The IRS made videos parodying Star Trek and Gilligan’s Island. It’s time for another: The Apprentice, IRS Style:
On the bright side, this video only cost us taxpayers $10,000; the Star Trek and Gilligan’s Island parodies cost a reported $60,000 each. What I’d like to see next from the IRS is a parody of Perry Mason where at the end we find out who ordered the IRS to target conservative applicants for 501(c)(4) status.
Section 1031 exchanges are a popular means of deferring taxation on commercial property. Suppose in 1970 you purchased a commercial property in Los Angeles for $500,000. You decide to sell it, and discover that it’s now worth $2.5 million. One way of avoiding paying capital gains tax on the gain is to use §1031 of the Tax Code to defer that gain. (There are lots of requirements with §1031, including using a qualified intermediary, specific dates for the exchange, etc. that must be met.)
Nothing in the Tax Code prohibits you from taking that property in Los Angeles and exchanging it with a property in, say, Jacksonville, Florida. Indeed, there is no state tax in Florida. Additionally, California does not have preferential tax rates on capital gains; that $2 million gain would be taxed as ordinary income, reaching the (current) 13.3% marginal rate.
You’re probably ahead of me: One method that some tax professionals have used is to perform a §1031 exchange from California property to non-California property. If the taxpayer then leaves California (or if he is a non-Californian), the Franchise Tax Board (California’s income tax agency) has no method of going after the gain. California’s legislature didn’t like that, so Sections 18032 and 24953 were added to California’s Revenue and Taxation Code. (§18032 is for individuals while §24953 is for corporations.)
Beginning for years on January 1, 2014 and after, Californians and non-Californians will be required to file annual reports after exchanges of §1031 property. The form(s) do not yet exist; presumably, taxpayers will have to acknowledge that they still own the new property (or a successor property if another §1031 exchange has occurred). The statutes authorize the FTB to assess tax if a report is not filed.
The IRS announced today that interest rates for the fourth quarter (beginning October 1, 2013) will be unchanged:
The announcement is Revenue Ruling 2013-16 and will be in Internal Revenue Bulletin 2013-40.
I am on the distribution list for TIGTA (the Treasury Inspector General for Tax Administration) audit reports. These reports (which generally review IRS operations) are quite useful. I don’t read all of the other federal agencies’ Inspector General reports. There are so many government agencies, each with their own Inspector General, that it would be impossible for me to do so.
The Social Security Administration (SSA) has an Inspector General. In a report issued on August 9th, the Social Security Inspector General looked at “Employers Who Report Wages with Significant Errors in the Employee Name and Social Security Number.” The stated goal of the report is
Our objectives were to identify patterns of errors and irregularities in wage reporting for (1) 100 employers who had the most suspended wage items and (2) 100 employers who had the highest percentage of suspended wage items for Tax Years 2007 through 2009.
Before I venture to the IRS’s role in this, I do need to note that SSA recognizes that misuse of social security numbers is a big issue. The Inspector General noted that most employers do not use the SSA’s Employee Verification Service nor do they use E-Verify. Many of the misuse errors stem from what the report call “noncitizen workforce.” I’ll call them by the more popular name (as in popular culture), illegal aliens.
So where does the IRS fit in to his? In several places. First, the Inspector General would like to see the IRS mandate use of verifications; the Inspector General doesn’t believe the situation will improve until that’s done.
Second, the IRS has the ability to levy fines and penalties against employers who submit inaccurate wage reports (e.g. Form 941s). From the report:
In previous reports, we noted that SSA relied on the IRS to enforce penalties for inaccurate wage reporting because SSA had no legal authority to levy fines and penalties against employers who submitted inaccurate wage reports. SSA senior staff did not believe employers had an incentive to submit accurate annual wage reports because the IRS rarely enforced existing penalties. SSA staff believed applying penalties would deter SSN misuse. Furthermore, SSA senior staff believed the Agency could provide the IRS with sufficient evidence to show an employer knew or should have known its employees’ SSNs were incorrect. For example, a reasonable person should recognize that hundreds of workers could not have the same or consecutively numbered SSNs.
Well, what does the IRS have to say about that?
