From Russ Fox, EA, of Clayton Financial and Tax of Las Vegas, NV. All of the items below are for information only and are not meant as tax advice. Please consult your own tax advisor to see how each item impacts your own situation.
Usually when you’re sentenced to prison for a tax crime, you get a few days (or weeks) to get your affairs in order. That wasn’t the case on Friday for former New York State Senator Pedro Espada, Jr.
Let’s first cover the crimes that Mr. Espada was found guilty of. He was convicted in May 2012 of four counts of stealing from non-profit medical clinics. In October, Mr. Espada pled guilty to making false statements on his federal tax return for 2005. Mr. Espada received five years at ClubFed, must make restitution to the IRS for $118,531, restitution to the victims of his thefts (the amount has yet to be determined), and must forfeit $368,088. What did Mr. Espada do with the money he stole? Plane tickets, theater tickets, $20,000 in takeout sushi, and gifts for his family are just some examples of where the money went.
This seems just like any other public corruption story…until we get to the denouement. It seems that Mr. Espada got the particularly brilliant idea of accusing the judge of tampering with jurors. Mr. Espada submitted an affidavit stating that occurred. Before Judge Frederic Block sentenced Mr. Espada he rebutted the accusation. He had phone records to show he was home, and there were records of when he entered the courthouse. “There is so simply no way I could have spoken to the jurors between the time they arrived and the time they reached their verdict,” Judge Block said. Oh, yes, Judge Block made sure to resolve this just before he sentenced Mr. Espada.
A helpful hint to anyone who is going to be sentenced by a judge: Do not accuse the judge of misconduct unless you have absolute ironclad proof (and your attorney agrees with that). It usually does not make a good impression on the judge. Judge Block also asked the prosecutors to see if an additional charge was merited against Mr. Espada for filing a phony affidavit. And Judge Block ordered the immediate incarceration of Mr. Estrada stating that he couldn’t trust Mr. Estrada.
Mr. Espada looks like an early candidate for this year’s Tax Offender of the Year award.
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Former Maryland Governor Bob Ehrlich writes on “Why the IRS scandal is worse than the others.” It’s an excellent read.
Meanwhile, we’ll see if those truly involved–they’re in Washington, not Cincinnati–come forward during the coming week. I suspect the Obama Administration is hoping this scandal will blow over. It won’t.
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Another week has gone by, and some Democrats want the world to believe that the IRS scandal is resolved. It’s not. Here’s the news I’ve seen over the last week.
Some sophisticated Democrats who’ve worked in executive agencies have suggested to me that the story is simpler than it seems—that the targeting wasn’t a political operation, an expression of political preference enforced by an increasingly partisan agency, its union and assorted higher-ups. A former senior White House official, and a very bright man, said this week he didn’t believe it was mischief but incompetence. But why did all the incompetent workers misunderstand their jobs and their mission in exactly the same way? Wouldn’t general incompetence suggest both liberal and conservative groups would be abused more or less equally, or in proportion to the number of their applications? Wouldn’t a lot of left-wing groups have been caught in the incompetence net? Wouldn’t we now be hearing honest and aggrieved statements from indignant progressives who expected better from their government?
She’s right, of course. To date, no progressive organizations have come forward. None. Incompetence doesn’t pass the smell test.
So where does that leave us? I think we’re weeks (at best) and months (more likely) from finding the answer to the question: Who in Washington ordered this scrutiny. There is no doubt in my mind that this is the primary question that must be answered in this scandal.
There is a secondary question: Who at the IRS violated federal law and disclosed confidential information from conservative groups’ 501(c)(4) applications to progressive groups (such as Pro Publica)? It clearly was done–Pro Publica has admitted it. I expect individuals from Pro Publica to face a subpoena and be required to disclose that information.
Meanwhile, the Administration appears to wish that this scandal would just vanish. That definitely isn’t going to happen. Sooner or later the answers will come out. And it’s clear to any reasonable observer that the answers lie in Washington, not Cincinnati.
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Buried in this week’s “e-News for Tax Professionals” was the following story:
E-Services: Disclosure Authorization and Electronic Account Resolution Applications Retire in August
________________________________________
Due largely to low usage, the IRS will retire and remove the Disclosure Authorization (DA) and Electronic Account Resolution (EAR) applications from e-Services effective Aug. 11.
