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Monthly Newsletter for ncpeFellowship Members Vol. 3 No. 2 February 2012

Remarks from Beanna

During the last 30 years of teaching tax professionals, I somehow became known as “Queen of Ethics”. I suppose it is because while I’ve taught Ethics and Professional Conduct for the IRS Nationwide Tax Forums. I have also not been quiet when it comes to those in this profession who behave dishonestly and disrespectfully of the position tax professionals maintain in effective tax administration and in their service to America’s taxpayers.

So to the question of the day…..what does a tax professional do when they learn of the unethical practices of another tax professional?

You report them to the IRS!

Call your local IRS office and report them.

Complete Form 3949A and disclose the inappropriate actions of the preparer. You don’t even have to identify yourself, it can be done anonymously. But do it!

Do not do it because you lost a client to this unethical preparer – they were not the kind of client you wanted in the first place. However, if we do not require the people in the business of tax to behave and conduct themselves professionally who do we expect to do it?

If we do not stand up for the profession we deserve to be tainted by the individuals who disrespect the trust that has been given us.

We deserve the respect that we demand and we demand individuals in the business of tax conduct themselves with respect.

Beanna

Beanna@ncpefellowship.com

Remarks from Beanna

Tax NewsGovernment Owed $450B in Unpaid TaxesWhat Will Tax Rates Look Like in 2013?The Turbo Tax ScamTax Relief and Health Care Acts Shape 2011 Returns APA Press Release, 5 Tips for Businesses to Avoid Compliance Penalties When Paying ContractorsCalculating Cost Basis Gets Easier This Year2011 Weather Disasters Carry Tax ImplicationsComparing Tax Liabilities of Same-Sex and Opposite- Sex FamiliesExit of Tax-Refund Loans Leaves Demand Unfilled

People in the Tax NewsJK Harris in LiquidationBuffett Tax on Wealthy Backed by Millionaires If They’re ExemptWal-Mart Stores Offering Free Simple Tax Preparation In Store Kiosks NationwideInfoSpace Agrees To Buy TaxACT For $287.5 MillionKardashian Can Pay More, California Tax Proponents SayHundreds of Prisoners Register as Tax Preparers Tax Fraud Victims Sue IRS for Refund

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IRS NewsTen Tips to Help You Choose a Tax Preparer Work Opportunity CreditIRS Explains Revisions to FBAR and Form 8300Reminder RE Reporting Health Insurance on W-2sFinal Regulations Toughen EIC Due Diligence Requirements Effective for This Filing SeasonHow to Report 2010 Roth IRA Rollovers and ConversionsGuidance in Temporary Regulations on Qualified

Residence Interest Deduction Continues to Apply After Law ChangeChief Counsel Advice 201201017

IRS Revises Disclosure Rules that Lessen Understatement and Preparer Penalties

Rev Proc 2012-15, 2012-7 IRBShulman Describes IRS’s “New Approach” to

Offshore Corporate Tax ComplianceIRS Offshore Programs Produce $4.4 Billion to Date

for Nation’s Taxpayers; Offshore Voluntary Disclosure Program ReopensIndividuals Must Report Specified Foreign Financial

Assets on New Form 8938 for 2011 Tax YearNew Proposed Guidelines Allow More Innocent Spouses to Qualify for ReliefIRS End to Tax Form Mailings Burdened Millions of TaxpayersIdentity Protection PINDon’t Be Scammed by Cyber Criminals

Thoughts from the Ragin CajunIRS Encourages Complaints Against Tax Return Preparers

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Tax Pros in TroubleAlabama Tax Preparers Sentenced to Prison for Preparing False Tax ReturnsFederal Court Bars Alabama Woman from Preparing Tax ReturnsKansas City Tax Preparer Pleads Guilty to False Tax ReturnsTax Preparer Charged with ID Theft and Tax OffensesNew York Return Preparer Pleads Guilty to Preparing False Tax Returns5 Indicted for Defrauding First-Time Home Buyer ProgramMobile County Tax Preparation Service Owners

Accused of Filing Tax Returns with Bogus DeductionsMilford Woman Charged with ID Theft, Tax Fraud

Taxpayer Advocacy & Tax ProfessionalsPower of Attorney RevisionsNational Taxpayer Advocate Delivers Annual Report

to Congress; Focuses on IRS Funding and Taxpayer RightsTaxpayer Bill Of RightsOther Key Issues Addressed

Wayne’s WorldTaxation without Representation

Sponsor of the MonthCost Segregation Services, Inc.

Tax Quotes

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National Center for Professional Education Fellowship

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Tax News

Government Owed $450B in Unpaid Taxes

People and businesses underpaid their taxes by an estimated 17 percent in the most recent year studied, failing to send the government a massive $450 billion that it was owed, according to an Internal Revenue Service report released Friday.

The study covered 2006; the most recent data the IRS said was available. The amount of underpaid taxes far exceeded the size of the entire federal budget deficit at the time.

After IRS audits and other enforcement efforts, non-compliance in 2006 shrank to 14 percent. That left the final amount of unpaid taxes at $385 billion, the agency said.

Friday’s report immediately became fodder for lawmakers arguing that any effort to overhaul the tax code — which seems a long-shot in an election year — must include closing the gap between what is owed and actually paid.

“The best way to increase compliance is to reform the tax code to make it simpler,” said Michelle Dimarob, spokeswoman for House Ways and Means Committee Chairman Dave Camp, R-Mich. She said that would cause fewer errors and “greatercertainty, which is key to job creation.”

“In an era when we’re squeezing the federal budget for every dollar of savings, we have to make every effort to recover these lost funds,” said Senate Finance Committee Chairman Max Baucus, D-Mont.

By either measure, the total of unpaid taxes in 2006 was larger than that fiscal year’s budget deficit of $248 billion. Federal fiscal years begin in October of the previous year.

Federal deficits have since mushroomed out of control, hitting a record $1.4 trillion in 2009 and barely receding to $1.3 trillion last year. President Barack Obama and Republicans in Congress have agreed to some spending cuts but have remained deadlocked over how to curb the gigantic budget shortfalls that are projected indefinitely.

Altogether, the IRS estimates it was owed nearly $2.7 trillion in taxes in 2006.

The agency said that out of the $450 billion taxpayers underpaid that year, the largest share — an estimated $376 billion — came from underreporting of income.

The IRS pointedly noted that compliance increases when third parties like employers report income information to the government and when they withhold taxes that are owed.

The report said that with wage and salary information reported to the IRS on W-2 forms, only 1 percent of that income was misreported. But an estimated 56 percent of income was underreported when the government requires little or no information, such as income earned by some small businesses, renters and businesses selling property.

The IRS has made efforts to improve compliance, such as increasing oversight of professional tax return preparers and increasing the information that must be reported to the agency by stock brokers, mutual fund companies and for some business transactions.

Even so, tax analysts said there was no reason to believe that today’s compliance rate has changed significantly from the 2006 figures.

That is chiefly because significant portions of the underpaid taxes are believed to come from businesses and individuals who report information about their income that is difficult for the IRS to verify.

“It’s hard to get to that,” said Clint Stretch, a tax policy expert for Deloitte Tax LLP. “Nobody wants a bunch of IRS police hammering on small business people.”

John Buckley, a Georgetown University law professor and former Democratic congressional tax aide, said that if IRS budget cuts continue, “It’s quite probable we’ll see a decline in compliance rates.”

The IRS’s roughly $12 billion budget was reduced by about $300 million this year.

The overall 2006 compliance rates were roughly similar to 2001, the last year the IRS had examined.

In that year, 16 percent of taxes were unpaid initially, while enforcement efforts lowered the non-compliance rate to 13 percent.

That meant that in 2001, $345 billion in taxes were uncollected initially and $290 billion remained unpaid even after IRS audits and other enforcement efforts.

“Despite increasing complexity and an ever-changing tax code, compliance has remained steady,” said IRS spokesman Frank Keith.

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The dollar amounts of unpaid taxes were larger in 2006 chiefly because the size of the economy and the amount of taxes owed had grown, agency officials said.

What Will Tax Rates Look Like in 2013?

What Congress will do about taxes this year is anything but clear, as noted in the latest Weekend Investor cover story, “The Road Ahead for Taxes.” The story itself detailed the known, definite tax changes both for 2012 and for 2011 returns due this year.

The great unknown remains: What will tax rates be in 2013? The Bush-era cuts in income, capital-gains and estate taxes enacted in 2001-03 expire on Dec. 31, when a two-year extension cobbled together by lawmakers in late 2010 runs out.

Tax Report put this question to more than two dozen veteran experts, ranging from tax preparers, wealth planners and Washington insiders to professors and former top Treasury and IRS officials.

A few of the experts simply threw up their hands, but other brave souls gave guesses that proved surprisingly similar. Here’s the sum of what they said:

Almost all the experts expect the top income tax rate will remain 35%, perhaps as a result of a one-year extension of current rates, although a few think it could be as high as 40%.Almost all expect the top capital gains rate will hold at 15%, with two guessing 20%. (This excludes the 3.8% tax on investment income taking effect for some in 2013.)

All believe the exemption will remain $5 million; most believe the rate will remain 35%, with a very few guessing 40% or higher. “The estate-tax rate is more likely to change than the exemption,” says Clint Stretch, a principal with Deloitte Tax in Washington.

Nearly all expect the rates won’t be set until December 2012 at the earliest, and possibly well into 2013—although one lone soul thinks Congress could pass a one-year extension of the 2012 rates before the election.

“Whatever the date, it will be late enough to cause chaos for payroll preparers and the IRS,” says Chris Bergin, publisher of the journal Tax Notes.

Will there be fundamental tax reform in 2012? Not a chance, say the experts. On this point, they were unanimous.

The Turbo Tax Scam

It’s not too early to start thinking about tax season, and one well-known tax preparation company is already taking a hit with scammers.

It’s called the Turbo Tax scam.

Scammers send out emails asking Turbo Tax users to update their software to be in compliance with new tax laws. When you click on the link, you are taken to a site that looks like it’s run by Turbo Tax, but it’s actually a decoy website that infects your computer with a virus.

Another variation asks you to provide personal information to verify you own Turbo Tax software. The thieves then use your information to file your taxes and eventually collect your refund.

Experts said the best way to avoid this scam is to not provide any personal information to a third party. Companies like Turbo Tax will not ask you to upgrade software by sending out emails asking you to click links.

Tax Relief and Health Care Acts Shape 2011 Returns

As tax professionals gear up for tax season, they’ll find the Form 1040 series for 2011 looking much the same as that of the previous year, but only because of Congress’ 11th-hour compromise late in 2010 to keep it so. Nonetheless, a number of new features affecting individuals and businesses, such as new information reporting forms, are debuting, so return preparers should be aware of developments in the past year that will affect 2011 tax returns.

The most significant event affecting 2011 returns was the signing on Dec. 17. 2010, of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act), P.L. 111-312, which extended the ordinary income tax rates introduced by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), P.L. 107-16, and the capital gain tax rates introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), P.L. 108-27. The Tax Relief Act also extended a large number of other expired or expiring provisions.

Many of the tax provisions enacted in EGTRRA and JGTRRA had been set to expire after 2010. The Tax Relief Act amended EGTRRA and JGTRRA to postpone the sunset of the affected provisions until after 2012 and extended many other provisions to 2011 or 2012.

PTINs. This tax season is the second for which tax preparers must register with the IRS and obtain or renew preparer tax identification numbers (PTINs). The IRS required preparers

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who registered and obtained a PTIN for the 2011 filing season to renew it for 2012 by the end of 2011.

Mandatory e-filing. This tax season, the threshold above which preparers must e-file most individual and fiduciary income tax returns drops from 100 returns they or their firm reasonably expect to file during the year to 11. A transitional rule allowing return preparers to paper file upon written request from the taxpayer expired at the end of calendar 2011 (Notice 2011-27). EITC due diligence. The U.S.-Korea Free Trade Agreement Implementation Act, P.L. 112-41, increased the preparer penalty under Sec. 6695(g) from $100 to $500 for each failure to exercise due diligence with respect to the earned income tax credit. The higher penalty is effective for returns required to be filed after Dec. 31, 2011.

Tax rates. EGTRRA introduced a 10% tax bracket below the 15% bracket for individuals and reduced the other tax brackets to 25%, 28%, 33% and 35%. Those changes were scheduled to sunset after 2010 so that in 2011 the 10% rate would disappear (with income in that bracket reverting to the 15% bracket) and the other rates would revert to 28%, 31%, 36% and 39.6%, respectively. With the Tax Relief Act’s postponement of the EGTRRA sunset, those rates are scheduled to continue through 2012.

Capital gains. In 2003, JGTRRA also lowered the capital gain tax rate to 15% (0% for taxpayers in the 10% and 15% ordinary income tax brackets). These rate changes also had been scheduled to expire after 2010. The Tax Relief Act’s postponement of JGTRRA’s sunset continues the lowered capital gain tax rate through 2012.Itemized deductions and personal exemptions. The Tax Relief Act also extended EGTRRA’s repeal of the itemized deduction phaseout and the personal exemption phaseout for two years through 2012.

For 2011 only, the Tax Relief Act also reduced the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2% (the employer’s portion remained at 6.2%). The payroll tax reduction replaced the former making work pay credit, which expired at the end of 2010. However, while the making work pay credit was phased out for higher-income taxpayers, the payroll tax reduction applied to all workers who paid payroll taxes, regardless of income level, and should be reflected in box 4 on the taxpayer’s 2011 Form W-2, Wage and Tax Statement.

Editor’s note: Provision set to expire 12/31/11 has been extended currently for two additional months.

The Tax Relief Act increased the alternative minimum tax (AMT) exemption amounts for 2010 and 2011 (also known as the AMT patch). For 2011, the amounts are $48,450 for unmarried individuals; $74,450 for married individuals filing jointly; and $37,225 for married individuals filing separately.

In addition, the Tax Relief Act extended through 2012 the 0% and 15% capital gain rates for the AMT; the AMT offset of the child tax credit; and the 7% AMT preference for excluded gain

on the disposition of qualified small business stock. It also extended the offset of nonrefundable personal credits against the AMT, but only through 2011.

The Tax Relief Act extended a variety of temporary individual tax provisions that had expired at the end of 2009 or were scheduled to expire at the end of 2010. They include tax credits, deductions and various tax incentives.

All of the following were extended for two years through 2012:

• Marriage penalty relief (the increased standarddeduction and expanded 15% bracket for married taxpayersfiling jointly);• The $1,000 child tax credit amount (previouslyscheduled to revert to $500 after 2010) and the expandedrefundability of the credit;• The increased starting and ending points for the earnedincome credit and the increase in the credit amount for familieswith three or more qualifying children;• The liberalized child and dependent care credit rules(allowing the credit to be calculated based on up to $3,000of expenses for one dependent or up to $6,000 for more thanone);• The American opportunity tax credit;• The higher contribution amount and other EGTRRAchanges to Coverdell education savings accounts;• The enhanced rules for student loan deductionsintroduced by EGTRRA;• The exclusion for employer-provided educationalassistance (Sec. 127); and• The exclusion for National Health Services Corps andArmed Forces Health Professions Scholarships (Sec. 117(c)(2)).

The following provisions were extended for one year through 2011:

• The treatment of mortgage insurance premiums asinterest (Sec. 163(h)(3)(E));• The parity for exclusion from income for employer-provided mass transit passes and parking benefits (Sec. 132);• The allowance for tax-free distributions from individualretirement plans for charitable purposes (Sec. 408(d)(8));• The temporary 100% exclusion of gain from the sale ofcertain small business stock under Sec. 1202, enacted by theSmall Business Jobs Act of 2010, P.L. 111-240;• The deduction for tuition and related expenses (Sec.222); • The state and local sales tax deduction (Sec. 164);• The deduction for elementary and secondary schoolteachers (Sec. 62(a)(2)(D));• The nonbusiness energy property credit (under the rulesin effect before the American Recovery and Reinvestment Actof 2009, P.L. 111-5) (Sec. 25C);• The credit for first-time Washington, D.C., homebuyers(Sec. 1400C); and• The special rules for qualified conservation contributionsby individuals (Sec. 170(b)(1)(E)).

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Although most of its major provisions will take effect in subsequent years, the health care reform legislation passed in 2010 contained some provisions that were effective in 2011.

Employees may see some new information on their Forms W-2 for 2011. The Patient Protection and Affordable CareAct (PPACA), P.L. 111-148, requires employers to discloseon each employee’s annual Form W-2 the value of theemployee’s health insurance coverage sponsored by theemployer. This provision was originally mandatory for taxyears beginning after Dec. 31, 2010; however, in Notice 2010-69, the IRS announced that employers will not be requiredto report the cost of employer- sponsored coverage on W-2sissued for 2011, due to the difficulty in preparing payrollsystems for the requirement. However, employers have theoption to report such costs in 2011, so some employees maysee this information. It will appear in box 12 of the W-2, witha code DD. This reporting is strictly informational; the amountreported will not affect the individual’s tax liability.

Over-the-counter medications. Under the PPACA, amounts paid or incurred after Dec. 31, 2010, for medications obtained without a prescription (except for insulin) are no longer reimbursable from health savings accounts (HSAs), Archer medical savings accounts (MSAs), health FSAs or health reimbursement arrangements.

