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Monthly Newsletter for ncpeFellowship Members Vol. 3 No. 11 November 2012

Remarks from Beanna

Voting in Elections

Is there a ‘right’ to vote? Or should we take a different view and argue that it is a ‘privilege’ to vote?

If voting is a ‘right’, especially if you call it a ‘civil right’ then by definition it can not be taken away. Rights can not be lost, for then they would not be ‘rights’.

Privileges can be lost (ask any teenager!), but not rights. Also, ‘rights’ belong to everyone equally, so if you have any rules about voting, it can not be a ‘right’. Many countries have a minimum voting age. Well, since many countries are filled with convicted criminals that can not vote, as well as underage people that can not vote, voting can not be legally considered a ‘right’.

Well then, it is a privilege? If so, there are rules on earning it and on losing it. How does one ‘earn’ the privilege to vote? Is it by being a landowner? Is it by being born male, or by being old enough? How old is old enough? Is it 18 or 21 years of age?

Do any of these rules, or the many other ones tried by countries over the centuries ensure quality voters? Many of us know people of voting age that are just plain, well, not intelligent voters. We also know people too young to vote that are very careful and intelligent about casting their vote. I know dumb landowners and intelligent renters. If you want to call voting a privilege, I assure you that any line you draw for people to cross in order to ‘earn’ that privilege will be a flawed line. I offer you the argument that voting is not a privilege.

Voting in political elections is not a right, nor is it a privilege. Then what is it? I contend that it is a grave responsibility.

November 6, 2012 is Election Day! Fulfill your responsibility!

BeannaBeanna@ncpefellowship.com or 775-787-7518

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Remarks from Beanna

Table of Contents

Tax NewsUnregistered Tax Preparers in No Hurry to Take IRS Competency Test 12.3 Million Households with Potential Tax LiabilityWhy the Health Care Tax Credit Eludes Many Small BusinessesLow Interest Rates Mean Bargains for Shareholders Borrowing from Their CorporationsCongress is Considering Allowing the Internal Revenue Service to Report on Taxpayers’ Tax Debts to Consumer Credit BureausReport on Government Waste Cites ‘Robosquirrels,’ Tax Breaks for NFL Social Security Amounts for 2013Nanny Tax Threshold Remains at $1,800 for 2013 The Solyndra Memorial Tax Break Preparers Unhappy About PTIN Info DisclosureAll PTINs Expire on December 31 Tax Resolution Schemes Persist Dividend Tax Hike: Impact on Stocks Might be Different Than You Think Marriage Law Ruled to Violate Same-Sex Couple Rights in Tax Case

People in the Tax News Tax Evasion Charged as Probe of Failed U.S. Bank WidensH&R Block to Leave Sears Store LocationsTax Cheat or Hero? Medical Marijuana Tax Revolt BrewingAttention Shoppers: Tax Returns on Sale Defense of Marriage Act Faces Widow’s Tax Case Appeal Defense of Marriage Act Faces Widow’s Tax Case Appeal Up for Grabs: The $300 Million Estate of Reclusive Heiress Huguette Clark

IRS NewsIRS Names Acting Commissioner, Shulman Steps Down Return Preparer Office Federal Tax Return Preparer StatisticsNew Regulations Save Taxpayers Real Dollars – Preparers can help with a Cost Segregation StudyInternal Revenue Cited for Insufficient Controls

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Contents Page

IRS Releases New Data on Federal Tax Classifications TIGTA Reports IRS Complying with Law Simplified Per-diem Rates Flat but Some Expenses Now May Be Separately Deducted or ReimbursedIRS Defers to DOMA in Recent Filing Guidance for Same-sex CouplesTIGTA Reports on Form 3949A IRS Delays in Processing NOL Cases Cost Millions IRS Updates List of Extreme Drought Areas for Extended Livestock Replacement Period IRC §1033Federal Agencies Owe $14 Million in Unpaid TaxesPreparer Compliance Letters

Thoughts from the Ragin Cagin Supreme Court Will Not Review Decision Penalizing S Corporation for Paying Unreasonably Low Wages

Tax Pros in TroubleTax Preparer Sentenced for Fraud, Money Laundering Tax-fraud Case: Preparer’s Guilty Plea Quickly Ends TrialTax Preparer gets 5 Years for Bogus Tax ReturnsLA Accountant will be Sentenced on April 18, 20132 San Diego Tax Preparers Guilty of Fraudulent Homeless Returns

Taxpayer Advocacy and Taxpayer RepresentationCCA Explains Assessment Periods and Penalties for Delinquent and Substitute ReturnsIRS Failed to Provide Penalty Relief to Millions of Taxpayers Who Qualified for It Contact Between IRS Appeals and Area Counsel Not Prohibited Ex-parte CommunicationsExpress Installment Plans Offer Advantages for Businesses with Delinquent Payroll TaxesForm 2848 – Power of Attorney From great members come great suggestions From another great member, Patrick Hurley

Wayne’s World How Much Money Can Tax Preparers Make

Letters to the Editor

Sponsor of the MonthCSSI – Cost Segregation

Tax Quotes and Tax Funnies

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New Feature of Indexed Page Navigation Direct Link Click:Place the mouse pointer over an article, subject name or page number,

the mouse pointer becomes a hand. Click with the mouse button to go directly to the page of this issue where the article is located.

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Tax News

Unregistered Tax Preparers in No Hurry to Take IRS Competency Test

The Internal Revenue Service sent more then 300,000 letters to return preparers who have yet to take a required competency test so they can stay in business past 2013.

The tax preparers will not be allowed to practice unless they become “registered tax return preparers” with IRS, and pass a basic competency test by Dec. 31, 2013.

“Our records indicate you are among the 340,000 preparers who must pass this test,” Carol Campbell, IRS Return Preparer Office director, said in the letter. “You should act soon to ensure your first choice for date, time and location.”

IRS has indicated there are about 340,000 tax preparers who need to take the test, because they are not certified public accountants, attorneys, or enrolled agents who are exempted because they meet state licensing requirements, or in the case of enrolled agents, pass a special test administered through IRS.

While IRS may be panicking over the amount of time left, some of the provisional tax preparers have decided to wait it out.

The letter noted that IRS will launch a public database of authorized paid preparers on the IRS website next year. It reminds them that if they do not pass the test they will not be considered to be registered tax return preparers and will not be included in the database.

What many of the preparers want to know now is: “What are you doing for me this year?” John Ams, executive vice president of the National Society of Accountants, said Oct. 5. His association represents some of the previously uncredentialled tax preparers.

Ams said these preparers are used to operating on a deadline and are busy assisting clients through tax season and beyond. He said there is no upside for them to take the test at this time.

“We’re talking about a deadline that is at the end of next year. These guys are used to deadlines. They figure they will just take it later,” he said.

IRS, however, is concerned that there will not be enough spots for them in Prometic testing centers, which will not only administer the tax preparer competency test, but also accommodate academic, corporate and other government testing.

12.3 Million Households with Potential Tax Liability

An additional 12.3 million households in the U.S. would have a potential tax liability if the Bush-era estate tax rates expire as

scheduled on Dec. 31, according to research released by the life-insurance trade group LIMRA of Windsor, Conn.

The current estate tax means that about 2.4 million of the wealthiest U.S. households face a potential tax liability at death, but if the current law expires at the end of the year, 14.7 million households could face an estate tax, LIMRA reports.

At issue is the ongoing debate by members of Congress about the future of all tax rates. The federal estate tax is a one-time tax on real estate, life insurance, trusts, annuities, business interests, cash, securities and other assets transferred through a person’s will at the time of his or her death, usually to children or other family members.

The vast majority of Americans would still be exempt from an estate tax even if it reverts to higher rates. The higher rates, if the current rate expires, would affect about 12.5 percent of U.S. households. The current rate affects about 2 percent of households.

The current rate exempts the first $5 million in assets, and the rest is subject to a tax rate up to 35 percent. If the law expires and Congress doesn’t act to extend it, or to modify the changes scheduled for Dec. 31, the exemption would drop to the first $1 million in assets and the rest could be taxed up to 55 percent.

Some in Congress have mentioned a possible compromise plan of exempting the first $3.5 million and taxing up to 45 percent for assets beyond that.

The $1 million threshold is the total of all assets — such as the total of a $450,000 house and $550,000 in retirement savings, ownership of a business, stocks, cash, secondary property and other assets.

If the current estate tax law is extended, 2.4 million of the wealthiest U.S. households would have a potential estate tax liability. At 35 percent, the average estate tax would be $2.4 million.

If the rate expires, the 14.7 million households facing a potential estate tax liability would have an average tax of $1.4 million at death.

LIMRA is not proposing a particular rate, but the trade group is advocating for some stability in the tax code.

“The uncertainty that has surrounded our estate tax laws has made it impossible for Americans to plan for a reasonable transition of their assets to the ones they love and to charity for the greater good,” said Robert Kerzner, president and CEO of LIMRA, LOMA and LL Global.

“Until we have long-term clarity on what the law will be, American families and small businesses will be challenged to make the prudent decisions to ensure their beneficiaries are protected,” Kerzner said.

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Why the Health Care Tax Credit Eludes Many Small Businesses

How small-business issues are shaping politics and policy.

The Agenda has now profiled three small businesses that are struggling in different ways with providing health insurance to employees. The companies are very different — they trade in very different parts of the economy, and couldn’t be located much further apart geographically — but they do have one thing in common: Though all three have fewer than 25 employees, not one has qualified for the tax credit in the Affordable Care Act that was intended to help small businesses pay for health insurance. Indeed, the credit is one element of the controversial health law that has already fallen short of expectations.

Estimates of the number of businesses eligible to take the tax credit have ranged from 1.4 million to 4 million companies, but in May, the Government Accountability Office reported that only 170,300 firms actually claimed the credit in 2010. Of these, only a small fraction, 17 percent, were able to claim the whole credit.

For eligible companies, the credit effectively refunds 35 percent of health insurance expenses between 2010 and 2013. After 2014, the credit increases to 50 percent and is available for any two consecutive years. The credit is fully available to companies with 10 or fewer full-time employees and average wages below $25,000. It phases out as the number of employees rises to 25 and wages grow to $50,000. In 2009, there were about 4.6 million companies with fewer than 10 employees, according to the Census Bureau, and 5.7 million with fewer than 100.

The credit was aimed squarely at the smallest companies, which rarely offer health insurance to employees. However, it appears not to have persuaded very many to start offering insurance. The most recent study of employer health insurance from the Kaiser Family Foundation found that just half of all companies with fewer than 10 employees offered insurance, a share that has not moved much since 2005.

So why has the credit fallen short of expectations? The G.A.O. concluded that the credit was too small to sway business owners. Moreover, it said, claiming the credit is a task so complicated as to discourage many companies from trying. Companies have to determine the number of hours each employee worked in the year, as well as compile information about their insurance premiums. “Small-business owners generally do not want to spend the time or money to gather the necessary information to calculate the credit, given that the credit will likely be insubstantial,” the report said, citing conversations with tax preparers. “Tax preparers told us it could take their clients from two to eight hours or possibly longer to gather the necessary information to calculate the credit and that the tax preparers spent, in general, three to five hours calculating the credit.”

The GAO report hints at the complexity with this delicious example:

On its Web site, I.R.S. tried to reduce the burden on taxpayers by offering “3 Simple Steps” as a screening tool to help taxpayers determine whether they might be eligible for the credit. However, to calculate the actual dollars that can be claimed, the three steps become 15 calculations, 11 of which are based on seven worksheets, some of which request multiple columns of information.

It may be tempting to hold the Internal Revenue Service responsible for whatever burden accompanies the tax credit, but in this case, the complexity is written directly into the law. It turns out that legislators wrote the provision in a way that makes it appear more generous than it really is. Many businesses with both fewer than 25 employees and average wages below $50,000 are in fact unable to claim the credit.

Under the law, once such a business has calculated its potential credit, it is required to reduce the credit first to account for any excess employees over 10 and then separately reduce the potential credit to account for any excess average wages paid over $25,000. For many companies, the two reductions exceed the potential credit itself — meaning the business gets no credit.

That’s what happened to Carrie Van Dyck, who along with her husband owns the Herbfarm Restaurant outside of Seattle. Excluding its owners, the Herbfarm, employed the equivalent of about 21 or 22 full-time staff members, who were paid an average wage of about $35,000 — a few thousand dollars over the credit’s threshold for 21 employees. The result surprised Ms. Van Dyck, she said recently by e-mail, because “it would seem that we are a pretty typical small, mom-and-pop type business that this should apply to.”

Of course, by making the credit less generous, the senators who wrote the law made it less expensive to the United States Treasury. Now it is apparent that credit will be even cheaper than planned: initially it was expected to cost the Treasury $2 billion in 2010; instead it cost the government only a quarter of that.

The law also excludes owners and owners’ families from counting toward the credit, which can cut both ways. On the one hand, owners don’t count as employees and their salaries are excluded from the annual wages, exclusions that could make some companies eligible for a bigger credit than they might otherwise have gotten. On the other hand, premiums paid for the owners’ and their families’ insurance aren’t eligible for the credit, which for some companies, as You’re The Boss commenter JAB recently noted, “greatly reduces the incentive to provide coverage for employees.”

The White House has said that the number of businesses claiming the credit for 2011 has grown to at least 360,000, but that is still well below even the smallest estimate of eligible businesses. Some advocates for the law say that more businesses will take advantage of the credit in 2014,

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when it grows to 50 percent, especially if the new insurance exchanges make it easier and cheaper for small companies to offer insurance.

The Obama administration has proposed making more businesses eligible for the credit, in part by starting phase-outs at higher thresholds, and also by changing the way it is calculated so that every business within the limits, such as the Herbfarm Restaurant, can take some amount of credit.

But judging from the comments of Representative Sam Graves, chairman of the House Small Business Committee, the initiative is unlikely to pass a Republican-controlled House anytime soon. “This tax credit has already largely failed to attract small-business owners, and expanding it will not make the president’s health care law affordable,” the Missouri Republican said in a statement. “For small employers that do not offer health insurance, tax incentives are unlikely to cause many of them to choose a massive new expense they just cannot afford in the first place.” It was Mr. Graves who sought the GAO report.

Of course, a business denied a credit has not been made worse off by the 2010 health law. But the law surely has raised and dashed a lot of hopes, and these are the early days — the sweeping changes that are the law’s hallmark don’t come until 2014.

*There are, of course, many caveats here, but the main oneis that the company has to pay at least half of the premium.

Low Interest Rates Mean Bargains for Shareholders Borrowing from Their Corporations

It’s the worst of times for savers invested in interest-bearing accounts, but the best of times for qualified borrowers, who are enjoying record-low rates thanks to the Fed’s policies. Times can be better still for shareholder-owners of closely held corporations fortunate enough to be sitting on a cash hoard. These shareholder-owners may be in the position to borrow money from their companies at super-low rates without running afoul of the Code Sec. 7872 imputed interest rates.

Under Code Sec. 7872, a below-market loan, in general a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate, or AFR, is recharacterized as a loan by the lender to the borrower in exchange for an interest-paying note, and then a transfer to the borrower of the funds to pay the interest. Then, in separate taxable events, the borrower is treated as paying, and the lender is treated as receiving, interest income.

In the shareholder-owner context, the imputed transfer by the lender to the borrower of the funds to pay the interest generally will be treated as a dividend, to the extent of the corporation’s earnings and profits.

A demand loan is a below-market loan if it does not provide for an interest rate at least equal to the AFR, and the imputed interest payments and deemed transfer of a dividend are

treated as being made annually. A term loan which is any loan other than one payable on demand is a below-market loan if the present value of all amounts due on the loan is less than the amount of the loan. For a term loan made to a shareholder-employee, the corporation-lender is treated at the time of the loan as transferring the difference between the loan amount and the PV of all the future payments under the loan as a dividend. The term loan is then treated as having original issue discount (OID).

In the closely held corporation/shareholder-owner context, the Code Sec. 7872 rules don’t apply if:

(1) The loan balance between the parties in the aggregateon any day does not exceed $10,000. (Code Sec. 7872(d)(3)) However, this exception doesn’t apply if the principalpurpose of the loan is tax avoidance.

(2) The loan bears interest at a rate at least equal to theAFR

For a term loan (the type likeliest to be used by shareholder-owners), the applicable federal rate (AFR) for the term (whether short-term, mid-term or long- term) is the rate under the OID rules of Code Sec. 1274(d) as determined by IRS each month, and in effect as of the day the loan was made, compounded semiannually. ( Code Sec. 7872(f)(2)(A)) The short-term rate applies to loans for a term of three years or less; the mid-term rate applies to loans for a term of over three years but not over nine years; and the long-term rate applies to loans for a term of over nine years.

Under proposed regs, the shorter of the compounding period or the payment interval would determine which rate (i.e., monthly, quarterly, semiannual, or annual) is appropriate. (Prop. Reg § 1.7872-3(b)(1))

Today’s low interest rate environment has produced the lowest AFRs in recent memory. For example, for the month of October, the short-term and mid-term AFRs are .23% and .93% respectively, regardless of the period of compounding. The long-term AFR is 2.34% for monthly and quarterly compounding, 2.35% for semi-annual compounding, and 2.36% for annual compounding. For example, a closely held corporation making a three-year loan to a shareholder-owner could charge just .23% interest on the loan and escape the imputed interest rules. For a mid-term loan of three to nine years, made in October, just .93% interest could be charged, and for a fifteen-year loan, the rate assuming monthly compounding could be 2.36%.

