2013 IRS Update 2013 IRS Update

Robert E. McKenzie

Arnstein & Lehr LLP

120 S. Riverside Plaza

Chicago, IL 60606

312-876-7100

remckenzie@arnstein.com

IRS Staffing for Key Enforcement Personnel

2008 2009 2010 2011 2012

Revenue Officers

5,492 5,451 6,042 5,619 5,186

Revenue Agents

12,599

12,958

13,888

13,867

13,021

Special Agents

2,631 2,650 2,780 2,698 2,661

Total 20,722

21,059

22,710

22,184

20,868

Preparer Regulation

• 2011 IRS issued regulations mandating that certain tax-return preparers

– Complete 15 hours of continuing education each year and

– Pass an initial qualifying exam

– Undergo background checks

• Loving v. IRS, No. 12-385 (JEB) (D.D.C. Jan. 18, 2012), held IRS’ lacks authority to continue preparer regulation.

• IRS has appealed

• As of now this is a victory for those not smart enough to pass a test or ethical enough to survive a background check

PTINs Allowed

• Loving court issued an additional opinion and order on 2-1-2013, clarifying and modifying its previous injunction.

• Denied the IRS' attempt to stay the injunction pending its appeal

• Modified the injunction allowing IRS to continue PTIN application and assignment system may continue

E-file Mandate

• Tax return preparers who prepare 100 or more individual or trust returns in 2011 will be required to e-file

• Tax return preparers who prepare 10 or more individual or trust returns in 2012 will be required to e-file

• Form 8948 to explain last page

2013 TAS Report

• Complexity of the Tax Code

• Alternative Minimum Tax Corrodes Both the Tax System and the Democratic Process

• IRS Is Significantly Underfunded to Serve Taxpayers and Collect Tax

• IRS Has Failed to Provide Effective and Timely Assistance to Victims of Identity Theft

• IRS Harms Victims of Return Preparer Misconduct by Failing to Resolve Their Accounts Fully

• the IRS Continues to Harm Taxpayers by Unreasonably Delaying the Processing of Valid Refund Claims that Happen to Trigger Systemic Filters

TAS Report• IRS’s Compliance Strategy for the Expanded Adoption Credit Has Resulted in

Excessive Delays to Taxpayers, Has Increased Costs for the IRS

• IRS Offshore Voluntary Disclosure Programs Discourage Voluntary Compliance by Those who Inadvertently Failed to Report Foreign Accounts

• IRS’s Handling of ITIN Applications Imposes an Onerous Burden on ITIN Applicants

• Preservation of Fundamental Taxpayer Rights Is Critical as the IRS Develops a Real-Time Tax System

• Overextended IRS Resources and IRS Errors in the Automatic Revocation and Reinstatement Process Are Burdening Tax-Exempt Organizations

• IRS Telephone and Correspondence Services Have Deteriorated Over the Last Decade

TAS Report

• IRS Has Failed to Make Free Return Preparation and Free Electronic Filing Available to All Individual Taxpayers

• IRS Is Striving to Meet Taxpayers’ Increasing Demand for Online Services, Yet More Needs To Be Done

• Challenges Persist for International Taxpayers as the IRS Moves Slowly

• IRS Processing Flaws and Service Delays Continue to Undermine Fundamental Taxpayer Rights to Representation

• IRS Lacks a Servicewide Strategy that Identifies Effective and Efficient Means of Delivering Face-To-Face Taxpayer Services

• IRS Is Substantially Reducing Both the Amount and Scope of its Direct Education and Outreach to Taxpayers

(Dollars in Billions)

2008 2009 2010 2011 2012

Collection $31.10 $26.90 $29.10 $31.10 $30.44

Examination $15.80 $12.60 $16.90 $12.40 $10.20

Appeals $4.80 $4.80 $6.70 $6.50 $4.20

Document Matching

$4.70 $4.60 $4.90 $5.20 $5.27

Total $56.40 $48.90 $57.60 $55.20 $50.20

Collection

2008 2009 2010 2011 2012

Levies 2,631,038 3,478,181 3,606,818 3,748,884 2,961,162

Liens 768,168 965,618 1,096,376 1,042,230 707,768

Seizures

610 581 605 776 733

Criminal Investigation

2008 2009

2010

2011

2012

Investigations Initiated

3,749 4121 4706 4720 5125

Information & indictments

2,547 2335 2645 2998 3390

State Information Sharing

• Form 1040, U.S. Individual Income Tax Return, as well as other income tax and information returns, such as Form 941, Employer’s Quarterly Federal Tax Return; Form 730, Tax on Wagering; Form 1120, U.S. Corporation Income Tax Return; various Forms 1099, U.S. Information Returns; and Form W-2, Wage and Tax Statement.

