Licensing Stops All Tax Preparer Fraud…Well, No

Posted on June 30, 2013 by Russ

As I mentioned, National Taxpayer Advocate Nina Olson believes that if the IRS licensed all tax preparers, tax preparer fraud would evaporate. Unfortunately, that’s definitely not the case.

This past week, the US Department of Justice indicted Teresa Marty, Rebecca Bandera-Marty, and Pamela Harris of conspiring to defraud the IRS. The defendants are alleged to have filed at least 250 false individual returns claiming more than $60 million in tax refunds. From the DOJ press release:

Marty and her daughter-in-law Bandera-Marty were licensed tax preparers, and Harris was AFS’s office manager. The defendants recruited clients by claiming that they could eliminate their debts and legally receive sizable tax refunds. They billed and collected excessive fees for this service, sometimes as high as $6,000. The defendants prepared the false tax returns claiming large refunds based on fictitious Forms 1099-OID. The fraudulent returns falsely reported that a client’s total outstanding debt (mortgage, credit limit s on credit cards, student loans, auto loans, etc.) was actually interest income that the client had received from the lender that had been withheld by the IRS, and therefore, the client was entitled to a refund. [emphasis added]

There’s nothing new about this kind of fraud, and the idea that by licensing tax professionals no tax professional would commit fraud is laughable. Wherever there is money, there’s temptation to obtain it in the wrong ways. Indeed, Teresa Marty had been previously permanently barred from preparing tax returns.

Ms. Marty, Ms. Bandera-Marty, and Ms. Harris are looking at terms at ClubFed if found guilty of the charges they face.

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National Taxpayer Advocate Report: Identity Theft, OVDP, and ITINs Among the Major Issues

Posted on June 30, 2013 by Russ

Nina Olson, the National Taxpayer Advocate, issued her annual report to Congress this past week. She also included a special report on “Political Activity and the Rights of Applicants for Tax-Exempt Status.” Here are some of the other issue she highlighted:

1. Tax reform. “The Time for Tax Reform is Now!” screams the lower right portion of the report. No argument–the US Tax Code is far too complex. Unfortunately, having tax reform depends on a functional Congress…and that’s not going to happen this year.

2. The IRS refuses to issue refunds to victims of tax preparer fraud. As Ms. Olson points out, the IRS Chief Counsel’s office says that the false return can be deemed a “nullity” and the true return can be accepted and processed. Yet the problem of getting refunds for innocent taxpayers continues.

3. Identity Theft. As Jason Dinesen can vouch, victims of identity theft will see delay after delay. Ms. Olson states that the current Identity Protection Specialized Unit is harming identity theft victims.

4. The current IRS Offshore Voluntary Disclosure Program burdens benign actors and damages IRS credibility. This is something I’ve commented on before, and I’m glad to see Ms. Olson agrees with me.

5. Lack of coordination between the IRS and FINCEN (responsible for the FBAR) burdens taxpayers and undermines compliance efforts. Ms. Olson focused on filing of the FBARs. I’d like her to take a look at the duplication between the FBAR and Form 8938. By the way, one piece of good news on the FBAR front: Buried in the FAQ of the BSA efile system is the announcement that tax professionals are now allowed to efile the FBAR for clients as long as we’re assured the information is accurate.

There’s plenty more in Ms. Olson’s report that I agree with, but I do want to point out one area where I disagree with her. Ms. Olson argues that the current limited oversight of return preparers makes taxpayers vulnerable to unscrupulous or incompetent preparers. Ms. Olson forgets that the IRS does have tools to weed out tax preparers who are unscrupulous. Indeed, the IRS has filed numerous civil and criminal cases against such tax preparers over the years. (I do agree with Ms. Olson that anyone using a tax professional should ask about his qualifications and should obtain a signed copy of the return.)

All-in-all, Ms. Olson’s report is worth reading by the IRS and Congress. She highlights many of the areas of concern that tax professionals have with the current system. Unfortunately, I expect her report to be lost in the sea of other news regarding the IRS that has come out of Washington this Spring and Summer.

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IRS Scandal Update: Washington & Austin

Posted on June 30, 2013 by Russ

The more that comes out of Washington, the more I’m beginning to think that IRS management is deliberately dragging their feet in revealing information. We still don’t know what happened, but there have been developments this week.

Liberals attempted to state that “progressive” organizations were also targeted. However, TIGTA Inspector General Russell George said that just wasn’t the case. This letter to Congressman Sander Levin should put the end to this issue.