The loan must be set up properly to avoid having the entire amount characterized as a taxable distribution under Code Sec. 301, and treated as a dividend to the extent of E&P. Some of the key factors for determining whether a bona fide loan exists are:

(1) Whether a ceiling existed on the amounts that could beadvanced to the shareholder. There would be a practicallimit on the amount that could be advanced where the

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approval of another shareholder to the advances was needed.

(2) Whether security is given for the advances. Therewould be such security if the corporation’s articles ofincorporation provide that the corporation will have a lienon the shareholder’s shares of stock for any debt of theshareholder to the corporation, even if the shareholders areunaware of the provision in the articles when the advanceis made.

(3) Whether the shareholder was in a position to repaythe advance. The shareholder’s salary as an employeeof the corporation is taken into account in making thatdetermination.

(4) Whether there is a repayment schedule or an attemptto repay.

(5) Whether there is a set maturity date. If there is none,actual repayments may be taken into account to determinewhen the loan is likely to be repaid.

(6) Whether the corporation makes systematic efforts toobtain repayment.

(7) The size of the advances.

(8) The extent to which the shareholder controls thecorporation.

(9) The earnings and dividend history of the corporation.

(10) Whether a note or certificate of evidence was taken bythe corporation.

(11) How the shareholder and the corporation recorded theadvances on their books and records.

Congress is Considering Allowing the Internal Revenue Service to Report on Taxpayers’ Tax Debts to Consumer Credit Bureaus

The Government Accountability Office has provided a report to Senate Finance Committee chairman Max Baucus, D-Mont., and Senate Judiciary Committee ranking memberCharles Grassley, R-Iowa., on the factors for considering acongressional proposal to report tax debts to credit bureaus.

The report noted that millions of individual and business taxpayers owe billions of dollars in unpaid federal tax debts—$373 billion as of the end of fiscal year 2011, including $258 billion in individual debt and $115 billion in business debt—and the IRS expends substantial resources trying to collect these debts.

Unlike many other debts owed to the federal government, tax debts are not directly reported to the credit bureaus that collect and sell information about the credit history of individuals

and businesses. The IRS is not allowed to directly report tax debt information to credit bureaus because long-standing federal law protects the privacy of any personally identifiable information reported to or developed by IRS. The IRS is, however, allowed to file tax liens on some tax debts. Tax liens become part of the public record, which can be picked up by credit bureaus and included in the credit history information they compile.

Report on Government Waste Cites ‘Robosquirrels,’ Tax Breaks for NFL

Republican Sen. Tom Coburn of Oklahoma says wasteful programs cost taxpayers almost $19 Billion.

The government wasted billions of dollars this year by allowing questionable tax breaks and paying for unnecessary programs even as the economy faltered, a Republican senator charged in a report released recently.

In his “Wastebook 2012” report, Sen. Tom Coburn of Oklahoma pointed to 100 items including tax breaks to highly profitable sports leagues like the NFL, NASA funding to develop meals for a Mars mission that may not take place for decades and thousands of dollars for scientists to build a “robosquirrel” to see if rattlesnakes would try to eat it.

Coburn, a longtime crusader against waste, said better prioritizing and oversight could have saved taxpayers $18.9 billion on the programs included in the report, which was based largely on existing government studies, inspector generals’ findings and media reports.

The White House’s Office of Management and Budget “share(s) Sen. Coburn’s commitment to cutting out waste and will continue to fight to prevent such spending wherever we find it,” agency spokeswoman Moira Mack said.

“Between 2010 and 2012, the president proposed to Congress to eliminate, cut or save money in 228 government programs and the administration has already been successful in more than half of those,” she added. “Where Congress has not acted, the president has moved aggressively through executive action to tackle unnecessary or excess spending.”Declaring that he works alongside “compulsive spenders” on

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Capitol Hill, Coburn in his report writes that with the struggling economy and the uncertainty of the looming fiscal cliff, it is imperative lawmakers reduce wasteful spending.

“Some try to rationalize the excessive borrowing and spending as necessary until the economy gets back on track,” the second term Republican said. “But the increased demand for help is precisely why Washington must be more careful how tax dollars are spent to ensure we can care for those who are truly in need.”

The report includes a National Science Foundation grant for $325,000 for university researchers in California to develop a robotic squirrel to observe how rattlesnakes react, to study the interaction between predators and prey.

The snakes appeared to accept the “robosquirrel” as real with one snake even biting off its head, CNN reported about the study in April.

The report cites $27 million spent by the U.S. Agency for International Development to train Moroccans to make and sell pottery around the world. But the report, which cited a USAID inspector general report, says the program was riddled with problems, including having a translator at classes who was not fluent in English, and by using dyes and clay not available in that country.

The study is critical of the continued production of the copper penny, which now costs more than two cents to make. It complains about $516,000 spent on a video game that simulates the social experience of attending a prom, $31,000 for Smokey Bear balloons to make appearances at balloon festivals, $300,000 to promote domestically produced caviar, and $268 million spent on a loophole for paper manufacturers that allows them to claim a waste byproduct is an alternative energy source.

The report is critical of what it calls a professional sports loophole that allows leagues to be treated like trade or association groups and be exempt from federal income taxes on earnings.

“Hardworking taxpayers should not be forced to provide funding to offset tax giveaways to lucrative professional sports teams and leagues,” says the report, which estimates getting rid of the loophole would bring $91 million into the treasury.

Greg Aiello, a spokesman for the NFL, said the league office itself “is classified as a not-for-profit under the tax code because the league office makes no profit.” He said the teams make the profits and they are taxed.

Coburn put much of the blame for the wasteful spending on Congress, which he described as deeply ineffectual and disliked by the America people.

Social Security Amounts for 2013

The Social Security Administration has announced the new

amounts for 2013.

The gross Social Security benefits increase for 2013 by 1.7%. We do not yet have the Medicare increase so it remains to be seen how much the net Social Security checks will increase.

The amount of earnings subject to Social Security taxes increases to $113,700 (up from $110,300 for 2012).

The amount of earnings required to be subjected to Social Security taxes in order to receive a quarter of coverage increases to $1,160 (up from $1,130 for 2012).

Earnings limitations for taxpayers who have not reached full retirement age (before having to repay Social Security benefits) increases to $15,120 ($1,260/month) (up from $14,640 ($1,220/month) for 2012).

Earnings limitations for taxpayers who reach full retirement age in the current year (before having to repay Social Security benefits) increases to $40,080 ($3,340/month) (up from $38,880 ($3,240/month) for 2012). (“Full retirement age” is age 66 for those born in 1943-1954.)

The maximum monthly Social Security benefits increases to $2,533.

The amount of the SSI Federal Payment Standard increases to $710/month. For a married couple this increases to $1,066/month. The SSI Student Exclusion Limits increases to $1,730/month with the annual limit increasing to $6,960.

The Substantial Gainful Activity earnings increase to $1,040/month for non-blind disabled recipients while the blind disabled recipient amount increases to $1,740/month. The Trial Work Period earnings increase to $750/month.

Nanny Tax Threshold Remains at $1,800 for 2013

On its website, the Social Security Administration has announced that for 2013, cash remuneration paid by an employer for domestic service in the employer’s private home isn’t FICA wages if the amount paid during the year is less than $1,800 (same as for 2012).

The dollar threshold applies separately to each domestic employee.

The Solyndra Memorial Tax Break

How Energy passed out tax-loss credits that mean taxpayers will pay twice for failure.

Perhaps you thought the Solyndra scandal amounted to a $535 million government loan that will never be repaid. No such luck. In the latest twist, Solyndra’s investors could be rewarded for their failure.

The Internal Revenue Service exposed this double Solyndra debacle in the U.S. bankruptcy court for the district of Delaware,

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which is unwinding the defunct solar-panel maker. The IRS formally objected to Solyndra’s Chapter 11 reorganization plan, claiming its “principal purpose is tax avoidance.”

Having sold off its manufacturing plant, fired nearly 1,000 workers and proven the non-viability of its business model, Solyndra’s only real assets are what the IRS calls “tax attributes.” These are between $875 million and $975 million in net operating losses that can reduce future taxable income, which the IRS values as high as $350 million. Before it went toes up, Solyndra also accumulated $12 million in solar tax credits that can reduce tax liabilities dollar for dollar.

Tax-loss carry-forwards are routine but worthless if a company cannot turn profits to pay taxes on. So Solyndra’s owners are asking the court to liquidate the rest of the business and contribute a net $6.7 million to pay off creditors for pennies on the dollar. A holding corporation will then emerge from Chapter 11 that will not make products or employ workers, but it will get the Solyndra tax offsets.

The dummy company is owned by Argonaut Ventures I LLC, Solyndra’s largest shareholder and the primary investment arm of the George Kaiser Family Foundation. Mr. Kaiser is a Tulsa oil billionaire... The other owner is Madrone Partners LP, a California venture outfit.

Solyndra’s Energy Department loan closed in September 2009, and a year later it was back asking for more as it bled cash. To stave off bankruptcy, the company asked Energy to release the loan’s remaining $95 million immediately, instead of in monthly drawdowns, and to restructure the terms (it had already technically defaulted). The emails that follow are from the negotiations that began in December 2010 and are either exhibits in the IRS objection or come from the 300,000 pages of documents the House Energy and Commerce Committee uncovered in its investigation.

Argonaut and Madrone were prepared to commit a new $25 million but needed the government either to take a haircut or subordinate taxpayer repayment rights to new senior debt. Solyndra’s private financing rounds were failing because new investors were coming in behind the government’s $535 million.

“The DOE really thinks politically before it thinks economically,” Steve Mitchell, an Argonaut managing director, wrote to Mr. Kaiser on December 7, 2010. The Department of Energy gnomes demanded $75 million and refused to invite the political blowback that signing away taxpayer claims to private financiers would invite, but Mr. Mitchell wouldn’t go above $25 million. So he wrote that he “politely moved the conversation toward how we should use the time to start discussing the bankruptcy process . . . To me it was clear that the DOE folks were somewhat caught off guard that we weren’t going to bail out the company.”

Argonaut and Madrone could walk away in part because they had so little skin in the game. Solyndra had 73% debt to 27% equity, not the 65%-35% split that the Treasury Department wanted before Energy boxed it out of a 2009 due-diligence review in the push to get stimulus dollars out the door. Realizing that Argonaut-Madrone would rather liquidate than throw good money after bad, Energy eventually gave in.

Meanwhile, Mr. Kaiser’s mind was on the net operating losses (NOLs). He mused to Mr. Mitchell that “I would go a long way to preserve the NOLs,” and he suggested that the final decision to ante up to $75 million could be “subject to our better understanding of whether the NOLs can conceivably be preserved in a semi-liquidation (that is, somehow maintaining the line of business and avoiding change of control).”

In February 2011, Energy signed off on a deal that would subordinate its repayment interests to a new $75 million loan to Solyndra from Argonaut and Madrone. The two owners would open this tranche of senior debt to other investors for equity warrants. But under the Energy term sheet, those warrants would then bounce back to the Argonaut-Madrone holding company if Solyndra became defunct. That gave Argonaut-Madrone 99.9% control of the net operating losses.

Solyndra went bust in September 2011, but Mr. Kaiser referred in August emails to “the consolation prize NOL” and wrote that “we could get the same benefit out of a new entity in there without absorbing the costs of resuscitating this one.” In other words, the holding company will merge with another profitable Argonaut business that can use the tax breaks.

The irony is that the law that created the loan program specifically bars the Energy Department from taking a junior debt position. So Energy simply produced a novel legal analysis claiming that this prohibition applies only when a loan originates, not when it is modified.

One staffer at the White House budget office wrote at the time that “I think they have stretched this definition beyond its limits” and noted in particular that the government “is better off liquidating the assets today than restructuring under DOE’s proposal.” Fly-speckers at the Treasury agreed.

Under the bankruptcy plan, taxpayers will recoup $27 million at most on the government’s $535 million “investment.” The IRS and Energy Department are now asking the courts to reject the deal, because bankruptcy is designed to give a business

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a second chance, not goose a tax return.

But this is little more than an ex post facto double-cross. Energy created the tax avoidance problem in the first place by gifting Argonaut and Madrone the net operating losses to delay the Solyndra crack-up that was fast becoming inevitable. That left taxpayers worse off than if they simply let Solyndra fail.

The larger problem is an economic model that seeks to pick winners and losers and misallocates capital. That’s bad enough. But do taxpayers have to get stuck twice for the same failed investment?

Preparers Unhappy About PTIN Info Disclosure

Preparers’ reactions range from annoyance over spam to concern over online privacy as they’ve learned that the IRS is publicly releasing some of the information it collects as part of its Preparer Tax Identification Number registration.

Some PTIN information is subject to release under the Freedom of Information Act, and the IRS makes a database of all approximately 700,000 registered preparers available to anyone who requests it and pays a fee of $35.

Concern among preparers surfaced last summer as commercial interests to set up their own databases that some preparers say have been designed to resemble the old IRS site or that try to get preparers to pay a fee to “upgrade” their posted information.

According to reports, the American Institute of CPAs has expressed concerns to the IRS about the information release. Many or most preparers were unaware of the possibility when they applied for a PTIN that their data would be publicly released, although the IRS has said from the beginning of the PTIN requirement that it plans eventually to publish such an online database of its own.

Preparers on several LinkedIn discussion boards, including the board for the National Association of Tax Professionals with the thread name IRS Responds to Angry Tax Preparers, are also reporting floods of e-mailed continuing education-related spam. Other preparers question why the IRS has not proceeded with a promised public-awareness campaign to educate the public about checking preparers’ credentials with an IRS database -- a delay that one preparer said allowed private enterprise databases “a big head start in reaching the public” with preparer verification information.

Some preparers said that they didn’t mind their information being released, but preparers also reported wide variation in the information available and released, from simple names and addresses to names, addresses (both business and home), phone numbers and e-mail addresses.

CPA David Bybee of Baybe and Co. in Kaysville, Utah, confirms on LinkedIn that the IRS has made changes to safeguard some data being collected from PTIN holders. Among the IRS responses reported was permitting PTIN registrants to list

either a physical address or a Post Office box, and to use any valid e-mail address as long as the preparer regularly checks it for PTIN communications. (One preparer also suggested listing a separate and otherwise unused e-mail address to receive the spam.)

According to the IRS page entitled “FOIA Awareness for PTIN Holders,” information subject to release includes name; business name, Web site and mailing address, and phone number; e-mail address; and professional credentials. The IRS has also changed the “Permanent Mailing Address” box on the PTIN application to “Personal Mailing Address” -- which clarifies that the information is personal and exempt from public disclosure under FOIA rules.

“If you used your Personal Mailing Address as your Business Mailing Address or used a street address when you would have preferred to provide a P.O Box as your Business Mailing Address, you may want to update your contact information,” the page reads. “This information is not exempt from disclosure under FOIA rules and it will be released even if it is the same as your Personal Mailing Address.”

Instructions follow on the page for updating PTIN account information either online or on paper Regarding spam and other unwanted solicitations, however, the service only offers a link to the FTC’s Bureau of Consumer Protection.

All PTINs Expire on December 31

The Internal Revenue Service expects the online renewal of PTINs is ready for tax professionals to log on to your PTIN account, or submit paper W-12. The later requires a long wait period for confirmation.

The Return Preparer Office, RPO, is recommending tax professionals:

1. Recheck the preparer data entry fields before submittingtax returns.

2. Confirm the PTIN you enter against the PTIN on yourwelcome letter.

3. Ensure the PTIN entry is in the proper format – P+8numbers.

The Return Preparer Office also recommends if you believe someone else is using your PTIN, use Form 14157 to report the misuse.

Tax Resolution Schemes Persist

In the throes of our country’s worst economic time since the Great Depression, “tax resolution” firms advertised heavily on television, promising relief which they could not deliver. Desperate taxpayers facing tax collection action responded to the ads. These firms use high-pressure sales techniques to exact substantial retainers—typically $5,000-$10,000. The retainer paid, the “resolution” firm disappears. The taxpayer

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is out his or her money, without relief. The government’s taxes go unpaid.

These unconscionable firms are unregulated. Many of them are accountants by trade. Certified public accountants, or CPAs as they are called, are trained to audit companies’ financial and report on them for the benefit of shareholders. I know. I was a CPA earlier in my career. CPAs who specialize in taxation tend to be adept at preparation of income tax returns. But CPAs are not trained in law or advocacy. If a case does not resolve administratively, a non-lawyer CPA is unable to take it to the next level—litigation. Petitioning the U.S. Tax Court, or the knowledge by IRS counsel that the taxpayer’s representative is capable of litigating the case, is important in resolving a tax case. Pursuant to IRS practice, once a case is docketed in U.S. Tax Court, it is sent back to IRS Appeals for another attempt at administrative resolution. IRS Counsel have ultimate settlement authority over a docketed case—they tend to be the most reasonable of all IRS representatives.