Tax Gap

Tax Year 2001

(billions) Tax Year 2006 (billions)

Total Tax Liabilities $2,112 $2,660 Gross Tax Gap $345 (83.7% compliance) $450 (83.1% compliance) Enforcement and Late Payments $55 $65 Net Tax Gap $290 (86.3% compliance) $385 (85.5% compliance)

NRP Followup Study

• (NRP) study for individual taxpayers that provides updated and more accurate audit selection tools and support efforts to reduce the nation’s tax gap.

• About 13,000 every year since October 2007

• 2,000 employment tax NRP’s per year since 2009

Abusive Return Preparer

• CI component

• Undercover Ops

• Audits of 30 Clients

• Referral to Criminal investigation

• Referral to the office of professional liability

• Preparer penalties

• Referral to Department of Justice to seek an injunction ordering the preparer to cease filing tax returns.

Abusive preparers

2012 2011 2010

Investigations Initiated

443 371 397

Prosecution Recommendations

276 233 202

Indictments/Informations

202 176 182

Convictions 178 163 145

Sentenced 172 163 132

Incarceration Rate*

84.3% 87.1% 88.6%

Average Months to Serve

29 25 24

2012 Budget

• Congress stupidly cut the IRS budget thereby reducing revenue much more than the savings from the budget cuts

• The IRS allocation is over $500 million below Obama's request and is 2 ½% below last year, better than an additional $600 million in cuts that the House Budget Committee originally pushed for, and which IRS Commissioner Doug Shulman said would rob the Treasury of $4 billion in revenue. But the cut still is costly.

2013 Budget

• Administration’s Fiscal Year (FY) 2013 Budget request for the IRS was approximately $12.8 billion, a $944.5 million increase (8%) over the FY 2012 enacted level but only a $639.3 million increase (5.3%) from the level enacted for FY 2011

• Included $403 million in new IRS enforcement activities, which are expected to raise $1.48 billion in revenue annually at full performance, once new hires fully trained and develop broader experience by FY 2015. This is a 4.3-to-1 return on investment.

• Budget not approved by Congress and IRS began Fiscal year frozen at 2012 level

• IRS now subject to the sequester meaning it has even fewer resources to do its job

2014 Budget

• Prediction: Congress once again will severely underfund IRS

APPEALS

• Strategic Priorities:

■ Increase taxpayer awareness of the Appeals process and their rights within the process

■ Increase taxpayer awareness of alternative dispute resolution programs

■ Improve our processes to meet customer needs and expectations and to reduce the length of the Appeals process while spending the right amount of time with each taxpayer

■ Promote employee productivity, engagement, and satisfaction

Campus Appeals Program• Any appeal from a compliance generated notice is

assigned to the campus appeals program.

• TIGTA has reported that it is not as effective as face to face.

• The campus appeals personnel are poorly trained and lack field experience. Contrasts with the well trained experienced former RA’s & RO’s assigned to the local appeals offices.

• When your client receives a notice from a campus allowing an appeal your protest should always request that your client be given a face to face conference in your local office.

Ernst & Young Settlement

• No Prosecution Agreement on tax shelters

• Over $100 million

Whistleblowers  2010 2011 2012

Cases Received 7,577 7,471 8,634

Awards Paid 97 97 128

Collections over $2,000,000 9 4 12

Total Amount of Awards Paid32

$18,746,327 $8,008,430 $125,355,799

Amounts Collected33 $464,695,459 $48,047,500 $592,498,294

Awards paid as a percentage of amounts collected

4.0% 16.7% 21.2%

ALERT!! Misclassified Workers

• 9-21-11 IRS announced Voluntary Worker Classification Program

• Employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they begin treating the workers as employees.

• A taxpayer who participates in the VCSP will agree to prospectively treat the class of workers as employees for future tax periods.

• In exchange, the taxpayer will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509

December & February Modifications

• The VCSP, has been modified in Announcement 2012-45 to:

– •Permit a TP under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP

– •Current eligibility requirement that a TP who is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit

– •TP is not eligible to participate if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or Department of Labor; and

– •Eliminate the requirement that a TP agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

– IRS will not require 1099 compliance until 6-30-13

2012 Settlement Offer Unreported Offshore Income

• Program continues in 2013

• Voluntarily and timely disclose unreported offshore income.

• Pay back-taxes and interest for 8 years,

• Pay either an accuracy or delinquency penalty on all eight years.

