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.

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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.

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Gilbert Hyatt Sues FTB & BOE Over 20+ Year Wait

Posted on April 27, 2014 by Russ

There are delays and there are delays. Gilbert Hyatt has been waiting two years to find out how the Nevada Supreme Court would rule on the (California) Franchise Tax Board’s appeal of his $500 million award. A decision in that case could come at any time (well, on any Thursday since that’s the day of the week that the Nevada Supreme Court releases decisions). But that two year delay is nothing compared to the delay in the original matter.

For those unfamiliar with Mr. Hyatt, he invented items related to microprocessors and semiconductors. (I’m sure my brother could give a much better description of this.) Back in 1991 (yes, this case goes that far back) he moved to Las Vegas; he knew he was soon going to get a large payment and Nevada’s state income tax rate–or better put, the lack thereof–appealed to him. The Franchise Tax Board (California’s income tax agency) said he didn’t move until sometime in 2012, conveniently after he received that payment. The FTB assessed tax and penalties. Mr. Hyatt appealed those.

Mr. Hyatt also argued that he had been subject to torts in Nevada and filed a lawsuit here in Las Vegas against the FTB in 1998. He alleged that the FTB had, among other things, rummaged through his garbage, visited business partners and doctors, and shared his social security number with the media. Bill Leonard (a former member of California’s Board of Equalization) said,

This is outrageous behavior and I call on the FTB to rein in their agents. What really galled me is the FTB testified in open court that this level of harassment was only a typical audit. If true, then the stormtroopers are alive and well at the FTB.

Mr. Hyatt’s case went up to the US Supreme Court. In 2003, the Supreme Court unanimously ruled that his case could go forward. In 2008, the trial was held and the FTB lost. That’s the appeal that the Nevada Supreme Court heard in 2012.

Meanwhile, Mr. Hyatt’s audit was decided against him in 1996. If you lose at the FTB, you can appeal a case to the Board of Equalization (BOE). That’s what Mr. Hyatt did. In 2008, Mr. Hyatt thought his BOE appeal would be heard within two years. It still hasn’t been heard. So he filed another lawsuit.

He has filed a lawsuit in federal court in Sacramento accusing the FTB and BOE of depriving him of his constitutional rights. As noted in Dan Walters’ column,

“Without this court’s grant of relief that Hyatt seeks,” his suit says, “the FTB’s 20-plus-year vendetta to ‘get’ Hyatt will continue indefinitely and unabated in violation of Hyatt’s equal protection rights.”

It’s been nearly 23 years since Mr. Hyatt did (or didn’t) move out of California. It’s been 18 years since the FTB rules on his appeal and the case has been in the hands of the BOE. Yes, I’m sure California’s tax agencies have been moving with all possible speed….

Mr. Hyatt is 76. My suspicion is that the litigation between him and California’s tax agencies will last beyond his lifetime.

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The Tanning Tax: Alan Greenspan Gets It Right (Again)

Posted on April 27, 2014 by Russ

Alan Greenspan, the former chairman of the Federal Reserve, has the wonderful quote:

Whatever you tax, you get less of.

It’s something our Congresscritters might take to heart…but I doubt it. Today, let’s look at the tanning tax.

This tax is one of the many ways that Congress had to pay for ObamaCare (aka the Affordable Care Act). Like almost everything else with ObamaCare, it’s not working as expected. The tax was predicted to generate $200 million annually. Instead, it’s took in $91 million in 2012 (the last year there are statistics for).

In this Politico article, Barton Bonn, Head of the American Suntanning Association, notes,

It’s effectively a price increase for our customers…Anybody knows that if you increase the price on a product or service, some people are not going to show up after the price increase, and that’s what occurred.

I’m not sure Mr. Barton is correct; I suspect some in Congress do not understand the law of supply and demand. In any case, it’s just another of the many tax flaws with ObamaCare.

Posted in Legislation | Tagged | Comments Off on The Tanning Tax: Alan Greenspan Gets It Right (Again)