Thankfully, the largest of these schemes have now been shut down. “Tax Lady” Roni Lynn Deutch was shut down by then-Attorney General (now Governor) of California Jerry Brown. Deutch has since surrendered her law license and declared bankruptcy...

A $195 million judgment was entered against Patrick Cox and his firm, Tax Masters. The firm ceased operations, and declared bankruptcy. The largest creditors included $2.6 million owed to CNN for advertising and $2.3 million owing to a Philadelphia law firm. What a shame.

JK Harris, which at its peak had several hundred offices throughout the country, has now ceased operations under crushing civil and administrative litigation.

But tax resolution schemes persist, albeit on a smaller, local or regional scale. I have long known that these operators hire “bird dogs” to search local register of deeds’ officers for Notices of Federal Tax Lien (“NFTL”), and then bombard the subjects of the notices with come-ons for tax relief. I have recently experienced the onslaught first-hand. A client owing a substantial balance to the IRS retired to a foreign country. As the client does not have a U.S. address, the IRS sends mail to him at my office address. When the IRS recorded an NFTL against the client, the barrage of mail from tax relief operators began. The ads were quite startling. Some made a deliberate effort to appear that they were coming from the Internal Revenue Service. Some came from people falsely claiming to be lawyers. All of them made outlandish unfounded claims promises of tax relief.

The IRS could end such “bird-dogging” by discontinuing the practice of disclosing taxpayers’ addresses on NFTLs. Congress could also legislate against such misuse of recorded NFTLs—NFTLs are recorded to put prospective creditors on notice of the IRS’ priority in a taxpayer’s assets.

“Buyer beware” prevails in the marketplace. Tax resolution schemes are a waste of money. If you have a tax problem,

you are best represented by a competent tax attorney, who is accountable to the organized bar, and to you.

Dividend Tax Hike: Impact on Stocks Might be Different Than You Think

Before the end of this year Congress has to make a decision about how dividends are taxed. If Congress lets current law expire, the current maximum 15% tax rate on qualified dividends will vanish and dividends will revert to being taxed at ordinary income tax rates. Right now that’s 35%, but current individual income tax rates also expire at the end of 2012; we won’t know until the lame duck session in Congress what rates will look like in 2013.

So it stands to reason that if dividend stocks are suddenly taxed at a higher rate, their allure will fall, sending the value of the stocks down. That wouldn’t exactly be great news for dividend stalwarts such as General Mills, Exxon-Mobil and Coca-Cola right?

Not so fast, says James Morrow, manager of the $8.5 billion Fidelity Equity Income fund. He and a few Fidelity colleagues who traffic in dividend payers took a deep dive into the topic and emerged with the opinion that a boost in the tax rate will not sink dividend stocks.

“Higher taxes are never good-but in my view, the possibility that rates will increase doesn’t alter the fundamental case for dividend-paying stocks.,” wrote Morrow.

According to the money managers, the fact that more than one-third of U.S. stocks are held in tax-advantaged accounts such as IRAs and 401(k)s, mitigates the impact of any change in tax law; as long as your dividends are taxed into those tax-deferred accounts you don’t have to worry about the tax rate. Moreover, the money managers note that most of the dividend income earned in the U.S. goes to the 1%, and, well, they are so stinking rich, their dividend income is less than 5% of their total income. So though they may gripe a bit at a higher dividend tax rate, its impact is likely not much more than a rounding error in their annual net worth.

Morrow also pointed out an interesting counter-argument:

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a change in the dividend tax rate could be part of a more comprehensive tax bill that could address the taxation of how U.S. corporations are taxed for earnings overseas. Right now, the likes of Cisco and Apple keep boatloads of their earnings overseas rather than bring ‘em back and pay a tax rate as high as 35%. If that rate was reduced-to get more of that money back to work in the U.S. economy -- the theory is that the cash rich companies would turn around and boost their dividend payouts. (Note: U.S. corporations can’t use cash held outside the country to pay out dividends.)

For the other 99%, though, it’s important to understand the more fundamental risk for dividend stocks. Namely, no matter how high the yield, and no matter how healthy the payout ratio, dividend payers are not immune to market drops.

Here’s how a few popular dividend stocks performed during the brunt of the financial-crisis sell-off, compared to the performance of the Vanguard Growth ETF. You got a relative victory, wrapped in absolute losses as seen in this stock chart.

The SPDR S&P Dividend ETF, comprised of high yielders that have a long history of maintaining or growing their dividend -- think Walgreen’s, Sysco and Consolidated Edison -- wasn’t exactly a lifesaver when markets sank in 2011.

That’s not a knock against dividend stocks. Just a reminder for frustrated bond investors considering a shift into dividend

stocks, given the higher yields, that they will be buying a whole lot more volatility.

Over the longer-term, that move can pay off. The total return (yield plus price change) of the dividend ETF has handily beaten the benchmark S&P 500.

Just beware that any intermittent market volatility could tax your nerves.

Marriage Law Ruled to Violate Same-Sex Couple Rights in Tax Case

A federal law’s definition of marriage as being only between a man and a woman was voided by a U.S. appeals court in a decision that may entitle the widow who brought the lawsuit to an estate tax refund.

A three-judge panel U.S. Court of Appeals in New York ruled yesterday in a 2-1 decision that a key section of the Defense of Marriage Act unconstitutionally bars the U.S. government from recognizing same-sex unions and improperly discriminates against gay men and lesbians who marry in states that allow gay weddings.

The ruling upheld a lower-court decision in favor of Edith “Edie” Windsor, who sued the federal government over a $363,000 federal tax bill she received after the 2009 death of her spouse, Thea Spyer. Windsor, 83, said the U.S. failed to recognize her 2007 marriage to Spyer in Canada.

The Defense of Marriage Act, or DOMA “was an unprecedented intrusion into an area of traditional state regulation,” the panel said in yesterday’s ruling.

“This is a reason to look upon Section 3 of DOMA with a cold eye,” the judges said. “Because DOMA is an unprecedented breach of longstanding deference to federalism that singles out same-sex marriage as the only inconsistency (among many) in state law that requires a federal rule to achieve uniformity, the rationale premised on uniformity is not an exceedingly persuasive justification for DOMA.”

This decision was the first by a federal appeals court ruling

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that government discrimination against gay people “gets a more exacting level of judicial review, known as ‘heightened scrutiny,’” said the American Civil Liberties Union, which represented Windsor.

Definition Rejected

Section 3 of the law, which the court overturned, requires that in determining the meaning of any federal law or regulation, “the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.”

Windsor and Spyer were married in Toronto and their marriage was recognized in New York, where they lived. Spyer’s estate would have been exempt from the taxes if she had been married to a man.

Roberta Kaplan, a lawyer for Windsor, said her client will now seek a refund of the tax she was forced to pay.

Tax Refund

“We are pleased that the federal circuit that represents three states that provide their gay and lesbian citizens with the right to marry affirmed the decision of the district court,” Kaplan said in a statement. “Given her age and health, we are eager for Ms. Windsor to get a refund of the unconstitutional tax she was forced to pay as soon as possible.”

This ruling leaves intact some portions of DOMA, including a provision that states that don’t allow gay marriage don’t have to recognize same-sex unions in states that do.

U.S. District Judge Barbara Jones in New York, ruled in June in favor of Windsor, concluding that the Section 3 portion of the act violated the equal protection clause because there was no rational basis to support it.

After the Justice Department said it would no longer defend DOMA in court, the Bipartisan Legal Advisory Group of the U.S. House of Representatives challenged Jones’s ruling and argued the law should be upheld. Former Solicitor General Paul Clement, who argued on behalf of the group, urged the judges to overturn the lower-court ruling.

Clement said that at the time DOMA was enacted, no states permitted same-sex marriage. Congress’s intention was “to maintain this traditional definition that was in place in all 50 states,” he said.

Improper Substitution

Kaplan argued last month before the appeals court that Congress improperly substituted its own definition of marriage in DOMA, instead of respecting state decisions on marital status as it had done in the past.

She told the judges last month that DOMA is unconstitutional

because Congress had no legitimate government interest that was rationally served by the law. She urged the judges to review the statute with a heightened level of scrutiny because it discriminates against a group that has suffered from bias.The appeals court concurred with Kaplan, saying that homosexuals are still “significantly encumbered” and not in a position to adequately protect themselves from “the discriminatory wishes of the majoritarian public.”

The appeals court also said the section had improperly attempted to “enforce a uniform definition of marriage.”

Argument Sidestepped

“DOMA’s classification of same-sex spouses was not substantially related to an important government interest,” the appeals court said. “Accordingly, we hold that Section 3 of DOMA violates equal protection and is therefore unconstitutional.”

The majority of the appeals panel also said its analysis would “sidestep” the argument that “same-sex marriage is unknown to history and tradition.”

“Law (federal or state) is not concerned with holy matrimony,” the judges said. “Government deals with marriage as a civil status -- however fundamental -- and New York has elected to extend that status to same-sex couples.”

Windsor, who worked for International Business Machines Corp., and Spyer, a clinical psychologist, met in 1963 and became engaged in 1967, according to court filings.

The two married in Toronto in May 2007, Windsor said. Spyer left all of her property to Windsor, including the apartment they shared.

Pride, Dignity

“This law violated the fundamental American principle of fairness that we all cherish,” Windsor said yesterday in a statement. “I know Thea would have been so proud to see how far we have come in our fight to be treated with dignity.”

Windsor’s case follows a decision in May by the U.S. Court of Appeals in Boston that the law was unconstitutional. That is the only other such ruling on DOMA by a U.S. appeals court.

Chester Straub, the third judge on the panel, disagreed with yesterday’s ruling that DOMA is unconstitutional. He said a 1971 U.S. Supreme Court dismissal of a challenge to a Minnesota law limiting marriage to opposite-sex couples decided the issue.

“Whether connections between marriage, procreation and biological offspring recognized by DOMA and the uniformity it imposes are to continue is not for the courts to decide, but rather an issue for the American people and their elected representatives to settle through the democratic process,” Straub wrote in his dissent.

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Ruling Cheered

The ruling was hailed by supporters including Lambda Legal Defense & Education Fund Inc. that filed friend-of-the-court briefs on Windsor’s behalf.

“The federal courts keep coming to the same conclusion -- treating married same-sex couples differently than married different-sex couples is just plain unconstitutional,” said Susan Sommer, Lambda’s litigation director.

DOMA affects more than 1,000 federal laws that refer to marriage, according to the opinion by the appeals court in Boston. The law may affect more than 100,000 couples, the judges said.

In February, U.S. Attorney General Eric Holder told Congress that the Obama administration would no longer defend DOMA.The five-member Bipartisan Legal Advisory Group of the U.S. House of Representatives consists of House Speaker John Boehner, a Republican, and the Republican and Democratic majority leaders and whips. The group’s two Democratic members, Nancy Pelosi and Steny Hoyer, didn’t support the appeal.

Supreme Court

The Obama administration and DOMA supporters have each asked the U.S. Supreme Court to rule on the constitutionality of DOMA. The court may say by the end of year whether it will take up the issue in its current term, which runs until June.

Windsor has petitioned the U.S. Supreme Court to hear her case, Kaplan said yesterday. The court hasn’t decided whether to hear her case, or any of several other challenges to DOMA.

New York, which didn’t allow gays and lesbians to wed in 2007 when Windsor and Spyer married, recognized same-sex unions that were performed in jurisdictions where they were legal.

New York Governor Andrew Cuomo, who last year signed a law legalizing gay marriage in the state, said yesterday that the appeals court’s decision should provide momentum toward achieving marriage equality.

“What we did here in New York can only be the beginning, and we must continue to work together until all Americans are free to marry whom they love and are entitled to all of the rights and benefits of marriage equally, regardless of sexual orientation,” Cuomo said in a statement.

Same-sex marriage is permitted in the District of Columbia and in six states: Connecticut, Iowa, Massachusetts, New Hampshire, New York and Vermont.

The cases are Windsor v. U.S., 12-2335, 12-2435, U.S. Court of Appeals for the Second Circuit (Manhattan).

People in the Tax News

Tax Evasion Charged as Probe of Failed U.S. Bank Widens

A Kentucky businessman was arrested on Monday and charged with evading $53 million in taxes in a multi-faceted case stemming from an ongoing U.S. investigation of failed Park Avenue Bank.

Called “a vortex of fraud” by prosecutors, Wilbur Huff, 51, was arrested at his Kentucky home and charged in a 13-count indictment that also involved two others, said a statement from Preet Bharara, U.S. attorney for the southern district of New York.

The other two suspects - Matthew Morris and Allen Reichman - were arrested at their homes in New York, Bharara said.

All three had relationships with Park Avenue Bank, which failed in March 2010. Former Park Avenue Bank President Charles Antonucci pleaded guilty in October 2010 to securities fraud and other charges. He was the first person convicted of attempting to steal U.S. government bank bailout funds during the financial crisis from the Troubled Asset Relief Program, or TARP.

Huff, Morris and Reichman were “alleged co-conspirators” with Antonucci, and the arrests on Monday represented “part two” of a continuing probe of the bank, Bharara said.

“Huff was a vortex of fraud who also evaded over $50 million in taxes,” said Bharara.

Huff posted bail and agreed to home detention in Kentucky, a representative for Bharara’s office said. Huff’s lawyer, David Lambertus in Louisville, declined to comment.

It could not be immediately determined who was representing the other two defendants.

From 2008 to 2010, Huff allegedly controlled a Florida-based payroll servicing company that was supposed to handle federal tax payments to the Internal Revenue Service for businesses in at least three states, according to the prosecutors’ grand jury indictment unsealed on Monday.

Instead of paying the employment taxes these companies owed to the IRS, Huff allegedly stole $53 million for his own uses, including the payment of mortgages and purchase of designer clothing, jewelry and luxury cars among other items, the indictment said.

The companies usually wired money for their employment taxes to Park Avenue Bank, the statement said.

“Huff allegedly violated his clients’ trust by pocketing payroll taxes that were to be paid to the IRS on their behalf,” IRS

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criminal investigation division special agent Jose Gonzalez said in a statement.

Morris was formerly the bank’s senior vice president and Reichman was formerly executive director of investments at an investment bank and financial services company involved in a related insurance fraud scheme, the statement said.

Huff, of Louisville, was charged with 13 counts, including tax evasion, wire fraud and conspiracy to commit bank bribery. He could face up to 30 years in prison, the statement said.

Morris was charged with five counts, including conspiracy and fraud. He could face up to 30 years in prison, while Reichman was charged with one count of conspiracy to commit wire fraud and could face up to 20 years.

The case is U.S. v. Wilbur Anthony Huff, et al.

H&R Block to Leave Sears Store Locations

Tax preparer H&R Block Inc. said it will no longer operate in Sears Holdings Corp. locations.

Tax preparers set up their outlets in department stores during tax season, hoping to benefit from the large number of customers frequenting these stores.

H&R Block had said this month that it would reduce the number of Sears’s locations it operates in to 112 this year from about 500 last year.

H&R Block has been trying to realign its business to focus on the fast-growing digital tax market to compete with tax-filing software such as Intuit Inc.’s TurboTax.

The company expects the move to exit Sears’ locations to add slightly to earnings in fiscal 2013.

Sears said in a separate statement that it has reached an agreement with Jackson Hewitt Tax Service to provide tax services in most of its locations in the United States.

Tax Cheat or Hero? Medical Marijuana Tax Revolt Brewing

Taxes are never far from Dave Hodges’ mind. According to the state of California, Hodges, the founder and operator of the All American Cannabis Club in San Jose, owes almost a quarter million dollars in back taxes. According to Hodges, the state owes him -- about $11,000, in taxes he “mistakenly” paid.

Like every other medical marijuana dispensary in the state, Hodges paid state sales taxes in order to appease the Board of Equalization, which levies the same tax rate on pot clubs (8.375 percent, as of October 1) as any other business.

Except Hodges does not conduct sales. His collective,

according to city law, receives donations in exchange for medical marijuana. And a donation is not a sale. The BOE told him so – and now Hodges wants to tell other dispensaries how not to pay taxes, too.

California state law is not explicit one way or another on the legality of a marijuana “sale” -- and indeed, as recently as the spring, San Francisco District Attorney George Gascón’s office filed a legal brief, which it since retracted, stating that all sales of marijuana are illegal (an odd stance to take in a city that had, at the time, more than 20 taxpaying medical marijuana businesses).

Storefront marijuana businesses may operate as nonprofit collectives or cooperatives under laws and guidelines passed by the legislature and Gov. Jerry Brown. The state began collecting sales tax on every transaction in 2007. But is walking into a dispensary and exchanging money for OG Kush a “sale”? Is it a “donation” to cover the cost of producing and distributing the product? Or is it something else entirely?

Hodges, who blogs and advocates for the medical cannabis movement at SaveCannabis.org, says that his organization does not sell marijuana (which is one reason why he changed the name of his dispensary from San Jose Cannabis Buyers Club in 2011). Other dispensary operators tired of forking over nearly 10 percent of their take may be interested in Hodges’ information symposium in San Jose on Oct. 19.