• File Form TD F 90-22.1 (FBAR)

• Pay 27.5% penalty on highest balance in foreign bank accounts if over $75,000 and 12.5% for smaller accounts

• Opt out option

• Offer does not have an expiration date

2012 Settlement Offer Unreported Offshore Income

• Will impose a 27.5% penalty on offshore income producing property and on any property purchased from $$ in the account

• No facts are allowed to be presented in mitigation

• All taxpayers will be audited

• Opt-out

• Quiet disclosure

ID Theft Hot Line

• Operational on October 1, 2008

• Toll free number: 1-800-908-4490

• Hours of Operation: Monday - Friday, 8:00 a.m. - 8:00 p.m. your local time

• In January, IRS began marking individual tax accounts involving verified victims of identify theft using a special filter to note their accounts

ID Theft

• Form 14026• Fax to: (978) 247-9965.• Mail to:• Internal Revenue Service

P.O. Box 9039

Andover, MA 01810-0939

Practitioner Priority Service

•1-866-860-4259

New Preparer Complaint Form

• Form 14157.

Supreme Court Rules for Taxpayer on 3 Year Statute of Limitations for Audits

• Home Concrete & Supply, LLC, Sup. Ct. Dkt. No. 11-139 (U.S. 4/25/12), aff’g 634 F.3d 249 (4th Cir. 2011)).

• IRS not allowed 6 years to audit tax shelters

• My case at the Supreme Court Beard V. Commissioner

OICs

2011 2012

Fresh Start

• Over the past 3 years the IRS has announced a series of initiatives for struggling taxpayers

• The initiatives are known as Fresh Start

LATEST FRESH START INITIATIVE

• 5-21-12

• Revises calculation of future income for OICs

• Expands allowable expense categories

• Liberalizes valuation of vehicles

• Liberalizes valuation of assets used in business

• Reduces use of dissipated asset theories

• Reduces multiplier for determining future income component of RCP

Reduced Valuation of Assets

• As a general rule, equity in income producing assets will not be added to RCP of a viable business unless the assets are not critical to the business

• Reduce the value of TP cash by $1,000 and by the amount of allowable expenses because it will be used for those expenses

• Reduce the value of vehicles, planes & boats used to produce income or for health & welfare of the family by $3,450 each

• Less use of dissipated asset theory

– If liability did not exist at the time TP at time of transfer

– Withdrawals from IRA’s & 401K’s to invest in a business if taxpayer did not owe taxes at that time

– 3 year period for asserting dissipated assets including the year of submission

Calculation of Future Income

• Offers to be paid in 5 or fewer payments use 12 as multiplier instead of prior 48

– Example: TP can pay $300 per month the RCP is $3,600 not $14,400

• Offers of 6 or more payments use 24 as multiplier instead of 60

– Example TP can pay $300 per month the RCP would be $7,200 not $18,000

– A deferred offer can no longer exceed 24 months

Future Income Component

• More expenses allowed

– Student loan payments

– Payments to state agencies proportional to federal payment

– Charge card payments

– No longer only allow car payments to projected payoff date

– Extra $200 per month allowed for vehicles with more than 75,000 miles or 6 years or older

Summary of 5-21-12 Changes

• Offers will now be accepted for a lot lower amount

• New Form 656 & instructions for OICs

• Most liberal OIC policies since adoption of the allowable expense standards in the 90’s

• The new policies can be used in negotiating installment agreements also

IRS Revised Rules for Streamlined Installment Agreements

• Announced 1-12-12

• The revised procedures now allow taxpayers up to 72 months to pay their tax obligations.

• The new procedures also increase the maximum amount subject to the relaxed streamlined agreements from $25,000 to $50,000.

• Form 9465-FS was to be used if your liability was greater than $25,000 but not more than $50,000. Though Form 9465-FS was meant to be used by taxpayers with liabilities greater than $25,000 but not more than $50,000, it could be used by all taxpayers to request an installment agreement. <$25,000 may also use Form 9465.

• 72 months to pay up from 60 months

Revised Form 9465

• In April, 2013 the IRS changed rules.

• Form 9465-FS eliminated and replaced by revised Form 9465

• No longer need financial statement for amounts between $25,000 and $50,000

Eligibility

• The new rules for Form 9465 only to individuals who:

– Who owes income tax on Form 1040,

– Who may be responsible for a Trust Fund Recovery Penalty,

– Who was self-employed and owes self-employment or unemployment taxes and is no longer operating the business,

– Who is personally responsible for a partnership liability and the partnership is no longer operating, or

– Owner who is personally responsible for taxes in the name of a limited liability company (LLC) and the LLC is no longer operating.

HAVE A LESS HAVE A LESS

TAXING YEAR!!!!!TAXING YEAR!!!!!

Thank You!!Thank You!!

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