Meanwhile, the House Oversight Committee voted on party lines that Lois Lerner waived her Fifth Amendment right to self-incrimination when she made her speech to the committee. She’ll likely be called back to testify, refuse (taking the Fifth), and end up in Court.

Meanwhile, from Austin (via Indianapolis) comes more unflattering news about the IRS. “IRS hit with audit for mismanagement and fraud,” reads the headline. It appears that there may be multi-billion dollar fraud coming from the ITIN unit in Austin. Another TIGTA report is due this summer. This sentence is probably making another set of IRS managers queasy:

“The IRS is not doing something as simple as requesting sufficient documentation,” Inspector General Russell George told WTHR this spring. “It’s very troubling.”

I’ve had dealings with the ITIN unit. I represented one taxpayer who had to resubmit data on his child three times (twice with the Taxpayer Advocate’s help). Eventually, my client received the ITIN for his child. As to what happened to the first two sets of data we submitted, who knows. My client wasn’t an illegal alien; based on reading this article, had he been (or his child) no documentation would have been required.

My next post will be dealing with the National Taxpayer Advocate’s recommendations for 2013. I will deal with one tangentially here: The IRS needs more money. That’s just not going to happen this year. There is no chance of the House approving a budget increase for the IRS. There’s a better chance of the Cubs winning the World Series this year. Republicans are upset, and the Administration (both the White House and the IRS Administration) have given the appearance of dragging their feet on revealing details.

Finally, the Chicago Tribune called for a special prosecutor to be appointed. The Tribune is asking the same questions I have been:

•Did someone nudge IRS employees to hassle certain groups or did agency officials spontaneously decide to do that?

•Inspector General George has testified that in June 2012, five months before the election, he told top Treasury Department officials of his probe into IRS targeting. Did his news, with its potential to rock the presidential campaign, stop atop Treasury — or did it make its way even higher in the administration?

•At multiple points in 2012, why did top IRS officials repeatedly mislead Congress by not disclosing — in response to highly specific questions — that the agency was targeting conservative groups?

The IRS hasn’t had a good week in some time…and this past week wasn’t any better.

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RIP Google Reader

Posted on June 30, 2013 by Russ

I was a Google Reader user for the last few years. It worked exceptionally well. However, effective July 1st Google is retiring Google Reader. I’d love to tell you what the reason is for that decision…but I can’t. I’ve switched to feedly. The reader does everything that Google Reader did (except the seemless link to Google documents). Based on my usage over the last two weeks I can recommend this aggregator.

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Mandatory efiling of FBARs Effective July 1st

Posted on June 28, 2013 by Russ

Effective July 1st, all FBARs–Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts–must be efiled. You must use the BSA efile system to efile FBARs. This includes amended FBARs.

(One exception would appear to be individuals coming into compliance within the Offshore Voluntary Disclosure Initiative or the Streamlined Disclosure; those required FBARs to be submitted on paper. Of course, this is the government making rules, so anyone looking into those programs at this date should likely get their tax professional to find out the answer. I sent an inquiry to the IRS but haven’t received a response yet. I’ll update this post when the IRS responds.)

One other current rule about the FBAR: Tax professionals currently cannot file an FBAR for clients; it’s against the rules. FINCEN (the Financial Crimes Enforcement Network), the government agency that handles FBARs, is looking into allowing 2013 FBARs (filed in 2014) to be filed by tax professionals. Until then, we can create the information that you need for the FBAR, but we cannot file it for you.

One piece of good news requiring the BSA efile system: It appears that it now works with most Internet browsers.

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DOMA Done, But Don’t File that Joint Return Just Yet

Posted on June 26, 2013 by Russ

The US Supreme Court ruled today that the federal Defense of Marriage Act (DOMA) was unconstitutional. That makes it appear that same-sex couples should be able to file joint tax returns. There’s only one problem: The IRS computers likely would reject such a return if it were filed today.

Suppose Jane and Susan are a legally married same sex couple. They are both on extension for this year. They hear about the decision today and think, “Great! We can efile our returns jointly, both federal and our state.” While legally I believe that’s correct (unless their state has some other law prohibiting same-sex married couples from filing jointly), the IRS computers haven’t been reprogrammed yet to take the return. I would urge same sex couples to wait for the IRS to acknowledge the ruling and an IRS announcement stating that IRS computers are now ready to accept such returns. I suspect it will be two months (maybe more) before the IRS is ready to accept such returns.