A main theme of the SaveCannabis.org Education and Planning Conference will be taxes -- namely, why and how not to pay them.

Hodges also refuses to remit taxes to the city of San Jose, which passed a local gross receipts tax on marijuana, Measure U, in 2010. That tax went into effect in 2011. Hodges doesn’t pay that tax, either, because city law says gross receipts apply to sales -- and again, Hodges maintains he takes donations.

If his argument is correct, and if his argument is judged correct in court, the BOE could be hard-pressed to collect the $100 million in state sales taxes medical marijuana was estimated to produce prior to the 2011 federal crackdown that closed 400 dispensaries statewide. In other words, a tax revolt could be brewing.

“The BOE, in a legal opinion from their attorneys, have stated that a collective does NOT pay sales tax,” Hodges told SF Weekly. “If I can prove in court we ARE a “collective” they owe me 11k in sales tax I mistakenly paid them.”

Such a decision could be a ways off. Hodges filed his initial petition against the BOE a year ago. Only recently did he receive notice of an audit on his tax situation; an appearance in court could be “60 days to a year” away, he said Thursday.

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Attention Shoppers: Tax Returns on Sale

Are consumers inclined to drop off their tax returns at a department store kiosk after shopping for linens, sporting goods, or electronic gadgets? Both Liberty Tax Services and Jackson Hewitt are betting they are.

Beginning next tax return season, Liberty Tax will set up shop in more than 300 Walmart stores around the country. The national tax preparation firm - with more than 4,100 offices in the United States and Canada - provides computerized tax preparation and electronic filing services for individual taxpayers. At each office, it offers audit assistance, a money-back guarantee, and a free tax return review to buyers. Liberty Tax already occupies year-round office space in about a dozen or so Walmart Supercenters.

“Liberty Tax is excited about the opportunity to provide excellent tax preparation operations to Wal-Mart’s customers,” said its CEO and founder, John Hewitt, in a prepared statement. “Our company is very customer centric, and the addition of the Walmart locations in tax season 2013 is another opportunity for us to provide a convenient solution for customers looking for a local tax preparer.”

The news coincides with an announcement that Jackson Hewitt, which was cofounded by John Hewitt before he left to start his own company, will replace longstanding tenant H&R Block at Sears’s stores in 2013. H&R Block reportedly will downsize to 112 Sears locations this year from approximately 500 as it attempts to refocus its business on competition with tax software providers like TurboTax.

It may be odd for us to think of shoppers stopping to get their tax returns prepared while they pick up household goods or clothing, but Hewitt sees the department store market growing to meet the demands of busy taxpayers. “We continue to expand our relationships, with Walmart being our latest,” he tells AccountingWEB. “Convenience is the key for consumers. We will be open from nine to nine, Monday through Friday, and nine to five on Saturday. One to two employees will be there during those hours.”

The main item for sale is preparation of individual tax returns,

although Hewitt says his company also offers corporate and partnership tax preparation services at the stores. But this constitutes less than 10 percent of Liberty Tax’s business.

Is there any potential downside to the setup with Walmart? Hewitt acknowledges that lack of privacy may be a concern. But he comments that they won’t move their operations into a more private area, like the layaway department, because they would lose the value of greater visibility. Expect to see the kiosks in plain sight next year.

Editor’s Comment: Provisions of Circular 230 address the confidentiality of taxpayer information. It will be interesting to see how this issue will be addressed by the Internal Revenue Service.

Defense of Marriage Act Faces Widow’s Tax Case Appeal

The Defense of Marriage Act, which bars the federal government from recognizing same-sex unions, faces a challenge from a lesbian spouse whose lawyer is scheduled to make arguments to a U.S. appeals court.

A three-judge panel in New York is set to consider arguments from Edith Windsor, who sued over a $363,000 federal tax bill she received after the 2009 death of her spouse, Thea Spyer. Their marriage, which was performed in Canada, was recognized under the laws of New York, where the couple lived. Windsor would have been exempt from the taxes if she had been married to a man. A federal judge in Manhattan sided with Windsor in June, finding the Defense of Marriage Act unconstitutional.

The case follows a May decision by the U.S. Court of Appeals in Boston that the law, which defines marriage as only between a man and a woman, is unconstitutional. That is the only ruling by a U.S. appeals court finding DOMA unconstitutional.

“The main issues in these cases revolve around equal protection, the idea that this federal law treats similarly situated people differently,” said Jonathan Entin, who teaches constitutional law at Case Western Reserve University law school in Cleveland.

Entin said he expects the final decision on whether DOMA is constitutional will rest with the U.S. Supreme Court.

James Esseks, director of the American Civil Liberties Union’s Lesbian Gay Bisexual and Transgender Project, said justifications for DOMA by its supporters amount to little more than “discomfort with gay people” and with same-sex marriage. The ACLU is helping Windsor challenge the law.

DOMA, which was signed into law by President Bill Clinton in 1996, affects more than 1,000 federal laws that refer to marriage, according to the opinion by the Boston-based appeals court. The law may affect more than 100,000 couples, the judges said.

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“The denial of federal benefits to same-sex couples lawfully married does burden the choice of states like Massachusetts to regulate the rules and incidents of marriage,” the court said in its ruling.

In February, U.S. Attorney General Eric Holder told Congress that the Obama administration would no longer defend DOMA. The case for upholding the law is being argued in the Windsor case by the Bipartisan Legal Advisory Group of the U.S. House of Representatives.

Gregory Katsas, who defended DOMA as assistant attorney general for the Justice Department’s Civil Division in the administration of President George W. Bush, said one of the strongest arguments DOMA supporters point to is the long history of defining marriage as a union between a man and a woman.

“Same-sex marriage is something that’s relatively novel and not that widely accepted,” said Katsas, now a partner with the Jones Day law firm in Washington. He said it’s a “hard sell” for the opponents to argue that Congress had no rational basis for restricting marriage to heterosexual couples.

Windsor, who worked for International Business Machines Inc., and Spyer, a clinical psychologist, met in 1963 and became engaged in 1967, according to the complaint filed in the case. They married Toronto in 2007. New York, which didn’t allow gays and lesbians to marry at the time, recognized same-sex unions that were performed in jurisdictions where they were legal. Last year New York Governor Andrew Cuomo signed a law legalizing gay marriage in the state.

The case is Windsor v. U.S., 12-2435, U.S. Court of Appeals for the Second Circuit (Manhattan).

Up for Grabs: The $300 Million Estate of Reclusive Heiress Huguette Clark

The stakes have been set in the battle over the wealth of copper heiress Huguette Clark. More than $300 million is on the table as her extended family prepares for a court battle with her nurse and others for the last whispers of one of the great fortunes from America’s Gilded Age.

At her death on May 24, 2011, in the New York City hospital where she had lived for 20 years, the daughter of one of the copper kings of Montana possessed about $306.5 million, counting all her real estate, stocks, bonds, cash, trusts and personal property. The accounting was filed this week in Surrogate’s Court in Manhattan by the office of the public administrator, the temporary executor of her estate.

Clark’s estimated property values:

• $84.5 million for Bellosguardo, her California beachfrontsummer home on 23.5 acres in Santa Barbara. That valuewas reduced to reflect $502,000 in property tax liens.• $53.0 million for her three apartments at 907 Fifth Ave.,New York City. Their values are $24 million for apartment 12-

W, which has been sold, $19 million for apartment 8-W, which has also found a buyer, and $10 million for apartment 8-E, still on the market. Each apartment has approximately 5,000 square feet.• $14.3 million for La Beau Château, her Connecticutcountry home on 51.7 acres in New Canaan.• $79.3 million in stocks, bonds, cash and trusts, including$4,039 in unclaimed funds received from the state of NewYork.• $75.4 million in personal property. Details are notgiven, but this includes a Monet and other paintings, jewelry,furniture and her doll collection.

Bellosguardo, the Huguette Clark summer home in Santa Barbara, California. Her executor estimates its value at $85 million. Other estimates have run to $100 million. It could go to a new arts foundation, or to her extended family.

The net value of the estate will be less. Federal and state estate taxes must be paid, and unpaid federal gift taxes are due to the IRS.

And the estate could increase in value if the executor is successful in efforts to claw back more than $44 million in gifts that were given to Clark’s nurses, doctors, hospital and

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others in her later years.

Huguette (pronounced “u-GET”) Marcelle Clark, born in Paris in 1906, inherited her fortune from William Andrews Clark (1839-1925), a U.S. senator from Montana who was among the richest men of the Gilded Age, a copper miner, banker, builder of railroads, and founder of the city of Las Vegas.

His youngest daughter attracted the attention of NBC News in 2009 because of her vacant but well-manicured mansions and questions about the management of her money. She lived her last 20 years in spartan hospital rooms, dying just weeks before her 105th birthday. The archive of Clark stories, photos and videos is at http://nbcnews.com/clark/.

To direct her fortune, at age 98, Huguette Clark signed two wills.

The first will left $5 million to her private-duty registered nurse, Hadassah Peri, leaving the bulk of her estate to her relatives from her father’s first marriage. The family members were not named in that will, which left the estate to her “intestate distributees,” legal language for the people who would inherit if she died without a will. Because Clark had been married only briefly, and had no children, her closest relatives were the descendants of her father from the first marriage. These were Huguette Clark’s half great-nieces and half great-nephews, and their children. Huguette and her four half-siblings had each received one-fifth shares of W.A. Clark’s empire in 1925. Huguette’s mother, Anna, received Bellosguardo, which then passed down to Huguette.

Just six weeks passed before Clark signed a new will. It specified that she intentionally left no money to family, with whom the will said she had little contact. The family is claiming that this will was the product of fraud. The newer document leaves the largest share of her fortune to a museum or art foundation to be set up at her oceanfront estate in Santa Barbara. Specific bequests are made to her attorney, accountant, doctor and others, and the remainder is split among the nurse, a goddaughter and the California foundation. A twist: Heiress Huguette Clark signed two wills.

Originally the temporary executors of the Clark estate were her attorney and accountant, but the court revoked the accountant’s authority, and suspended the attorney from his role, leaving only the public administrator to manage the estate for now. The judge, Surrogate Kristin Booth Glen, acted after the public administrator’s attorney revealed that Clark had not filed gift tax returns from 1997 through 2003, leaving her owing millions in taxes plus interest and possible penalties.

Though a criminal investigation was launched in August 2010 into the handling of Clark’s finances by her attorney and accountant, no one has been charged with any crime. Both men have maintained that they did nothing more than carry out the wishes of a woman who wanted to protect her privacy. The investigation continues by the Elder Abuse Unit of the New York County District Attorney’s Office. The investigation was prompted in part by reports by NBC News about the sale

of property owned by Clark, including a Stradivarius violin and a Renoir painting.

Clark’s jewelry collection was sold at auction in April for $18.3 million. That money will be held by the estate during the contest over the wills. Her country estate in Connecticut is for sale, recently marked down to $15.9 million. Her estate in Santa Barbara is being carefully maintained, awaiting the court’s decision.

IRS News

IRS Names Acting Commissioner, Shulman Steps Down

Steven Miller will become acting head of the Internal Revenue Service after Doug Shulman, the present commissioner, steps down on Nov. 9.

Shulman had been expected to resign at the end of his term in early November as head of the 104,000-employee agency that each year collects trillions of dollars in federal tax revenue and enforces the complex U.S. tax laws.

Miller, IRS deputy commissioner for services and enforcement since September 2009, is a 25-year veteran of the agency.

The IRS leadership change comes ahead of a turbulent period, with Congress facing several major decisions on taxes as part of the “fiscal cliff” events at year-end. Tax experts have said that delays in issuing tax refunds could result next year.

Miller’s top challenge will be “navigating next year’s filing season,” said Kevin Brown, a principal at Big Four accounting firm PricewaterhouseCoopers LLP who was an IRS acting commissioner for several months in 2007.

“This is the worst set of circumstances that I can remember with the ‘fiscal cliff’ looming,” Brown said, but added that with Miller on the job, “the IRS is in very good hands.”

The commissioner’s post is a presidential appointment subject to Senate confirmation.

Shulman, a Democrat appointed to the post under Republican President George W. Bush, has served since March 2008. The IRS did not provide details about Shulman’s next career move.

Before Shulman was confirmed by the Senate at the start of his term, the IRS was led by two acting commissioners over a transition period of more than nine months.

The previous Senate-confirmed commissioner was Mark Everson, who stepped down in May 2007.

Treasury Secretary Tim Geithner praised Miller as a “dedicated

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career public servant.” The Treasury Department oversees the IRS.

Treasury and IRS did not say when a nominee for commissioner would be announced.

Return Preparer Office Federal Tax Return Preparer Statistics

Number of Individuals with Current PreparerTax Identification Numbers (PTINS) for 2012 728,185

Professional Credentials

Attorneys 32,059Certified Public Accountants 214,565Enrolled Actuaries 544Enrolled Agents 43,359Registered Tax Return Preparers 18,676

Other CategoriesSupervised Preparers 56,873Non-1040 Preparers 45,604Preparers with provisional PTINs who have Not yet passed the RTRP test 327,438

Cumulative number of individuals issued PTINs since 9/28/2010: 858,976

Some preparers have multiple professional credentials.

Date – 9/18/2012

Editor’s note: Dorothy Leamon, ncpeFellowship member from North Caroline submitted this information. Thank you Dorothy.

New Regulations Save Taxpayers Real Dollars – Preparers can help with a Cost Segregation Study

Revenue Procedures 2012-19 & 2012-20

An Engineered Cost Segregation Study may bring your clients a substantial amount of Cash Flow from accelerated depreciation and increased current year tax deductions.

The new regulations may mean even more significant tax savings for your clients. Temporary regulations were published in December 2011 that impact owners of real property. These temporary regulations are known as T.D 9564 and their purpose is to clarify Sec 263(a) rules of capital expenditures. In March 2012, Revenue Procedures 2012-19 & 2012-20 were published to provide guidance on implementing the new temporary regulations through the Change in Accounting Form 3115. The new regulations make available tax benefits to commercial property owners through favorable rulings on building improvement and repairs and building component

dispositions. A Cost Segregation Study can be the key to unlocking these new tax benefits.

A cost segregation study will allow the commercial property owner to take advantage of the new capital improvement guidelines. Old regulations defined an improvement as an expenditure that betters a unit of property, restores a unit of property, or adapts a unit of property to a new or different use. The new regulations expand these guidelines to building structures to be specific to building systems or units of property that make up the building structure. Building systems or units of property are defined as HVAC systems, plumbing systems, electrical systems, escalators/elevators, roof systems, lighting, flooring, and any other structural component defined through a cost segregation study. Improvements and repairs conducted on the building are either capitalized or expensed depending on its effect on the unit of property. Qualitative tests are performed based on the cost of the unit of property and the current expenditure is either capitalized or expensed. Of course, an expense is more favorable to the owner. The new regulations will allow for the expensing of repairs and maintenance to a unit of property, but the unit of property must be defined in order to allow for this. A Cost Segregation Study will define the units of property within the building allowing the owner to take advantage of this portion of the new tangible property regulations.

In addition to favorable capital improvement regulations, the tangible property regulations now allow for disposed of building components to be deducted up to their remaining depreciable basis. Through a Cost Segregation Study, disposed of building components’ costs can be correctly identified so the commercial property owner can accurately deduct the remaining depreciable basis of these components. If a Cost Segregation Study is not performed, the costs of the disposed of building components could not be correctly identified resulting in no deduction for the commercial property owner. Revenue Procedures 2012-19 & 2012-20 create further tax benefits by allowing the commercial property owner to claim deductions of previously retired building components. This deduction is realized on the Change in Accounting Form 3115. These Revenue Procedures also allow the filing of multiple 3115 forms in 2012 and 2013. Again, a Cost Segregation study will be needed to determine the correct cost of the previously disposed of building components.

In conclusion, the new tangible property regulations can provide great tax benefits to commercial property owners, and a Cost Segregation Study is the preferred method in obtaining these tax benefits. The commercial property owner will be able to elect to follow these new regulations through a 3115 even if they are not currently making any changes related to repair and maintenance expenditures. The 3115 can also include the change to Cost Segregation deprecation since Revenue Procedures 2012-19 & 2012-20 allow for multiple 3115s in the tax years of 2012 and 2013.

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Internal Revenue Cited for Insufficient Controls

IRS has insufficient controls over its electronic services, and some tax professionals are improperly using these services in a manner that can lead to the unauthorized release of confidential taxpayer information, the Treasury Inspector General for Tax Administration (TIGTA) said in a recent audit. (Audit Report No. 2012-40-071)

TIGTA’s criticism focused on current controls that fail to ensure tax professionals properly file a power of attorney with IRS before the agency discloses taxpayer information to them. Specifically, controls now in place cannot ensure the following conduct: that tax professionals obtain a signed Form 2848, Power of Attorney and Declaration of Representation, before submitting it via e-Services Disclosure Authorization; that tax professionals use Form 2848 only for its intended purpose; and that only tax professionals who can file a power of attorney electronically have access to Disclosure Authorization. The audit noted that tax professionals are abusing the system by obtaining a power of attorney solely for the purpose of ordering and providing tax return transcripts for individuals who request them online. “In addition, tax professionals who have access to e-Services but are not permitted by the IRS to electronically file a power of attorney can circumvent this control,” the audit said. Details regarding this practice were redacted from the publicly-released audit report. “I am troubled that the IRS allows tax professionals to electronically obtain powers of attorney without obtaining proper authorization,” said J. Russell George, the inspector general.