Tax on HSA distributions. The additional tax on distributions from an HSA or an Archer MSA that are not used for qualified medical expenses was increased to 20% of the disbursed amount, effective for disbursements made during tax years starting after Dec. 31, 2010. (Under prior law, the tax was 10% of the disbursed amount for HSAs and 15% for Archer MSAs.)

SIMPLE cafeteria plans. Starting in 2011, small businesses could start offering SIMPLE cafeteria plans. Under the provision, an eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self-insured medical expense reimbursement plan and benefits under a dependent care assistance program. Under the safe harbor, a cafeteria plan and the specified qualified benefits are treated as meeting the specified nondiscrimination rules if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements.

Self-employment. The self-employment tax rate for 2011 dropped from 15.3% to 13.3%, reflecting the one-year cut in the Social Security tax also applicable to employees. However, taxpayers taking the above-the-line deduction for one-half of self-employment tax can still claim the same 7.65% amount as in 2010—making the deduction equal to 57.51% of self-employment tax for 2011. However, a provision that for 2010 allowed self-employed individuals to deduct health insurance premiums from self-employment income for purposes of determining self-employment tax (Sec. 162(l)(4)) was not extended for 2011.

Editor’s note: This provision was extended for 2 months through 2/28/12 currently.

Depreciation. Property acquired and placed in service between Sept. 9, 2010, and Dec. 31, 2011, may be eligible for 100% depreciation.

Work opportunity tax credit. Employers who hire certain military veterans, young people and members of other targeted groups by Dec. 31, 2011, may claim a credit based on the employee’s wages (Sec. 51).

Stock basis reporting. Individual taxpayers should also see more information on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, which has been expanded to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. Stockbrokers and mutual fund companies will use Form 1099-B to report this information at year-end. They will also use the expanded form to report whether gain or loss realized on these transactions qualifies as long-term or short-term gain or loss. The payer is required to file the expanded Form 1099-B with the IRS by Feb. 28, 2012 (or April 2, 2012, if the payer files electronically) and provide it to investors by Feb. 15, 2012. Box 3 will show the cost or other basis of securities sold.

Credit card transactions. Beginning with calendar year 2011, payment settlement entities for traditional and online merchants will be required to report to a payee, as well as to the IRS, the gross amount of the payee’s reportable payment transactions within a calendar year. The payee is the party that accepts a payment card as payment or establishes an account with a third-party settlement organization to settle transactions. In a payment card transaction, the payee is generally the merchant or seller. This provision was enacted as Sec. 6050W by the Housing and Economic Recovery Act of 2008, P.L. 110-289, but became effective only in 2011. These payments are reported on Form 1099-K, Merchant Card and Third Party Network Payments, which may be furnished electronically.

The IRS in Notice 2011-89 provided transitional relief for 2012 from penalties under Secs. 6721 and 6722 for Forms 1099-K that are incorrect or incomplete, as long as the payer makes a good-faith effort to file and issue them correctly. The IRS also postponed until 2013 backup withholding with respect to amounts reportable under Sec. 6050W (Notice 2011-88). Form 1040, schedules C and E for 2011 tax years includes a line for payee taxpayers to report amounts reported to them on Form 1099-K, but the schedules direct taxpayers to enter a zero on the line.

Basis of inherited property. While most commentary and guidance has focused on the changes in estate and gift taxes for 2010 and 2011 as they relate to gift and estate returns, CPA practitioners may see effects of the 2010 modified carryover basis election on capital gains for 2011 reported by inheritors of the estates of 2010 decedents that made the election. Under these rules, the heirs receive inherited property with a basis equal to the lesser of the decedent’s basis or the property’s

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fair market value (FMV) as of the date of death (Sec. 1022(a)), plus any basis increase (up to the FMV of the property at the decedent’s date of death) allocated to the property by the executor of the estate.

The maximum amount of basis increase that the executor can allocate among all of the decedent’s assets is $1.3 million ($60,000 for estates of nonresidents who were not citizens), plus certain losses and loss carryovers of the decedent. Property transferred outright to the decedent’s spouse and qualified terminable interest property is eligible for an additional $3 million of basis increase. If the executor has made the Sec. 1022 election, the heir should receive from the estate a Form 8939, Schedule A, containing information about the property’s basis, date acquired, whether any gain on its sale would be ordinary, the amount of basis increase allocated to it and its FMV on the decedent’s date of death.

Individuals who inherited property from 2010 decedents may have already disposed of it before the estate made the carryover basis election and assumed that their basis was the FMV at the time of death. The estate’s subsequent election to apply the modified carryover basis rules may result in such individuals’ owing capital gain tax, due to the now lower basis of the property. The IRS has said that, in such cases, it will presume the recipient’s reasonable cause and good faith for any increase in the recipient’s tax liability due to the application of Sec. 1022 and will not impose failure-to-pay or accuracy-related penalties (Notice 2011-76). The IRS advises affected taxpayers to write at the top of an amended return “IR Notice 2011-76” to obtain the relief.

The IRS made inflation adjustments to the income tax tables and many tax credits and other items for tax years beginning in 2012 in Rev. Proc. 2011-52.

Separately, the IRS announced the 2012 contribution limits and other figures for pension plans and other retirement-related items (IR-2011-103).

The increases are greater than in the previous two years, when inflation was lower.

Besides revised income tax tables, the new revenue procedure included updated amounts for various items such as the personal exemption (which increases from $3,700 to $3,800) and standard deduction. The revenue procedure also gave new figures for the child tax credit, American opportunity and lifetime learning credits and the earned income tax credit—40 items in all.

The $13,000 annual gift exclusion is unchanged for 2012, although the estate and gift lifetime exclusion for decedents dying during 2012 goes up from $5 million to $5.12 million.

The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b) or 457(b) plans and the federal government’s Thrift Savings Plan increases from $16,500 to $17,000. The catch-up contribution limit under those plans for those age 50 and over is unchanged at $5,500.

The Social Security Administration announced that the Social Security wage base for 2012 is $110,100 (up from $106,800 in 2011).

APA Press Release, 5 Tips for Businesses to Avoid Compliance Penalties When Paying Contractors

The American Payroll Association (APA) has issued a press release that includes five basic tips on how to avoid IRS penalties when paying independent contractors.

With limited exceptions, every person, corporate or otherwise, engaged in a trade or business who, in the course of that business, makes payments aggregating $600 or more to another person (e.g., an independent contractor) in a calendar year must file an information return (Form 1099-MISC) setting forth the payee’s name and address and the amount paid, and furnish a statement to the payee. Reportable payments are: rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, prizes or awards (that aren’t for services rendered), or other fixed or determinable gains, profits and income. (Code Sec. 6041)

APA’s tips for employers are as follows:

(1) Form 1099-MISC is required for noncorporate serviceproviders. Employers must provide a Form 1099-MISC,Miscellaneous Income, by Jan. 31, 2012, to any noncorporate service provider who was paid at least $600 for servicesduring 2011. The Form 1099-MISC does not have to beprovided to a corporate service provider. Employers shouldlook at the completed Form W-9, Request for TaxpayerIdentification Number and Certification, that they receivedfrom the service provider to determine whether the serviceprovider is “noncorporate” or “corporate.” Employersmust provide Form 1099-MISC to sole proprietorships,partnerships, attorneys, and medical service providers whodo business as corporations.

(2) Form 1099-MISC is not required if contractor paidelectronically. There is no requirement to send a Form1099-MISC to any contractor that was paid electronically,such as by credit card, debit card, PayPal, or gift card. Thebank or credit card company that made the actual paymentto the contractor will send the contractor Form 1099-K,Merchant Card and Third Party Network Payments.

(3) The pilot program for truncation of TIN numbers hasbeen extended. The IRS pilot program that allows for thetruncation of taxpayer identification numbers (TINs) on1099 forms has been extended to include 1099s throughthe 2012 calendar year (filed in 2013). This means that thefirst five digits of the TIN can be replaced with asterisks orXs on the payees’ paper copies of Form 1099, but copiesfiled with IRS must have their full TIN.

(4) Better safe than sorry. The APA advises employers whoare unsure whether a Form 1099-MISC is required to goahead and send one. Employers can’t go wrong by sendingmore 1099s than are required, but could be subject to

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penalties if they do not send all qualified service providers their Form 1099-MISC.

(5) File forms on time. Paper copies of Forms 1099-MISCmust be mailed to the IRS no later than Feb. 28, 2012.Forms 1099-MISC filed electronically must be submitted tothe IRS by April 2, 2012.

Calculating Cost Basis Gets Easier This Year

Anyone who has ever been baffled by calculating the net proceeds from the sale of an investment will find some relief, starting with the 2011 tax return due April 17. If you bought any stocks after January 1, 2011, and sold them later in the year, you should be receiving information from your broker shortly that tells you the adjusted cost basis of those stocks. Your adjusted cost basis, which affects the amount of tax you may owe on the sale, represents the original purchase price plus any commissions or other fees, and takes into account factors such as stock splits, corporate acquisitions or spinoffs, and reinvested dividends.

In the past, cost basis information has sometimes been available as a service; the Emergency Economic Stabilization Act of 2008 now requires all broker-dealers and other financial intermediaries to report the information on your 1099-B form. However, you won’t be the only one to receive that information; your broker also is required to report the same information to the Internal Revenue Service. Individual taxpayers (or their tax preparers) will still be responsible for accurately reporting the net proceeds of a sale on their federal income tax returns, but the IRS will now have a better way to double-check those figures.

The new reporting requirements don’t mean you can empty your files completely. Because they’re being phased in, the rules don’t apply to stocks bought before January 1, 2011, for which you’ll still need to do your own calculations, or to securities held in retirement accounts. Cost basis reporting does go into effect this year for mutual funds and stock bought as part of a dividend reinvestment plan; however, it will apply only to shares bought after January 1, 2012, and will be reported on the 1099-B that will be available in 2013 for the tax year 2012. And cost basis for bonds, options, and other securities won’t have to be reported until 2013, so those will still need to be monitored independently.

Brokers also will be required to report losses that are disallowed as a result of a wash sale (which occurs when shares are sold and then repurchased within 30 days). However, they only have to do so if the newly acquired securities are identical to the securities sold (meaning the securities share the same CUSIP identification number). They also are not required to report adjusted cost basis for wash sales when the purchase and sale transactions occur in different accounts.

You can tailor your reporting method to suit your tax situation.

Investors sometimes use cost basis to help manage their tax liability on a securities sale. If you’re one of them, the reporting

requirements make it more important to determine in advance what accounting method you wish to use for each sale. Most broker-dealers will designate a default option to use if you do not specify a method. That default will typically be the so-called FIFO method (an acronym for “first in, first out”), which means that the first shares of a security purchased are considered the first shares sold. However, your broker might also allow you to specify LIFO (“last in, first out”) or designate specific shares as the ones sold. In some cases, such as shares bought through a direct reinvestment program, using an average cost basis for all shares may be most convenient (most mutual fund companies already employ this method of calculating cost basis).

If you don’t want to use your broker’s default method, you may be able to put in a standing order specifying the method you want to use for all trades, or choose on a case-by-case basis; you may also authorize your financial professional to make that decision for you. The rules permit investors to change the designated method for a given trade until the settlement date (the date on which money actually changes hands, which for a typical stock sale is three business days after execution of the trade). After the trade settles, you cannot change your mind about the method used.

Brokers also will be required to report to the IRS the cost basis of a short sale in the year in which the short is closed (in the past, it was done for the year a short sale was opened).

2011 Weather Disasters Carry Tax Implications

In 2011, it seemed that area homes and automobiles were under constant assault from flooding or hailstorms.

As tax season officially begins, local accountants are reminding people to get information prepared for individual income tax returns; after all, there may be taxable benefits depending upon damages.

Francis Clark of Dickinson & Clark CPAs PC said with the natural disasters faced by the area residents this year, people must contact their tax preparers before coming in for an appointment.

“I can’t stress it enough,” he said. “People need to talk to their tax preparers before their appointment and ask, ‘What information am I going to need?’”

Some of that information might take some time to get – such as a real estate appraisal – so the sooner someone talks to their preparer, the better, added Dickinson & Clark Senior Accountant Arien Crawford.

Clark and Crawford provided some information to help people prepare for meeting with tax representatives.

If there was damage to your home or property as a result of the flood or the hail, you may have taxable income or a deduction. Clark said this will vary from taxpayer to taxpayer depending on the type and amount of damage; what, if any,

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insurance proceeds were received; and whether the damage was repaired or not.

In a majority of cases involving hail damage, Clark said there will be no tax implications.

“Most people will not have to report it,” he said. “People suffered hail damage, their insurance company paid them and they had it repaired.”

However, if flooding damaged a home, there are a number of possible tax implications.

“A Federally Declared Disaster Area with individual assistance provides significant tax advantages to individuals,” Clark said.

Taxable benefits will differ for each taxpayer depending upon damages to their property.

To determin e the amount of taxable income or deduction, taxpayers will need to obtain the following information:

– If no repairs were made, the fair market value before andafter the loss.

– If repairs were or will be made, the actual or estimated costof the repairs or objective evidence.

– The amount of the insurance proceeds received.

– The tax basis of the property damaged, which is normallydetermined by the original purchased price plus anyimprovements made to the property.

Again, Clark and Crawford stressed that each situation will likely be unique.

“It’s a complicated area; there are no easy answers,” Clark said.

Farmers along the river will also likely face tax implications from flooding.

Clark said damage to farmland and buildings could be significant.

“If their homes are damaged, they could potentially have personal and business losses,” Crawford added.

Comparing Tax Liabilities of Same-Sex and Opposite-Sex Families

Methodology: Same-sex spouses lose big on taxes

Every year at this time in the United States and elsewhere, thoughts start to turn toward tax preparation. Of course it’s generally too late to make significant changes that will affect my tax bill. This year though, my marriage, which took place in California in 2008, has given me tax benefits in Illinois, my

home state. If fact, several states and locations, and even businesses, are making it possible for legally recognized gay and lesbian couples to receive benefits generally denied by the federal Defense of Marriage Act (DOMA).

CNNMoney asked tax preparer H&R Block to run a variety of scenarios comparing tax liabilities of same-sex and opposite-sex families for our story about gay marriage and taxes.

Here’s how H&R Block’s Tax Institute did the math.

General assumptions:

• 2011 tax year• No itemized deductions; the standard deduction is usedfor all scenarios• Wages are the only source of income• The families in the first three scenarios do not live incommunity property states; the families in scenarios fourand five live in a community property state

Scenario 1: The stay-at-home parent (no child tax credit)

In the first scenario, we compare a married-filing-jointly couple with two kids to a same-sex family (also with two kids). One spouse works and earns $100,000 in wages; the other spouse cares for the children. The same-sex earner, who has a base salary of $100,000, must include health insurance premiums of $5,000 in income for insurance paid by his employer to cover his partner.

The married-filing-jointly taxpayer has four exemptions (two for married-filing-jointly and two for the children). The same-sex taxpayer files as head of household and claims himself, the two children, and the same-sex spouse (as a qualifying relative), also for a total of four exemptions.

No other income or deductions are reported.

The married-filing-jointly couple’s net federal tax liability is $10,656, vs. $15,199 for the same-sex household, costing the same-sex couple $4,543.

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Note: If the same-sex spouse did not have health insurance and the same-sex wage earner’s income was also $100,000 (instead of $105,000), the married-filing-jointly couple’s tax liability would be reduced and the cost for being unable to file a married-filing-jointly return would be $3,293 instead of $4,543.

The difference is due to a higher standard deduction for married-filing-jointly and how the tax rate brackets work. More of the head-of-household taxable income is exposed to tax at the 25% rate than the married-filing-jointly taxable income.

Scenario 2: The stay-at-home parent (child tax credit included)

This scenario is the same as Scenario 1, but the child tax credit has been included. The filing status and earnings are the same, but while the child tax credit can be fully claimed by the married-filing-jointly couple, the same-sex couple is in the phase-out range for the child tax credit (for a head-of-household taxpayer, the CTC begins to phase out with AGI of $75,000, vs. AGI of $110,000 for married-filing-jointly taxpayers).

Thus, the married-filing-jointly family has a full $2,000 CTC because the phase-out has not occurred. The credit is reduced to only $500 for the same-sex couple because of the phase-out. Thus, the cost of being unable to file a married-filing-jointly return is increased to $6,043 ($4,543 + $1,500) when the CTC is introduced.

Scenario 3: Dual wage earners, no children

In this scenario, unrelated to the first two, both spouses work, each earns $100,000, and there are no children. The married couple has AGI of $200,000 and a net federal tax liability of $38,750. The two same-sex spouses also earn a combined AGI of $200,000 (there is no inclusion of health insurance in the income of one partner).

Exit of Tax-Refund Loans Leaves Demand Unfilled

The tax-refund loan, once a profit source for banks and tax-preparation companies, is vanishing under pressure from federal bank regulators and consumer advocates. Tax filers’ need for quick cash hasn’t eroded, and the companies are looking for ways to capitalize on that market.

Companies including H&R Block Inc., the nation’s largest tax-preparation chain, are turning to so-called refund-anticipation checks that let taxpayers without bank accounts take advantage of the speed of directly deposited tax refunds through an account established for the payment.

