2015 Representation Update

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2015 IRS Update 2015 IRS Update

Robert E. McKenzieArnstein & Lehr LLP

120 S. Riverside Plaza Chicago, IL 60606

312-876-7100remckenzie@arnstein.com

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Learning Objectives

•Recognize how current IRS enforcement programs work in a reduced budget environment

• Identify key changes to preparer regulations in 2014

• Identify some of the most serious problems related to IRS budget cuts

•Determine how the current IRS exam, collection and criminal investigation priorities impact tax preparers and taxpayers.

IRS Staffing for Key Enforcement Personnel

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2010 2011 2012 2013 2014

Revenue Officers

6,042 5,619 5,186 4,748 4439

Revenue Agents

13,888 13,867 13,021 12,234 11,659

Special Agents

2,780 2,698 2,661 2,509 2437

Total 22,710 22,184 20,868 19,491 18535

IRS Staffing

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Preparer Regulation

• 2011 IRS issued regulations mandating that certain tax-return preparers – Complete 15 hours of continuing education each year

and – Pass an initial qualifying exam – Undergo background checks

• Loving v. IRS, No. 12-385 (JEB) (D.D.C. Jan. 18, 2013), held IRS’ lacks authority to continue preparer regulation.

• IRS lost appeal in February 2014• As of now this is a victory for those not smart

enough to pass a test or ethical enough to survive a background check

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6-10-14 Regulations

•Modify the standards dealing with written advice and update certain other provisions.

•Amend Circular 230 by eliminating the rules governing covered opinions in Section 10.35 of the U.S. Tax Code, expand the requirements for written advice under Section 10.37.

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6-10-14 Regulations

Regulations also broaden the scope of the procedures to ensure compliance under Section 10.36, requiring that a practitioner with principal authority for overseeing a firm’s federal tax practice take reasonable steps to ensure the firm has adequate procedures in place for purposes of Circular 230 compliance.

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6-10-14 Regulations

New 10.35 Practitioners must exercise competence when engaged in practice before the IRS, and that the prohibition on a practitioner endorsing or negotiating any check issued to a taxpayer regarding a federal tax liability applies to government payments made by any means.

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6-10-14 Regulations

Eliminates the need to put disclaimer on emails & letters:

– This electronic mail transmission may contain confidential or privileged information. If you believe that you have received this message in error, please notify the sender by reply transmission and delete the message without copying or disclosing it. Pursuant to Internal Revenue Service guidance, be advised that any federal tax advice contained in this written or electronic communication, including any attachments or enclosures, is not intended or written to be used and it cannot be used by any person or entity for the purpose of (i) avoiding any tax penalties that may be imposed by the Internal Revenue Service or any other U.S. Federal taxing authority or agency or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

New Voluntary Program

• Announced 6-26-14 for 2015 tax season• Annual Filing Season Program• For preparers who are not CPA’s EA’s or attorneys• Tax return preparers who elect to participate in the program

and receive a record of completion from the IRS will be included in a database on IRS.gov

• Database will include(CPAs), EA’s enrolled retirement plan agents (ERPAs) and enrolled actuaries who are registered with the IRS

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Taxpayer Bill of Rights 6-10-14

• The Right to Be Informed• The Right to Quality Service• The Right to Pay No More than the Correct Amount of Tax• The Right to Challenge the IRS’s Position and Be Heard• The Right to Appeal an IRS Decision in an Independent

Forum• The Right to Finality• The Right to Privacy• The Right to Confidentiality• The Right to Retain Representation• The Right to a Fair and Just Tax System

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2015 TAS Report

In the preface to the report, Olson emphasizes four points:

–  “First, the budget environment of the last five years has brought about a devastating erosion of taxpayer service, harming taxpayers individually and collectively;

– “Second, the lack of effective administrative and congressional oversight, in conjunction with the failure to pass taxpayer rights legislation, has eroded taxpayer protections enacted 16 or more years ago;

– “Third, the combined effect of these trends is reshaping U.S. tax administration in ways that are not positive for future tax compliance or for public trust in the fairness of the tax system; and

– “Fourth, this downward slide can be addressed if Congress makes an investment in the IRS and holds it accountable for how it applies that investment.”

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Decline in Taxpayer Service Levels

IRS’s diminished service expectations for FY 2015 are as follows:

• The IRS is unlikely to answer even half the telephone calls it receives, and levels of service may average as low as 43%.

