“The IRS Has Failed to Provide Effective and Timely Assistance to Victims of Identity Theft”

Posted on January 9, 2013 by Russ

That’s not just my opinion, it’s the opinion of the National Taxpayer Advocate, Nina Olson. Most tax professionals who have run into identity theft can relate horror stories. Jason Dinesen, an Enrolled Agent in Iowa, has been dealing with an identity theft matter for over 20 months (that’s nearly two years). The matter is still unresolved.

Ms. Olson today came to the conclusion that:

■■ The IRS is moving backward — away from a centralized approach to assisting identity theft victims — and is increasing the risk that taxpayer-victims may fall through the cracks;
■■ After years of ineffective efforts to reengineer its processes, the IRS still takes too long to fully resolve the accounts of victims;
■■ While the Identity Protection Personal Identification Number (IP PIN) that the IRS has developed provides additional security, it does not cover all victims;
■■ The Taxpayer Protection Unit may not be sufficiently staffed to handle the volume of calls from impacted taxpayers;
■■ Congress may unnecessarily create additional exceptions to taxpayer privacy protections; and
■■ The Social Security Administration still makes the Death Master File available to the public, creating an opportunity for identity thieves to steal and then misuse personal information.

The IRS and the Taxpayer Advocate both have reasonable arguments; the report (linked to above) notes both sets of issues. But I think Ms. Olsen misses a key point: The place to stop identity theft is checking addresses when returns are filed. The proposal that I made back in September would stop some identity theft before it happens. An ounce of prevention is worth a pound of cure.

Ms. Olson hits a bullseye with her comments on the Social Security Death Master File; she sees no reason for that to be available to the public while the social security numbers could be used for identity theft. I agree completely. The government is handing to crooks information they need to be crooks.

Finally, Ms. Olson’s comments about the length of time it takes to resolve many identity theft claims are accurate. The cases take a long time. They are complex. That said, many individuals are waiting years to get matters resolved. This is a disservice to an agency that has “service” in their name.

Posted in IRS | Tagged , , , | 1 Comment

IRS Announces Tax Season to Start on January 30th

Posted on January 8, 2013 by Russ

The IRS announced today in an email that tax filing season will begin on Wednesday, January 30th. That’s a delay of about two weeks and is caused by Congress’s delay in enacting the “fiscal cliff” tax extender legislation (including the AMT patch).

A small subset of individuals will not be able to file returns until late February to March. These include individuals who file Form 5695 (residential energy credits), Form 4562 (depreciation and amortization), and Form 3800 (General Business Credit). There are more forms that will be impacted; these will be listed on the IRS’s website.

UPDATE: Here is a link to the full list of forms. The most notable of the other forms is Form 8582, Passive Losses. This will impact some taxpayers.

The email in full is reproduced below.

IRS Plans Jan. 30 Tax Season Opening For 1040 Filers

WASHINGTON — Following the January tax law changes made by Congress under the American Taxpayer Relief Act (ATRA), the Internal Revenue Service announced today it plans to open the 2013 filing season and begin processing individual income tax returns on Jan. 30.

The IRS will begin accepting tax returns on that date after updating forms and completing programming and testing of its processing systems. This will reflect the bulk of the late tax law changes enacted Jan. 2. The announcement means that the vast majority of tax filers — more than 120 million households — should be able to start filing tax returns starting Jan 30.

The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline or obtain an extension.

“We have worked hard to open tax season as soon as possible,” IRS Acting Commissioner Steven T. Miller said. “This date ensures we have the time we need to update and test our processing systems.”

The IRS will not process paper tax returns before the anticipated Jan. 30 opening date. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit.

“The best option for taxpayers is to file electronically,” Miller said.

The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on Jan. 1, 2013, with many affecting tax returns for 2012. ‬While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it can begin accepting tax returns.

The IRS originally planned to open electronic filing this year on Jan. 22; more than 80 percent of taxpayers filed electronically last year.

Who Can File Starting Jan. 30?

The IRS anticipates that the vast majority of all taxpayers can file starting Jan. 30, regardless of whether they file electronically or on paper. The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax (AMT) patch as well as the three major “extender” provisions for people claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

Who Can’t File Until Later?

There are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS hopes to begin accepting tax returns including these tax forms between late February and into March; a specific date will be announced in the near future.

The key forms that require more extensive programming changes include Form 5695 (Residential Energy Credits), Form 4562 (Depreciation and Amortization) and Form 3800 (General Business Credit). A full listing of the forms that won’t be accepted until later is available on IRS.gov.