“There’s always going to be demand, and I believe someone’s going to come up with a product,” said John Hewitt, the president, CEO and chairman of Liberty Tax Service Inc., a Virginia Beach, Va.-based tax-preparation company. Liberty will offer loans to tax filers in at least six states with consumer- finance laws that allow it.

The shift away from tax-refund loans has occurred over the past few years. The Internal Revenue Service stopped telling tax preparers and banks whether refunds would be siphoned off to cover other debts. Bank regulators at the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency questioned whether refund loans were a safe product for banks and if they adequately protected consumers.

The shrinking of the refund-loan industry culminated Dec. 8 when Republic Bancorp Inc., the last bank company to finance refund loans, announced a settlement agreement with the FDIC. London-based HSBC Holdings and New York-based JPMorgan Chase & Co. had previously exited the business.

People in the Tax News

JK Harris in Liquidation

Many of ailing firm’s creditors will get nothing.

JK Harris & Co., at one point a nationwide firm offering to settle people’s tax debts for pennies on the dollar, came to a humble end in a Charleston courtroom Tuesday.

Dogged by consumer complaints and large legal settlements, deeply in debt and unable to find a way out, the Goose Creek-based company’s proposed bankruptcy restructuring was converted to a liquidation. A trustee has been assigned to scrounge up what assets she can find to repay creditors.

Many creditors, including consumers who are collectively owed millions from settlements of claims that the company misled them, will get nothing.

Need to file a claim in the JK Harris bankruptcy case? Visit the U.S. Bankruptcy Court website at www.scb.uscourts.gov for a “proof of claim” form. The case number is 11-06254-JW.

JK Harris filed for bankruptcy protection in October to pre-empt an effort by the Texas attorney general to force the company into receivership. After failing to sell or reorganize the company, the business closed its remaining offices about

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two weeks ago, putting more than 100 local employees out of work.

Some employees were previously laid off, when the bankruptcy was filed, and are wondering if and when they will get wages they are due. “My whole thing is, I loved working for JK Harris, but I had to take out a title loan on my car because I’m waiting for this money I’m owed,” said Nicole Hagan, a single mother of three in Goose Creek.

At the time of the shutdown, the company had thousands of clients, many of whom were counting on the firm to help them resolve problems with the Internal Revenue Service. For a fee, typically several thousand dollars, the company offered to help clients pursue IRS settlements known as offers in compromise.

“I don’t have the money to pay another lawyer,” said Todd Bilodeau, a landscaper in New Hampshire. “I’m just looking for someone to help me here.”

“We’ve got time-sensitive stuff, and we don’t know what we’re going to do,” he said in a phone call to The Post and Courier.

The consumer actions against the company -- more than 20 attorneys general took steps against the firm -- were related to claims JK Harris took money from clients who could not qualify for the IRS program.

Columbia attorney Mario Pacella handled a class-action case involving more than 15,000 former JK Harris clients, who together are still owed nearly $4 million from a settlement.

Recent clients who were still working with the company, like Bilodeau, will now have to hire someone else or go through the IRS’ “offer in compromise” process on their own.

Company founder and Chief Executive Officer John K. Harris said Tuesday that former employees will be released from noncompete clauses, and could choose to contact former clients and offer to represent them.

Clients who paid the company money for work that wasn’t completed will have to get in line with other creditors. Unsecured creditors are expected to leave empty-handed. Most of the company’s assets already have been claimed by a New Jersey lender. “There will be no recovery at all for the $20 million in general unsecured claims,” said William McCarthy, JK Harris’ attorney.

U.S. Bankruptcy Court Chief Judge John E. Waites appointed Michelle Vieira of Myrtle Beach as the trustee to oversee the liquidation.

Buffett Tax on Wealthy Backed by Millionaires If They’re Exempt

Millionaires said they support Warren Buffett’s view that the wealthiest should pay more in taxes, as long as it’s other rich Americans, according to a survey released today.

About 71 percent of millionaires surveyed said they agree with Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. that the very wealthy ought to pay more in taxes and give more to charity. That included 49 percent who said that they’re “not in the same league” as Buffett and that higher taxes on the wealthiest shouldn’t apply to them personally, according to the survey released today by PNC Wealth Management, a unit of Pittsburgh- based PNC Financial Services Group Inc., the sixth-largest U.S. bank by deposits.

“When we compare ourselves to somebody else, we always think that they should do more,” said R. Bruce Bickel, senior vice president of PNC Wealth Management. The 555 survey respondents, who each had household investable assets of $1 million or more excluding real estate, may be saying, “‘well I don’t consider myself the ultra-wealthy, when I compare myself to a Buffett,’” he said.

Buffett, 81, the world’s third-richest person according to Forbes magazine, in August urged Congress to raise taxes on households earning more than $1 million, in an opinion article published in the New York Times. About 236,883 households earned $1 million or more in 2009, according to the U.S. Internal Revenue Service.

Income-tax rates for top earners will rise to 39.6 percent from 35 percent in 2013 and rates on capital gains and dividends also may rise, unless Congress acts.

The survey didn’t ask respondents for the level of income or assets that should trigger higher taxes, according to Alan Aldinger, a PNC spokesman.

About 41 percent of those surveyed said they would change their investment strategy in response to an increase in taxes, and 24 percent said they would reduce commitments to philanthropy. Almost 70 percent of survey respondents said they plan to increase their charitable giving or give the same amount, and about 22 percent have cut back or plan to donate less.

“People are beginning to say, ‘In difficult times, those of us who have been blessed with financial wealth need to give back,’” Bickel said.

Taxpayers generally can’t take deductions for charitable contributions of more than 50 percent of their adjustable gross income, according to the IRS.

About 71 percent of respondents said they’re much better off than their parents were at the same age, compared with about 10 percent who said they expect their children will be much better off by the time they’re the same age.

“Some may be saying the American dream is not something that’s achievable for the next generation,” Bickel said.

PNC hired Artemis Strategy Group, a public-relations research and consulting group, and HNW Inc., a marketing firm, to

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conduct the online survey.

Wal-Mart Stores Offering Free Simple Tax Preparation In Store Kiosks Nationwide

Free preparation of simple tax forms is being made available at more than 3,000 Wal-Mart Stores nationwide.

The nation’s largest retailer has contracted with the top two tax prep companies, H&R Block Inc. and Jackson-Hewitt Tax Service Inc., to set up kiosks inside its stores where customers can have their tax returns completed by trained preparers.

As it is doing in its own retail locations nationwide, H&R Block will offer free preparation of 1040EZ forms at Wal-Mart through Feb. 29. Block will have kiosks in about 250 Wal-Mart stores. It’s the second year Block is offering free simple tax prep. The company, based in Kansas City, Mo., has shifted strategies to retain market share after struggling for several years and the free preparations are one of its tactics to get people in the door.

Jackson-Hewitt will provide free prep of the simple forms throughout the tax season at about 2,800 Wal-Mart stores, up from 2,000 last year. A spokesman said some of its retail outlets may also offer free 1040EZ prep but doing so is not companywide policy.

About 39 percent of the total 133 million individual returns filed with the Internal Revenue Service last year were submitted before the end of February.

Early filers usually expect a refund. The average refund last year was $2,805, down 2.6 percent from $2,880 in 2010.

Customers who have their taxes prepared at Wal-Mart will have the usual options for receiving a refund: direct deposit into a bank account or to a prepaid card or a mailed check.

The IRS has promoted direct deposit in the past few years as a safer, faster alternative. Combined with returns filed electronically, refunds can be delivered in 10 days or less using direct deposit. Checks may take several weeks.

Last year, about 74 percent of refunds were sent via direct deposit.

Wal-Mart, H&R Block and Jackson Hewitt all offer prepaid cards that can be credited with the tax refund at no cost for customers who do not have bank accounts. The cards have some fees associated with using them, although Wal-Mart waives fees for customers who have at least $1,000 loaded onto a card in a given month.

Wal-Mart also provides low-cost check cashing for those customers who receive mailed refunds. The retailer charges $3 to cash checks up to $1,000 and $6 for checks between $1,000 and $7,500.

That’s far less than the typical amount charged at a check-

cashing outlet, which often takes as much as 3 percent of a check, or $75 for a refund of $2,805

InfoSpace Agrees To Buy TaxACT For $287.5 Million

InfoSpace Inc. (INSP) said it agreed to acquire tax-preparation software company TaxACT for $287.5 million in cash, giving the Internet search company exposure to the growing online tax-preparation market.

The deal comes only months after TaxACT rival H&R Block Inc.’s (HRB) attempt to acquire the company for the same amount was

Kardashian Can Pay More, California Tax Proponents Say

Kim Kardashian, can’t you pay more? Proponents of a proposed tax increase on millionaires in California are asking that question of the outsize personality, who has parlayed her reality TV celebrity status into fame and personal fortune.

An online video from the Courage Campaign targets the star of “Keeping Up with the Kardashians” and “Kourtney and Kim Take New York” as part of its campaign for a proposed November ballot initiative to raise taxes on the wealthiest Californians.

The video ad flashes images of Kardashian enjoying the good life, proclaiming that “being on TV has changed my life, because you get lots of free stuff.”

It says Kardashian made $12 million in 2010 but paid just 1 percentage point more in California income taxes than someone making $47,000 — 10.3 percent vs. 9.3 percent.

“Not everyone was born a Kardashian, but we all need to pay our fair share,” it says.

A spokeswoman for Kardashian, Pearl Servat, did not respond to a request for comment Tuesday from The Associated Press.The Courage Campaign and the California Federation of Teachers are among the groups backing a so-called millionaire’s tax that would raise income tax rates by 3 percent to 5 percent for individuals who make more than $1 million a year.

Proponents say the tax would raise about $6 billion to help fund public schools and local services that have been hit hard during the recession, such as social services, programs for the elderly and public safety.

If the groups are successful in getting their tax initiative on the November ballot, they would likely pursue a television ad on the same theme, Courage Campaign spokeswoman Ana Beatriz Cholo said.

Tax revenue to the state has dropped $17 billion since the

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recession began during the 2007-08 fiscal year, requiring billions of dollars a year in budget cuts.

The millionaires tax is one of several ballot proposals circulating in California seeking to increase income taxes on the wealthy as a way to help close the state’s annual budget deficit. In 2010, about 41,000 Californians reported adjusted gross income above $1 million, paying about $13.1 billion in taxes to the state, according to the Franchise Tax Board.

A proposal by Gov. Jerry Brown also seeks to raise taxes temporarily, and he has been reaching out to wealthy donors who could help finance his initiative campaign. The Democratic governor said he has found that most wealthy people are not too excited about increasing their own taxes, with some exceptions.

“I talked to Rob Reiner; he was very excited about paying more taxes,” the governor quipped last week. A spokesman for Reiner was not immediately available for comment Tuesday.

Through their reality TV shows and other promotions, Kim Kardashian, two of her sisters and their mother have created a celebrity brand name for themselves, appearing in endorsements for everything from weight-loss products to fast food. Forbes magazine estimated Kardashian made $12 million in 2010.

Kim Kardashian’s father, Robert Kardashian, was an attorney and close friend of O.J. Simpson who played a prominent role in his murder trial.

After a lavish, made-for-TV wedding event last summer that reportedly netted the couple millions of dollars in royalties, Kim Kardashian filed for divorce in October, citing irreconcilable differences just 10 weeks after she wed NBA player Kris Humphries.

The couple’s star-studded, black-tie ceremony was held at an exclusive canyon estate near Santa Barbara in the seaside enclave of Montecito. Kardashian wore three different designer wedding gowns, complemented by her 20.5 carat engagement ring. The couple’s wedding registry at a Beverly Hills jeweler totaled $172,000 and included such items as a $1,650 coffee pot and two $1,250 sterling silver vegetable spoons.

The one-minute Courage Campaign ad flashes pictures of Kim Kardashian in fur and jewels, then compares her 10.3 percent income tax rate with that of a “middle-class Californian” who makes $47,000 a year and pays 9.3 percent.

“Don’t you think she could pay a little more?” the ad asks as pictures of schoolchildren, firefighters and an elderly woman appear. “Especially to fund education and critical services?”

Hundreds of Prisoners Register as Tax Preparers

Hundreds of prison inmates have found new careers behind bars — by registering with the IRS as income tax preparers.

A total of 331 inmates were serving prison terms when they got active or provisional tax preparer tax identification numbers from the IRS, according to an audit issued by the Treasury Inspector General for Tax Administration.

Forty-three of those applicants were serving life sentences at the time. Yet none of the lifers disclosed their felony convictions on the IRS application, the audit found.

In all, 962 applicants who had an incarceration date within the last 10 years got active or provisional tax preparer identification numbers. More than three in four didn’t disclose their convictions.

The inmates and ex-cons were among thousands of applicants who got the identification numbers from the IRS from September 2010 through July 2011 as the agency began phasing in a 2009 congressional mandate that requires many preparers to file tax returns electronically.

The IRS officials told auditors it would suspend tax preparer identification numbers already issued to prisoners and deny any future applications from inmates.

“Our report shows that the problem of misuse of the tax system by prison inmates continues,” said J. Russell George, who heads the inspector general’s office. “Based on our report, the IRS is working on solutions for suspending preparer identification numbers obtained by prisoners and preventing future applicants who are prisoners from receiving a preparer ID number. They must persevere in these efforts ... especially given the prison inmate population’s determination to misuse the system.”

Prisoner registration as tax preparers is a new twist in a long history of tax scams involving inmates.

For instance, USA Today reported in February that prisoners in three states — Florida, Georgia and California — led the nation’s inmate population by using false or fraudulent tax returns to scam nearly $19 million in IRS refunds during 2009.

That total was part of $39.1 million in unmerited federal tax returns the IRS issued to jail and prison inmates nationwide, according to an IRS report to Congress in January.

Tax Fraud Victims Sue IRS for Refund

Jay and Christine Gordon want their lawsuit to reach class-action status because others have similar issues.

As far as Jay Gordon is concerned, the Internal Revenue Service was the victim of someone who used Gordon’s identity to commit tax fraud, and now Gordon and his wife are victims of the IRS.

“I know we’re not the only ones,” said Gordon, who described his predicament as “ridiculous, asinine, whatever you want to call it.”

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The Gordons have filed what they hope will be a class-action lawsuit against the U.S. government on behalf of a growing number of Florida residents who are having trouble getting their tax refunds because someone else filed tax returns to obtain fraudulent refunds in their names.

Law enforcement authorities in Tampa say tax refund fraud has exploded in the area, with postal inspectors intercepting what they estimate to be hundreds of millions of dollars of fraudulent tax refund checks.

Victims of identity theft have expressed near universal frustration with how the IRS has handled their cases. Lawmakers in Washington have introduced legislation and convened hearings to address the issue.

“We’re basically not receiving what’s ours because somebody else did something fraudulently,” said Gordon, who teaches psychology at Tarpon Springs High School. “And I just don’t understand why it’s affecting us.”

Gordon said he has “a high level of frustration” with the IRS. “All they try to do is just sort of placate you, and it’s just ridiculous because you know it’s going on with a lot of people.”

Gordon said he and his wife, Christine, first learned of the tax fraud when they received a letter from the IRS in March stating that the agency wanted to audit his tax return. There were two problems with that: Gordon and his wife always filed taxes jointly, and they hadn’t even filed their taxes yet.

Finding out about the fraud was “a little bit surreal and very unnerving,” Christine Gordon said.

When they called the IRS, after being put on interminable hold, they were told someone must have stolen their identity. Jay Gordon said they were told to file an identity theft affidavit, which they did. After that, they continued to get letters informing them of an audit.

He said he called the IRS and said, “Don’t you know that we have filed as identity theft, and you need to back off.”

The response, he said, was, “Well this department doesn’t

communicate with this department. Their bureaucracy is just, ‘wow.’ “

Finally, around June, the audit letters stopped.

“You’re on hold, and then you’re transferred from one ill-informed representative to another,” added Christine, a licensed massage therapist.

The day after the Gordons attempted to file their electronic tax return, they were notified that their return was rejected.

No one would tell them how much of a refund the criminal obtained in his name. But the IRS has still failed to send the Gordons their $2,500 refund.

“I’ve called countless times,” Jay Gordon said, “and we’ve got plenty of things coming up that we need to pay for.”

He estimated he’s called the IRS between 10 and 15 times, being put on hold each time for up to an hour. Frequently, he said, he’s told someone will call him back. But no one ever does.

The IRS released a written statement about the Gordons’ lawsuit, saying they couldn’t legally address the specifics of an individual case.

“We understand that this is a frustrating process for identity theft victims, and we share their frustrations,” the statement said. “These are some of the most complex cases we handle. The IRS is firmly committed to working with people to take care of these issues as quickly as possible. We have been working hard to speed up resolution of refund fraud cases and help get these fixed promptly for taxpayers. We have put more people into this area to help resolve these cases as fast as we can.”

The Gordons may have an uphill battle in court, as class-action lawsuits have been difficult to bring in recent years.

But their attorney, James A. Staack of Clearwater, said he thinks the prospects are good that a federal judge will give his approval to the class-action status of the suit.

“I think the class can be certified based on the existing rules and case law because everybody is experiencing the same problem,” Staack said. “The IRS owes them a refund; they’ve applied for a refund … Everybody in the class we’ve defined has done that and the IRS has failed and refused to give them the money they’re entitled to.