• Taxpayers who manage to get through are expected to wait on hold for 30 minutes on average and considerably longer at peak times.

• The IRS will answer far fewer tax-law questions than in past years.  During the upcoming filing season, it will not answer any tax-law questions except “basic” ones.  After the filing season, it will not answer any tax-law questions at all, leaving the roughly 15 million taxpayers who file later in the year unable to get answers to their questions by calling or visiting IRS offices.

• Tax return preparation assistance has been eliminated.

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TAS: Consequences of Budget Cuts

As a consequence, the IRS has already reduced its workforce by nearly 12,000 employees and projects further reductions will be needed during FY 2015.  In addition, the IRS has reduced the amount it spends on employee training since FY 2010 by 83%.  These cutbacks leave the IRS with a shrinking workforce whose employees are less equipped to do their jobs.

Among the “Most Serious Problems"

•Lack of Clear Rationale for Taxpayer ServiceResource Allocation Decisions. •Lack of a Functional IRS Presence in Many

Areas.  •Potential Patient Protection and Affordable

Care Act (ACA) Burdens•Offshore Voluntary Disclosure (OVD) Program

Inequities

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Most Litigated

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(Dollars in Billions)

2010 2011 2012 2013 2014

Collection $29.10 $31.10 $30.44 $31.40 $33.20

Examination $16.90 $12.40 $10.20 $9.83 $12.51

Appeals $6.70 $6.50 $4.20 $6.83 $6.47

Document Matching

$4.90 $5.20 $5.27 $5.29 $4.97

Total $57.60 $55.20 $50.20 $53.35 $57.15

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Exam by Income Amount

2013 2014

     All returns .96% .86%No adjusted Gross Income

6.04% 5.26%

$1 under $25,000 1.00% .93%$25,000 under $50,000

.62% .54%

$50,000 under $75,000

.60% .53%

$75,000 under $100,000

.58% .52%

$100,000 under $200,000

.77% .65%

$200,000 under $500,000

2.06% 1.75%

$500,000 under $1 million

3.79% 3.62%

$1 million under $5 million

9.02% 6.21%

$5 million under $10 million

15.98% 10.53%

$10 million or more 24.16% 16.22%

Collection

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2010 2011 2012 2013 2014

Levies 3,606,818

3,748,884

2,961,162

1,855,095 1,995,987

Liens 1,096,376

1,042,230

707,768 602,005 535,580

Seizures

605 776 733 547 432

Criminal Investigation

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2012 2013 2014

Investigations Initiated 5125 5314 4297

Prosecution Recommendations

3701 4364 3478

Informations/Indictments

3390 3865 3272

Convictions 2634 3311 3110

Sentenced* 2466 2812 3268

Percent to Prison 81.5% 80.1% 79.6%

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Continuing NRP Study

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

• About 10,000 to 14,000 every year since October 2007

• 2,000 employment tax NRP’s per year 2009 to 2011

• 2014 examined 2500 corporate returns with assets under $250,000

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2015 Budget

• President once again asked for increased IRS funding• Congress once again severely underfund IRS thereby costing

the American taxpayer billions $$ in lost revenue– “Suppose you were an idiot. And suppose you were a

member of Congress. But then I repeat myself.”-- Mark Twain

– “There is no distinctly native American criminal class...save Congress.”-- Mark Twain

– “In my many years I have come to a conclusion that one useless man is a shame, two is a law firm and three or more is a congress.” -- John Adams

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Dirty Dozen

1. Phone Scams2. Phishing3. Identity Theft4. Return Preparer Fraud5. Offshore Tax Avoidance6. Inflated Refund Claims

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Dirty Dozen

7. Fake Charities8. Hiding Income with Fake Documents9. Abusive Tax Shelters10. Falsifying Income to Claim Credits11. Excessive Claims for Fuel Tax Credits12. Frivolous Tax Arguments

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APPEALS

• In a webcast on July 15th, 2013 the Chief of the IRS Office of Appeals announced a change in procedures within the next few months. As currently set forth in the IRM, Appeals can raise new issues if: – (a) the Appeals Officer is “quite certain” that the IRS would

win in court; – (b) the necessary facts are readily available; and – (c) the additional tax liability is material.

• Appeals also sometimes refers cases back to the auditors for further factual development. As part of its “judicial approach and culture” project, Appeals decided that changes in these procedures would better reflect its mission and function.