A senior IRS employment tax official we contacted during this review acknowledged that the IRS has enforcement powers and can impose fines/penalties on employers who submit inaccurate wage reports. In fact, he noted that the penalty for employers who submit incorrect names and SSNs recently increased from $50 to $100 for each incorrect wage item. Although the IRS periodically conducts compliance audits, which may identify wage reporting issues, it could not provide data on the number of employers it had penalized because of inaccurate wage reporting. Furthermore, the tax official told us the IRS needs stronger standards (additional legislation) to deter employers who submit inaccurate wage reports. In addition, several ESLOs [Employer Service Liaison Officers] told us they were not aware of any fines/penalties the IRS had levied against employers who consistently submit erroneous name and/or SSN information.
Given the possible misuse of social security numbers could also be an issue with identity theft, one would think the IRS would be all over this issue. That’s especially the case given the IRS’s recent press releases noting the agency’s strong policies against identity theft. In this case, one would be wrong.
We acknowledge SSA’s efforts in working with the IRS to improve employer wage reporting. Unless the IRS takes additional steps to hold employers who consistently submit erroneous or incorrect wage reports accountable for their actions through an effective employer penalty program, we do not believe employer wage reporting will significantly improve.
There isn’t much to add to this. While the SSA Inspector General’s report was aimed at the Social Security Administration, it appears to this observer that the real target should have been the IRS. But perhaps the IRS has been too busy with other items (such as tax preparer regulation) to look into this issue.
The Department of the Treasury and the IRS announced last week that all same-sex marriages will be recognized for federal tax purposes. That means that if you are in a legal same-sex marriage, you must file as married filing jointly or married filing separately (with few exceptions) beginning with the 2013 tax year. What does this mean? Let’s look at this in a Q&A format:
I’m in a legal same-sex marriage in a state that recognizes same-sex marriage. Will I file as Married in 2013? Yes, you must file as either married filing jointly (MFJ) or separately (MFS) on both returns.
I was married legally (in a same-sex marriage); however, I reside in a state that does not recognize such marriages. How will I file? For federal tax purposes, you will file (in 2013) as married (MFJ or MFS) on your federal return. You will likely file as single (or Head of Household if you qualify) on your state returns. The state filing will depend on your state’s policies–it’s too early to state this for sure.
I’m in a Civil Union. How will I file? A civil union is not for federal tax purposes a legal marriage. Nothing has changed for you.
Do I need to amend my earlier tax returns to show my marriage (assuming you were married in an earlier year)? You can if it benefits you but you do not have to. That’s per current IRS guidance. The 2010-2012 tax years remain open and can be amended (it’s possible some older years are also open for some taxpayers).
Will filing as married benefit me on a tax basis? Probably not. It may make you feel better (from the standpoint that the US government recognizes your marriage), but there are many “marriage penalties” built into the Tax Code; ObamaCare only exacerbates this issue. You will likely find your tax bill will go up.
I live in a community property state. Will my marriage follow community property guidelines? Yes. There’s nothing in the Treasury/IRS notice stating that a same-sex married couple would be treated differently from any other married couple. That means if you live in one of the community property states (AZ, CA, ID, LA, NV, NM, TX, WA, and WI; AK allows it though separate property is the norm), you will follow community property rules.
While I expect more guidance in the future from the IRS, last week’s announcement paves the way to how the 2013 tax year will go for most same-sex married couples. The biggest takeaway for most same-sex married couples is that you will be filing as married on your 2013 tax return.
If the IRS and the Obama Administration was hoping the IRS crisis would blow over, it’s just not going to happen…and the IRS continues to ensure that’s the case. Reports have surfaced that the IRS is requiring the American Legion and other similar organizations to provide military service records for its members.
This definitely didn’t amuse Senator Jerry Moran (R-KS). He’s asked Danny Werfel, the current acting head of the IRS, to provide the authority that the IRS has for this, why it’s being done, who it’s being done to, and when this began. Senator Moran stated, “Given the American public’s increased frustration with the IRS and the failures of government bureaucracy at large, I am disappointed that such a policy targeting America’s servicemen and women would be a priority for the IRS.”