Last year, users submitted less than 10 percent of all disclosure authorizations through the DA application. Similarly, only three percent of all account-related issues came in through the EAR application.
In anticipation of this change, the IRS has increased the number of employees who process authorizations and has improved internal work processes to decrease the average processing time significantly from the current 10-day processing period.
The IRS will continue to explore better ways to reduce processing time and improve overall service to the users. However, current budget cuts will impact their dedicated resources to this program and they are working to determine the impact on processing time.
Once IRS removes the two applications, former DA users will need to complete Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorizations, and mail or fax it to the appropriate IRS location listed on the form’s instructions. Please allow at least four days for the authorization to post to the IRS database before requesting a transcript through the Transcript Delivery System. Former EAR users should call the Practitioner Priority Service at 1-866-860-4259 for help resolving account-related issues.
The IRS continues to look for ways to improve its current processes and is exploring an improved electronic solution for DA and EAR in the future.
This is not a good decision by the IRS. As I noted in my earlier post on this, this decision will increase costs for the IRS. As for the supposed ten-day processing time, I’ve had occasions where it’s been four weeks for a POA to post. One POA had to be resubmitted three times (over three months) before it finally made its way into the system.
I know that the National Association of Enrolled Agents is expressing its displeasure to the NAEA; I expect the AICPA to do the same. As for whether the IRS will change its mind over this decision, I have no idea.
Posted inIRS|TaggedIRS.eServices|Comments Off on IRS Makes It Official: Disclosure Authorization Gone from eServices on August 11th
The National Association of Enrolled Agents (NAEA) is reporting via its Facebookpage that the IRS has decided to “retire” two products from eServices: Disclosure Authorization (DA) and Electronic Account Resolution (EAR). Apparently the IRS, which is already cementing its reputation among Congress and the public, wants to make sure that the tax professional community isn’t left out.
For those of you who aren’t tax professionals, let me explain what this is about. In order for me to represent a taxpayer in front of the IRS, I must have a signed Power of Attorney (Form 2848). Once I have a signed POA, I can either enter it in through eServices, or I can mail or fax it to the IRS Centralized Authorization File (CAF) unit. Once in the IRS’s computer system, the IRS knows that I’m representing the taxpayer. If I have a POA, the IRS will discuss and disclose a clients’ information to me. Rightly, the IRS wants the taxpayers to authorize this before I have the ability to see information.
Using eServices to enter a POA has been a great boon for my practice, and I assume anyone who deals with any representation matters. After entering the POA, I can obtain transcripts from the IRS. If a client says he hasn’t filed a (say) 2011 return, I can obtain a Wage & Income transcript and know much of what needs to be on the return. This saves me time, saves the client money, saves the IRS time (I’ve done everything in an automated manner rather than, well, see below), and increases the efficiency of the system.
This shutdown will apparently be effective on August 11th. So beginning on August 12th, I will either have to fax or mail POAs, or I can call the Practitioner Priority Service (PPS). While on the phone with PPS, I can fax over a POA (yes, I have a real fax machine in my office) and the IRS will order transcripts to be faxed back to me. (PPS will also forward the POA to the CAF unit.) However, a transcript ordered through PPS takes up to 72 hours to be received. That means a client in a representation matter will most likely need two appointments before we can make a plan of action. It can take two weeks for a POA sent to the CAF unit to be entered into the system. (Last year there were times when it was taking over a month for the CAF unit to enter information.)
This will increase my costs (which I will pass on to clients). I will have more phone calls to make, and it will take more time to obtain information. While I can do other work while on hold for PPS (hold times have been running about 30 minutes), it usually takes about 15-30 minutes once I am off hold for the IRS to verify the information. I make my income from the time I spend, so I will have to charge a client an extra amount for this time.
This will also increase the costs to the IRS. I wrote my practitioner liaison an email, and noted the additional costs:
There will be many more telephone calls to PPS. Calls where practitioners must fax documents undoubtedly take longer, so this will increase the need for personnel.
There will be many more faxes to the CAF unit, requiring additional personnel.
The cost for the automated portion cannot be particularly significant. The products are there already. In general, the processes are automated, so human intervention is less.
Because it will take longer for many practitioners to obtain information—especially practitioners dealing with collections matters—it will take longer for issues to be resolved. This will increase the burden on the IRS (both in manpower and in slowing down collections).