“It’s not the IRS’ money; it’s not the government’s money; it’s the taxpayers’ money as of Jan. 1. Our position is they’re withholding the taxpayers’ money.”

Editors Note: Contributed by fellowship member Martha Bell.

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IRS News

Ten Tips to Help You Choose a Tax Preparer

Many people look for help from professionals when it’s time to file their tax return. If you use a paid tax preparer to file your return this year, the IRS urges you to choose that preparer wisely. Even if a return is prepared by someone else, the taxpayer is legally responsible for what’s on it. So, it’s very important to choose your tax preparer carefully.

This year, the IRS wants to remind taxpayers to use a preparer who will sign the returns they prepare and enter their required Preparer Tax Identification Number (PTIN).

Here are ten tips to keep in mind when choosing a tax return preparer:

1. Check the preparer’s qualifications. New regulationsrequire all paid tax return preparers to have a Preparer TaxIdentification Number. In addition to making sure they havea PTIN, ask if the preparer is affiliated with a professionalorganization and attends continuing education classes. TheIRS is also phasing in a new test requirement to make surethose who are not an enrolled agent, CPA, or attorney havemet minimal competency requirements. Those subject to thetest will become a Registered Tax Return Preparer once theypass it.

2. Check on the preparer’s history. Check to see if thepreparer has a questionable history with the Better BusinessBureau and check for any disciplinary actions and licensurestatus through the state boards of accountancy for certifiedpublic accountants; the state bar associations for attorneys;and the IRS Office of Enrollment for enrolled agents.

3. Ask about their service fees. Avoid preparers who basetheir fee on a percentage of your refund or those who claimthey can obtain larger refunds than other preparers. Also,always make sure any refund due is sent to you or depositedinto an account in your name. Under no circumstances shouldall or part of your refund be directly deposited into a preparer’sbank account.

4. Ask if they offer electronic filing. Any paid preparer whoprepares and files more than 10 returns for clients must filethe returns electronically, unless the client opts to file a paperreturn. More than 1 billion individual tax returns have beensafely and securely processed since the debut of electronicfiling in 1990. Make sure your preparer offers IRS e-file.

5. Make sure the tax preparer is accessible. Make sure youwill be able to contact the tax preparer after the return hasbeen filed, even after the April due date, in case questionsarise.

6. Provide all records and receipts needed to prepare yourreturn. Reputable preparers will request to see your records

and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items. Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub. This is against IRS e-file rules.

7. Never sign a blank return. Avoid tax preparers that askyou to sign a blank tax form.

8. Review the entire return before signing it. Before yousign your tax return, review it and ask questions. Make sureyou understand everything and are comfortable with theaccuracy of the return before you sign it.

9. Make sure the preparer signs the form and includestheir PTIN. A paid preparer must sign the return and includetheir PTIN as required by law. Although the preparer signs thereturn, you are responsible for the accuracy of every item onyour return. The preparer must also give you a copy of thereturn.

10. Report abusive tax preparers to the IRS. You can reportabusive tax preparers and suspected tax fraud to the IRSon Form 14157, Complaint: Tax Return Preparer. DownloadForm 14157 from www.irs.gov or order by mail at 800-TAX-FORM (800-829-3676).

Work Opportunity Credit

Expanded Tax Credit for Hiring Unemployed Veterans

The work opportunity credit has been expanded to provide employers with new incentives to hire certain unemployed veterans.

On November 21, 2011, the President signed into law the VOW to Hire Heroes Act of 2011. This new law provides an expanded work opportunity tax credit to businesses that hire eligible unemployed veterans and for the first time also makes part of the credit available to tax-exempt organizations. Businesses claim the credit as part of the general business credit and tax-exempt organizations claim it against their payroll tax liability. The credit is available for eligible unemployed veterans who begin work on or after November 22, 2011, and before January 1, 2013.

IRS Explains Revisions to FBAR and Form 8300

If you already filed certain Bank Secrecy Act paper forms but need to correct an error, there’s a new process to follow - and it is simple.

To amend a previously filed Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, or TD F 90-22.1, Report of Foreign Bank and Financial Accounts:

• Check the “Amended” box near the top of Form 8300(item 1a) or in the upper right corner of the FBAR

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• Complete the form in its entirety, including the amendedinformation

• Mail the amended form (without the original form) to:

Department of the TreasuryPO Box 32621Detroit, MI 48226

If you prefer, you may electronically file original or amended FBARs using the Department of Treasury’s BSA E-File System.You must mail Forms 8300 to the IRS until e-filing is expanded to include Form 8300.

These changes are published in the FBAR form and instructions (PDF) and Form 8300 and instructions (PDF), both available on IRS.gov.

FBAR help is available by telephone at (866) 270-0733 (toll-free within the U.S.) or (313) 234-6146 (from outside the U.S., not toll-free) from 8 a.m. - 4:30 p.m. Eastern time, or email your inquiry to FBARquestions@irs.gov.

Reminder RE Reporting Health Insurance on W-2s

Part of the Health Act of 2010 requires employers to report health insurance costs on the Forms W-2 starting with the 2011 Forms. (IRC § Section 6051(a)(14)) Back in late-2010 IRS Notice 2010-69 gave employers a one-year reprieve from this requirement, therefore NOT requiring this for the 2011 Forms W-2. The amount is to be reported in Box 12 with a code DD. We are providing the following information to remind you of the requirements for 2012 & 2013 AND to remind you what it means if you receive a W2 with code DD in box 12.

Earlier this year IRS Notice 2011-28 provided more guidance including:

1) The amount entered in box 12, code DD, is not taxable butmerely a reporting.

2) Questions 28-31 deal with methods of calculating theemployer’s cost of the insurance.

3) The amount to be entered in box 12, code DD, is the totalof the cost of insurance “paid” by the employer, the cost paidby the employee with after-tax contributions, and the cost paidby the employee with pre-tax contributions. However, if anyamount of the insurance cost is paid by the employee througha Section 125 cafeteria plan, this amount is NOT included inbox 12, code DD. The costs of dental or vision insurance isnot required to be included in this amount.

4) The Forms W-2 for 2012, to be filed in January 2013, willrequire the reporting of the health insurance costs UNLESSthe employer is a small business. For this purpose a “smallbusiness” is an employer that is required to file fewer than 250Forms W-2 for the calendar year 2011.

5) The Forms W-2 for 2013, to be filed in January 2014, willrequire the reporting of the health insurance costs by allemployers.

Notices 2010-69 and 2011-28 can be found at www.irs.gov/pub by clicking on irs-drop and then on n-10-69 and n-11-28.

Information provided by ncpe Fellowship members, David and Mary Mellem.

Final Regulations Toughen EIC Due Diligence Requirements Effective for This Filing Season

In lightning speed, IRS has issued final regs that require paid tax return preparers to file a due diligence checklist, Form 8867, with any federal return claiming the Earned Income Credit (EIC) and that otherwise toughen the due diligence requirements. With various modifications, the final regs adopt proposed regs issued on Oct. 6, 2011. They apply to returns and refund claims for tax years ending on or after Dec. 31, 2011 and reflect a law change made after the proposed regs were issued.

An “eligible individual” (in general, an individual who has a “qualifying child” for the tax year, or any other individual who doesn’t have a qualifying child but meets the requirements set out in Code Sec. 32(c)(1)(A)(ii)) is allowed as a credit against his or her tax for the tax year an amount equal to the “credit percentage” of so much of the taxpayer’s “earned income” for the tax year as doesn’t exceed the earned income amount. The EIC is phased out at certain levels of earned income. It is also refundable, and can provide a tax benefit to taxpayers who otherwise owe no taxes.

The credit percentage and earned income amount, and therefore the maximum EIC, depend on the number of qualifying children that the taxpayer has.

According to IR 2011-98 (issued with the proposed regs), although as many as one in five eligible taxpayers fail to claim the EIC, some of those who do claim it either compute it incorrectly or are ineligible. IRS has made various compliance efforts over the years in order to prevent taxpayers from incorrectly or over-claiming the credit.

The Taxpayer Relief Act of ‘97 added a $100 penalty for preparers of returns or refund claims for each failure to comply with due diligence requirements in determining a taxpayer’s eligibility for (or the amount of) the EIC, effective for tax years beginning after ‘96. (Code Sec. 6695(g)) The Act left it to IRS to set forth the due diligence requirements in regs, which it subsequently did in October of 2000.

On October 21, 2011, section 501 of the United States-Korea Free Trade Agreement Implementation Act, Public Law 4 112-41, 125 Stat 428, amended Code Sec. 6695(g) by increasing the amount of the penalty from $100 to $500, for returns required to be filed after Dec. 31, 2011.

Under the preexisting regs, in order to avoid the Code Sec.

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6695(g) penalty, a preparer had to:

(1) complete Form 8867, Paid Preparer’s Earned IncomeCredit Checklist, or other form prescribed by IRS, orotherwise record in his files the information necessary tocomplete the Eligibility Checklist;

(2) complete the Earned Income Credit Worksheet,contained in the Form 1040 instructions, or otherwise recordin his files the computation and information necessary tocomplete the Computation Worksheet;

(3) have no knowledge or reason to know that anyinformation used by the preparer in determining eligibilityfor, and the amount of, the EIC was incorrect; and

(4) retain for three years the Eligibility Checklist and theComputation Worksheet (or alternative records), and arecord of how and when the information used to determineeligibility for, and the amount of, the EIC was obtained bythe preparer. The three-year period ran from the June 30thfollowing the date the return or refund claim was presentedto the taxpayer for signature.

Additionally, a preparer could avoid the penalty for a particular return or refund claim if he could show to IRS’s satisfaction that, considering all the facts and circumstances, his normal office procedures were reasonably designed and routinely followed to ensure compliance with the due diligence requirements, and that the particular failure was isolated and inadvertent (“facts and circumstances exception”).

The proposed regs would:

Require a tax return preparer to not just complete Form 8867 (or its successor) or otherwise record the required information, but also to submit the Form 8867 with the tax return or refund claim claiming the EIC.

Change the three-year retention date to run for three years from the later of the due date of the return (determined without regard to any extension of time for filing), or the date the return or refund claim was filed.

Subject to the Code Sec. 6695(g) penalty all “return preparers,” whether an individual or firm, who determine eligibility for or amount of an EIC and fail to satisfy the due diligence requirements. (Prop Reg § 1.6695-2(a)) (In contrast, the preexisting regs only subjected a “signing tax return preparer” to the penalty.)

Before imposing the penalty on a firm based on an employee’s failure to comply with the due diligence requirements, establish that a member of its principal management (or the principal management of a branch office) participated in or knew of such failure.

Subject a firm to the penalty if it has established reasonable and appropriate compliance measures, but disregarded same through willfulness, recklessness, or gross

indifference in the preparation of a tax return or refund claim for which the penalty is imposed.

Provide that a firm that is subject to the penalty under the special proposed rules for firms cannot satisfy the facts and circumstances exception.

The final regs reflect the following modifications:

Increased penalty. The increase in the penalty to $500 is reflected in Reg. § 1.6695-2(a).

Submission of Form 8867. In response to comments, IRS has clarified the rules in the regs to provide how tax return preparers who prepare a tax return or refund claim but don’t submit it directly to IRS can satisfy the requirement under the proposed regs to submit the completed Form 8867 to the IRS. Specifically, under Reg. § 1.6695-2(b)(1)(i), such preparers may satisfy this aspect of their due diligence obligation by providing the form to the taxpayer or the signing tax return preparer, as appropriate, for submission with the tax return or refund claim.

Conditions for penalizing firms. Addressing a concern raised by a commentator with respect to the knowledge condition for imposing a penalty on a firm, the final regs provide that a firm is only subject to a penalty under Reg. § 1.6695-2(c)(1) if the manager knew of an employee’s failure to complywith the due diligence requirements before the date the taxreturn or refund claim was filed.

Retention of records. One commentator stated that the record retention date should not be tied to the date the tax return or refund claim was filed because, if the tax return preparer who prepares the tax return or refund claim is not the individual who files it, that tax return preparer might not know when it is filed and when the retention period expires. In response, the final regs require a tax return preparer to retain the records described in Reg. § 1.6695-2(b)(4)(i) for the period ending three years after the later of thedate the tax return or refund claim was due or the date itwas transferred in final form by the tax return preparer tothe next person in the course of the filing process. For asigning tax return preparer who electronically files the taxreturn or refund claim, the next step in the filing processwill be to electronically file the tax return or refund claim,so the relevant date is the date the tax return or refundclaim is filed. For a signing tax return preparer who doesnot electronically file, the next person will be the taxpayer,so the relevant date is the date the tax return or refundclaim is presented to the taxpayer for signature. For anonsigning tax return preparer, the next person will be thesigning tax return preparer, so the relevant date is the datethe nonsigning tax return preparer submitted to the signingtax return preparer that portion of the tax return or refundclaim for which the nonsigning tax return preparer wasresponsible.

Editor’s note: Fellowship members will find an EITC Due Diligence worksheet on the Resources Tab of

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www.ncpefellowship.com.

How to Report 2010 Roth IRA Rollovers and Conversions

IRS has issued guidance on its website for the 2011 reporting requirements of 2010 rollovers and conversions to Roth IRAs. For tax years beginning after 2009, the rule that barred taxpayers with more than $100,000 of modified AGI from converting traditional IRAs to Roth IRAs was eliminated. Additionally, starting in 2010, married taxpayers filing a separate return could convert amounts in a traditional IRA into a Roth IRA (before 2010 they were barred from doing so). (Code Sec. 408A(c)(3)) Additionally, for such conversions made in 2010, any amounts that would be included as income as a result of the conversion had to be included in income in equal amounts in 2011 and 2012, unless the taxpayer elected to include the entire amount in income in 2010. (Code Sec. 408A(d)(3))

For distributions made after Sept. 27, 2010, participants in qualified 401(k) plans and 403(b) annuity plans that maintain a qualified Roth contribution program may roll over distributions from their 401(k) and 403(b) plans to designated Roth accounts maintained for the benefit of the individual to whom the distribution was made. (Code Sec. 402A(c)(4)(B)) These transactions are known as “in-plan Roth rollovers” (IPRRs).

The IPRR is not tax-free. Rather, the amount that an individual receives in a distribution from an applicable retirement plan that would be includible in gross income if it were not part of a qualified rollover distribution must be included in gross income. (Code Sec. 402A(c)(4)(A)(i))

Any amount that would be includible in a taxpayer’s gross income for any tax year beginning in 2010 is included in gross income ratably over 2011-2012. However, the taxpayer could elect to not have this 2-year deferral apply and to include the taxable portion in gross income in the 2010 tax year. Any such election for any distributions made during a tax year may not be changed after the due date for such tax year. (Code Sec. 402A(c)(4)(A)(iii))

The Code Sec. 72(t) 10% tax on early withdrawals (which generally applies to the taxable portion of a plan or IRA distribution made before the participant has reached age 59 1/2, unless an exception applies) doesn’t apply to such distributions. (Code Sec. 402A(c)(4)(A)(ii)) However, the recapture rule under Code Sec. 408A(d)(3)(F) applies to distributions within a specified 5-tax-year holding period. (Code Sec. 402A(c)(4)(D))

Half of the taxable amount of these 2010 rollovers and conversions must be reported on 2011 income tax returns unless the taxpayer (1) elected to include the taxable amount in income for 2010 by filing a 2010 Form 8606 (“Nondeductible IRAs”), and completed Part II or Part III or both, as applicable, and checked the box on line 19, the box on line 24, or both; (2) recharacterized the 2010 rollover or conversion to a RothIRA; or (3) received a distribution in 2010 or 2011 of any of

the taxable amount (in which case, an amount other than half may need to be reported on the 2011 tax return).

IRS issued the following guidance on how taxpayers should report 2010 Roth rollovers and conversions:

If no part of the 2010 conversion to a Roth IRA was distributed in 2010 or 2011, the amount from line 20a of the 2010 Form 8606 must be reported on:

... line 15b of the 2011 Form 1040;

... line 11b of the 2011 Form 1040A; or

... line 16b of the 2011 Form 1040NR.

If no part of the 2010 rollover to a Roth IRA (from a retirement plan other than an IRA) or 2010 IPRR was distributed in 2010 or 2011, the amount from line 25a of the 2010 Form 8606 must be reported on:

... line 16b of the 2011 Form 1040;

... line 12b of the 2011 Form 1040A; or

... line 17b of the 2011 Form 1040NR.

If, as required, distributions of a 2010 rollover and conversion to a Roth IRA or IPRR were reported on a taxpayer’s 2010 tax return, the taxpayer must, on the 2011 return, report:

... on Form 1040, line 15b (Form 1040A, line 11b; or Form 1040NR, line 16b) the smaller of (a) the amount from the 2010 Form 8606, line 20a, or (b) the remaining taxable amount of the 2010 conversions to a Roth IRA; and ... on Form 1040, line 16b (Form 1040A, line 12b; or Form 1040NR, line 17b) the smaller of (a) the amount from the 2010 Form 8606, line 25a, or (b) the remaining taxable amount of the 2010 rollovers to a Roth IRA and IPRRs.