Let’s assume Jane and Susan efile their return today. Six weeks later their return is rejected, and they each get notices mailed to them. On the day Jane and Susan receive their notices the IRS announces they’ve reprogrammed their computers and same sex couples can now file jointly. Jane and Susan can’t just refile their return–they’re in the notice stage. They’ll each have to reply to the IRS. It would be a huge mess.

This is definitely a case where waiting for the IRS will make impacted couples lives far, far easier. As usual with the government, it’s hurry up and wait.

Posted in IRS | Tagged | 2 Comments

Loving Appeal to be Heard on September 24th

Posted on June 26, 2013 by Russ

The US Court of Appeals for the District of Columbia set oral arguments for September 24th in the IRS’s appeal of Loving v. IRS. This is the case that stopped the IRS’s scheme to regulate unenrolled tax professionals. While the oral arguments were heard in September, a decision on the appeal will likely not be rendered for weeks to months after the oral arguments (probably in early 2014).

I joined an amicus curiea brief supporting the original plaintiffs (Loving, et. al.) in the case.

Meanwhile, Nina Olson, the National Taxpayer Advocate, released her annual report to Congress. While I agree with many of the items in her report (more on that in a separate post), I disagree with her on preparer regulation. Ms. Olson’s views:

The National Taxpayer Advocate believes that the district court’s decision in Loving is based in part on an outdated understanding of return preparation and filing. The return preparation industry has changed substantially over the last few decades as a result of the ready availability of return preparation software, refundable credits, and refund-based loans. These changes underscore the significance of tax return preparers in our self-assessment system and the role of the tax return in making claims against the government. In fact, the National Taxpayer Advocate believes that the problems associated with refund claims in today’s tax system are directly analogous to the problem Congress sought to address in the original 1884 grant of regulatory authority to Treasury. [footnotes omitted]

Ms. Olson is correct that the return preparation industry has changed. However, having preparers take an open-book exam, and a small amount of continuing education doesn’t make a bad preparer into a good preparer. Yes, it will weed out the lowest of the low, but that’s about all it will do in that regard. The IRS’s preparer regulation scheme will cut the supply of preparers, and that will increase the cost to individuals; that’s basic economics.

Please note that I do agree with Ms. Olson that all taxpayers should make sure that their returns are signed by the preparer, and that the preparer’s PTIN is noted on the return.

In any case, the earliest we’ll see preparer regulation is sometime in early 2014…and only if the DC Court of Appeals overturns the ruling in Loving.

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Why Saying No to wsop.com If You Win the $111,111 “Free” Seat Is a Good Idea

Posted on June 25, 2013 by Russ

Tonight, wsop.com will be giving away a “free” entry into a $111,111 buy-in tournament that begins on Wednesday. To be eligible for the free entry, you had to sign-up in person for the new online poker site wsop.com at the World Series of Poker at the Rio Hotel and Casino here in Las Vegas. (You also had to sign-up no later than yesterday.) wsop.com will open for “real money” online poker play to individuals within Nevada sometime in the coming weeks. The promotion is to gain signups for what will likely be Nevada’s second legal online poker site.

How can anyone turn down a free entry into an event where first prize figures to be over $1 million? Taxes.

What, you say? If I were to win $1 million, paying taxes wouldn’t be an issue. And you’re right, of course. As long as you put aside about 40% of what you make (more, if you reside in a tax-disadvantaged state like California), you should be fine. The problem is that no matter how good a poker player you are, your most likely result is a loss; only about 10% of the entrants will “cash” (win money in the tournament). Even the world’s best tournament poker players lose most of the tournaments they enter.

What’s the issue, you might ask? After all, I was “comped” the entry, so who cares if you win or lose. The problem is that you won a prize with a value–the value is clearly $111,111. Under the Tax Code, Caesars (owners of the World Series of Poker and wsop.com) will have to send you a Form 1099-MISC for $111,111. And that’s income to you. If you’re in the 25% tax bracket, that’s $27,778 of tax you will owe (plus state income tax, if applicable). Is playing that tournament worth that to you?

Well, it’s a gambling loss, so I’ll be able to offset it with my loss in the event. No, you can’t. Your winning the entry was not the result of a wagering activity. Instead, it was a contest. wsop.com will be randomly selecting one of the people who signed up for their site to win the prize. I personally went through a similar situation when I won a free trip to the Bahamas. My tournament entry was a prize, and could not be offset by the loss in the event. (And yes, I didn’t win any money in that event.) However, I could use the gambling loss to offset other gambling winnings from that year. If the winner has other gambling income and doesn’t cash in the event, he or she can use the $111,111 as a gambling loss.