I have no idea what the IRS was thinking when they made this decision. This decision is, at best, penny-wise and pound foolish. I guess Sir Isaac Newton’s Third Law of Motion has been proven again: For every action, there is an equal and opposite reaction. This morning, I reported on a decision by the IRS that makes complete sense and will save both the IRS and taxpayers time and money. So a decision by the IRS that would cost taxpayers and the IRS money was, I suppose, inevitable.
One of the things that I am asked at least once a year is about question 8 at the bottom of Schedule B of Form 1040: “During 2012, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If ‘Yes’ you may have to file Form 3520….” Of course, most individuals don’t have foreign trusts so this question is usually answered no.
However, when you are a tax practitioner in Southern California (which I was until late 2011), you will come across fideicomisos. These are Mexican land trusts. Under Mexican law (at least, how it’s been explained to me), non-Mexicans cannot own property in many areas of Mexico. So if an American wants to purchase a home in Mexico, a fideicomiso is used as the vehicle.
The problem is that these are a trust, and they’re clearly foreign, so that means that individuals who have these have to tangle with Form 3520. In 2012 there was a private letter ruling on this; unfortunately, a PLR is only applicable to the exact situation involved. Today the IRS announced in Revenue Ruling 2013-14 that common fideicomisos are not trusts under Section 301-7704-4(a). Thus, for most individuals who use fideicomisios, a nasty IRS form is now in the trash heap.
This is excellent news for Americans who hold Mexican property through fideicomisos. Tax professionals who have clients in a fideicomiso should still read the Revenue Ruling; if the fideicomiso has any other property (besides real estate), it appears that the fideicomiso would be considered a trust.
A lot has happened with the IRS scandal. A week has gone by, and there haven’t been any new Congressional hearings (because Congress was out of session last week). That will change this week. The White House is still stating the scandal isn’t political, and that it’s some number (2, 4, or 88) “low-level” IRS employees. Let’s look at what we really know, and don’t know, and what conclusions we can accurately draw.
First, CBS and McClatchey both noted that this scandal goes beyond organizations applying for 501(c)(4) status.
“The administration is still — their paid liar, their spokesperson, picture behind,” Issa said on CNN’s State of the Union this morning, where the set has a picture of Carney behind host Candy Crowley, “he’s still making up things about what happen[ed] and calling this local rogue.”
“The reason that Lois Lerner tried to take the fifth [amendment] is not because there’s a rogue in Cincinnati,” he added. “It’s because this is a problem that was coordinated. in all likelihood, right out of Washington headquarters.”
What this means, though, is that policy was spread over five groups. This isn’t just something that happened with one or two people in one group, or even a “rogue” GM. Somebody set a policy for an entire office, and made sure at least five Groups got the word. That could only have happened in writing, and must have come from at least two levels above the GM. The level above is a Branch Chief, and Branch Chiefs don’t make policy either. Neither does the level above that. Again, I don’t know exactly how Exempt Organizations is structured, but in CI, a Branch Manager (the Assistant Special Agent in Charge) wouldn’t have more than four groups. Policy comes from DC.
So let’s look at the possible sources of the scandal. They are:
Two or four ‘rouge’ IRS agents in Cincinnati decided to implement this policy; or
One or more mid-level managers in Cincinnati, Laguna Niguel, El Monte, and elsewhere implemented this policy; or
A high-level employee in Washington decided to implement this policy; or
The policy came from the White House.
Let’s look at each of these and see if we can determine if they’re still plausible.
1. Two or four ‘rogue’ IRS agents in Cincinnati implemented this policy. I put the chance of this at zero. There were too many IRS employees involved in offices throughout the country. Employees in Cincinnati forwarded information to Washington…and the policy wasn’t stopped. It fails both the smell test and the real world test. In all my dealings with the IRS bureaucracy one thing that has been emphasized is the rigidity of policy. Sooner or later my manager would scold me to high heaven if I were to do this. Additionally, those low-level employees have stated that the direction for this came from Washington. The current excuse being peddled by the White House is clearly wrong.
2. One or more mid-level managers in Cincinnati, Laguna Niguel, El Monte, and elsewhere implemented this policy. This also can’t be correct for the same reasons as above. Mid-level IRS managers don’t make policy, they implement it. Additionally, the policy existed nationally. The answer is not mid-level managers.
3. A high-level employee in Washington decided to implement this policy. High level employees at the IRS do make policy. Thus, let’s examine the structure of the Tax Exempt & Government Entities division of the IRS.