Illustration: A taxpayer converted $30,000 from a traditional IRA to a new Roth IRA on Feb. 1, 2010. On June 1, 2010, the taxpayer received a $20,000 distribution of the converted amount from the Roth IRA. Part II of the 2010 Form 8606 was completed to report the $30,000 as the taxable amount of the conversion, and the taxpayer elected to include $15,000 of the taxable amount in income for 2011 and $15,000 for 2012. The $30,000 was the only amount put into the new Roth IRA in 2010, so the entire $20,000 distribution was from the taxable amount of the conversion. The $20,000 was included in the taxpayer’s 2010 income by reporting it on line 15b of the 2010 Form 1040.

Only $10,000 of the 2010 conversion remains to be taxed, and because this is smaller than the $15,000 listed on line 20a of the 2010 Form 8606 (half of the total 2010 conversion to a Roth IRA), $10,000 must be included on line 15b of the 2011 Form 1040. None of the 2010 conversion to a Roth IRA will have to be reported in 2012 income.

Additionally, a taxpayer may have to include in 2011 income all or some of the taxable amount of 2010 rollovers and conversion to a Roth IRA and IPRRs that would have otherwise been included in 2012 income. To determine the amount to report

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in 2011, the 2011 Form 8606 must be completed, using Part III for distributions from a Roth IRA and Part IV for distributions from a designated Roth account.

Guidance in Temporary Regulations on Qualified Residence Interest Deduction Continues to Apply After Law Change

Chief Counsel Advice 201201017

In Chief Counsel Advice (CCA), IRS has concluded that based on the legislative history of Code Sec. 163(h), until regs are issued, taxpayers may use any reasonable method in allocating debt in excess of the acquisition and home equity debt limitation, including the exact and the simplified methods in temporary regs issued under a previous version of Code Sec. 163(h), the method in Pub 936, or a reasonable approximation of these methods.

Generally, personal interest is nondeductible. (Code Sec. 163(h)(1)) However, under an exception to this rule, qualified residence interest (which includes interest on acquisition indebtedness and home equity indebtedness) is deductible. (Code Sec. 163(h)(1)) Acquisition indebtedness is indebtedness incurred to buy, build, or substantial improve an individual’s qualified residence that is secured by the residence. The total amount treated as acquisition debt can’t exceed $1 million for any period ($500,000 for a married individual filing separately). (Code Sec. 163(h)(3)(B)(ii)) Home equity indebtedness is indebtedness (other than acquisition indebtedness) secured by taxpayer’s qualified residence, to the extent the aggregate amount of the debt doesn’t exceed the fair market value (FMV) of the residence, as reduced by the amount of acquisition indebtedness on it. (Code Sec. 163(h)(3)(C)(i)) The total amount treated as home equity indebtedness for any period can’t exceed $100,000 ($50,000 for a married individual filing separately). (Code Sec. 163(h)(3)(C)(ii))

The Tax Reform Act of ‘86 (‘86 Act, P.L. 99-514, 10/22/1986), which made personal interest generally nondeductible, allowed a deduction for qualified residence interest on indebtedness that did not exceed the basis of the residence and the cost of improvements, and on certain indebtedness incurred for medical and educational purposes. IRS issued Reg. § 1.163-9T and Reg. § 1.163-10T to explain the qualified residence interest deduction, as amended by the ‘86 Act. Reg. § 1.163-10T provides two methods for determining a taxpayer’s qualified residence interest when the debt exceeds the applicable limitation: a simplified method and an exact method.

• Under the simplified method, interest on all secureddebts is multiplied by a fraction, the numerator of which isthe adjusted purchase price of the qualified residence andthe denominator of which is the sum of the average balances of all secured debts (to take account of the OBRA changes,see below, the $1,000,000 acquisition indebtedness limitand the $100,000 home equity indebtedness limit must

be substituted for the adjusted purchase price). When the simplified method is used, a taxpayer is required to treat interest on all excess debt as personal interest. (Reg. § 1.163-10T(d))

• Under the exact method, the amount of qualifiedresidence interest is determined on a debt-by-debt basisby comparing the applicable debt limit for the debt to theaverage balance of each debt. The applicable debt limit isan amount that is different for each debt and is the lesserof the fair market value of the residence on the date thedebt is secured and the adjusted purchase price of thequalified residence at the end of the tax year, reducedby the average balance of each debt that was previouslysecured by the qualified residence. If the average balanceof the debt doesn’t exceed the limitation for that debt, allthe interest on that debt is qualified residence interest. Ifthe average balance of the debt exceeds the limitation,the amount of qualified residence interest is determined bymultiplying the interest paid or accrued with respect to thedebt by a fraction, the numerator of which is the applicabledebt limit for that debt and the denominator of which is theaverage balance of the debt. Under the exact method, ataxpayer is allowed to treat interest on debt that exceedsthe limitations according to the use of the debt proceedsunder the interest tracing rules in Reg. § 1.163-8T. (Reg. §1.163-10T(e)).

The qualified residence interest deduction provision in the ‘86 Act was amended by the Omnibus Budget Reconciliation Act of ‘87 (OBRA, P.L. 100-203, 12/22/1987) to allow a deduction for qualified residence interest for up to $1,000,000 of acquisition indebtedness and $100,000 of home equity indebtedness. The legislative history to the OBRA changes anticipated that IRS would issue regs describing the proper method for allocating interest on excess amounts of debt. Until such regs were issued, the legislative history provided that a reasonable method of allocation should be used. (H.R. Rep. No. 100-391, p. 1033)

After the OBRA changes, IRS issued Notice 88-74, 1988-2 CB 385, and published Publication 936, Home Mortgage Interest Deduction, to provide guidance the qualified residence interest deduction. Under the worksheet in Pub 936, taxpayers use a method similar to the simplified method in Reg. § 1.163-10T(d), but unlike the reg, Line 13 of the worksheet provides that the part of secured indebtedness that isn’t qualified residence interest may be allocated in accordance with the use of the proceeds of the debt.

Both Reg. § 1.163-10T(o) and Pub 936 state that taxpayers may make an election to treat a debt that is secured by a qualified residence as not secured by a qualified residence. The election must apply to the entire indebtedness, and the election is made by reporting the interest on the return as business interest or other deductible interest rather than qualified residence interest. Such an election allows interest on the debt to qualify as an “above the line” deduction (allowable in determining adjusted gross income) and also allows a debt that is allocable to trade or business expenses

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(and so deductible without the Code Sec. 163(h) deduction) to not “use up” the applicable limitation.

The question examined by the CCA was to what extent the temporary regs remain relevant to the calculation of qualified residence interest after the OBRA changes. For example, although the limitation is now $1,000,000 for acquisition indebtedness and $100,000 for home equity indebtedness, rather than indebtedness not in excess of basis increased by certain medical and educational debt, are the general methodologies provided in the regs still applicable, if modified to reflect the new limitations?

In the CCA, IRS concluded that since the legislative history indicates that, until regs are issued, a reasonable method of allocating debt in excess of the acquisition and/or home equity debt limitation may be used, taxpayers may use any reasonable method, including the exact and the simplified methods in the regs, the method in Pub 936, or a reasonable approximation of those methods. Further, a taxpayer may allocate the amounts that exceed the limitations in accordance with the use of the debt proceeds, as provided in Reg. § 1.163-10T(e)(4) and the instructions to line 13 of Pub 936.

The CCA provides the following illustration of the exact method in Reg. § 1.163-10T(e), substituting the current statutory limits. A taxpayer owns one qualified residence that secures the following debts incurred in this order: first, $900,000 of acquisition debt; second, $250,000 of home equity debt allocated to personal expenditures; and third: $150,000 allocated to business expenditures The applicable debt limit for the first $900,000 debt is $1 million, all of the interest on which is deductible. The applicable debt limit for the second $250,000 debt is $100,000, 10/25ths of the interest on which is deductible. The applicable debt limit for the third $150,000 debt is 0 ($100,000 reduced by the previous $250,000 debt).

However, since the third debt is allocable to business expenditures, interest on that debt would be deductible, regardless of whether the taxpayer had elected to treat the debt as not secured by the qualified residence, because under the exact method the taxpayer is allowed to treat interest that exceeds the limitation as traced to the particular expenditures for which the debt is used.

In addition, the CCA concluded that a taxpayer using the exact method, or any other reasonable method, isn’t required to make the election under Reg. § 1.163-10T(o)(5) in order to allocate the interest on the part of the debt that exceeds the qualified residence interest limitations under Reg. § 1.163-8T. Further, the Reg. § 1.163-10T(o)(5) election applies to the whole amount of a debt (not to part). When the election is made, the entire debt is treated as not secured by the residence. When the election isn’t made, only the part of the debt that exceeds the limitation is traced according to the use of the debt proceeds.

A taxpayer using the simplified method may allocate excess interest under the interest tracing rules of Reg. § 1.163-8T, as described in the instruction to line 13 of the worksheet in Pub

936, without making an election under Reg. § 1.163-10T(o)(5). The method provided for in Pub 936 is another reasonable method allowed by the legislative history.

IRS Revises Disclosure Rules that Lessen Understatement and Preparer Penalties

Rev Proc 2012-15, 2012-7 IRB

IRS has made minor changes in the Revenue Procedure that identifies when disclosure on a taxpayer’s return for an item or a position is adequate to reduce a Code Sec. 6662(d) understatement of income tax under the accuracy-related penalty, and to avoid the Code Sec. 6694(a) preparer penalty for understatements due to unreasonable positions. The revised Revenue Procedure applies to any income tax return filed on 2011 tax forms for tax years beginning in 2011, and to any income tax return filed on 2011 tax forms in 2012 for short tax years beginning in 2012.

Under Code Sec. 6662, a 20% penalty applies to the portion of a tax underpayment that is attributable to a substantial understatement of income tax. The penalty rate is 40% in the case of gross valuation misstatements under Code Sec. 6662(h), nondisclosed noneconomic substance transactions under Code Sec. 6662(i), or undisclosed foreign financial asset understatements under section Code Sec. 6662(j). An understatement is “substantial” if it exceeds the greater of 10% of the amount of tax required to be shown on the return for the tax year or $5,000. However, a corporation (other than an S corporation or personal holding company) has a substantial tax understatement if the understatement exceeds the lesser of (1) 10% of the tax required to be shown on the return for a tax year (or, if greater, $10,000), or (2) $10 million. (Code Sec. 6662(d))

For a non-tax shelter item, the understatement is reduced to the extent the relevant facts affecting the item’s tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the taxpayer’s tax treatment. (Code Sec. 6662(d)(2)(B)(ii))

Under Code Sec. 6694(a), a penalty is imposed on a tax return preparer who prepares a return or refund claim reflecting an understatement of liability due to an “unreasonable position” if he knew (or reasonably should have known) of the position. A position (other than for a tax shelter or a reportable transaction) is generally treated as unreasonable unless (1) there is or was substantial authority for the position; or (2) the position was properly disclosed under Code Sec. 6662(d)(2)(B)(ii)(I) and had a reasonable basis. If the position is with respect to a tax shelter or a reportable transaction, the position is treated as unreasonable unless it is reasonable to believe that the position would more likely than not be sustained on the merits. (Notice 2009-5, 2009-1 CB 309)

Updated procedure. Rev Proc 2012-15 revised Rev Proc 2011-13 to correct a reference to Schedule M-3 (Form 1120), Part III, and to include a reference to the employee-remuneration limitations under the amended Code Sec. 162(m).

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Thus, Rev Proc 2012-15, Sec. 4.01(4), provides that for Schedule M-3 (Form 1120), Part III, line 37—and not line 35 as indicated in Rev Proc 2011-13—“Other expense/deduction items with differences,” the entry must provide descriptive language; for example, “Cost of non-compete agreement deductible not capitalizable.”

Rev Proc 2012-15, Sec. 4.02(2)(d), provides that with regard to the reasonableness of officers’ compensation, the disclosure protection will not apply to the extent that remuneration paid or incurred exceeds the “employee-remuneration limitations”—and not the “employee-remuneration deduction limitations” as indicated in Rev Proc 2011-13—under Code Sec. 162(m), if applicable.

Shulman Describes IRS’s “New Approach” to Offshore Corporate Tax Compliance

In prepared remarks at the 24th Annual Institute on Current Issues in International Taxation, IRS Commissioner Doug Shulman discussed a number of issues relating to offshore tax compliance. In particular, he focused on IRS’s new business-based approach to corporations operating in a global context, explaining that U.S. tax administration and corporate taxpayers overall will benefit by IRS’s understanding of companies’ business objectives and tax planning strategies.

Shulman stated that IRS is shifting its approach to large business taxpayers operating in a global environment, viewing such taxpayers through their business objectives and tax planning strategies rather than “through the lens of individual code sections.” By better understanding companies’ business and tax goals, Shulman said that IRS will be better able to identify, and not place undue burdens on, companies that are making legitimate decisions to limit their tax exposure.

Shulman emphasized the mutual benefits of IRS’s new approach. He said that IRS wants to “spend time on issues that really matter and understand what companies are really doing,” and predicted that companies will be happier with “an IRS that cuts to the chase, challenges the right stuff, and knows what’s really at stake.”

According to Shulman, the goal of IRS’s new approach is to organize its international compliance programs to:

identify the highest compliance risks among the taxpayer base;

work cases as effectively and efficiently as possible;not waste IRS’s and taxpayers’ time on issues that don’t pose compliance risk; and

find appropriate ways to resolve cases as soon as possible.

The new approach also involves drawing a distinction between outbound and inbound situations—i.e., those involving a U.S.-based company with operations abroad, and those involving a foreign-based company with U.S. operations.

For outbound situations, Shulman noted that corporate planning tends to center around income shifting, deferral, foreign credit management, and ways to repatriate accumulated U.S. profits. He also observed that these are also the areas where IRS sees the most controversy.

For inbound situations, the major issues include the U.S.’s jurisdiction to tax, efforts to shift income outside of the U.S., inbound financing (i.e., stripping income through interest deductions or guarantee arrangements), and strategies to reduce withholding on the repatriation of cash back to the company’s foreign home office.

In dealing with these issues, Shulman described IRS’s efforts to bring international examiners, lawyers, economists, and other experts together in teams to work strategic issues collaboratively. As an example, he cited IRS’s new Transfer Pricing Practice had previously been “scattered” and disaggregated, but which was now integrated into a single program in which IRS’s experts were working together closely under common leadership.

Shulman also spoke about IRS’s recent efforts to conduct joint audits, and how these efforts reflect many of the issues and goals underlying IRS’s new approach to dealing with multinational businesses. He described a CAP taxpayer Compliance Assurance Process; that underwent a joint audit regarding a transfer pricing issue, and said that within six months—a relatively short amount of time compared to how long it would have taken absent the joint audit process—the issue was bilaterally resolved for the CAP year, and the taxpayer was provided with a bilateral Advance Pricing Agreement to cover future years. He said that this result reflected many of IRS’s goals for a well-functioning tax system in a global environment, including transparency, resolving issues in real time rather than years after the issue arises, providing certainty for the current year as well as future years, and cooperation between two governments.

Shulman touted the successes of the most recent OVDI, which gave U.S. taxpayers with income in undisclosed offshore accounts a second chance to get current with their taxes. He stated that, in addition to bringing billions of dollars into the U.S. Treasury, IRS’s efforts have also changed the “risk calculus” associated with hiding assets overseas, noting that an individual seeking to engage in offshore evasion will have a harder time now finding an advisor who would suggest such an approach or a bank that would accept the money under secrecy conditions. He also said that IRS’s efforts have increased American taxpayers’ confidence in the fairness of the U.S. tax system.

Code Sec. 1471 through Code Sec. 1474, added by (and also known as) FATCA, provide withholding rules designed to encourage information gathering and reporting on foreign accounts in which U.S. persons have or may have specified interests. The rules are generally effective for payments made after Dec. 31, 2012. Shulman stated that bank and financial institution executives’ FATCA-related concerns tend to focus on two key areas: the conflict between FATCA and

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other countries’ laws; and the difficulty in implementing and administering the withholding requirements for pass-through payments, and the potential burden they place on foreign financial institutions. He said that IRS is expecting to issue new proposed regs soon after the new year that take these concerns into account.

IRS Offshore Programs Produce $4.4 Billion to Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens

The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come

forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

Individuals Must Report Specified Foreign Financial Assets on New Form 8938 for 2011 Tax Year

As recently announced in IR 2011-117, IRS has released the final version of Form 8938 (Statement of Specified Foreign Financial Assets) and its Instructions, which individuals must use to report specified foreign financial assets under Code Sec. 6038D for tax year 2011. Until IRS issues regs in the future, only individuals, and not specified domestic entities, must file Form 8938. The Instructions carry a number of examples of who does and doesn’t have to file Form 8938.

