 Comment

There Is No Tax Fairy (Yet Again)

Posted on April 27, 2014 by Russ

Joe Kristan has the story of two CPAs who told clients that there is a wonderful Tax Fairy, that mythical creature who turns income into deductions or credits through alchemy and magic. Unfortunately, the Tax Fairy doesn’t exist, and clients who used these CPAs had total tax adjustments (audit changes) of over $3.5 million. This particular scheme revolved around Section 419 (“Voluntary Employee Beneficiary Association” plans). The Tax Fairy worked…until the IRS audited the results.

As usual, if it sounds too good to be true, it probably is.

Posted in Tax Evasion, Tax Preparation | Tagged | Comments Off on There Is No Tax Fairy (Yet Again)