As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure as smooth a tax season as possible under the circumstances.

Updated information will be posted on IRS.gov.

Posted in IRS | Tagged | 1 Comment

The Problem with PEOs

Posted on January 7, 2013 by Russ

Sometimes I have the right idea but don’t consider the full spectrum of issues. That’s the definition of a blind spot, and with my post on the $7 million tax fraud yesterday, I had a big blind spot. Thankfully, some of my fellow tax accountants noted the issue.

Joe Kristan noted the problem with Professional Employer Organizations (PEOs):

PEOs that file taxes under their own names and ID numbers have a hidden danger: their clients can’t verify that the IRS has received their payments via the Electronic Federal Tax Payment System (EFTPS). Employers can use EFTPS to monitor payments when they use a payroll service that reports employee taxes under the employer’s own name and Tax ID number. This makes it necessary for taxpayers to investigate PEO-type providers very carefully before trusting them with payroll services. If your payroll taxes are stolen by your payroll provider, the IRS will come after you to collect. Not many employers can afford to pay payroll taxes twice. [emphasis in original]

As noted by Joe and Ann-Margaret Johnston (in a comment to my post), you can’t check PEO tax payments. This means that if you use an unscrupulous PEO, you’re out of luck; the IRS can come after you for the unpaid payroll taxes.

Does this mean you shouldn’t use a PEO? Of course not; there are many PEOs that are well-run. It does mean that you need to be very, very careful using a PEO; you need to check references; you may want to get periodic copies of payroll tax deposits made for your “employees.” Other than that, there aren’t many reliable solutions to this dilemma.

Posted in Payroll Taxes | 2 Comments

What’s $7 Million Among Freinds?

Posted on January 6, 2013 by Russ

Arthur Weiss had a successful business running various professional employer organizations (PEOs). For a fee, his business would pay employees, remit taxes to the IRS and states, file tax returns, and provide workers compensation insurance. It turns out his fee was slightly larger than advertised.

Mr. Weiss did take in all the money, and he did pay employees. It was was the remitting of payroll taxes to the government that he didn’t like to do. Instead, he lived the good life enjoying jewelry, Ferraris, Lamborghinis, and Porsches. The amount of payroll taxes not remitted to just the IRS was over $4 million.

But that’s not all! The workers compensation premiums also lined Mr. Weiss’ pockets, so employees who got hurt weren’t covered (nor were employers).

But there’s more! Mr. Weiss decided to commit insurance fraud. He reported four pieces of jewelry worth $177,480 lost or stolen. They were found during a search of his former home. Oops….

Like a bad informercial, there’s yet even one more crime: bank fraud. Mr. Weiss decided to get some loans. Instead of showing the tax returns he submitted to the IRS, he made up new returns which, of course, showed more income than he reported.

Sooner or later this fraud was bound to be discovered. And it was, with Mr. Weiss indicted last June. He pleaded guilty in October. He was sentenced last week to more than 15 years at ClubFed. He also must make restitution of $7 million to his victims. Given that bankruptcy fraud was among the crimes he was accused of, it’s likely restitution will be a long time in coming.

This brings up the key point of this case: If you use an outside payroll company, you must make sure they remit your payroll taxes. For the IRS, there’s an easy way to do this. Simply enroll in EFTPS, and you can verify that the payroll deposits are being made. “Trust but verify” is a good motto when dealing with payroll. Why is this important? Because paying payroll taxes is bad enough the first time; to have to pay them twice is very bad. Yet if your payroll company does what Mr. Weiss did (abscond with the payroll deposits), that’s what will happen to you. A one-time registration followed by periodic checking up which takes just a few seconds can prevent this.

Note that this is not doable for a PEO. Please look at my new post on PEOs.

I’m sure many of Mr. Weiss’s clients wish they had done this.

Posted in Payroll Taxes, Tax Fraud | 2 Comments

American Rights Litigators Has a Cameo Appearance

Posted on January 6, 2013 by Russ

Do you remember American Rights Litigators (ARL)? They were the outfit that counseled Wesley Snipes so successfully that he’s now enjoying three years at ClubFed. A couple who also believed the snake oil that ARL peddled is likewise about to find their way to ClubFed.