The IRS provides a web page noting how it is structured. At the top is the Commissioner of the IRS (currently Daniel Werfel is the Acting Commissioner). Underneath him are two Deputy Commissioners: Deputy Commissioner for Services and Enforcement (DCSE) and Deputy Commissioner for Operations Support. It’s DCSE where we need to go, as here there are nine reports, including the Commissioner of Tax Exempt and Government Entities Division (TEGE). The DCSE? Well, it’s listed as former IRS Acting Commissioner Steven T. Miller, the Acting Commissioner for Tax Exempt and Government Entities is Michael Julianelle. (You can see the top-level of the IRS Organization Chart here.)
As you might remember, Ms. Lerner took the Fifth when testifying before Congress. She made a statement where she said she wasn’t guilty of anything. That might be true. However, if she didn’t implement the policy, her bosses had to order her to do so. It could not have been at a level below hers. Indeed, I suspect it was done above her level…but that’s just a suspicion.
4. The policy came from the White House. Today, there is absolutely no evidence of this. But the IRS is part of the Executive Branch. Could this have been ordered from the White House? Certainly. (Note that when I say “from the White House” I do not mean it had to be President Obama. It could have been the President, the Secretary of the Treasury, the White House Chief of Staff, etc.)
The reason there are suspicions that this comes from above the IRS is the reports of individuals who filed the 501(c)(4) applications receiving scrutiny in other ways. The individuals were subject to audits (from another division of the IRS), scrutiny by the Bureau of Alcohol, Tobacco, and Firearms, the Department of Labor, etc. It is theoretically possible that these are all coincidences. Today, there’s no proof that these are not coincidences. But it sure feels improbable to me.
I’m reminded of one of my favorite lines in literature. Sir Arthur Conan Doyle wrote, “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” I think we can safely eliminate the first two possible causes (listed above). That leaves just two possible sources of the policy. Having dealt with the IRS for fourteen years, I can safely state that given that this policy was in force for over two years, there is no chance it was started by low-level employees or mid-level managers. It’s impossible.
[My thanks to my good friend Randy for inspiring me on this post.]
NBC News reported that they were shown proof that others besides two (or four) rogue Cincinnati IRS employees were involved in the scandal. The entire story should be read, as it appears to put an end to the first explanation of the scandal as offered by the IRS.
Jay Sekulow, an attorney representing 27 conservative political advocacy organizations that applied to the Internal Revenue Service for tax-exempt status, provided some of the letters to NBC News. He said the groups’ contacts with the IRS prove that the practices went beyond a few “front line” employees in the Cincinnati office, as the IRS has maintained.
“We’ve dealt with 15 agents, including tax law specialists — that’s lawyers — from four different offices, including (the) Treasury (Department) in Washington, D.C.,” Sekulow said. “So the idea that this is a couple of rogue agents in Cincinnati is not correct.”
So what are the big questions? Why did the IRS scrutinize “conservative” and “tea party” applications? It’s clear the orders came from Washington. Who ordered it? The IRS employees in Cincinnati were most likely just following the orders from Washington. Someone came up with the idea to have this scrutiny.
A friend of mine asked me if this scandal will still be talked about on August 1st. Given how the IRS, some IRS employees, and the Administration are currently acting–deny, evade, and possible lies–this scandal will still be talked about on August 1, 2014. If the truth comes out voluntarily by the end of June, the scandal would likely blow over.
My professional society, the National Association of Enrolled Agents (NAEA) is very much in favor of the regulations. Indeed, in last week’s newsletter (distributed by email to members of the NAEA) there were several paragraphs on Loving. As for what the NAEA would like:
Unfortunately for those who believe IRS should be providing some minimal oversight to a multi-billion dollar business conducted in part at kitchen tables by those who believe the costs of education would kill their business model, the fact that attorneys for the plaintiff/appellee don’t appear to know very much about either taxation or representation is probably not a significant stumbling block for their case, which centers on whether IRS has authority under Circular 230 to regulate return preparers.