“When tax professionals use Form 2848 for other than its intended purposes, they are circumventing IRS controls designed to protect taxpayer information.

IRS Releases New Data on Federal Tax Classifications

IRS has published new data on sole proprietorships segmented by region and state, foreign-controlled domestic corporations, and corporations claiming a foreign tax credit. (Statistics of Income Bulletin – Summer 2012)

Some 23 million individual income tax returns reported nonfarm sole proprietorship activity for 2010, with profits of $267.7 billion reported on these returns, according to figures released by the agency on Sept. 24. The southwest experienced the largest growth, with a 4.6% increase. During the period of tax year (TY) 2007 through TY 2009, the total number of sole proprietorship returns filed fell by 1.9% to 24.2 million.

Gross receipts reported on these returns decreased over the same period. For TY 2007 through TY 2009, partnership returns filed increased 3.1% to 3.3 million. Partnership gross receipts (less returns and allowances) decreased 5.7% percent over the same period. For TY 2009, there were 66,197 foreign-controlled domestic corporations (FCDCs) that reported combined profits of $36.4 billion. They accounted for

just 1.1% of U.S. corporation income tax returns filed for 2009.

“However, FCDCs generated $3.5 trillion of total receipts with $10.5 trillion of total assets, and accounted for 14.2% of the receipts and 13.8% of the assets reported on all U.S. corporation income tax returns,” IRS said. For TY 2008, 7,242 corporations claimed total foreign tax credits of over $100 billion against their U.S. income tax liability. Manufacturing firms accounted for almost two-thirds of the foreign-source taxable income.

The United Kingdom, Canada, the Netherlands, Ireland, and Norway were collectively responsible for about one-third of the foreign-source taxable income.

TIGTA Reports IRS Complying with Law

The IRS is complying with “the intent” of the law that requires it to notify taxpayers of their rights when requesting an extension of the statute of limitations for assessing additional taxes and penalties, according to a recently released TIGTA audit. (Audit Report No. 2012-30-102)

However, auditors did find some cases in which agency employees failed to document whether taxpayers or their representatives were advised of these rights, as described in the audit.

Code Section 6501(c)(4)(B) requires IRS to notify taxpayers of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to specific issues or a specific period of time. TIGTA stressed that notification just to a taxpayer’s representative is insufficient. “Although notification to the taxpayers’ representatives appears to meet the intent of the law, the IRS’s internal procedures require notification to be provided to both the taxpayer and the representative,”TIGTA said..

Simplified Per-diem Rates Flat but Some Expenses Now May Be Separately Deducted or Reimbursed

Notice 2012-63, 2012-42 IRB

IRS has issued its annual notice carrying the “high-low” simplified per-diem rates for post-Sept. 30, 2012 travel. Both the high-cost area and low-cost area per-diems are unchanged from the prior simplified per-diems. However, some expenses are no longer treated as incidental and thus may be separately deducted or reimbursed.

An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid does not exceed IRS-approved maximums, and the employee provides simplified substantiation (time, place and business purpose), the reimbursement is treated as made under an accountable plan—it isn’t subject to income- or payroll-tax withholding

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and is not reported on the employee’s Form W-2. Receipts of expenses are not required.

In general, the IRS-approved per-diem maximum is the GSA per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. These rates in effect for the federal government’s fiscal year period beginning Oct. 1, 2012, may be found at http://www.gsa.gov. However, in applying the per-diem, M&IE, and incidental-expenses-only allowances, an employer may continue using the CONUS (continental U.S.) rates that were in effect for the first nine months of 2012 for CONUS expenses in all of 2012, instead of using the GSA rates that are effective Oct. 1, 2012, provided that the employer consistently uses those prior rates for the last three months of 2012.

Rev. Proc. 2011-47, Sec 3.02(3) provides that the term “incidental expenses” has the same meaning as in the Federal Travel Regulations, 41 C.F.R. 300-3.1, and that future changes to the definition of incidental expenses in the Federal Travel Regulations would be announced in the annual per-diem notice. On Sept. 7, 2011, the General Services Administration published interim (temporary) regulations revising the definition of incidental expenses under the Federal Travel Regulations to include only fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Transportation between places of lodging or business and places where meals are taken, and the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings, are no longer included in incidental expenses. Accordingly, taxpayers using per-diem rates may separately deduct or be reimbursed for transportation and mailing expenses.

A payor that pays a per-diem allowance in lieu of reimbursing actual expenses an employee pays or incurs or will pay or incur for travel away from home may use the high-low substantiation method in lieu of the per-diem substantiation method or the M&IE-only method

Under the high-low substantiation method, there is one uniform per-diem rate for all “high-cost” areas within CONUS, and another per-diem rate for all other areas within CONUS. Under the optional high-low method for post-Sept. 30, 2012 travel, the high-cost-area per diem is $242 (same as the previous rate), consisting of $177 for lodging and $65 for M&IE. The per-diem for all other localities is $163 (same as the previous rate), consisting of $111 for lodging and $52 for M&IE.

There are no changes in the list of high-cost localities from the list of high-cost localities in the previous notice.

A payor that uses the high-low substantiation method for an employee must use that method for all amounts paid to that employee for travel away from home within CONUS during the calendar year. The payor may use any permissible method (actual expenses, the per diem substantiation method, or the meal and incidental expenses only per diem substantiation method) to reimburse that employee for any CONUS travel away from home.

For travel in the last three months of a calendar year: (1) a payor must continue to use the same method (per diem method, or high-low method) for an employee as the payor used during the first nine months of the calendar year; and (2) a payor may use either the rates and high-cost localitiesin effect for the first nine months of the calendar year or theupdated rates and high-cost localities in effect for the lastthree months of the calendar year if the payor uses the samerates and localities consistently for all employees reimbursedunder the high-low method.

A payor must treat M&IE allowances as a food and beverage expense that is subject to the 50% deduction limit on meal expenses. The percentage is 80% for food and beverage expenses of certain individuals (e.g., air transport workers, interstate truckers, bus drivers) during or incident to a period of duty subject to the hours-of-service limits of the Department of Transportation.

Instead of using actual expenses in computing deductions for ordinary and necessary incidental expenses of away-from-home business travel, employees and self-employed individuals who don’t pay or incur meal expenses for a calendar day (or partial day) of travel away from home may for post-Sept. 30, 2012 travel deduct $5 per day (same as previous rate) for each calendar day (or partial day) the taxpayer is away from home. This amount is deemed substantiated if the taxpayer substantiates the time, place, and business purpose of the travel for that day (or partial day). The incidental-expenses-only per-diem can’t be used by payers that use a per-diem or M&IE-only per-diem method (see below), or by employees or self-employed individuals who use the M&IE-only per-diem method. The incidental-expenses-only per-diem is not subject to the 50% deduction limit on business meals.

Under some circumstances, an employee may receive a per-diem reimbursement only for his M&IE for travel away from home. If simplified substantiation is supplied (time, place, business purpose), and one of several conditions is met (e.g., payor provides lodging in kind or pays the service provider directly for lodging), the amount paid is deemed paid under an accountable plan as long as the rate does not exceed the federal M&IE rate for the locality of travel for the period when the employee is away from home. Similar rules apply to self-employed individuals who pay or incur meal expenses.

Effective Oct. 1, 2012, taxpayers in the transportation industry paying (or deducting) a per-diem only for M&IE may treat $59 as the M&IE rate for all localities within CONUS and $65 as the M&IE rate for all localities outside of CONUS (same as the previous rates. A transition rule provides that taxpayers that used the federal M&IE rates or the special transportation industry rates during the first nine months of 2012 for an individual can’t switch to the other method for that individual until 2013.

IRS Defers to DOMA in Recent Filing Guidance for Same-sex Couples

IRS has issued guidance, in question and answer format, to

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clarify certain filing questions and ambiguities faced by same-sex couples in state-recognized marriages, civil unions, and domestic partnerships. Despite the facts that the Obama Administration has decided not to defend the Defense of Marriage Act (DOMA), and that a number of courts have struck down the key provision in DOMA that denies recognition of same-sex marriages for purposes of administering federal law, IRS continues to maintain that legally married same-sex couples don’t qualify for tax benefits otherwise available to married taxpayers.

In ‘96, Congress enacted, and President Clinton signed into law, the Defense of Marriage Act (DOMA). §3 of DOMA defines marriage for purposes of administering Federal law as the “legal union between one man and one woman as husband and wife.” It further defines “spouse” as “a person of the opposite sex who is a husband or wife.”

In large part, DOMA was a reaction to the possibility that states would begin to legally recognize same-sex marriages. The impact of DOMA’s definition of marriage is estimated to affect at least 1,138 federal laws and regs, and to deprive approximately 100,000 legally married same-sex couples of the benefits afforded to heterosexual married couples.

In February of 2011, Attorney General Holder announced that the Department of Justice would no longer defend DOMA’s constitutionality because he and President Obama believed that a heightened standard of scrutiny should apply to classifications based on sexual orientation, and that §3 is unconstitutional under that standard.

A number of courts have upheld challenges to DOMA §3 in several tax-related contexts. For example, in Dragovich v. Dept. of Treas., et al, (DC CA 2012) a California district court struck down the DOMA-based exclusion of same-sex couples from tax-favored state long-term care insurance plans. Soon after, in a case involving a DOMA-based denial of the estate tax marital deduction for a decedent’s same-sex spouse, a New York district court found that DOMA §3 violated the equal protection clause. (Windsor v. U.S., (DC NY 2012) Additionally, in Pedersen, et al, v. Office of Personnel Management, et al, (DC CT, 2012) Civil Action No. 3:10-cv-1750, a Connecticut district court ruled in favor of same-sex spouses who sought tax refunds equal to the difference between the amounts they paid based on separate vs. joint filing

In its most recent pronouncement on the issue, IRS continued to defer to DOMA in its guidance to same-sex couples. Among other things, IRS stated that:

... Same-sex couples who are legally married for state law purposes may not file using either married filing separately or married filing jointly status.

... A taxpayer can’t file as head of household based solely on his or her same-sex partner, regardless of whether the same-sex partner is the taxpayer’s dependent.

... If a child is a qualifying child under Code Sec. 152(c) of

both parents who are same-sex partners, either parent, but not both, may claim a dependency deduction for the child.

... If a same-sex couple adopts a child together, each same-sex partner may claim the adoption credit in an amount equal to the qualified adoption expenses paid or incurred for the adoption. The same-sex partners may not both claim a credit for the same expenses, and neither partner may claim more than the amount of expenses that he or she actually paid or incurred.

... If a taxpayer adopts the child of his or her same-sex partner, the taxpayer may claim an adoption credit for the qualifying adoption expenses.

TIGTA Reports on Form 3949A

The IRS is “not efficiently or effectively processing” the reporting of suspected tax law violations submitted on Form 3949-A, Information Referral, via the agency’s website, the Treasury Inspector General for Tax Administration (TIGTA) said in an audit released on Oct. 3. (Audit Report No. 2012-40-106) During fiscal year 2011, more than 116,000 individualssubmitted a Form 3949-A, the audit found.

“Reporting guidelines provided to taxpayers and employees are confusing and inconsistent and cause individuals to use Forms 3949-A for other than its intended purpose,” TIGTA said. The audit revealed a number of problems that require resolution. For example, the instructions on Form 3949-A do not explain what types of fraud and tax law violations to report when using the form, TIGTA said.

The form also lacks specificity, which results in taxpayers not always providing IRS with the information it needs to take appropriate action, the audit said. In addition, the agency processes identity theft referrals received on Form 3949-A as regular correspondence, leading to delayed action on such cases. Furthermore, “a lack of oversight and effective procedures has resulted in workable Forms 3949-A, including identity theft claims, being destroyed without any acknowledgment of receipt to the taxpayer,” TIGTA said. “With the increasing number of identity thefts, it is imperative the IRS develop a process to ensure that these referrals are appropriately processed and efficiently examined,” said J. Russell George, the inspector general.

IRS Delays in Processing NOL Cases Cost Millions

The Internal Revenue Service is paying millions of dollars every year in unnecessary interest payments due to delays in processing net operating loss cases within the required 45 days, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, examined a statistical sample of 334 of 86,483 NOL carryback tax abatements that posted to individual taxpayer accounts during calendar year 2010. The analysis

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found that 64 of the 334 cases examined (19 percent) were not processed within 45 days. TIGTA estimates that the IRS could pay approximately $334 million of avoidable interest payments and delay payment to more than 74,000 individual taxpayer accounts in the next five years due to delays with processing NOL cases.

J. Russell George

When taxpayers experience significant financial losses, their deductions can exceed their income, creating an NOL that can be carried back and applied against prior-year taxes or carried forward for up to 20 years after the year the loss occurred. Interest is paid to the taxpayer if the IRS does not process an NOL case within 45 days. TIGTA initiated the audit to determine whether the IRS was processing NOL cases on a timely basis to minimize the interest payments it needs to make as well as the burden on taxpayers.

There were several reasons why cases were not processed within 45 days. Some cases had to be reassigned multiple times before they were closed. Other cases were not given the proper priority code on the IRS’s monitoring and tracking system. For some cases, manual refunds were not always issued when required.

TIGTA also found that the current performance measures used by the IRS are not ensuring that NOL cases are worked in a timely manner. Neither the interest paid on NOL cases nor the 90-day statutory time period for processing tentative applications is monitored to help determine whether the IRS is processing NOL cases on a timely basis.

“This situation is costly to the government and creates a burden to taxpayers when their refunds are delayed,” said TIGTA Inspector General J. Russell George in a statement.

TIGTA made five recommendations. IRS management agreed with TIGTA’s recommendations and plans to take appropriate corrective actions. However, IRS management did not agree with the outcomes discussed in the report. The basis of the disagreement was that the calendar year from which TIGTA’s samples were drawn had an unusually high number of NOL carrybacks due to legislation that took effect for that year. The IRS believes that TIGTA’s samples were representative of what occurred in calendar year 2010, but are not representative of

future years.

“This was an unusual year due to passage of the American Reinvestment and Recovery Act of 2009 and the Worker, Homeownership and Business Assistance Act of 2009, which extended the NOL carryback period from two years to five years for eligible small businesses,” wrote Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Due to this change in the law, the sample is representative of what happened in 2010, but is not representative of what will happen over the next five years.”

However, TIGTA noted that because of the unusually high volumes in calendar year 2010, it adjusted its estimate using the volume of carryback transactions posted in calendar year 2011.

IRS Updates List of Extreme Drought Areas for Extended Livestock Replacement Period IRC §1033

IR 2012-72; Notice 2012-62, 2012-42 IRB

IRS has released the seventh version of an annual list (published each September) of counties or parishes in which exceptional, extreme, or severe drought has been reported during the preceding 12 months. The list, which is exceptionally long this year because of severe drought conditions that have affected many parts of the U.S., can be used instead of U.S. Drought Monitor maps to determine whether an extended replacement period applies for livestock sold because of drought.

An involuntary conversion is the compulsory or involuntary conversion of a taxpayer’s property into similar property, dissimilar property or money as a result of the property’s destruction, theft, seizure, requisition or condemnation (actual or threatened). Involuntary conversion includes the sale or exchange of livestock (in excess of the number that the taxpayer would sell if he followed his usual business practices) solely on account of drought, flood, or other weather-related conditions. Where property is involuntarily converted into other property similar or related in service or use to the converted property, no gain is recognized.

If a taxpayer sells livestock on account of drought, flood, or other weather-related conditions which result in the area being designated as eligible for assistance by the federal government, the involuntary conversion replacement period is four years. This four-year period may be extended further by IRS on a regional basis if the weather-related conditions continue for more than three years.

IRS has said that if a sale or exchange of livestock is treated as an involuntary conversion because of drought, the 4-year replacement period is extended until the end of the taxpayer’s first tax year ending after the first drought-free year for the applicable region. The first drought-free year for the applicable region (which is the county that experienced the drought and

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owed by agencies topped $406 million, the IRS said, which has since dropped by nearly 97 percent to its current $14 million level.

“Despite a number of complexities, the IRS is working to continue to make progress in this area,” the agency said.

The list detailing which agencies owe back taxes and how much each owes was redacted from the audit report. TIGTA spokeswoman Karen Kraushaar said by law, no taxpayer’s return information, including taxes owed or delinquent, can be disclosed. That law applies to governments as well as individuals and corporations.

The audit found that 18 agencies also failed to file or were late in filing their tax returns. Agencies owe $2.6 million worth of taxes dating back more than three years. The IRS stopped trying to collect $2.4 million worth of those oldest cases, according to the report.

Faris Fink, commissioner of the Small Business/Self-Employed Division of the IRS, which is responsible for collecting back taxes from federal agencies, said the office faces “significant obstacles” in collecting those taxes.