This won’t go over well with Congress (with either party).
Let’s assume you owe the IRS $10,000 in back taxes. What would you do? Perhaps obtain a payment plan? Maybe you can negotiate an Offer in Compromise? Or maybe you have so little funds on hand than you can go into Currently Uncollectible Status. Or maybe you will elect to attempt to steal welding equipment, and then become the prototypical demolition derby driver. And yes, someone actually did this.
Joel Grasman (and his wife) apparently owed the IRS $10,000. Instead of doing one of the obvious things to resolve the tax debt, he first stole welding equipment from the MTA (New York’s transit system), then on his way out drove his truck into power lines. That caused thousands of Long Island power customers to be powerless.
This New York Post article notes that Mr. Grasman has confessed. He faces a multitude of charges; frankly, his tax debt is the least of his current problems.
A couple of months ago the IRS announced that they were “retiring” Disclosure Authorization from IRS e-Services. For the laypeople who read this blog, this means that if you come to my office and we need to print a transcript and I do not currently have a Power of Attorney on file, we can’t immediately obtain a transcript. Instead, I can call the IRS and be put on hold (average hold time recently is about 45 minutes), I’ll then fax the completed POA to the IRS (average time to do this, about 15 minutes), and then within 72 hours I’ll obtain the transcripts. Alternatively, I can just fax the POA to the IRS CAF unit, and then within a promised three four days, the transcript will be entered into the IRS’s computer system. I’ll then be able to obtain the transcript. (If anyone believes that this standard won’t slip again–it already has once–I have a bridge to sell.)
As the NAEA said today, how can this be considered an improvement? Perhaps the IRS wants e-Services when it helps them, and not tax professionals. Of course, as I’ve noted before the loss of Disclosure Authorization will also impede the IRS: They will have more phone calls to handle, more paperwork to handle, etc.
In any case, the retirement is official:
There is a planned power outage scheduled this weekend from Saturday, Aug. 31 at 5 p.m. EDT through Tuesday, Sept. 3 at 12:00 p.m. All e-Services products, including the Transcript Delivery System, e-file Application, Registration, Disclosure Authorization, Electronic Account Resolution and TIN Matching will be unavailable during this time.
There will be several changes made to e-services while the system is unavailable including the retirement of Disclosure Authorization (DA) and Electronic Account Resolution (EAR) and TIN Matching reengineering. Additional information for TIN Matching Re-engineering is available on the e-services page under Tax Professionals.
As with any upgrade, users could experience intermittent downtime for the first few days following implementation. If you experience problems, you may contact the e-help Desk at 866-255-0654.
The cliche goes, if you don’t succeed at first, try, try again. Of course, where you and I would never go, the Bozo side of the tax world loves to venture. The Tax Court today got the chance to look at a two-time Tax Court loser. Would his third chance at Tax Court give a better result?
The first case was for the 1991 tax year. I’ll let the Tax Court describe the issue (the quote is from today’s ruling):
The principal issue arose from a dispute between petitioner and his brokerage house, which eventually liquidated his account by selling the securities in it. Petitioner failed to report on his 1991 tax return the capital gain realized on the sale of these securities, contending that his brokerage house had engaged in a “tortious conversion” of his account and that it, rather than he, was taxable on gains realized when the stock was sold. Golub I, 78 T.C.M. at 373. We determined that petitioner in effect was attempting to relitigate in this Court securities law claims that were subject to an arbitration proceeding in which he had refused to participate. See id. at 373, 378. We concluded that petitioner “received substantial amounts of income in 1991,” that he “failed to pay tax on those amounts,” and that “[h]is defense to that failure is frivolous and wholly without merit.” Id. at 378.
He lost, and also had to pay a $10,000 penalty for taking a frivolous position at Tax Court.
The second case involved an appeal of a Collections Due Process (CDP) hearing; the IRS was attempting to collect the tax debt from 1991.
The IRS Appeals Office sustained the tax lien, and we upheld that determination…We concluded that the IRS had followed all appropriate procedures in filing the notice of tax lien, and we specifically rejected petitioner’s argument that the IRS had “improperly offset his income tax refund for tax year 2004 against his outstanding tax liability for tax year 1991.” As we explained, section 6402 of the Code explicitly authorizes the IRS “to credit an overpayment to offset an outstanding income tax liability.”