For tax years beginning after Mar. 18, 2010, the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act, P.L. 111-147) provides that individuals with an interest in a“specified foreign financial asset” during the tax year mustattach a disclosure statement to their income tax return forany year in which the aggregate value of all such assetsis greater than $50,000 (or a higher dollar amount as IRSmay prescribe). (Code Sec. 6038D(a)) In addition, to the

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extent provided by IRS in regs or other guidance, Code Sec. 6038D applies to any domestic entity formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if the entity were an individual. (Code Sec. 6038D(f))

“Specified foreign financial assets” are: (1) depository or custodial accounts at foreign financial institutions, and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity. (Code Sec. 6038D(b))

A specified person who fails to provide required information for any tax year is subject to a $10,000 penalty. A failure continuing for more than 90 days after the day on which IRS mails a notice of the failure to the specified person subjects the specified person to an additional penalty of $10,000 for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired, up to a maximum penalty of $50,000 for each such failure. (Code Sec. 6038D(d)) No penalty applies if the failure was due to reasonable cause and not willful neglect. (Code Sec. 6038D(g))

In Notice 2011-55, 2011-29 IRB 53, IRS suspended the Code Sec. 6038D reporting requirements until it releases Form 8938. Individuals for whom the filing of Form 8938 was suspended for a tax year will have to attach the form for the suspended tax year to their next income tax return required to be filed with IRS.

In October of 2011, IRS released a draft version of Form 8938.

Unless an exception applies, a taxpayer must file Form 8938 if: (1) they are a specified person that has an interest in specifiedforeign financial assets; and (2) the value of those assets ismore than the applicable reporting threshold.

The Instructions note that specified persons aren’t required to file Form 8938 for any tax year for which they aren’t required to file an annual return, even if the value of their specified foreign financial assets is more than their applicable reporting threshold.

A specified person includes any specified individual or—to the extent provided in future regs—a specified domestic entity if it is formed or availed of to hold specified foreign financial assets. If the value of the specified foreign financial assets is more than the appropriate reporting threshold and no exception applies, taxpayers must file Form 8938 even if none of the specified foreign financial assets affect their tax liability for the tax year. Generally, a specified individual is: a U.S. citizen; a resident alien of the U.S. for any part of the tax year; a nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return; or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.

If a taxpayer and his spouse file a joint return (and so would

file one combined Form 8938 for the tax year), he must include the value of the asset jointly owned with his spouse only once to determine the total value of all of the specified foreign financial assets that they own. If a taxpayer and his spouse are specified individuals and each files a separate return, he includes one-half of the value of the asset jointly owned with his spouse to determine the total value of all of his specified foreign financial assets. If a taxpayer has joint ownership with a spouse who isn’t a specified individual or someone other than a spouse, each joint owner includes the entire value of the jointly owned asset to determine the total value of all of that joint owner’s specified foreign financial assets.

The following reporting thresholds apply to taxpayers living in the U.S.:

• An unmarried taxpayer satisfies the reporting thresholdonly if the total value of his specified foreign financial assetsis more than $50,000 on the last day of the tax year or morethan $75,000 at any time during the tax year.

Illustration 1: Bev isn’t married and doesn’t live abroad. She sold her only specified foreign financial asset on October 15, when its value was $125,000. Held: Bev has to file Form 8938. She satisfies the reporting threshold even though she doesn’t hold any specified foreign financial assets on the last day of the tax year because she did own specified foreign financial assets of more than $75,000 at any time during the tax year. (Instructions for Form 8938, page 3)

Illustration 2: Anne isn’t married and doesn’t live abroad. Anne and an unrelated U.S. resident jointly own a specified foreign financial asset valued at $60,000. Held: Each has to file Form 8938 because each satisfies the reporting threshold of more than $50,000 on the last day of the tax year. (Instructions for Form 8938, page 3)

• Married taxpayers filing a joint income tax returnsatisfy the reporting threshold only if the total value of theirspecified foreign financial assets is more than $100,000 onthe last day of the tax year or more than $150,000 any timeduring the tax year.

Illustration 3: Carl and his wife file a joint income tax return and do not live abroad. They jointly own a single specified foreign financial asset valued at $60,000. Held: They do not have to file Form 8938 because they do not satisfy the reporting threshold of more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. (Instructions for Form 8938, page 3)

Illustration 4: David and Cindy do not live abroad. They file a joint income tax return, and jointly and individually own specified foreign financial assets. On the last day of the tax year, they jointly own a specified foreign financial asset with a value of $90,000. Cindy also has a separate interest in a specified foreign financial asset with a value of $10,000, while David has a separate interest in a specified foreign financial asset with a value of $1,000. Held: David

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and Cindy must file a combined Form 8938. They have an interest in specified foreign financial assets in the amount of $101,000 on the last day of the tax year—i.e., ($90,000, the entire value of the specified foreign financial asset that they jointly own, + $10,000, the value of the asset that Cindy separately owns, + $1,000, the value of the asset that David separately owns). David and Cindy satisfy the reporting threshold of more than $100,000 on the last day of the tax year. (Instructions for Form 8938, page 3)

• A married taxpayer filing a separate income tax returnsatisfies the reporting threshold only if the total value of hisspecified foreign financial assets is more than $50,000 onthe last day of the tax year or more than $75,000 at anytime during the tax year.

Illustration 5: Fred and Ethel do not live abroad. They file separate returns, and jointly own a specified foreign financial asset valued at $60,000 for the entire year. Held: Neither has to file Form 8938. They each use one-half of the value of the asset, $30,000, to determine the total value of specified foreign financial assets that they each own. Neither satisfies the reporting threshold of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. (Instructions for Form 8938, page 3)

The following reporting thresholds apply to a taxpayer living abroad—i.e., whose tax home is in a foreign country and who is (1) a U.S. citizen who has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year; or (2) a U.S. citizen or resident who is present in a foreign country at least 330 full days during any period of 12 consecutive months that ends in the tax year being reported:

• A taxpayer who doesn’t file a joint return satisfies thereporting threshold if the total value of his specified foreignfinancial assets is more than $200,000 on the last day ofthe tax year or more than $300,000 at any time during thetax year.

Illustration 6: Dan and Betty live abroad and file separate income tax returns. Betty isn’t a specified individual. On the last day of the tax year, Betty and Dan jointly own a specified foreign financial asset with a value of $150,000. Betty has a separate interest in a specified foreign financial asset with a value of $10,000, while Dan has a separate interest in a specified foreign financial asset with a value of $60,000. Held: Dan has to file Form 8938 but Betty, who isn’t a specified individual, doesn’t. Dan has an interest in specified foreign financial assets in the amount of $210,000 on the last day of the tax year—i.e., $150,000, the entire value of the asset that he jointly owns, + $60,000, the entire value of the asset that he separately owns). He satisfies the reporting threshold for a married individual living abroad and filing a separate return of more than $200,000 on the last day of the tax year. (Instructions for Form 8938, page 3)

• A married taxpayer who files a joint income tax returnsatisfies the reporting threshold only if the total value of allspecified foreign financial assets he or his spouse owns ismore than $400,000 on the last day of the tax year or morethan $600,000 at any time during the tax year.

New Proposed Guidelines Allow More Innocent Spouses to Qualify for Relief

In a Notice, IRS has provided a proposed Revenue Procedure that would revise the threshold requirements for requesting equitable relief and would revise the factors used by IRS in evaluating these requests to ensure that requests for innocent spouse relief are granted under Code Sec. 6015(f) when the facts and circumstances warrant. The guidelines would ensure that, when appropriate, requests are granted in the initial stage of the administrative process.

Each spouse is jointly and severally liable for the tax, interest, and penalties (other than the civil fraud penalty) arising from a joint return. Code Sec. 6015(b) (regular innocent spouse relief) and Code Sec. 6015(c) (relief for separated or divorced individuals) specify two sets of circumstances under which relief is available for innocent spouses from joint and several liability for joint returns. Where relief is not available under those sections, Code Sec. 6015(f) allows relief to a requesting spouse if, among other conditions, taking into account all the facts and circumstances, it is inequitable to hold the individual liable. A similar equitable relief provision is also available under Code Sec. 66(c) for married individuals with community property income

Notice 2012-8 provides a proposed Revenue Procedure that would update Rev Proc 2003-61, 2003-2 CB 296, which provides guidance on equitable relief from income tax liability under Code Sec. 66(c) and Code Sec. 6015(f). The proposed revenue procedure would update the criteria used in making innocent spouse relief determinations for Code Sec. 6015(f) equitable relief cases and revise the factors for granting equitable relief to ensure that requests for innocent spouse relief are granted when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process.

Significantly, the proposed Revenue Procedure would expand how IRS will take into account abuse and financial control by the nonrequesting spouse in determining whether equitable relief is warranted. IRS’s review of the innocent spouse program has demonstrated that when a requesting spouse has been abused by the nonrequesting spouse, the requesting spouse may not have been able to challenge the treatment of any items on the joint return, question the payment of the taxes reported as due on the joint return, or challenge the nonrequesting spouse’s assurance regarding the payment of the taxes. The review has also highlighted that lack of financial control may have a similar impact on the requesting spouse’s ability to satisfy joint tax liabilities. Accordingly, the proposed Revenue Procedure would provide that abuse or lack of financial control may mitigate other factors that might otherwise weigh against granting equitable relief under Code

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Sec. 6015(f).

IRS End to Tax Form Mailings Burdened Millions of Taxpayers

The Internal Revenue Service saved about $14.19 million by not mailing out tax form packages this year, but the elimination of the mailings increased the burden on approximately 6 million taxpayers who needed to obtain the forms themselves, according to a new government report.

The report by the Treasury Inspector General for Tax Administration, found that the IRS’s estimate that it had saved about $8.25 million as of July 27 by not mailing out the form packages was incorrect. TIGTA determined that the IRS overestimated its postage and printing savings by $2.08 million. On the other hand, the IRS did not include $8.02 million in savings realized by processing more tax returns electronically. In addition, the data the IRS used to identify taxpayers who would have received a tax year 2010 tax package and notify them they would not be receiving one were inaccurate, according to TIGTA.

Eliminating individual tax package mailings increased the burden for a number of taxpayers, including those who complained they could not locate the forms they needed or did not know which forms to use.

Taxpayers who did not receive Tax Year 2010 tax packages reported difficulties in obtaining forms, schedules and instructions. In addition to making it more difficult for taxpayers to voluntarily comply with tax laws and file their tax returns, the IRS estimated it took the average taxpayer 15 minutes to obtain the forms they needed to file a tax return if they did not receive them in the mail. That translated into approximately 1.5 million additional hours in taxpayer burden for the nearly 6 million taxpayers who received a Notice 1400 and still elected to file a paper tax return without the assistance of tax return preparation software or a paid tax return preparer.

“An important part of the IRS’s mission is to help all taxpayers meet their responsibilities, even while striving to reduce costs,” said TIGTA Inspector General J. Russell George in a statement. “Additional taxpayer burden must be carefully considered when developing strategies to reduce costs and implement efficiencies.”

Taxpayers who ordered documents by calling the IRS or visiting a local office reported difficulties in knowing which forms, schedules and instructions they needed to order or use. For those who ordered forms, if they did not order all of the correct documents, they needed to find another way to obtain the documents, or call the IRS and wait another 10 days to receive the additional documents. Taxpayers who visited a local Taxpayer Assistance Center or Tax Form Outlet Program partner may have had to make another trip to their local office.

To help ensure taxpayers received the forms, instructions and schedules they needed, the IRS automatically sent the

applicable instructions to taxpayers who called to order the forms. In addition, the IRS said it is developing an interactive tool that will assist taxpayers in determining which tax forms, schedules and instructions they need. This tool will be available on IRS.gov.

The IRS received 37 congressional inquiries, two White House inquiries, and 230 comments and complaints from individual taxpayers on the IRS’s decision to eliminate the mailings of tax packages.

Many of these taxpayers were elderly or disabled, lived in rural areas, did not have easy access to personal computers or printers, or could not find the documents they needed at their local post offices or libraries. Taxpayers used several options to submit their comments and complaints to the IRS, including submitting comments on IRS.gov. They also contacted the Taxpayer Advocacy Panel, which maintains a system to track and monitor complaints. In addition, some taxpayers chose to contact their congressional representatives who, in turn, contacted the IRS Congressional Correspondence Office. Each congressional inquiry represented one or multiple taxpayer complaints received in the Congressional Correspondence Office.

The IRS does not plan to evaluate how eliminating Forms 1065, 1120 and 1120S package mailings affected taxpayer burden. However, it plans to estimate the effect that eliminating Form 1040 tax packages had on individual taxpayers and report the results in fiscal year 2012.

TIGTA recommended that the IRS develop a process to ensure savings and cost data related to the future elimination or reduction of mailing tax products are current and reliable. In addition, a formal strategy should be developed and documented to ensure that publishing and postage costs are continually evaluated and cost and savings calculations are documented and validated, TIGTA recommended.

In response to the report, the IRS stated that it agreed with the recommendations and has developed a process to ensure that information leading to the elimination and reduction in the mailing of the remaining two tax packages is complete, current and reliable. In addition, the IRS has developed strategies to ensure it continually evaluates costs, implements efficiencies, and evaluates taxpayer burden.

The IRS did not agree with TIGTA’s outcome measure related to the first recommendation. It agreed with TIGTA’s methodology for calculating the average cost per tax package, but believes TIGTA should have multiplied the average costs by a 10-year trending estimate in volume decreases to calculate the average percentage decrease for individual tax packages. TIGTA said it used the formula first provided by the IRS to calculate total savings, but used updated bid prices for the average cost per tax package. The IRS did not provide its own estimate of the cost savings using the 10-year trending estimate in volume decreases.

In its written response to the report, the IRS estimated that it

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had saved about $26 million by reducing printing and postage costs, or about $24.87 million when taking into account contract termination fees, but it expects to realize the full $26 million in savings next tax season.

“Our efforts have also supported the President’s Going Green Campaign by eliminating both the monetary and opportunity costs associated with printing and/or transporting tax packages that would have otherwise been used by many of the taxpayers who converted from paper to electronic filing for the 2010 Tax Year,” wrote Richard Byrd Jr., commissioner of the IRS’s Wage and Investment Division. “In addition to the elimination of mailing individual and business tax packages, the IRS also achieved savings of more than $4 million through increased use of ground shipping in lieu of next-day air service, the elimination of non-mandatory inserts in taxpayer notices, and improved efficiencies in the procurement of envelope stock, single-sheet forms and instructions.”

Identity Protection PIN

There is a place at the bottom of page 2 of the Form 1040 asking for an IP PIN. This is an Identity Protection PIN. Taxpayers who are victims of identity theft involving income tax returns find out when IRS contacts them stating more than one tax return was filed with their information or that IRS records show wages from an employer the taxpayer has not worked for in the past. IRS is trying to help these victims by issuing them an IP PIN. Entering the IP PIN on the taxpayer’s return will help IRS determine if the return is the real return for the taxpayer and not another identity theft return.

IRS issued a letter in November informing taxpayers they would be receiving another letter in mid-December that would contain this IP PIN. Entering this IP PIN on the return will speed up the processing. If a taxpayer has been issued an IP PIN and does NOT enter it on the return that is being e-filed, the return will receive a reject notice and have to bepaper filed. If a taxpayer is paper filing the return, the IP PINshould be entered in the box to help speed up the processing.Failure to include the IP PIN on the returns for victims whohave received the letter will likely result in a lengthy delay inthe processing of their returns.

A new IP PIN will be issued to each victim each tax year, therefore the taxpayer does not have to remember a IP PIN from one year to the next. If a taxpayer loses the letter, the taxpayer’s return will have to be paper filed. IRS is not able to retrieve a taxpayer’s IP PIN

A taxpayer who believes they are at risk of identity theft due to lost or stolen personal information can contact IRS so the agency can take action to secure their tax account. They can contact the IRS Identity Protection Specialized Unit at 800-908-4490. The taxpayer will be asked to complete Form14039, IRS Identity Theft Affidavit.

This IP PIN is just one more way IRS is trying to help detect identity theft in tax matters. In 2010 IRS began marking the accounts of deceased taxpayers to prevent misuse by identity

thieves.

Editor’s Note: This information is provided by David and Mary Mellem.

Don’t be Scammed by Cyber Criminals

The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious emails, phone calls, faxes or notices claiming to be from the IRS. Many of these scams fraudulently use the IRS name or logo as a lure to make the communication appear more authentic and enticing. The goal of these scams – known as phishing – is to trick you into revealing your personal and financialinformation. The scammers can then use your information –like your Social Security number, bank account or credit cardnumbers – to commit identity theft or steal your money.

Here are five things the IRS wants you to know about phishing scams.

1. The IRS never asks for detailed personal and financialinformation like PIN numbers, passwords or similar secretaccess information for credit card, bank or other financialaccounts.

2. The IRS does not initiate contact with taxpayers by emailto request personal or financial information. If you receive ane-mail from someone claiming to be the IRS or directing youto an IRS site:

• Do not reply to the message.

• Do not open any attachments. Attachments may containmalicious code that will infect your computer.

• Do not click on any links. If you clicked on links in asuspicious e-mail or phishing website and entered confidentialinformation, visit the IRS website and enter the search term‘identity theft’ for more information and resources to help.

3. The address of the official IRS website is www.irs.gov. Donot be confused or misled by sites claiming to be the IRS butending in .com, .net, .org or other designations instead of .gov.If you discover a website that claims to be the IRS but yoususpect it is bogus, do not provide any personal informationon the suspicious site and report it to the IRS.

4. If you receive a phone call, fax or letter in the mail froman individual claiming to be from the IRS but you suspectthey are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contactyou. Report any bogus correspondence. You can forward asuspicious email to phishing@irs.gov.