By law, agencies can only use current appropriations to pay taxes for the current fiscal year, making it difficult for the IRS to collect taxes owed from prior years, the report said.

The IRS cannot charge the federal government interest or penalties for not paying taxes like it can private taxpayers or businesses. Nor can the IRS place a lien or confiscate government property to enforce tax laws.

Instead, the IRS relies on its Federal, State, and Local Government Office to educate agencies and encourage them to pay their taxes in full and on time.

“We concur with your reported outcome measures,” Fink said in his written response to the audit. “As you mention in your report, federal appropriations law and IRS policies make it difficult to collect delinquent taxes from federal agencies.”

The report recommends that the IRS notify each agency’s chief finance officer when payments are late. TIGTA also recommends the IRS work to develop regulatory and law changes that could make it easier to collect taxes from federal agencies. And the IRS should set standards for the time needed to process and close out delinquent cases.

In its 2007 review, TIGTA recommended that the IRS develop a method to resolve old agency delinquent accounts; better record and share the causes of the delinquencies and results of any action to better focus outreach and education efforts and to draft comprehensive guidelines and procedures to assign, control and resolve federal tax delinquencies.

“By not fully implementing the corrective actions to address the recommendations from our prior report, SB/SE Division officials have not been as effective in educating federal

all contiguous counties) is the first 12-month period that: (1) ends on Aug. 31; (2) ends in or after the last year of thetaxpayer’s 4-year replacement period; and (3) does not includeany weekly period for which exceptional, extreme, or severedrought is reported for any location in the applicable region.Taxpayers can determine whether drought conditions exist foran applicable region by referring to either the U.S. DroughtMonitor maps produced by the National Drought MitigationCenter or a list that IRS publishes in September.

In the Appendix to Notice 2012-62, IRS lists counties in 43 states for which exceptional, extreme, or severe drought was reported during the 12-month period ending Aug. 31, 2012. Any county contiguous to a county listed by the NDMC also qualifies for relief.

Under Notice 2006-82, the 12-month period ending on Aug. 31, 2012, is not a drought-free year for an applicable region that includes any county on this list. For a taxpayer who qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and whose replacement period is scheduled to expire at the end of 2012 (or, in the case of a fiscal year taxpayer, at the end of the tax year that includes Aug. 31, 2012), the replacement period under, will be extended if the applicable region includes any county on this list. This extension will continue until the end of the taxpayer’s first tax year ending after a drought-free year for the applicable region.

Federal Agencies Owe $14 Million in Unpaid Taxes

As of December, 70 federal agencies owed the U.S. Treasury $14 million in unpaid taxes that were withheld from federal workers’ paychecks, according to a federal audit released Thursday.

Unlike private businesses, federal agencies are exempt from paying federal income taxes. However, like private employers, federal law requires agencies to withhold and pay employment taxes on behalf of their employees, such as Medicare and Social Security withholdings.

“Federal agencies must comply with the same filing and paying standards that apply to all American taxpayers,” J. Russell George, Treasury Inspector General for Tax Administration, said in a written statement.

The Treasury Inspector General for Tax Administration’s audit also found that the IRS did not make recommended changes included in a similar audit five years ago and needs to improve its efforts to get federal agencies to pay their taxes on time.

In an emailed statement to Federal News Radio, the IRS said it is “committed” to collecting the billions in employment tax deposits agencies are required to withhold and pay each year and cited the “substantial progress” it has made over the past several years.

In 2005, the amount of delinquent employment tax deposits

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Thoughts from the Ragin Cagin

Supreme Court Will Not Review Decision Penalizing S Corporation for Paying Unreasonably Low Wages

Watson, P.C. v. U.S., (CA8 02/21/12) 109 AFTR 2d 2012-1050, cert denied 10/01/2012

The Supreme Court has declined to review a decision of the Court of Appeals for the Eighth Circuit, which held that an S corporation paying unreasonably low salary was liable for employment taxes on dividends reclassified as salary. Specifically, the Eighth Circuit, affirming the district court, found that the shareholder-employee’s $24,000 salary in 2002 and 2003 was unreasonably low and allowed IRS to reclassify as salary over $67,000 in dividend payments to the officer during each of those years. This resulted in the corporation owing employment taxes on the reclassified dividend payments.

Attendees of the Corporate, Partnership and LLC seminar this summer remember this court case and the ramifications on reasonable compensation.

Employers are liable for FICA (Social Security) taxes on wages paid to their employees. Code Section 3111, Fact Sheet 2008-25, August 2008 warns S corporations not to attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages. The Fact Sheet includes these factors that courts have considered in determining reasonable compensation:

• training and experience;• duties and responsibilities;• time and effort devoted to the business;• dividend history;• payments to non-shareholder employees;• timing and manner of paying bonuses to key people;• what comparable businesses pay for similar services;• compensation agreements; and• use of a formula to determine compensation.

In 1992, David E. Watson joined with Tom Larson, Jeff Bartling, and Dale Eastman to form an accounting firm named

agencies about their tax responsibilities, preventing the violation of IRS policies, and reducing the amount of time required to work and close (Federal Agency Delinquency) Program cases,” the report said.

A database detailing the reasons for the delinquencies included vague descriptions such as “dead end” or “agency.” And a secondary reason field that provided more detailed explanations such as ‘”payment misapplied to another tax period” or “unable to locate payment” was not shared with the education and outreach arm of the IRS, the report said.

Following the 2007 review, the IRS crafted new policies to improve delinquency processing. However the new audit found the agency did not regularly adhere to those procedures including a lack of follow-up action within 60 days, assessing penalties illegally, and taking more than two years to close out some cases, the report said.

Preparer Compliance Letters

The IRS will be sending out approximately 5,000 letters to tax preparers of all designations who filed tax returns with a Schedule C that have a high percentage of traits typically found to have errors. These letters are being sent prior to the tax-filing season. The IRS has acknowledged that they specifically targeted returns that have car and truck expenses that appear irregular.

The letters are meant to be an educational tool and a reminder of tax compliance. Three different letters are being sent:

1. One simply covers due diligence responsibilities,potential consequences and includes helpful resources.

2. Another recommends that the preparer take five hoursof continuing education on Schedule C prior to tax season.This letter will only be sent to EAs, RTRPs and prospectiveRTRPs, because the IRS can track the CPE for thesepreparers.

3. The third letter informs the preparer that an IRSemployee will be in contact with them to schedule aneducation visit to review the responsibilities of the preparer.These visits will not be an audit and the IRS employee willnot look at any client documents.

The IRS intends to post copies of the letters on its website and when they are available, we will report it in the TAXPRO Weekly. For those who receive one of these letters or anyone who may need Schedule C training, consider taking our Introduction to Schedule C self-study, which includes several modules specifically on car and truck expenses.

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to testify on that issue. Specifically, DEWPC asserted that Ostrovsky was not qualified, changed his opinion, relied on insufficient underlying facts, and used flawed methods in rendering his opinion.

The Eighth Circuit rejected these arguments. It found that even if Ostrovksy’s education and training were not specifically tailored to compensation issues, he had demonstrated practical experience qualifying him as an expert in the field. Accordingly, the Eighth Circuit held that the district court did not abuse its discretion in determining that Ostrovsky was qualified to render an expert opinion on Watson’s compensation.

DEWPC also asserted that Ostrovsky was not a competent expert witness because his opinion as to the value of Watson’s services changed over the course of the proceedings. Ostrovsky did revise his report before arriving at his final estimate but DEWPC put forth no authority supporting its contention that Ostrovky’s revised opinion rendered his testimony incompetent.

DEWPC also argued that Ostrovsky failed to consider certain facts and used flawed methods. The Eighth Circuit found that Ostrovsky did not fail to consider a plethora of facts rendering his opinion fundamentally unsupported. As for the flawed methods argument, DEWPC could have addressed this through cross-examination or by presenting its own expert.

When it determined the amount that constituted remuneration for employment, the district court required DEWPC to prove it paid Watson reasonable compensation, which DEWPC claimed was error. According to DEWPC, because the district court applied an incorrect legal standard, it incorrectly found that $91,044 constituted Watson’s wages in 2002 and 2003. To buttress this argument, DEWPC repeatedly asserted that there is no statute, reg, or rule requiring an employer to pay minimum compensation. And, by requiring proof of reasonable compensation, DEWPC argued, the district court imposed a minimum compensation requirement. Rather than looking to whether compensation was reasonable, DEWPC contended that the district court should have focused on taxpayer intent when characterizing the payments.

The Eighth Circuit noted that while the reasonable compensation issue normally comes up in determining whether a business is attempting to deduct too high an amount of compensation, IRS finds the concept equally applicable to employment tax cases. For example, in Rev. Rul 74-44, 1974-1 CB287, , IRS concluded that dividends received by an S corporation’s two sole shareholders were wages for which the corporation was liable for FICA, FUTA and income tax withholding. In Joseph Radtke v. U.S., (DC WI 4/11/89) 63 AFTR 2d 89-1469, aff’d, (CA 7 2/23/90) 65 AFTR 2d 0-=1155, a district court determined that certain funds designated as dividends were actually compensation for which an S corporation owed employment taxes.2/23/90)

The Eighth Circuit said that the district court properly found that DEWPC understated wage payments to Watson by $67,044 based on the following evidence:

Larson, Watson, Bartling & Eastman (“LWBE”). On Oct. 11, ‘96, Watson incorporated David E. Watson, P.C (DEWPC) as an Iowa Professional Corporation (PC). Larson, Bartling, and Eastman also formed PCs, and on Oct. 11, 1996, each of the four partners replaced their individual ownership in LWBE with ownership by their respective PC. On the same date, LWBE, DEWPC, and Watson entered into an employment agreement whereby Watson became DEWPC’s employee and agreed to provide his accounting services exclusively to LWBE.

By 1998, Paul Jeffer, PC, had replaced Dale Eastman, PC as a partner, causing LWBE to be reformed as Larson, Watson, Bartling, and Jeffer (“LWBJ”). The change did not significantly alter the work performed by the firm, or the employment arrangement between the firm, DEWPC, and Watson.

During 2002 and 2003 (the years at issue), Watson provided accounting services exclusively to LWBJ and its clients as an employee of DEWPC.

Since its inception, DEWPC had elected to be taxed as an S Corporation, and Watson had been its sole shareholder, employee, director, and officer. Watson was the only person to whom DEWPC distributed money in 2002 or 2003. At shareholder meetings Watson held with himself in 2000–2002, he authorized for himself a salary from DEWPC in the amount of $24,000 annually. In 2002 and 2003, DEWPC paid Watson $24,000 in funds designated as salary and paid federal employment taxes on that amount.

On Feb. 5, 2007, IRS assessed $48,519 in taxes, penalties, and interest against DEWPC for the eight calendar quarters of 2002 and 2003. It made these assessments after it determined that portions of the dividend distributions from DEWPC to Watson should have been characterized as wages paid to Watson that were subject to employment taxes. DEWPC later paid $4,063.93 toward these assessments and then filed a claim for refund of the payments. IRS denied the claim and DEWPC sued in district court.

Before the district court, DEWPC argued that IRS did not have the authority to recharacterize any of the dividend payments as compensation. However, the district court found that DEWPC’s position was undermined by IRS revenue rulings and case law. Adopting the conclusions of IRS’s expert, Igor Ostrovsky, the district court determined that, for each of the years 2002 and 2003, the reasonable amount of Watson’s remuneration for services performed was $91,044. It thus recharacterized over $67,000 in dividend payments in each of those years as compensation.

DEWPC argued that the district court erred in allowing an Ostrovsky to testify as an expert witness for IRS on the issue of compensation. Second, it argued that it was improper for the district court to characterize $91,044 as “wages” for the purposes of assessing FICA tax in 2002 and 2003.

DEWPC argued that the district court erred in allowing Ostrovksy to testify as an expert witness on the issue of reasonable compensation because he was not competent

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(1) Watson was an exceedingly qualified accountant withan advanced degree and nearly 20 years experience inaccounting and taxation;

(2) he worked 35-45 hours per week as one of the primaryearners in a reputable firm, which had earnings muchgreater than comparable firms;

(3) LWBJ had gross earnings over $2 million in 2002 andnearly $3 million in 2003;

(4) $24,000 is unreasonably low compared to other similarlysituated accountants;

(5) given the financial position of LWBJ, Watson’sexperience, and his contributions to LWBJ, a $24,000salary was exceedingly low when compared to the roughly$200,000 LWBJ distributed to DEWPC in 2002 and 2003;and

(6) the fair market value of Watson’s services was $91,044.

DEWPC urged that instead of focusing on reasonableness, the district court should have focused on DEWPC’s intent. The Eighth Circuit acknowledged that taxpayer intent, like reasonableness, is usually part of a Code Sec. 162(a)(1) compensation deduction analysis. As the language of Code Sec. 162(a)(1) suggests, a deduction may be made if salary is both (1) “reasonable” and (2) “in fact payments purely for services.

The Eighth Circuit did not think intent was the determining factor for characterization purposes. It said, however, that even if intent controls, after evaluating all the evidence, the district court specifically found “Watson’s assertion that DEWPC intended to pay Watson a mere $24,000 in compensation for the tax years 2002 and 2003 to be less than credible.” The Appeals Court said that this finding as to DEWPC’s intent was not clearly erroneous.

Accordingly, the Eighth Circuit affirmed the district court.

The Supreme Court has declined to review this case. Accordingly, the Eighth Circuit’s decision is now final.

Quite literally, the Watson Case is the new standard for Reasonable Compensation and should be viewed by all tax professionals as a landmark case.

Jerry

Tax Pros in Trouble

Tax Preparer Sentenced for Fraud, Money Laundering

The owner of a Baton Rouge tax preparation business was sentenced to nearly eight years in prison for filing false tax returns.

Ronald Wilkerson, 42, had been convicted of filing false tax returns with the IRS, claiming $1.4 million in false telephone excise tax refunds, causing the IRS to issue refunds of $119,450.

He also used the fake returns to obtain refund anticipation loans from HSBC Bank, costing the bank over $500,000.

Wilkerson also collected $485,000 in tax preparation fees, which he tried to remove from a business bank account on the same day his business was searched for evidence.

In addition to 92 months in prison, Wilkerson will also forfeit $956,000, his stake in the tax preparation business and will have to repay HSBC Bank $500,959.

Tax-fraud Case: Preparer’s Guilty Plea Quickly Ends Trial

Jurors had been picked, attorneys had made opening statements and an undercover agent was ready to testify.

Then Neville Lyimo decided not to chance a trial on 27 counts of preparing fraudulent tax returns.

He pleaded guilty to one of those counts, and his trial ended on the second day.

Internal Revenue Service investigators said Lyimo, 36, had pumped up 17 clients’ tax refunds by listing false exemptions and credits for education, children and dependent care and by exaggerating charitable contributions, business expenses, tax-return preparation fees and personal property taxes.

“This is the Neville Lyimo way of doing taxes,” Assistant U.S. Attorney Jessica W. Knight said in court on Monday. Bigger refunds, she said, meant happy clients who brought additional

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return preparer, pleaded guilty to conspiracy to defraud the Internal Revenue Service (IRS) and assisting in the filing of a false federal income tax return before U.S. District Court Judge Leslie E. Kobayashi in Honolulu, Hawaii. Duban was previously scheduled to begin trial on October 2, 2012.

Florence T. Nakakuni, United States Attorney for the District of Hawaii, said that Duban faces maximum penalties of up to five years imprisonment for the conspiracy charge and up to three years imprisonment for the false return count, along with fines of up to $250,000 on each count, when he is sentenced on April 18, 2013.

- Duban was a Certified Public Accountant who ran anaccounting firm called Duban Sattler and Associates, LLP(formerly Duban Accountancy, LLP), in Los Angeles, California. Duban provided accounting and tax planning services toHawaii residents Charles Alan Pflueger, James Pflueger, andsome of the Hawaii-based entities they controlled, includingPflueger, Inc. and Pflueger Properties.

- Beginning as early as 2003, Duban knew that personalexpenses of Pflueger, Inc. owner Charles Alan Pfluegerwere being paid for by Pflueger, Inc. and illegally deductedon corporate income tax returns as business expenses.Duban also knew that some personal expenses of anotherco-defendant were being paid for and illegally deducted byPflueger, Inc.

- In preparing tax returns for Charles Alan Pflueger and anotherco-defendant from at least 2003 to 2006, Duban did not includeas additional items of income all personal expenses of whichhe was aware were paid for by Pflueger, Inc. and constitutedincome to the taxpayers.

- In connection with the 2007 sale of Hacienda, a San Diego,California investment property owned by Pflueger Properties,Duban agreed with another co-defendant to file a falsePflueger Properties 2007 partnership income tax return andfalse individual income tax return which falsely reported thegain on the sale of the property, which sold for $27,500,000.In particular, Duban reported the basis of Hacienda asapproximately $7 million higher than its actual basis.