So why am I against the IRS regulating unenrolled tax professionals? Quoting from the brief:
As an Enrolled Agent, Mr. Fox is not directly affected by the regulations. Nevertheless, based on his extensive experience in tax practice, he has a number of objections to the regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, Mr. Fox objects to the regulations because the IRS already has ample statutorily authorized tools to apply against incompetent or unscrupulous tax-return preparers; because the regulations will not be effective in eliminating incompetent or unscrupulous tax-return preparers; because they will give a tacit stamp of approval to preparers who are not competent; because they will have the effect of driving many low-volume tax-return preparers out of business, thereby increasing the cost of tax-return preparation services for the clients of those preparers; and because administering the regulations will require scarce IRS resources that could be better used for other purposes, such as combatting identity theft.
There’s another reason, too: I don’t believe the IRS has the authority to regulate tax professionals. I believe that the Institute for Justice (the non-profit that has provided the legal counsel for the plaintiffs-appellees) is absolutely correct that the IRS doesn’t have authority to regulate tax professionals. That’s not covered in the amicus curiae brief because those arguments are part of the plaintiffs-appellees brief.
My fellow tax bloggers also have good reasons for joining the amicus curiae brief. Jason Dinesen:
As an Enrolled Agent, Mr. Dinesen is not directly affected by the regulations. Nevertheless, Mr. Dinesen believes the regulations would have an indirect adverse effect on his business (and on Enrolled Agents generally) because the Registered Tax Return Preparer designation created by the regulations would have the effect of diminishing the value of the Enrolled Agent designation in the market for tax-preparation services, largely because the number of Registered Tax Return Preparers would be substantially greater than the number of Enrolled Agents.
Joe Kristan:
As a CPA, Mr. Kristan is not directly affected by the regulations. Nevertheless, based on his longstanding and extensive experience in tax practice, Mr. Kristan has a number of objections to these regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, Mr. Kristan objects to the regulations because they will reduce options for consumers of tax-preparation services by driving many low-volume but competent and conscientious tax-return preparers out of business because of the cost of compliance with the regulations; will increase the compliance cost and burden on low-volume tax-return preparers that remain in business; will increase the cost of tax preparation services without increasing the value of those services; will prompt some low-income individuals to resort to tax-return preparers who will evade compliance with the regulations; will prompt some low-income individuals to prepare their own returns, rather than using paid preparers, resulting in less accurate returns; will prompt some low-income individuals to cease filing altogether; will adversely affect Enrolled Agents by diminishing the value of their Enrolled Agent designation; and will likely ultimately be extended to CPAs, attorneys, and Enrolled Agents.
Both Jason and Joe note that the proposed RTRP (Registered Tax Return Preparer) designations would diminish the Enrolled Agent credential. I agree with that, though I think this is less of an issue for my business because I’m established. For potential new EAs competing against the possible huge numbers of RTRPs, this could be a real issue.
Additionally, the Tax Foundation joined the brief because, “[T]he Tax Foundation believes the costs of the regulations substantially exceed potential benefits.” Two unenrolled preparers, Tonda Gordon and Dennis Tafelski, also joined the brief. Ms. Gordon noted that she would be adversely effected (she had to increase her fees) and, “Ms. Gordon objects to the regulations because they are unnecessary, since, in Ms. Gordon’s experience, most tax return preparers to whom the regulations apply are competent and conscientious; and because the regulations are not targeted to the problems they are intended to address but instead are broadly applicable to many situations where no problems exist.” Mr. Tafelski’s objections are also germane:
In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, and the direct effects of the regulations on him, Mr. Tafelski objects to the regulations because they will result in substantially increased tax-return preparation fees for the types of retired individuals for whom Mr. Tafelski has prepared returns; because they contain no exemption for low-volume preparers such as himself; because the regulations’ exemption for attorneys and CPAs is unwarranted because of the normal absence of tax-specific continuing education requirements for attorneys and CPAs; and because the IRS has seldom made use of its existing statutorily authorized tools for regulating tax-return preparers, such as the tax-return preparer penalty.
The next brief due is the IRS’s reply brief to the plaintiffs-appllees brief. That’s due in a couple of weeks. The arguments in the case will likely be heard this fall.
It’s just about to be the Memorial Day Weekend. However, that weekend already started for the IRS. Tomorrow, Friday, May 24th, is the first of five “sequester” days off. All offices and employees of the IRS will be closed. Additionally, most IRS computer systems will be off until Tuesday at 9am EDT: The IRS computer systems will be down for planned maintenance.
Everyone’s hopin’ it will all work out…
Posted inIRS|Comments Off on Not Working for the Weekend