On to the present. Here, the petitioner was having a problem with the IRS regarding 2008. He thought there was an overpayment of $24,627 (so he should receive a refund of that amount); the IRS thought he owed $17,373. The difference was $42,000 that allegedly was, “‘2008 estimated tax payments and amount applied from 2007 return.'” The matter went to another CDP hearing. I’ll let the Court describe that hearing:
Although petitioner’s position at the hearing was not entirely clear, he appeared to argue (once again) that the Tax Court decision sustaining deficiencies and penalties for 1991 was unconstitutional and should be vacated; that the IRS’ application to his 1991 tax liability of overpayments and credits from other tax years was thus erroneous; and that these overpayments and credits should have been applied instead to his tax liability for 2008. Petitioner failed to provide any evidence at the hearing that he had made quarterly estimated tax payments for 2008 or that the IRS had misapplied any overpayments or credits.
He lost at the CDP and appealed to Tax Court.
When you go to Tax Court, you need proof–evidence that the IRS erred. This could be arguing that the IRS is interpreting some part of the Tax Code or a regulation incorrectly. It could be that you have evidence showing payments made that the IRS refused to honor. It could be that the IRS’s position on a payment plan (installment agreement) or an offer in compromise is unreasonable. All those are good arguments at Tax Court. However:
We operate at a disadvantage in assessing petitioner’s arguments because the summary judgment papers he filed, some 90 pages in toto, are devoted almost exclusively to rehashing arguments about his 1991 tax liability and the legitimacy of this Court’s (long since final) decision sustaining the IRS determinations of deficiencies and penalties for that year. To discern from petitioner’s papers anything relevant to the actual controversy before us is to search for needles in a haystack. However, his position appears grounded on an assertion that the IRS improperly failed to credit his 2008 account with $42,000 in payments comprising “2008 estimated tax payments and amount applied from 2007 return,” as claimed on his 2008 Form 1040, line 63. Petitioner submitted no evidence, to the IRS or this Court, that he made any quarterly estimated tax payments toward his 2008 tax liability.
The Court goes on to note that the IRS is specifically authorized by both statute (the Tax Code) and regulations to offset overpayments and apply them to outstanding tax.
…[P]etitioner’s argument reduces to the contention that he has no 1991 tax liability because our decision sustaining the 1991 deficiencies and penalties was unconstitutional. This argument is frivolous. We accordingly grant summary judgment for respondent.
The Court then looked at whether the petitioner should get another penalty for being frivolous. Not only had he been sanctioned once previously by the Tax Court, “…[T]wo U.S. District Courts and the Court of Appeals for the Second Circuit had previously imposed sanctions against petitioner, prohibiting him from using their resources to advance frivolous attacks against his former brokerage house and other securities defendants.”
I think you know where this is headed:
Petitioner’s filings in this summary judgment proceeding consist mainly of incoherent verbiage that he has cut and pasted from previous filings in this and other courts…At the end of the day, petitioner’s position is that he has no tax liability for 1991 because the IRS and the judicial system have conspired to deprive him of his constitutional rights. That is a frivolous position that has been rejected repeatedly, and sanctions are once again appropriate.
We take petitioner at his word when he avers that he “will never cease” litigating his 1991 tax liability. He should understand, however, that this persistence will come at an ever-increasing price. We therefore impose a penalty in the amount of $15,000 under section 6673(a)(1).
I should point out (for the record) that not only did the IRS make a motion for summary judgment (which was granted), the petitioner had also done so. “We have also considered petitioner’s cross-motion for summary judgment. We find it wholly without merit and entirely frivolous….”
I was recently interviewed by April Brewster Smythe for a series for “Masters in Accounting.” If you’d like to learn a bit more about my background–it’s quite different from most in the accounting profession–you can read the interview.
You can find all of the interviews April Brewster Smythe conducted here. She’s interviewed a number of well regarded individuals in accounting, including fellow tax bloggers Joe Kristan and Robert Flach.