- Prior to the sale of the Hacienda property, Duban and othersassisted the same co-defendant in creating a nominee CookIslands trust and opening a bank account at Wegelin Bankin Switzerland in the name “Southpac Trustee International,Inc., as Trustee of the Vista Pacifica Trust.” Proceeds of theHacienda sale, over $14 million, were sent to the Wegelinaccount. Duban and a New York-based firm served asinvestment managers for the account. Duban and the co-defendant did not timely report the co-defendant’s beneficialinterest in the Swiss account on Schedule B of a Form 1040individual income tax return or by filing a Report of ForeignBank Account (“FBAR”).

- Duban had an interest in other foreign bank accounts thathe failed to properly report to the government. For at least2006 and 2007, Duban failed to report his interest in at least

business to Lyimo’s Netask Tax Service at 5848 Emporium Square.

Lyimo, of 3311 Windridge Dr. on the Far East Side, catered to clients who were African immigrants. He is a U.S. citizen who emigrated from Africa.

His attorney, Derek A. Farmer, argued in court that Lyimo “relied upon information that he received from individual taxpayers” when filling out their tax returns.

“They signed those forms saying that this information was true,” he said.

Court records show that Lyimo agreed in January to plead guilty to one count of preparing fraudulent tax returns but then rejected the deal.

As part of the investigation, an undercover agent hired Lyimo to fill out a tax return. The agent should have received a $90 refund, but Lyimo prepared the return so the refund totaled $540, court records show.

The 17 taxpayers involved in the Lyimo case received $45,575 in tax-refund overpayments between 2005 and 2007.

IRS Special Agent Craig Casserly said each of the 17 will have to return the overpayment to the IRS and pay fees and penalties.

Lyimo could be sentenced to three years in prison and fined $100,000. A sentencing date has not been set.

Tax Preparer gets 5 Years for Bogus Tax Returns

A California tax preparer has been sentenced to five years in prison for filing hundreds of bogus income tax returns.

Federal prosecutors say 61-year-old Ernesto Jesus Suarez of Orange met with clients and prepared accurate income tax returns on his laptop computer.

He then wrote refund checks from his personal bank account and gave them to his clients.

But Suarez would add bogus expenses and deductions to boost the refund amount and he directed the Internal Revenue Service to send the refunds to 29 bank accounts he controlled.City News Service says Suarez fraudulently obtained $1.4 million.

Suarez pleaded guilty and he was sentenced in Los Angeles to five years in federal prison. He must also pay $753,000 in restitution.

LA Accountant will be Sentenced on April 18, 2013

Dennis Duban, a Los Angeles-based accountant and tax

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one New Zealand account, held in the name of Lookout Point Limited, on Schedule B of his individual income tax returns or by filing an FBAR.

As part of the plea agreement filed in connection with his guilty plea, Duban admitted that the tax loss associated with his criminal conduct is at least $1 million. He agreed to pay a 50 percent penalty for the one year with the highest balance in his undisclosed New Zealand accounts in order to resolve his civil liability for failing to file FBARs, Forms TD F 90-22.1.

In May 2012, Charles Alan Pflueger, Randall Kurata, and Julie Kam, who were charged in the same indictment, pleaded guilty to filing false tax returns regarding improper payments of personal expenses by Pflueger, Inc. and another entity. The remaining defendant charged in the indictment, James Pflueger, is currently set for trial before Judge Kobayashi on February 12, 2013.

The indictment resulted from an investigation conducted by IRS - Criminal Investigation. Assistant United States Attorney Leslie E. Osborne, Jr. and Tax Division Trial Attorneys Timothy J. Stockwell and Dennis R. Kihm, handled the prosecution.

2 San Diego Tax Preparers Guilty of Fraudulent Homeless Returns

Two San Diego-based tax preparers pleaded guilty to preparing and filing dozens of false and fraudulent federal income tax returns between 2008 and 2010 by actively soliciting clients from homeless shelters and other areas frequented by low-income individuals.

Raymond Konkus and Justin James Petersen, both 37, also pleaded guilty to dodging their own personal tax obligations during the same time they operated the fraudulent tax preparation business, prosecutors said.

The defendants admitted that they were partners in a tax-preparation business in El Cajon.

They operated the business under the name of SoCal Consulting and Tax Preparation, but referred to it as “Street

Angels,” because their business model consisted of soliciting clients from extremely poor neighborhoods and homeless shelters.

Though these individuals were not entitled to tax refunds, the scheme worked because Konkus and Petersen filed false claims seeking an Earned Income Credit on the filer’s behalf, prosecutors said.

EIC is a refundable federal income tax credit for low to moderate income working individuals and their families to offset the burden of social security taxes and to provide an incentive to work.

When EIC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

According to court documents and admissions in court, the defendants solicited clients by offering to prepare federal tax returns that would generate EIC funds.

In exchange, the defendants charged a portion of the anticipated refund or EIC payment as a fee.

To generate the refunds (and substantial tax-preparation fees), the defendants knowingly prepared and filed tax returns on behalf of their clients that contained inflated income figures and other falsities that caused the IRS to issue refunds/EIC payments to the individuals with losses approaching $200,000, according to prosecutors.

Both defendants are scheduled to be sentenced on Jan. 4.

Taxpayer Advocacy and Taxpayer RepresentationCCA Explains Assessment Periods and Penalties for Delinquent and Substitute Returns

Chief Counsel Advice 201238028

In Chief Counsel Advice (CCA), IRS has concluded that it didn’t have the authority to reverse a tax abatement for an assessment made under a Code Sec. 6020(b) substitute return where the collection limitations period on the tax assessed under the substitute return had expired before the tax could be collected. The CCA found that the abatement should be reinstated. However, IRS did have the authority to assess a fraudulent failure to file penalty under Code Sec. 6651(f) for some of the years at issue.

Under Code Sec. 6501(a), with some exceptions, the amount of any tax can be assessed within three years after the tax return is filed. Under Code Sec. 6501(c)(3), if the taxpayer fails to file a return, the tax may be assessed at any time. Code Sec. 6502 provides that the assessment of any tax may be collected by levy or by a proceeding in court only if the levy is made or the proceeding begun within 10 years after the assessment of tax.

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manner:

For Year 1, IRS abated tax liability on the amount due on the account as of Date 6.

For Year 2, IRS initially abated tax on the amount due on the account as of Date 6. However, IRS reinstated this balance, and then assessed an additional tax on the amount by which the tax shown on the delinquent return exceeded the amount shown on the substitute return.

For Year 3, IRS made an assessment in the amount by which the tax shown on the delinquent return exceeded that shown on the substitute return.

For Years 4 through 6, IRS abated tax in the amounts by which the taxes shown on the substitute returns exceeded that shown on the delinquent returns.For Years 7 through 12, IRS assessed the amounts of tax shown on the delinquent returns, as well as an Code Sec. 6651(a)(1) failure to file penalty.

For Year 13, IRS assessed the amount of tax shown on the timely filed return.

For Years 1 through 12, IRS also requested Counsel’s approval to assess the Code Sec. 6651(f) fraudulent failure to file penalty.

The CCA concluded that IRS was correct to abate the tax from the substitute return for Year 1 that remained unpaid as of Date 6—the date the 10-year collection statute of limitations expired. However, IRS shouldn’t have reinstated the abatement of tax for Year 2 that remained unpaid as of Date 6—the date that the collection statute of limitations expired for that year. The CCA determined that this amount should be abated once again.

IRS reasoned that when a taxpayer files a delinquent return after an assessment has been made under a substitute return, IRS may assess any additional amount of tax shown on that return under Code Sec. 6201(a)(1). Such an assessment wouldn’t be barred by Code Sec. 6501. Unlike the collection statute of limitations, the assessment statute of limitations was triggered by the taxpayer’s filing of the return. IRS’s execution of a substitute return didn’t start the running of the limitations period on assessment. The additional tax had to be assessed within the 3-year period of limitations provided by Code Sec. 6501(a), if the delinquent returns weren’t themselves false or fraudulent. The collection statute expiration date for the additional tax shown due on the delinquent returns would be ten years from the time the additional tax was assessed.

In this case, the CCA concluded that IRS was correct to assess the additional tax shown on the Year 2 and Year 3 returns. For Year 2, even though IRS must abate the previously assessed taxes, it was proper to assess the additional tax shown on the return that was never assessed before. Taxpayer filed these returns on Date 5, so the assessment statute of limitations was open when the assessments for Year 2 and Year 3 were

Under Code Sec. 6020(b), IRS may execute a return for any taxpayer who fails to make a required return at the time prescribed, or who makes, willfully or otherwise, a false or fraudulent return. The execution of a Code Sec. 6020(b) return does not start the running of the period of limitations on assessment and collection without assessment. (Code Sec. 6501(b)(3) Accordingly, until a taxpayer files his own return, there is no deadline by which IRS must assess the tax or file a suit to collect without assessment. Once IRS assesses the tax, however, a 10-year period of limitations on collection of that assessment begins. (Code Sec. 6502(a)(1)

An assessment after the collection period expired is a statutory overpayment under Code Sec. 6401, which provides that an “overpayment” includes a tax payment which is assessed or collected after the expiration of the applicable limitations period. This applies to both collection by IRS and voluntary payments by the taxpayer. (Rev. Rul 74-580. 1974-2 CB 400) Any such payments would have to be refunded to the taxpayer, or used to offset another outstanding tax liability under Code Sec. 6402(a).

Under Code Sec. 6651(a)(2), when a taxpayer fails to file any required return, a penalty of up to 25% of the amount required to be shown on a return can be imposed. Under Code Sec.6651(f), if the taxpayer’s failure to file a return is fraudulent, the penalty rate increases to a maximum of 75% of the tax required to be shown on the return. The filing of a delinquent non-fraudulent return will not prevent IRS from assessing additions to tax, such as the fraudulent failure to file penalty—that is, a late filed return doesn’t negate a preexisting fraudulent failure to file. The additions must be assessed within three years of when the non-fraudulent return was filed.

IRS is not required to follow the deficiency procedures of Code Sec. 6211 to assess the Code Sec. 6651(f) fraudulent failure to file penalty, if the penalty is based on tax shown on a delinquent return. (Code Sec. 6665(b))

Taxpayer failed to file timely income tax returns for each of Years 1 through 12. IRS executed substitutes for returns under Code Sec. 6020(b) for several of these years. IRS made assessments based on the tax shown on those substitute returns for: (1) Years 1 and 2 on Date 1; (2) Years 3 and 4 on Date 2; (3) Year 5 on Date 3; and (4) Year 6 on Date 4. For each of these years, IRS also assessed an Code Sec. 6651(a)(1) failure to file penalty.

Taxpayer was also convicted of tax evasion under Code Sec 7201 for Years 1 through 7. On Date 5, after Taxpayer completed his prison sentence, he filed delinquent tax returns for Years 1 through 12. At the same time, Taxpayer filed a timely return for Year 13. IRS accepted all of these returns as filed. For Years 1, 4, 5, and 6, Taxpayer’s delinquent returns showed a total tax liability less than that assessed under the substitute returns. For Years 2 and 3, Taxpayer’s delinquent returns showed a tax liability greater than that assessed under the substitute returns.

IRS processed Taxpayer’s delinquent returns in the following

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made on Date 7 and Date 8, respectively. The collection statute would expire for these assessments on Date 9 and Date 10.

The CCA concluded that IRS had the authority to assess the Code Sec. 6651(f) penalty for Years 3 through 12, but shouldn’t do so for years 1 and 2.

Taxpayer filed delinquent returns for Years 1 through 12 on Date 5. IRS accepted these delinquent returns as filed and assessed a Code Sec. 6651(a)(1) failure to file a return penalty for Years 7 through 12. (IRS had already assessed a Code Sec. 6651(a)(1) penalty for Years 1 through 6 after the substitute returns for those years were executed.) The delinquent returns—although themselves not fraudulent—didn’t cure the taxpayer’s fraudulent failure to file.

IRS reasoned that for Years 7 through 12, no penalty assessment was made before Taxpayer’s filing of his delinquent returns. The statute of limitations on assessment remained open until Date 11 (based on the filing date of the delinquent returns). Until then, IRS could abate the Code Sec. 6651(a)(1) penalty and assess the Code Sec. 6651(f) penalties instead. For Years 3 through 6, IRS could do the same.

The CCA found that assessing the Code Sec. 6651(f) penalty for Years 1 and 2 would be inconsistent with its prior conclusion that the previously assessed tax for those years must be abated. That previously assessed tax included the Code Sec. 6651(a)(1) penalties for failure to file a return. The CCA concluded that it wouldn’t be equitable to require abatement of the earlier uncollected penalty, while allowing the assessment of an additional, more punitive penalty after the expiration of the original collection statute.

IRS Failed to Provide Penalty Relief to Millions of Taxpayers Who Qualified for It

The Treasury Inspector General for Tax Administration (TIGTA) has reported that IRS failed to inform about 1.45 million taxpayers that they qualified for relief from penalties totaling close to $181 million under a little known program—“First-Time Abate” relief.

IRS imposes penalties on taxpayers who are required to file a return and fail to do so and who fail to timely pay the full tax shown on any tax return.

The Code Sec. 6651(a)(1) failure to file penalty is usually 5% of the unpaid taxes for each month or part of a month that a tax return is late. This penalty will not exceed 25% of the unpaid taxes. If a taxpayer files his tax return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

If a taxpayer doesn’t pay all taxes owed by the due date, he will generally have to pay a failure to pay penalty of one-half of one percent of the unpaid taxes for each month or part of a month after the due date that the taxes aren’t paid. This

penalty can be as much as 25% of the unpaid taxes. The failure to pay penalty will continue to accrue after the initial assessment if the taxpayer fails to pay the total tax due when the tax return was due. (Code Sec. 6651(a)(2), Code Sec. 6651(a)(3))

Beginning in 2001, IRS began granting penalty relief under an Administrative Waiver known as the First-Time Abate. Under its First-Time Abate relief, to reward past tax compliance and promote future tax compliance, IRS waives these two penalties for taxpayers who have demonstrated full compliance over the prior three years. However, the relief is provided only if the taxpayers request penalty relief. IRS doesn’t widely publicize the opportunity to request this waiver.

IRS can also abate both the failure to file and failure to pay penalties where taxpayers show that they exercised ordinary care and prudence, and failure to file or pay was due to reasonable cause and not due to willful neglect.

TIGTA reports that taxpayers with compliant tax histories are not offered and do not receive the waiver. For the 2010 tax year, TIGTA estimated that approximately 250,000 taxpayers with failure to file penalties and 1.2 million taxpayers with failure to pay penalties did not receive penalty relief even though they qualified under First-Time Abate waiver criteria. TIGTA estimated that the unabated penalties totaled more than $181 million.

In addition, TIGTA found that the First-Time Abate waiver was not used to its full potential as a compliance tool because it was granted before taxpayers demonstrated full compliance by paying their current tax liability.

To make better use the First-Time Abate waiver as a compliance tool, TIGTA recommended that IRS ensure that taxpayers are aware of their potential to receive the waiver based on their past compliance history, and that IRS make the grant of the waiver contingent upon taxpayers paying their current tax liability.

TIGTA also recommended that a process be developed to address the negative impact to taxpayers who qualify for abatement of the failure to file and failure to pay penalties based on reasonable cause, but are given First-Time Abate waivers instead. This may preclude these taxpayers from being granted the First-Time Abate waiver in future years, and may reduce the portion of their penalties abated.

Illustration: Taxpayer, who had a clean compliance history, asked to have his failure to file penalty abated in tax year 2010 for reasonable cause (serious illness). IRS would first consider the First-Time Abate waiver and Taxpayer would be granted penalty relief under First-Time Abate criteria. The following year, Taxpayer was late paying his tax year 2011 taxes, but did not have reasonable cause. He will be assessed a failure to pay penalty, which can’t be waived because he had been granted a First-Time Abate waiver for the prior tax year. Had the failure to file penalty for tax year 2010 been excused on the basis of reasonable cause, he would have qualified for a

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parte procedures that would apply in a judicial proceeding” but instead attempts to “ensure the independence of the

Appeals organization, while preserving the role of Appeals as a flexible administrative settlement authority, operating within the Internal Revenue Service’s overall framework of tax administration responsibilities.”

On June 10, 2006, IRS sent to Norman Hinerfeld by certified mail a Final Notice of Intent to Levy and Notice of Your Right to a Hearing with respect to unpaid Code Sec 6672 trust fund penalties totaling $471,696. Hinerfeld submitted to Appeals a timely Form 12153, Request for a Collection Due Process or Equivalent Hearing, indicating that he was preparing an offer-in-compromise (OIC). Hinerfeld did not dispute that he was liable for the trust fund penalties at issue as a responsible person of Thermacon Industries, Inc. On Feb. 5, 2008, IRS Settlement Officer (SO) Carol Berger recommended that IRS accept Hinerfeld’s amended OIC in the amount of $74,857, and she requested Area Counsel’s verification and review.