Stephen Thomas and Patricia Anderson of Lawrenceville, Georgia operated an outdoor furnishing store and a contracting business in Duluth, Georgia. (Both locations are near Atlanta.) Rather than file tax returns, Thomas and Anderson (who are married) submitted letters noting they were not US citizens but American citizens. In 2009 they submitted two claims for refunds of over $420,000 (they weren’t entitled to these, of course). They also submitted fictitious business documents to the IRS, including a purported $100 billion bond. Before 2009, they didn’t file tax returns for ten years.

Thomas was sentenced to five years at ClubFed while Anderson received only 51 months. Both will follow their sentences with three years of supervised release and both must pay a $10,000 fine. And although not mentioned in the DOJ press release, they will have to file real tax returns that show the real results of their businesses.

A hint to anyone else trying to practice such snake oil schemes: Don’t. Their chance of success is what you would expect (zero).

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Your Mileage Log: Start It Now!

Posted on January 2, 2013 by Russ

Today is the first business day of the new year. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log.

Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you need a paper log.

The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 40,315). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car.

Here’s the other things you should do:

On the cover of your log, write “2013 Mileage Log for [Your Name].”

Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:

1/2 40315-40350 Office-Acme Products-Office, 1234 Main St, Las Vegas
Discuss requirements for preparing tax return, year-end journal entries

It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.565/mile, the 35 miles in this hypothetical trip would be worth a deduction of $20. That deduction does add up.

Some gotchas and questions:
1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.

2. I have a second car that I use just for my business. I don’t need a mileage log. Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.

3. Why do I need to record the starting miles for the year? There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.

So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.

Posted in IRS | Tagged | 2 Comments

House Passes Tax Bill; Most Things Stay the Same for 2012

Posted on January 1, 2013 by Russ

This evening, the House passed by a 257-167 vote the tax compromise. Here’s what this bill means:

Income Tax
– For 2013 forward, the Bush tax cuts were permanently extended except for the “wealthy.” That’s defined as $400,000 for individuals, $450,000 if married filing jointly (MFJ). Above this, the top marginal tax rate returns to 39.6%
– Welcome back, marriage penalty! (See above.)
– The Alternative Minimum Tax will no longer be patched each year; it is now indexed for inflation. Among other pluses with this, the tax filing season should begin normally in mid-January.
– Many tax credits were extended for five years, including the American Opportunity Credit, the Earned Income Credit, and the child tax credit (at a higher level than in the past).
– The ability to deduct sales tax instead of state income tax was extended for one year. Other deductions, such as the teacher expense deduction and the tuition and fees deduction, were also extended.
– Both exemptions and itemized deductions will again “phase out” at high incomes: $250,000 (single), $275,000 (head of household), and $300,000 (MFJ). Note that those itemized deductions which didn’t phase out in the past (e.g. gambling losses) will not phase out in the future, either.

Payroll Tax
The 2% payroll tax holiday has expired. Employee’s share of social security will return to 6.2% from 4.2%; self-employment tax increases to 15.3% from 13.3%.

Estate Tax
The estate tax exemption continues at $5 million base, with inflation adjustments ($5.12 million for 2012). The rate increases to 40% from 35% above the exemption.

The ‘sequester’ (cutting of expenses) was put off for two months. Coincidentally, that’s about when the debt ceiling will be reached. That battle–likely to begin in February–will be interesting as most Republicans want significant cuts and most Democrats don’t.

This year figures to be quite taxing for Congress (and that pun was intended).

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A Podcast to Start the New Year

Posted on January 1, 2013 by Russ

On the day the world didn’t end, I was interviewed for the Thinking Poker podcast. The interview ran about an hour, and it was a lot lighter than most discussions on taxes and gambling. You can download the episode through the link above or on iTunes.

By the way, if you are a poker player I strongly recommend you regularly listen to the Thinking Poker podcast. There have been some excellent strategy discussions, along with discussions with interesting personalities.

Posted in Gambling, Taxable Talk | Tagged | 1 Comment

Fiscal Cliff Compromise Deal?

Posted on January 1, 2013 by Russ

Last night the Senate approved on a compromise deal that averts the “fiscal cliff.” Supposedly, most tax provisions that were to expire are extended in the deal (including the deduction for state income tax, a permanent indexing for the AMT, and cancelled debt relief on a primary residence). The House will likely vote on the deal later today.

There will still be major battles ahead inc Congress, as this measure does nothing on spending. The debt ceiling will be reached within two months, and Republicans likely will demand major cuts in spending to allow for a debt ceiling increase.