5. You can help shut down these schemes and prevent othersfrom being victimized. Details on how to report specific typesof scams and what to do if you’ve been victimized are availableat www.irs.gov. Click on “phishing” on the home page.

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name, street address, city, state, zip code, telephone numbers and e-mail address where you can be contacted. Providing this information is optional, however if we need additional information to investigate your complaint, we will need a way to contact you.

The Form 14157 is to be mailed to:

Attn: Return Preparer Office1122 Town & Country CommonsChesterfield, MO 63017-8200

The primary purpose of this form, as stated by IRS, is to report potential violations of the Internal Revenue laws by tax return preparers. We are requesting this information under authority of 26 U.S.C. § 7801 and § 7803. Providing this information is voluntary, and failure to provide all or part of the information will not affect you. Providing false or fraudulent information may subject you to penalties. We may disclose this information to the Department of Justice to enforce the tax laws, both civil and criminal, and to cities, states, the District of Columbia, and U.S. commonwealths or possessions to carry out their tax laws. We may also disclose this information to other countries under a tax treaty, to federal and state agencies to enforce federal nontax criminal laws, and to federal law enforcement and intelligence agencies to combat terrorism.

Never before in the history of tax return preparation has the return preparer been so exposed to charges by taxpayers and subsequent actions by the Internal Revenue Service.

This is why I worked closely with the Fellowship to develop a new Due Diligence Worksheet for the tax preparer – found under Resources at www.ncpefellowship.com.

Due Diligence is the phrase of the day! You now are aware!

Jerry

Tax Pros in Trouble

Alabama Tax Preparers Sentenced to Prison for Preparing False Tax Returns

Judge Mark Fuller of the U.S. District Court for the Middle District of Alabama sentenced Lutoyua N. Thompson and Melinda M. Lambert to prison today for their involvement in a fraudulent tax return preparation scheme, the Justice Department and Internal Revenue Service (IRS) announced. Thompson was sentenced to 18 months in prison. Lambert was sentenced to six months in prison and six months of home confinement. Both had previously pleaded guilty to aiding and assisting the preparation of a false tax return.

According to the court documents, both Thompson and Lambert were employed by James E. Moss as tax return preparers at a

Thoughts from the Ragin Cajun

IRS Encourages Complaints Against Tax Return Preparers

July, 2011 the Internal Revenue Service unveiled a new Form 14157 – Complaint: Tax Return Preparer.

Lines 1 through 12 are all about the preparer of the tax return, with boxes designating Preparer’s Professional Status – Attorney, CPA, Enrolled Agent, Registered Tax ReturnPreparer and Other/Unknown.

Line 13 is “Nature of Complaint”, listing the following:

• False Exemptions or Dependents• False Expenses or Deductions or Credits• False or Overstated W-2 or Form 1099• False or Altered Documents• Incorrect Filing Status• Theft of Refund• PTIN Missing• PTIN Misuse• Misrepresentation of Credentials• Paid Preparer Failed to Sign• Paid Preparer Failed to Provide Copy of Return• Paid Preparer Failed to Return My Records• Paid Preparer Diverted Refund to Unknown Account• Omitted Income• E-filing Using Payroll Stub• E-filing Cash Advance• Failure to Send Employment Taxes or Withholding toIRS• Paid Preparer Filed Returns Using Off Shelf Softwareor Free File• Paid Preparer Provided a Copy that is Different fromWhat was Filed• Other (explain)

Line 13 also includes the opportunity to provide facts and other information.

Question 14 is about Your Contact Information – Enter your

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Kansas City Tax Preparer Pleads Guilty to False Tax Returns

A Kansas City, Mo., tax preparer pleaded guilty in federal court to aiding and assisting in filing fraudulent tax returns over a five-year period while paying herself exorbitant fees by taking the inflated refunds from her clients, which resulted in a tax loss to the United States of more than $100,000.

Kansas City, MO - Beth Phillips, United States Attorney for the Western District of Missouri, announced that Vera Irene Smith, also known as Vera S. Bradley, 39, of Kansas City, pleaded guilty to the charge contained in a Feb. 9, 2011, federal indictment.

Smith admitted that she prepared and filed federal and state income tax returns for friends, family members, and others for tax years 2004 through 2008. Those returns contained false claims for credits and deductions to which the clients were not entitled, as well as falsified income claims. Smith prepared at least 53 fraudulent income tax returns, resulting in a tax loss to the government of approximately $112,300.

As part of her scheme, Smith generally told her clients that her fee was between $50 and $75, which she received in cash. However, Smith typically had her client’s tax refunds paid directly to bank accounts in her control or to debit cards for her own personal use, paying herself exorbitant fees frequently in the range of $700 to $1,700 per return. She did not tell her clients the full amount of their refunds and rarely provided them with copies of the submitted tax returns.

Smith was employed in an accounting role at the Full Employment Council (FEC) in Kansas City, Mo., for several years before resigning towards the end of 2005. Through this employment, she had contact with many program participants and solicited her tax services to several program participants at the FEC.

Smith has never claimed any income from her tax preparation activities on any of her personal federal income tax returns. The returns that she prepared did not provide any information that would identify her as the return preparer.

Under federal statutes, Smith is subject to a sentence of up to three years in federal prison without parole, plus a fine up to $250,000 and an order of restitution. A sentencing hearing will be scheduled after the completion of a presentence investigation by the United States Probation Office.

This case is being prosecuted by Assistant U.S. Attorney Roseann A. Ketchmark. It was investigated by IRS-Criminal Investigation and the Department of Labor – Office of Inspector General.

Tax Preparer Charged with ID Theft and Tax Offenses

A Milford woman who ran a tax preparation business in

tax return preparation business known as Flash Tax, located in Montgomery, Ala. Thompson was employed at Flash Tax from December 2003 through June 2005 and prepared approximately 600 tax returns. Lambert was employed at Flash Tax from December 2004 through January 2007 and prepared approximately 900 tax returns. The majority of the returns prepared by Lambert and Thompson contained false information designed to illegally obtain higher refunds to which clients were not entitled. Lambert and Thompson admitted that Moss trained them to prepare false tax returns in order to obtain higher tax refunds for Flash Tax customers by inflating or deflating specific numbers and/or by adding totally fictitious numbers to the returns.

On Nov. 2, 2011, Moss was convicted by an Alabama jury of conspiring to defraud the United States and of aiding and assisting the preparation of false tax returns. His sentencing is currently set for March 13, 2012.

John A. DiCicco, Principal Deputy Assistant Attorney General for the Justice Department’s Tax Division commended the IRS special agents who investigated this case and Tax Division trial attorneys Charles M. Edgar, Jr., Thomas J. Krepp, and Michelle M. Petersen who prosecuted the case.

Federal Court Bars Alabama Woman from Preparing Tax Returns

A federal court in Mobile, Ala ., has permanently barred Delois Warren from preparing federal tax returns for others, the Justice Department announced today. Judge Kristi K. DuBose of United States District Court for the Southern District of Alabama issued the permanent injunction order.

The government complaint in the case alleged that Warren of Greensboro claimed bogus earned-income tax credits and first-time-homebuyer credits for her customers through her business, Branjalo Tax Service. According to the complaint, Warren prepared income tax returns for some customers falsely claiming that they were engaged in profitable businesses in order to maximize refunds based on the earned-income tax credit. The complaint also states that Warren claimed the first-time-homebuyer credit on at least 190 returns in 2009. In examples cited in the complaint, Warren claimed the credit for as much as $8,000 for customers who did not purchase houses in 2008.

The civil injunction order requires Warren to mail a copy of the order to all persons for whom she has prepared a federal tax return since January 1, 2007, and to give the government a list of those customers.

In the last decade, the Justice Department’s Tax Division has obtained hundreds of injunctions to stop tax fraud promoters and unscrupulous tax return preparers. Information about these cases is available on the Justice Department’s website.

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Somerville has been arrested and charged with identity theft and tax fraud charges relating to her operation of that business.

Rosa Ivette Colon, 44, was arrested and charged with aggravated identity theft, filing false claims with the Internal Revenue Service (IRS) and forging endorsements on United States Treasury checks in a 32 count indictment returned by a grand jury sitting in Boston, on Dec. 7, 2011.

According to the indictment, Colon operated a business called X-Press Taxes in various offices in Somerville, where she prepared fraudulent income tax returns for clients whose primary language was Spanish. During the tax years 2004 through 2010, Colon prepared hundreds of client income tax returns and, according to the indictment, Colon repeatedly included false and inflated expenses, deductions and credits, including claims for non-existent dependents, on client income tax returns in an attempt to fraudulently lower the clients’ tax liabilities and in many cases boost clients’ refunds.

The indictment also alleges that on numerous dates, when preparing income tax returns for clients, Colon prepared two different versions of the income tax return. One version of the prepared return was provided to the client while Colon allegedly filed a different version of the return with the IRS – without the client’s knowledge – seeking a larger incometax refund. Colon then pocketed the additional refund amountby directing that the refunds due from the tax return be splitbetween her clients’ bank accounts and bank accounts thatshe controlled.

The indictment further alleges that Colon unlawfully used the identities of three individuals in connection with her fraudulent tax refund scheme. In two instances, it is alleged that she filed tax returns in clients’ names without their knowledge, and in one instance, she claimed a client’s two-year old child as a dependant on another client’s tax return, charging $1,000 for this service.

Finally, the indictment alleges that Colon submitted false personal income tax returns to the IRS on her own behalf. Colon claimed fraudulent refunds by attaching bogus Forms W-2 claiming nonexistent wages and withholdings. If convictedon these charges, Colon faces a two year mandatory minimumsentence for each count of aggravated identity theft, up to fiveyears in prison on each count of filing a false claim with the IRS,and up to 10 years on each count of forging an endorsementon a United States Treasury check.

United States Attorney Carmen M. Ortiz; Principal Deputy Assistant Attorney General John DiCicco of the Justice Department’s Tax Division; William P. Offord, Special Agent in Charge of the of the Internal Revenue Service’s Criminal Investigation in Boston; and Steven Ricciardi, Special Agent in Charge of the U.S. Secret Service made the announcement today. The case is being prosecuted by Assistant U.S. Attorney Paul G. Levenson of Ortiz’s Economic Crimes Unit along with Trial Attorney Sean R. Delaney of the Tax Division.

The details in the indictment are allegations. The defendant is presumed to be innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

New York Return Preparer Pleads Guilty to Preparing False Tax Returns

The owner of a Dix Hill, N.Y ., tax preparation business pleaded guilty today in United States District Court in the Eastern District of New York in Central Islip, N.Y ., to endeavoring to obstruct the internal revenue laws and aiding in the preparation of false income tax returns, the Justice Department and Internal Revenue Service (IRS) announced today.

According to court documents, Howard Levine owned and operated Milaur Associates, also known as Milaur Inc. Many of the tax returns prepared by Levine for 2004 through 2009 were false and contained fictitious deductions, business expenses and corporate losses created by Levine. Levine admitted to preparing no fewer than 56 false returns, resulting in a tax loss of $620,844.

In order to obstruct and impede the IRS from determining his role in preparing the returns, Levine included false information in the paid preparer section of the return he prepared. Despite the United States District Court for the Eastern District of New York issuing an injunction in 2009 that barred Levine from preparing federal tax returns for anyone other than himself, Levine violated the injunction by continuing to prepare false returns.

5 Indicted for Defrauding First-Time Home Buyer Program

Tax on the Run may have run out of luck. The North Texas tax preparation business was used to file false income tax returns claiming First-Time Home Buyer Tax Credits, federal prosecutors say. The firm’s owners and co-conspirators hauled in more than $1 million before authorities hauled them in. Now, five people have been indicted for falsely obtaining income tax refunds, according to the U.S. Attorney’s Office. Among those indicted are Jason Altman, Jarrod Altman and Emanuel Harrison, who owned the tax business. The others accused in the case are Fread Jenkins and Rickel Shine. The indictments were unsealed this week in Dallas.

The case was investigated by IRS - Criminal Investigation and is being prosecuted by Trial Attorneys Mark Kotila and Jeffrey B. Bender of the Justice Department’s Tax Division.

Mobile County Tax Preparation Service Owners Accused of Filing Tax Returns with Bogus Deductions

Three south Mobile County residents pleaded not guilty to federal charges accusing them of using bogus tax deductions to defraud the Internal Revenue Service.

U.S. Magistrate Judge William Cassady allowed Gerrode

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Smith to remain free pending trial, along with his wife, Pamela Smith, and his cousin, Artemius Smith.

Gerrode Smith, 34, and Artemius Smith, 26, co-owned a tax preparation business called Smith’s Tax Service from January 2009 until March 19, 2010, according to the indictment. The indictment accuses them of conspiring with Pamela Smith, 45, who stands accused of preparing false income tax returns.

Artemius Smith’s lawyer, Richard Alexander, said his client has no criminal record, aside from traffic violations.

“This man’s named in one count, and I don’t think he was involved,” he said.

It is the second federal prosecution in Mobile in less than 2 years of a tax preparation service. A Monroeville woman pleaded guilty in July to charges that she reaped more than $500,000 in fraudulent tax returns.

The indictment in this case cites tax returns that Smith’s Tax Service prepared for 2008 and 2009. Authorities contend that the defendants, with and without the permission and knowledge of their clients, filed returns that falsely claimed First Time Home Buyer credits, claimed bogus dependents and fraudulently sought money under the Earned Income Tax Credit program designed to supplement the income of the working poor.

The defendants also stand accused of creating phony paperwork to falsely state wages for clients who had no income and business income for people who did not own companies.

The indictment lists 14 fraudulent returns that authorities contend that Gerrode Smith personally prepared from Jan. 18, 2009, to March 19, 2010. That includes returns for himself, his wife and his cousin. The indictment accuses him of filing for a $7,500 credit available to first-time homebuyers in 2008, even though he actually had purchased the house 2 years earlier.

Gerrode Smith also filed a return that falsely claimed that Artemius Smith had purchased a home in 2008 and was eligible for the Earned Income Tax Credit, according to the allegations.

In one case, according to the indictment, Artemius Smith suggested that a client claim a vacant house as her home. He claimed a First Time Home Buyer credit on the return, the indictment alleges.

All 3 defendants face a maximum penalty of 5 years in prison, if convicted of the conspiracy charge. In addition, Gerrode Smith has been charged with 14 counts of procuring a false tax return, 5 counts of wire fraud and 5 counts of aggravated identity theft.

The indictment lists the initials of 5 people whose names and Social Security numbers Gerrode Smith allegedly used to file false tax returns. Conviction of each count of aggravated identity theft carries a mandatory 2-year prison sentence on

top of whatever punishment he were to get for convictions on the other charges.

“The really serious thing is going to be the identity (theft charges), and it does not involve my client,” Alexander said.

Milford Woman Charged with ID Theft, Tax Fraud

Rosa Ivette Colon, 44, has been arrested and charged with aggravated identity theft, filing false claims with the IRS and forging endorsements on U.S. Treasury checks in a 32-count federal indictment.

Taxpayer Advocacy & Tax Professionals

Power of Attorney Revisions

It took the IRS seven (7) years to update its Power of Attorney form to keep it responsive to the needs of today’s client tax representation. There is a new form that just came out in October, 2011. There were seven (7) changes to it, and it will be valid for seven (7) years only, unless renewed or revoked. The ”9-9-9 tax reform” programs from an aspiring President had just died and now we have a “7-7-7” reform for taxpayers and tax practitioners power to IRS representation. All the seven (7) new requirements are good, except for the IRS instructions that are not yet posted on the website, which is not unusual. There will be always difficulty in dealing with the IRS on their “business communications.” The agency has two (2) tracts of conversations, i.e., one set for the taxpayer (acidform), and another set for tax practitioners with unlimited fullpower rights to defend taxpayers. The first one is a collectortype; the second one is behaved, cautious and carefulbecause the taxpayer is represented by a professional. Theymight also lose their job after a lengthy numeral disclosure oftheir employee number.

Let us look at what these 7-7-7 are, for the new Power of Attorney Form.

1) A renewal is needed after 7 years.2) A new tax representative RTRP (registered tax returnpreparer) has been added. They were given very limitedpower if they passed an IRS examination and suitabilitychecks.3) A joint-tax return power of attorney will no longer beacceptable. Married filers cannot do this.4) Tax practitioners will no longer receive copies oftaxpayer’s letters and notices unless this option is chosen.The government needs to save.5) New “check the boxes” features have been added,i.e., to disclose tax return information to third parties, toauthorize tax practitioners, etc. to sign tax return, and tosubstitute or add a tax representative. Extended powersmust be written.6) CPAs are now required to reflect their license numberand the State where licensed. I have one.

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7) Tax Practitioners are now required to reflect theirrenewed or new valid PTIN (Preparer Tax IdentificationNumber). I just renewed my number.

If any of these changes would be helpful to you, this New Power of Attorney form must be submitted to replace the old versions and resubmit for the prior years.