In the course of his review, Area Counsel discovered that Hinerfeld and his wife were named as codefendants in a lawsuit filed by a third-party creditor of Thermacon, alleging that Hinerfeld had fraudulently conveyed Thermacon assets to his wife. Area Counsel concluded that it would be premature to accept Hinerfeld’s amended OIC because the resolution of the lawsuit might show that Hinerfeld had participated in a fraudulent transfer of Thermacon’s assets, exposing his wife as his nominee and providing a new source for IRS to collect Hinerfeld’s unpaid trust fund penalties. SO Berger contacted Hinerfeld’s counsel on June 4, 2008, and informed him that her supervisor, Appeals Team Manager John O’Dea (ATM O’Dea), agreed with Area Counsel’s recommendation to reject Hinerfeld’s amended OIC. SO Berger also informed Hinerfeld’s counsel that Appeals was amenable to designating Hinerfeld’s liability “currently not collectible.” Hinerfeld rejected the proposal to place his account in currently not collectible status. By letter dated June 25, 2008, ATM O’Dea informed Hinerfeld that his amended OIC had been rejected.

On July 28, 2008, Appeals sent Hinerfeld a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notice of determination) rejecting the amended OIC and sustaining the proposed levy. The notice of determination stated, in relevant part: (1) the amended OIC was investigated and recommended for approval by Appeals, but Area Counsel determined that there might be additional collection potential once a pending lawsuit was resolved, and (2) Appeals offered to designate Hinerfeld’s account currentlynot collectible as a less intrusive alternative to the proposedlevy.

Before the Tax Court, Hinerfeld argued that the discussions where Area Counsel alerted SO Berger to the lawsuit and the possibility of a fraudulent conveyance and recommended rejection of his OIC constituted prohibited ex parte communications which compromised the independence of Appeals. Consequently, Hinerfeld contended, the case should be remanded for a supplemental hearing. IRS contended that

First-Time Abate waiver for the failure to pay penalty for tax year 2011.

In response to the TIGTA report, IRS officials agreed with the recommendations and are taking appropriate corrective actions. IRS plans to study how best to use the First-Time Abate waiver as a compliance tool.

Contact Between IRS Appeals and Area Counsel NOT prohibited Ex-parte Communications

Hinerfeld (2012) 139 TC No. 10

The Tax Court has held that communications between IRS’s Appeals Division and Area Counsel regarding an amended offer in compromise (OIC) did not fall in the category of prohibited ex parte communications. The case concerned an OIC with regard to unpaid trust fund recovery penalties under Code Sec. 6672.

Under Code Sec. 6672 upon all property and rights to property belonging to a taxpayer liable for taxes who fails to pay those taxes within 10 days of notice and demand for payment. The levy may be made only if IRS has given written notice to the taxpayer at least 30 days before the day of the levy identifying the amount of the unpaid tax and informing the taxpayer of his right to a collection due process (CDP) hearing with Appeals. If the taxpayer submits a timely request for a CDP hearing, Code Sec. 6330(c)(1) requires Appeals to obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met. In addition, the taxpayer may raise at the CDP hearing any relevant issue relating to the unpaid tax or the proposed levy, including offers of collection alternatives such as offers in compromise (OICs), or, in certain circumstances, a challenge to the underlying liability.

At the conclusion of the CDP hearing, Appeals must determine whether to proceed with the collection action and shall take into account the required verification, issues raised by the taxpayer, and whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the taxpayer that any collection action be no more intrusive than necessary.

The Code Section authorizes the Treasury Secretary to prescribe guidelines for IRS officers and employees to determine whether an OIC is adequate and should be accepted to resolve a dispute.

As part of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA, P.L. 105-206), Congress directed IRS to develop a plan to restrict ex parte communications between Appeals employees and other IRS employees. In accordance with this Congressional mandate, IRS issued Rev Proc 2000-43, 2000-2 CB 404, which provides guidelines in Q&A format that are designed to distinguish between prohibited and permissible ex parte communications between Appeals and other IRS employees during an administrative appeal In so doing, the review procedure does not adopt “formal ex

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The Tax Court concluded that communications between employees of the Office of Chief Counsel and Appeals to facilitate compliance with Code Sec 7122(d), are not prohibited ex parte communications for purposes of the RRA or Rev Proc 2000-43.

Express Installment Plans Offer Advantages for Businesses with Delinquent Payroll Taxes

During the Sept. 12, 2012 IRS webinar titled “Payment Alternatives – When You Owe the IRS,” Traci Suiter, lead public affairs specialist with IRS’s Small Business/Self-Employed Division, explained the criteria that must be met for a business owing payroll taxes to qualify for an In-Business Trust Fund Express Installment Agreement (IBTF-Express IA). These plans don’t require detailed financial information and may help the owner to avoid a responsible person penalty.

IRS may enter into written agreements with any taxpayer under which that taxpayer may make payment on any tax in installment payments if IRS determines that the installment agreement will facilitate full or partial collection of the tax liability. (Code Sec. 6159) Before entering into such an agreement, IRS determines if it’s appropriate for the circumstances and then sets up the agreement, processes the payments and monitors the taxpayer’s compliance with the agreement. If a taxpayer fails to comply with any of the installment agreement’s terms, the agreement is deemed to be in default and IRS has the right to terminate the agreement.

In order to qualify for an IBTF-Express IA, a business owing payroll taxes must satisfy the following requirements:

• They must owe $25,000 or less at the time theagreement is established. If they owe more than $25,000,they may pay down the liability before entering into theagreement in order to qualify.• The debt must be paid in full within 24 months or prior tothe Collection Statute Expiration Date (CSED), whicheveris earlier.• They must enroll in a Direct Debit installment agreement(DDIA) if the amount they owe is between $10,000 and$25,000.• They must be compliant with all filing and paymentrequirements.

One of the advantages of applying for an IBTF-Express IA is that a business is generally not required to provide a financial statement or financial verification as part of the application process, so the agreement is likely to be approved more quickly than other payment alternatives. The Internal Revenue Manual (IRM) also notes that it is IRS policy not to pursue the trust fund recovery penalty against an individual in a business that has set up an IBTF-Express IA.

To request an IBTF-Express IA, a business may call the number on the tax bill, or (800) 829-4933. A business could also complete Form 9465, Installment Agreement Request, and send it to the address on the tax bill (or the address on page 2 of the instructions for Form 9465). Suiter noted that

the discussions between Area Counsel and Appeals were not prohibited ex parte contacts.

Tax Court sides with IRS. The Tax Court pointed out that Q&A 11 of Rev Proc 2000-43, specifically addresses communications between Appeals and the Office of Chief Counsel. Acknowledging the need for Appeals employees to obtain legal advice from the Office of Chief Counsel, it provides three limitations on communications between Appeals employees and Office of Chief Counsel attorneys: (1) Appeals employees must not communicate with ChiefCounsel attorneys who have previously provided adviceto IRS employees who made the determination Appeals isreviewing; (2) requests for legal advice where the answer isuncertain should be referred to the Chief Counsel’s NationalOffice and handled as requests for field service advice ortechnical advice; and (3) although Appeals employees mayobtain legal advice from the Office of Chief Counsel, theyremain responsible for making independent evaluations andjudgments concerning the cases appealed to them, andCounsel attorneys are prohibited from offering advice thatincludes settlement ranges for any issue in an appealed case.

The Tax Court concluded that there was no evidence that the Area Counsel attorneys with whom Appeals conferred in Hinerfeld’s case had previously advised any employee who made the determination under Appeals review; that is, any employee of the Collection Division who made the determination to levy on his property. In addition, the administrative record established that while SO Berger disagreed with Area Counsel’s recommendation to reject Hinerfeld’s amended OIC, the decision to reject the OIC was made by ATM O’Dea who, rather than SO Berger, had the authority to do so. Unlike SO Berger, ATM O’Dea agreed with Area Counsel’s recommendation to reject. Given the substantial evidence that Area Counsel had marshaled to support the conclusion that Hinerfeld had made a fraudulent conveyance, the Tax Court was satisfied that ATM O’Dea exercised independent judgment as contemplated in Rev Proc 2000-43, when he agreed with Area Counsel’s recommendation. Thus, the communications between Appeals and Area Counsel in Hinerfeld’s case did not fall within the limitations prescribed in Rev Proc 2000-43.

The Tax Court also pointed to Q&A 16 of Rev Proc 2000-43, which covers a comparable scenario concerning communications between Appeals and the Commissioner or other IRS personnel who have overall supervisory responsibility for IRS operations. Noting the Commissioner’s supervisory responsibilities under Code Sec 7803, Q&A 16 states that ex parte communications about specific cases are permissible between Appeals and the Commissioner and other IRS officials with overall supervisory responsibility. Thus, Q&A 16 exempts ex parte communications that occur pursuant to the statutory responsibilities of IRS employees who communicate with Appeals employees in fulfillment of those responsibilities. The Tax Court concluded that the same principle applies to Appeals employees’ communications with Office of Chief Counsel employees in fulfillment of their responsibilities under the OIC rules of Code Sec 7122(b)..

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This keeps me from getting a plethora of IRS notices about other things that the client is involved in.

Editor’s Note: ncpeFellowship Member, Andy Anderson, submitted this terrific suggestion. He highly credits his taxpayer representation skill to NCPE’s Taxpayer Representation Courses and to instructor, Bryan Gates.

The IRS suggested revocation form for POAs can now be found at www.ncpefellowship.com under Resources – Practitioner Aids.

From another great member, Patrick Hurley

I sent to IRS asking for list of all POA that I have on file and received 183 pages with over 1300 names including individuals, partnerships, corporations and payroll. Upon receipt of list, I revoked 100% of all POA’s prior to 1/1/2012 and the IRS sent out their letter.

WOW

Upon reading the letter, almost every person calls and believes that they are no longer clients. The wording goes “we received correspondence from P Hurley stating he would no longer be representing you. As of Sept 19, 2012, we cancelled the Form 2848 in our file for the following tax periods: December 31, 2006 to December 31, 2011”.

Naturally, the client looks at this and feels that I am no longer doing tax returns for them. The statement “no longer be representing you” leaves the impression that I have retired. Last week, over 80 people called and this was the impression they felt the letter gave them.

But it is extremely important that practitioners delete all old POA’s that are in the system.

Oh well, this taught me a lesson and use only the POA only for the specific year involved and inform the client when the engagement is over that the POA will be revoked. Even then, send them an e-mail and say it again.

applications for the payroll tax installment agreement are not currently available online, but said that may change in the future.

Further information on the program is available on the Small Business/Self-Employed section of the IRS website on the webpage called “Fresh Start Installment Agreements.”

Form 2848 – Power of Attorney

The Internal Revenue Service instructs: To revoke an existing Power of Attorney (POA) or Tax Information Authorization (TIA) recorded on the Centralized Authorization File (CAF) system, you must either send: (1) a signed and dated statement of revocation listing the name and address of each recognized representative or appointee whose authority is revoked; or (2) a copy of the previously executed POA or TIA with a current signature(s), signature dates, and “REVOKE” written across the top of the form.

IRS has announced new FAX numbers for all CAF units. The old ones will work until 12/31/2012. The new numbers are as follows:

Ogden1973 N. Rulon White BlvdM/S 6737 Ogden, UT 64404New FAX (855) 214-7522

MemphisP. O. Box 268, Stop 8423Memphis, TN 38118New FAX (855) 214-7519

PhiladelphiaInternational CAF MS 3-EO8, 1232970 Market StreetPhiladelphia, PA 19104New FAX (267( 941-1017

The new Form 2848 includes check boxes on line 2 in order that the IRS be directed to send correspondence to the taxpayer’s representative. The box “Check if to be sent notices and communications” is only available to the first two representatives electing to receive correspondence.

From great members come great suggestions

I have starting putting in the “Exceptions” area of the IRS Form 2848 the statement “This POA is for this one phone call that is placed this date, withdraw POA at end of call.”

Every time I call PPS with IRS they have no problem, and I use it when I am getting IRS Wage and Income information.

This makes me not liable for any other correspondence and I have done my due diligence.

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Wayne’s World

How Much Money Can Tax Preparers Make

I am always challenged when a would-be tax professional asks, “How much money can I expect to make doing tax returns?”

To begin the U. S. Bureau of Labor Statistics (BLS) is the most authoritative institution on the pay scales for different jobs, so this is definitely a pretty reliable source. As reported, the mean hourly wage for professional tax preparers comes in at $17.82 per hour, and the mean annual wage for professional tax preparers is $37,060 per year.

These figures more or less match what is seen in the tax preparation industry. If you are a strong tax preparer with good skills and experience, there is no reason you cannot, over time, make approximately $35,000-$40,000 per tax season. If course you can make much more and you can make much less, but that $37K figure is a pretty decent ballpark estimate for a skilled and experienced tax preparer.

The Bureau of Labor Statistics also points out California is by a large margin the best market for tax preparation, with 66 percent more tax preparers working in California than in the second best tax preparation market, Texas. According to a 2011 report by Anything Research, , the market for tax and accounting services in the State of California is approximately $15 billion per year—far and away the biggest statewide market for tax and accounting services in the United States.

Notice, too, that the mean annual wage for California tax preparers is higher than the national mean, at $21.56 per hour or $44,840 per year.

There are many factors that can affect your earning power as a tax preparer.

The first factor that affects every tax preparer’s ability to earn money is how busy your place of employment is during tax season. If you are working in a tax office that has 200 clients, you are likely to make a lot less money as a tax preparer than if you’re working as a tax preparer in a tax office that has 2,000 clients. No matter what tax company you work for, or if you’re self-employed, the size of your client base matters immensely. The more clients you have, the more money will be coming in the door.

Secondly, you will need to look closely at the pay structure being offered by your employer. Are you being paid hourly, on commission, or some combination of the two? Many tax companies start new tax preparers at a low hourly rate, but may offer performance bonuses or the ability to work on commission once you know what you’re doing and don’t need constant handholding. As you gain experience as a tax professional, you will almost certainly make more money working on commission than at an hourly rate; at that point, it will just depend what the commission rate is and, as noted above, how many clients you can expect to serve and, of course, what the average fee is being paid by each client!.

Thirdly, do you have any special qualifications or attributes that make you worth more as a tax preparer? On January 1, 2014, all individuals in the business of tax will have a marketable designation, CPA, Attorney, Enrolled Agent or Registered Tax Return Preparer. These are the kinds of things that can make you stand out in the mind of an employer, and in turn may enable you to command a higher salary and/or commission.

A fourth and widely underestimated factor that can affect your earnings as a tax preparer is the quality of the other tax preparers in your office. This can be a double-edged sword as far as your own earning power. On the one hand, you want to work with skilled tax pros, but on the other hand, if the preparers in your office are far more experienced some clients may prefer a well seasoned tax person and the “big fish” may eat up all the fees that come in the door.

The fifth major factor that we would identify that can affect your earnings as a tax preparer is whether or not you are self-employed. If you’re a self-employed tax preparer, operating a company either under your own name or as a franchisee of an existing tax preparation brand, you can make substantially more money than a tax preparer who is an employee. It is in “running your own show” that the potential income go to $100,000 per tax season or higher.

Many owners of tax preparation businesses personally earn between $100,000-$200,000 per year.

However, those kinds of earnings don’t happen overnight!

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You have to put in the work. Of course, despite the vastly superior earning potential of self-employed tax preparers, self-employed tax prep professionals can also make substantially less money than tax preparers who work as employees. Starting your own business can be daunting; not impossible at all, but not easy.

In today’s extremely competitive tax preparation marketplace, you must earn every client that you get. Believe us on this, competing with established and aggressive national brands like H&R Block® and TurboTax® is no joke! That being said, if you are good at attracting and retaining tax clients, you can make great money by starting up your own tax preparation and consulting business.

Certainly if you want to make “big money” in the tax business, it should be your goal to someday run your own office(s), either under your own name or as a franchisee. An employer will never pay you as much as you could make on your own.

Wayne

Letters to the Editor

Well, I tried to renew my PTIN and what a pain. First I need to ask them for my User ID - only do it once a year so how do I remember? Then I had to ask for the password.

I had to lie about my EA expiration date since I still have not received my new EA card. It would not let me enter the expired date on my card 3/13/12.

I tried to use the memorized credit card and then it kicked me out because I made too many attempts. It would have been helpful if the program told me to update the expiration date of my credit card.

This system stinks. I guess I have to wait to try it again. The website did not tell me how long to wait to try again. What a waste of time.

How much is this costing us?

Larry Pon, ncpeFellowship member

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Tax Quotes and Tax Funnies

Dan was a single guy living at home with his father and working in the family business.

When he found out he was going to inherit a fortune when his sickly father died, he decided he needed to find a wife with whom to share his fortune.

One evening, at an investment meeting, he spotted the most beautiful woman he had ever seen. Her natural beauty took his breath away.

“I may look like just an ordinary guy,” he said to her, “but in just a few years, my father will die and I will inherit $200 million.” Impressed, the woman asked for his business card.

Three months later, she became his stepmother.

Women are so much better at financial planning than men.

“The income tax is like a daily mugging”-Ronald Regan

“The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin”-Mark Twain

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“Income tax returns are the most imaginative fiction being written today”-Herman Wouk

“The avoidance of taxes is the only intellectual pursuit that carries any reward”-John Maynard Keynes

“The income tax has made more liars out of the American people that golf has”-Will Rogers

“The difference between death and taxes is death doesn’t get worse every time congress meets”-Will Rogers

“The income tax created more criminals than any other single act of congress”-Barry Goldwater

Next Edition of Taxing Times: December 1st, 2012

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