I’ll have more on this tomorrow when I’m back working.

Posted in Legislation | Comments Off on Fiscal Cliff Compromise Deal?

2012 Tax Offender of the Year

Posted on December 31, 2012 by Russ

It’s time once more for that prestigious award, the 2012 Tax Offender of the Year. To be considered for this award you must do more than cheat on your taxes. It has to be special; it really needs to be a Bozo-like action or actions.

Coming in third this year is the Miccosukee Tribe of Indians in Florida. The Miccouskees run a successful casino near Miami. While the tribe itself is exempt from taxes (they’re a sovereign nation), the members of the tribe are not. The Miccouskees allegedly decided to ignore that little aspect of the law. Their attorney apparently advised them that wasn’t a good idea. So did the Miccosukees start withholding taxes on distributions to its members? Or did they sue their attorney for malpractice? And did they also allegedly not forward federal income tax withheld from patrons’ winnings to the IRS?

The Miccosukees can’t win in 2012; these are still all allegations and nothing has been resolved. However, they are very strong contenders for the 2013 Tax Offender of the Year award.

Coming in second place is last year’s winner, the United States Congress. While I’m tempted to put them in first place–after all, there’s an excellent chance I won’t be filing any personal tax returns until late March–I can’t. There’s still a day for everyone to get on the same page, and this will have an impact in 2013, not 2012. True, the US Senate has not passed a budget in years (President Obama’s proposed 2012 budget received no votes from either the House or the Senate), and the Tax Code keeps getting more and more convoluted; however, most of the changes that are coming are the result of the passage of Obamacare. I already awarded the 2011 Tax Offender of the Year to Congress for that (and their other acts of ineptitude).

Steven Martinez used to work for the IRS. After leaving the IRS, he became a tax preparer. Mr. Martinez had a unique method of filing tax returns. He first prepared the returns, showing his clients owed money to the IRS and the Franchise Tax Board (California’s income tax agency). He then had his clients make out checks to a client trust account rather than the IRS or FTB. He also had estimated taxes made out through that account.

Of course, since I’m writing this you know where the money ended up: home improvements for himself, a beach house in Mexico, usage of a private airplane, investments (more than $2 million), and for $2 million of payments on credit cards and loans.

After preparing those returns showing clients owing money, Mr. Martinez prepared a second set of returns. These showed the clients owing either a small amount of money or no tax at all. He then submitted those returns to the IRS and FTB.

Sooner or later this fraud was bound to be discovered. A taxpayer would obtain a transcript of his return and notice the differences between what was filed with the IRS (or FTB) and what his copy of the return showed. Or perhaps some unlucky taxpayer was audited and the copy of the return that the taxpayer had and the return the IRS had would not match.

He committed Social Security fraud and identity theft by preparing false tax returns with the IRS. He mailed those returns to the IRS; that’s mail fraud. He used nominee bank accounts to conceal $2 million of income. Yes, he also prepared false tax returns for himself.

All of the above is definitely Bozo behavior. However, what I’ve written is just the beginning of the story. Mr. Martinez was indicted on April 15, 2011 for 49 counts of fraud, money laundering, and identity theft.

After being indicted, there are a number of possible strategies. Getting a good attorney would be the first thing I’d want to do. I’d look at the defense I have to the charges (if any). Perhaps a plea bargain is in order. Maybe I should hire a hit man to kill the prosecution witnesses.

Wait a second: Did I just bring up the idea of finding a hired killer to eliminate the prosecution witnesses? I did. After all, if you’re accused of 49 felonies, what’s a few more anyway? And yes, Mr. Martinez did exactly that.

Luckily for all concerned, the man that Mr. Martinez solicited to commit the murders called the FBI; a second meeting between the would-be assassin and Mr. Martinez was taped by the FBI. Mr. Martinez told the man that “he could make him rich for the rest of his life, $100,000 cash, if he eliminated the lady in Rancho Santa Fe and the lady in La Jolla.” Mr. Martinez also helpfully told the supposed hit man to use two different pistols and buy a silencer.

In the end, Mr. Martinez pleaded guilty to not only the tax fraud charges, but murder-for-hire, witness tampering involving attempted murder, and solicitation of a crime of violence. Mr. Martinez is truly deserving of the 2012 Tax Offender of the Year award.

That’s a wrap for 2012. Hopefully, 2013 will be a fruitful and prosperous year for everyone.

Posted in Taxable Talk | Tagged , | 2 Comments