I suspect that the individual who wins the entry won’t consider the tax impact of accepting the prize. Caesars likely won’t issue the 1099-MISC until December or January, so the lucky winner will likely savor his experience of playing with the high-stakes pros…until next January when he gets the bill.

Posted in Gambling | Tagged | 3 Comments

FBAR Deadline Is Now

Posted on June 24, 2013 by Russ

Almost every tax form uses a postmark deadline. For example, if you mail your tax return on April 15th (using certified mail, return receipt requested, of course), and the post office sends your return to Fresno via Fargo so it doesn’t get there for two weeks, your return is still timely filed. It was mailed by the deadline. Unfortunately, for every rule there’s an exception. The FBAR is where the exception can be very, very nasty.

What’s an FBAR? The FBAR is shorthand language for the Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1). If you have $10,000 in one or more foreign financial accounts, you must file an FBAR. This is determined by taking the maximum balance of each account at any time during 2012, summing the maximums, and comparing that sum to $10,000. If you reach that $10,000 number, you must file an FBAR.

Some examples of foreign financial accounts include bank accounts, securities accounts, and third-party payment accounts (e.g. Moneybookers/Skrill and Neteller). Online gambling sites are not considered foreign financial accounts.

You have two choices as to completing the FBAR. You can electronically file it using the BSA efile system or you can print the form and mail it to the Department of the Treasury. This form needs to be received by June 30th (for reporting 2012), and there are no extensions.

Since June 30th falls on a Sunday, the deadline is really Monday, July 1st, right? Wrong. This deadline isn’t extended, so if it is received at the PO Box in Detroit where FBARs are sent on Saturday, June 29th, it would likely be timely filed. It definitely will be considered timely filed if it is received on Friday, June 28th. That makes the true mailing deadline tomorrow, June 25th.

You can send it via FedEx, DHL, or UPS overnight; that would give you until Thursday, June 27th.

The good news is that many of my clients who file the FBAR have been able to use the BSA system without any problems this year. It appears that the system now works in most browsers (last year, it only worked in Internet Explorer). You get a receipt when you efile (which you should save, of course).

The penalties for willfully not filing the FBAR start at $100,000 per account or half the value of the account, whichever is greater. So if you have an FBAR filing requirement, this is something to take care of now. The form is not particularly odious, but the penalties are.

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Onwards and Upwards into the 20th Century!

Posted on June 21, 2013 by Russ

Not to sound like a broken record, but if today is a vision of the future, boy, do I want the past.

I have another new client and needed to order transcripts. I called the IRS Practitioner Priority Service (PPS) and received (as usual) the good news that, “The average wait time is greater than 30 minutes.” For phone call #1, the wait time was 45 minutes. Unfortunately, in the middle of talking to the IRS representative, “Click.” I waited ten minutes to see if I’d get a phone call from her, but I didn’t, so I called back. The second wait time was 48 minutes.

(For the record, the first representative did call me back, about 15 minutes into the hold time of call #2. Her system crashed, and she apologized and noted that she couldn’t call back until it rebooted. I do not blame her, or the IRS, for that mishap–these things do happen.)

In today’s E@lert (from NAEA), in a section labeled “Knuckleheads in the News…Continued,” the NAEA notes that the IRS has not changed its mind on eliminating disclosure authorization (DA). Once DA is retired, I expect average hold times on calls to the PPS to average ten to fifteen minutes longer than today. Perhaps the IRS’s motto should be, “Onwards and Upwards into the 20th Century!”

The fallacy is the IRS stating that by allocating more resources to the CAF unit–and their wonderful alleged ten-day processing period for faxed authorizations (Tax Information Authorizations and Powers of Attorney)–the problem will be handled. That’s just not the case. What most practitioners will do is (a) fax the authorization to the CAF unit (which I did) and call the PPS to order the transcripts. I don’t want to wait the average ten days to obtain a transcript. Apparently, the IRS hasn’t considered this.

Perhaps the next retirement from the IRS will be the ability to fax Tax Information Authorizations and Powers of Attorney to the PPS. I probably shouldn’t have written that; given the IRS’s most recent actions, someone at the agency could believe that doing that would solve the problem….

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