The IRS made these changes without soliciting for comments. Hopefully it will not cause a lot of confusion. It is likely that we licensed tax practitioners will not receive anymore copies of the IRS notices and letters through the old versions of the Power of Attorney for the old tax years. We will have to do the extra work of updating client powers of attorneys. There is no special form yet for revoking a Power of Attorney. It is still in Cloud 9. But this Cloud 7-7-7 above-mentioned is good. I believe it was also meant to cut on government costs. What else are new these days? Let’s look at the numbers now that 9-9-9 tax reform is dead: this new Power of Attorney is good for 7, the IRS collects old taxes for 10, the IRS Commissioner’s term is 6, the President’s term is 4, and you will need this new Power of Attorney if not now, yes, within 3 years when you get an audit or if you cannot pay your taxes. Let us protect you from IRS letters and from IRS “one-track-nasty” taxpayer conversations with a Power of Attorney. It’s time for new tax numerology…. It’s 7-7-7 full power of attorney tax representation to avoid that personal IRS conversation.

This article was contributed by ncpe Fellowship member, Angel Y. Dayan,

National Taxpayer Advocate Delivers Annual Report to Congress; Focuses on IRS Funding and Taxpayer Rights

National Taxpayer Advocate Nina E. Olson today released her annual report to Congress, identifying the combination of the IRS’s expanding workload and declining resources as the most serious problem facing taxpayers. The result, the report says, is inadequate taxpayer service, erosion of taxpayer rights, and reduced tax compliance. The Advocate expressed her continuing concern that the IRS’s expanding use of automated processes to adjust tax liabilities is causing harm to taxpayers and recommended that Congress enact a comprehensive Taxpayer Bill of Rights.

The IRS Is Not Adequately Funded To Serve Taxpayers And Collect Taxes

“The overriding challenge facing the IRS is that its workload has grown significantly in recent years, while its funding is being cut,” Olson said in releasing the report. “This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers – and at the same time reduces the IRS’s ability to deliver on its core mission of raising revenue.”

Workload Overload. The sharp increase in the IRS’s workload is due to several factors, including the increasing complexity

of the tax code and the code’s frequent changes, the need to provide service to an increasingly diverse taxpayer population, the IRS’s increasing responsibility for administering economic and social policies, a surge in refund fraud and tax-related identity theft, and the implementation of new third-party information reporting requirements.

There were approximately 4,430 changes to the tax code from 2001 through 2010, an average of more than one a day, including an estimated 579 changes in 2010 alone. The IRS must explain each new provision to taxpayers, write computer code so it can process returns affected by the provision, and train its auditors to identify improper claims.

In addition, the report says, an expansion of refundable credits in recent years – including the First-Time Homebuyer Credit, the Making Work Pay credit, the American Opportunity tax credit, the health care premium tax credit, the adoption tax credit, and the Additional Child Tax Credit – has helped spawn an increase in illegal activity that seeks to profit off the tax system by filing bogus refund claims and often by stealing and using another taxpayer’s identity. While refundable credits provide valuable benefits to the target populations, they can be tempting targets for fraud because taxpayers eligible for them may claim refunds that exceed the amount of taxes they have paid. In 2011, the IRS’s Electronic Fraud Detection System (EFDS) flagged 1,054,704 returns on suspicion of fraud, an increase of 72 percent over 2010. Meanwhile, the IRS’s centralized Identity Protection Specialized Unit (IPSU) received more than 226,000 identity theft-related cases, an increase of 20 percent over 2010.

“Each year,” Olson wrote, “the IRS’s task in identifying these claims has become more challenging, with the inevitable result that some fraudulent claims are never identified and many legitimate claims are mistakenly held up, imposing a significant burden on honest taxpayers.”

“Shortcuts” Shortcut Taxpayer Rights: “Non-Audits,” IRS Math Errors, Lack of Notice, and Delays. To keep up with its rising workload, the IRS is increasingly relying on automated data-matching procedures to identify potentially inaccurate claims and adjust tax liabilities. However, automated processes are inherently imperfect, so the taxpayer’s return position often turns out to be correct. Moreover, taxpayers subject to audits are entitled to established taxpayer rights protections. But an increasing number of IRS adjustments are not classified as audits, so these protections often do not apply. Throughout the report, Olson describes IRS practices that “harm taxpayers by acting on assumptions of noncompliance arrived at by automated processes that do not solicit, encourage, or allow taxpayer response.”

Non-Audits and Automated Examinations. In 2010 alone, the IRS made about 15 million contacts with individual taxpayers to adjust their tax liabilities, but it treated only about ten percent (1.6 million) as audits. Thus, in the majority of cases, the IRS’s actions did not give rise to traditional audit protections, including the right to avoid repetitive and unnecessary examinations and the right to seek review of

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the IRS’s determination in the U.S. Tax Court before tax is assessed. Even where the IRS designated reviews of individual taxpayer returns as “audits,” it conducted about 78 percent of them by correspondence in a highly automated campus setting where no single IRS employee was responsible for the audit, making it more difficult for the taxpayer to communicate with the IRS about his or her case.

Some “Math Errors” May Be Corrected Using IRS Data. In 2010, the IRS issued notices correcting 10.6 million “math errors,” up from four million in 2005. These notices are tax assessments that presumably result from mathematical or clerical errors. Unless a taxpayer disputes the IRS assessment within a limited timeframe, it may not be appealed to the Tax Court. The report notes that math error authority is increasingly used where there is disagreement over a facts-and-circumstances issue. The report says that math error notices are often vague and do not state the perceived error with specificity, making it difficult, if not impossible, for affected taxpayers to determine what has changed on their returns and whether to accept or contest the adjustments. Taxpayers whose returns are correct sometimes do not respond because they do not know what is being asked of them. IRS math error notices also are sometimes inaccurate. When the IRS used math error authority in 2010 to disallow exemptions for dependent children on about 300,000 returns, it ultimately had to reverse about 55 percent of the adjustments. Of the 184,000 corrected math errors, a Taxpayer Advocate Service (TAS) sample showed the IRS had internal data to immediately resolve 56 percent of these reversals, and thus could have avoided denying eligible taxpayers their dependency exemptions and related tax credits and refunds.

The IRS Determines Some Taxpayers Have Committed Fraud Without Notifying Them and Giving Them an Opportunity to Respond. Under a program designed to detect returns relating to a scheme known as “Operation Mass Mail,” the IRS declined to process about 900,000 returns in 2011. In most situations where the IRS identifies questionable claims, it sends notices to the affected taxpayers to give them an opportunity to contest the IRS’s position. In these cases, however, the IRS simply “auto-voided” the returns, providing the individuals who had submitted them with no notice of the IRS action. Yet in tens of thousands of these cases, the IRS later marked the accounts with a code that indicates it had erred and the return had been submitted by a legitimate taxpayer. The report expresses concern that this “auto-void” procedure violates fundamental notions of due process, as individuals whom the government suspects of fraud – a serious charge – normally are given notice and an opportunity to respond before the government takes adverse action.

Substantial Delays to Receive Large Refunds. Among taxpayers who sought assistance from TAS after their refunds were withheld on a suspicion of fraud, 75 percent received relief. These taxpayers had to wait an average of nearly six months overall to receive their refunds. The average refund amount was $5,600, a significant sum for most households. Thus, these delays can create significant financial hardships.“In light of the IRS’s indiscriminate use of automation to avoid

personal contact with taxpayers and the sheer volume of work to be accomplished,” Olson wrote, “the IRS is increasingly in danger of judging taxpayers as noncompliant when in fact they are not.”

Taxpayer Service Concerns: Delays and Non-Responses to Taxpayer Inquiries. Two key indicators of taxpayer service are the IRS’s ability to answer taxpayer telephone calls and the IRS’s ability to respond to taxpayer correspondence. From FY 2004 to FY 2011, the percentage of calls that the IRS answered from taxpayers seeking to speak with a telephone assistor dropped from 87 percent to 70 percent.

Over the same period, the IRS’s ability to timely process taxpayer correspondence also declined. Comparing the final week of FY 2004 with the final week of FY 2011, the backlog of correspondence in the tax adjustments inventory jumped by 158 percent (from 357,151 to 920,768), and the percentage of correspondence in this inventory classified as “over-age” (i.e., 45 days or older, with issues that have not been resolved) increased by 309 percent (from 11.5 percent to 47.0 percent of correspondence).

“The decline in these key measures is deeply disturbing,” the report says. “Telephone calls and correspondence are the two main ways taxpayers communicate with the IRS. Few government agencies or businesses would be satisfied if their customer service departments were unable to answer three out of every ten calls, nor would they be content when nearly half of all correspondence takes more than 6½ weeks to answer.”

Increased Diversity of the Taxpayer Population Presents Challenges. When the federal individual income tax was enacted in 1913, it applied to high-income taxpayers. The individual taxpayer population in 1913 was estimated at 358,000, grew to 47.1 million in 1944, and stands at 141.2 million today. The taxpayer population has become more diverse over time due to demographic developments as well as expansions in the scope of the tax law. With one tax return filed for about every two people in the United States each year, demographic trends – including ethnicity, economics, gender, age, and geography – are having an impact on both taxpayer service needs and IRS compliance initiatives.

Revenue Consequences of IRS Underfunding. The report says inadequate funding for the IRS contributes to many of these problems and means the IRS cannot adequately pursue unpaid tax liabilities. The report points out that the IRS functions as the “accounts receivable” department of the federal government, as it collects more than 90 percent of all federal revenue and therefore provides the funds that make almost all other federal spending possible. On a budget of $12.1 billion, the IRS collected $2.42 trillion in FY 2011. In other words, for every $1 that Congress appropriated for the IRS, the IRS collected about $200 in return. However, current federal budgeting rules do not take into account that a dollar appropriated for the IRS typically generates substantially more than a dollar in additional tax collections, leaving the agency substantially underfunded to do its job and limiting its

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ability to close the tax gap and thereby help reduce the federal budget deficit.

The report points out that the size of the tax gap raises important equity concerns, because compliant taxpayers end up carrying a disproportionate share of the tax burden. For 2001, the most recent year for which a complete tax gap estimate existed when the report was written, the IRS estimated it was unable to collect $290 billion in taxes. Since there were then 108 million households in the United States, the average household paid a “noncompliance surtax” of almost $2,700 to enable the federal government to raise the same revenue it would have collected if all taxpayers had reported their income and paid their taxes in full. “That is not a burden we should expect our nation’s taxpayers to bear lightly,” the report says. [Last week, the IRS released updated tax gap estimates. For 2006, the IRS estimated it was unable to collect $385 billion in taxes when there were 114 million households, producing an updated “noncompliance surtax” of nearly $3,400 per household.]

National Taxpayer Advocate Recommendation. In light of the IRS’s unique role as the federal revenue collector, the National Taxpayer Advocate recommends that Congress develop new budget procedures designed to fund the IRS at a level that will enable it to meet taxpayer needs and maximize tax compliance, with due regard for protecting taxpayer rights and minimizing taxpayer burden.

Taxpayer Bill Of Rights

The report urges Congress to codify a Taxpayer Bill of Rights that would clearly list the major rights and responsibilities of taxpayers. “The U.S. tax system is based on a social contract between the government and its taxpayers,” Olson wrote. “Taxpayers agree to report and pay the taxes they owe and the government agrees to provide the service and oversight necessary to ensure that taxpayers can and will do so.”

Most Taxpayers Don’t Know Their Rights. Over the past two decades, Congress has enacted three significant taxpayer rights’ bills, but the number of bills and the lack of publicity have muddled the message. The report describes a recent taxpayer survey in which 55 percent of respondents said they did not believe they had rights before the IRS and 61 percent did not know what their rights are.

“I believe taxpayers and tax administration will benefit from an explicit statement of what taxpayers have a right to expect from their government and what the government has a right to expect from its taxpayers,” Olson said.

10 Taxpayer Rights. The report recommends that Congress organize taxpayer rights under the following ten broad principles: (1) right to be informed; (2) right to be assisted; (3) right to be heard; (4) right to pay no more than the correctamount of tax; (5) right of appeal; (6) right to certainty; (7) rightto privacy; (8) right to confidentiality; (9) right to representation;and (10) right to a fair and just tax system.

5 Taxpayer Responsibilities. To help taxpayers understand what the law requires of them, the report further recommends that Congress organize taxpayer responsibilities under the following five principles: (1) obligation to be honest; (2) obligation to be cooperative; (3) obligation to provide accurate information and documents on time; (4) obligation to keep records; and (5) obligation to pay taxes on time.

The report summarizes recommendations the Advocate has made in past reports to create additional taxpayer rights and recommends that those rights be incorporated into Taxpayer Bill of Rights legislation. “It has been 13½ years since we have had major taxpayer rights legislation,” Olson wrote. “Our laws have not kept pace with our notions of procedural fairness in 21st century tax administration, particularly given our tax system’s expanded and diverse taxpayer base and duties.”

Other Key Issues Addressed

Federal law requires the National Taxpayer Advocate to submit an Annual Report to Congress that identifies at least 20 of the most serious problems encountered by taxpayers and makes administrative and legislative recommendations to mitigate those problems. Overall, this year’s report identifies 22 problems, provides updates on four previously identified issues, makes dozens of recommendations for administrative change, proposes 13 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts.

Among other things, the report contains:

• A comprehensive overview of the nearly 100-yearhistory of the U.S. tax system, which details how theincome tax expanded from a “class tax” to a “mass tax,”how the IRS has changed from focusing on personal, localservice to automated, centralized processes, and how themission of the IRS has expanded from pure tax collector todisburser of federal benefits as well.• An analysis of the IRS’s current examination strategythat discusses the IRS’s increasing use of automatedprocedures not technically classified as audits to adjust taxliabilities. The report argues that these procedures deprivetaxpayers of traditional audit rights and make it difficultfor taxpayers to discuss their cases directly with an IRSexaminer.• A research study on the impact of tax liens on taxpayercompliance behavior. The results suggest the overuse of liens may undermine tax collection by reducing payment compliance, reducing filing compliance, and reducing the amount of income earned (and thus the amount of tax due) by taxpayers against whom liens have been filed. • A recommendation that Congress modify thecircumstances under which the personal information ofdecedents, including their names, Social Security numbers,and dates of birth, are made available to the public shortlyafter their deaths. Such information is used by identitythieves to commit tax fraud.• A “Most Serious Problem” discussing the IRS’s policychange in applying key terms of the IRS’s 2009 Offshore

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worry about the consequences. The first act of the French and Indian War was touched off by a young George Washington during an armed expedition into western Pennsylvania. With the war started Great Britain had to lend a large military force to North America (at huge cost) to protect the colonists. When Great Britain then decided that the colonists should help to pay off that debt through taxes, they revolted, basically wanting to get something for nothing.

Where this leaves us today….American are suffering through the worst economic downturn since the 1930’s and the IRS is increasing its actions against taxpayers with more and more audits and more severe collection activity.

Ncpe wants you to be the best prepared tax return preparers and taxpayer advocates in the country. Plan on attending the Taxpayer Representation Series offered by ncpe this summer. Bryan Gates, founder of the NAEA NTPI course will be the instructor for the three levels of IRS representation. If you prepared it, you must be prepared to defend it. Representation is no longer an option for the return preparer but a requirement to protect you from possible penalty assessment.

Taxation with Representation – the ncpe way!

Wayne

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Voluntary Disclosure Program more than a year after the application deadline had passed. The report states that the policy change contravenes the IRS’s written pledge that “under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.” • An update on the IRS’s progress in developing andimplementing a system to register and test federal taxreturn preparers.• A recommendation that Congress authorize the IRSto issue refunds in hardship cases during a government shutdown. When a government shutdown seemed imminent during the 2011 filing season, the IRS and the Treasury Department concluded that the IRS would have been legally barred from paying certain refunds or taking other actions that would benefit or minimize harm to taxpayers during the shutdown.

Wayne’s World

Taxation without Representation

A history lesson:

The American Colonies claimed that, as British subjects, they were entitled to have representatives in Parliament. Without such representation, the Parliament would have no right to tax them. This is a pretty weak argument, but one that “sold” at home to build support for oppostion to Great Britain.

Regarding taxes, etc. At the time, the standard of living in the American Colonies was actually pretty high. Some articles indicate that it was even higher than in England itself. Taxes were low, but just like today, nobody wants to pay taxes, but at the same time they expect the government to provide services.

Great Britain imposed taxes on the colonies to pay for the huge cost that they incurred fighting the French and Indian War in North America, which was a part of the global 7-years war between England and France. The cause of the conflict in North America was that the English colonists continued to move west and began encroaching on French territory. The British tried to prevent the westward movement to avoid the conflict, but just like today, people will do as they please and not

35

depreciation in the year of the study (i.e. now).

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• Compliant/Independent: CSSI is independent and follows IRS protocols that eliminate gray areas and maximizingtax savings.

This is your money, we’re here to help you realize the benefit.

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Next Edition of Taxing Times: March 1st, 2012

Tax Quotes

“f you make any money, the government shoves you in the creek once a year with it in your pockets, and all that don’t get wet you can keep. “

Will Rogers

“When there’s a single thief, it’s robbery. When there are a thousand thieves, it’s taxation.”

Vanya Cohen

“The taxpayer - that’s someone who works for the federal government but doesn’t have to take the civil service examination.”

Ronald Reagan

“America is a land of taxation that was founded to avoid taxation.”

Laurence J. Peter

“Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?”

Peg Bracken

“The nation should have a tax system that looks like someone designed it on purpose.”

William Simon

“What at first was plunder assumed the softer name of revenue.”

Thomas Paine

“Did you ever notice that when you put the words “The” and “IRS” together, it spells “THEIRS?”

Author Unknown