IRS Scandal

• News broke on 5-10-13 that IRS had slowed processing of organizations with tea party, progressive, occupy or patriot in their names & were asked more questions prior to granting 501c(4) tax exempt status

• 501(c)4 status established for Civic Leagues, Social Welfare Organizations, and Local Associations of Employees; may keep donors secret

• Proper status was 527 tax exempt but must disclose donors• There are many Congressional investigations• The current uproar is because politicians of both parties like

to keep donors secret

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Whistleblowers

04/19/23Robert E. McKenzie 312.876.6927 Arnstein & Lehr LLP

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  2010 2011 2012 2013 Awards Paid 97 97 128 122

Collections over $2,000,000

9 4 12 6

Total Amount of Awards Paid

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

$53,054,302

Amounts Collected

$464,695,459

$48,047,500 $592,498,294

$367,042,420

Awards paid as a percentage of amounts collected.

4.0% 16.7% 21.2% 14.6%

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Misclassified Workers

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

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

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

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

In the News

• Credit Suisse pleads guilty and pays a $2.6 billion penalty, marking a watershed in a campaign that has led to charges against more than 100 people since 2009

• Over 100,000 Foreign Banks to Share Tax Info with IRS

• Zwerner: Jury Determines 150% FBAR Penalty Applies

• 106 Swiss banks cooperating with U. S.

FATCA

•Effective 6-30-14•Over 150 countries have signed agreements for

their banks to report accounts of U. S. taxpayers to IRS

•Over 100,000 foreign financial services will report to IRS beginning March 2015

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Credit Suisse Indicted

•Credit Suisse was indicted on 5-19-14•It has entered into plea deal to plead guilty to

a felony offense of aiding & abetting tax fraud•It paid a penalty in excess of $2.6 billion •Agreed to have a monitor to prevent further

violations•Justice Department now pursuing the names

of American depositors

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2012 Settlement Offer Unreported Offshore Income • Program continues in 2014• Voluntarily and timely disclose unreported offshore

income. • Pay back-taxes and interest for 8 years, • Pay either an accuracy or delinquency penalty on

all eight years.• File Form TD F 90-22.1 (FBAR) • Pay 27.5% penalty on highest balance in foreign

bank accounts if over $75,000 and 12.5% for smaller accounts

• Opt out option• Offer does not have an expiration date

New Program

•Announced 6-18-14•Streamlined for non-wilful

– 5% for TP’s in U. S.– 0% for TP’s abroad

•Higher penalty for those banking with 12 banks if have not applied by 7-1-14

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New Program

Penalty increases from 27.5% to 50% if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that the financial institution where the underlying financial account is maintained is under investigation by the IRS or the Department of Justice.

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ID Theft Hot Line

•Operational on October 1, 2008

•Toll free number: 1-800-908-4490

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

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

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ID Theft

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

P.O. Box 9039Andover, MA 01810-0939

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Practitioner Priority Service

1-866-860-4259

Collection: Higher User Fees• Prior to 2014 the fee for an IA was:

– $105, – a reduction to $52 for a direct debt agreement, and – $45 to restructure or reinstate a defaulted IA. 

• As of 1-1-2014, IA fees are:  – $120 for an IA and – $50 to restructure/reinstate a defaulted IA.  – Direct debit agreement fee does not change. 

• Prior to 2014 the fee for an OIC was $150. • As of January 1, 2014, for an OIC is $186.  The “no fee” for low-

income taxpayers continues to apply.

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Offer Environment

 Offers in compromise (thousands):

2012 2013 2014Number of offers

received 64 74 68Number of offers

accepted 24 31 27

% Accepted 38% 42% 40%

Amount $ of offers accepted 195,652

195,379 179,354

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Fresh Start

•Between 2009 and 2012 the IRS had a series of initiatives for struggling taxpayers

•The initiatives are known as Fresh Start

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IRS Revised Rules for Streamlined Installment AgreementsAnnounced 1-12-12– The revised procedures now allow taxpayers up to 72 months to

pay their tax obligations. – The new procedures also increase the maximum amount subject to

the relaxed streamlined agreements from $25,000 to $50,000.– Form 9465-FS was to be used if your liability was greater than

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

– 72 months to pay up from 60 months

Revised Form 9465

• In April, 2013 the IRS changed rules. •Form 9465-FS eliminated and replaced by revised

Form 9465•No longer need financial statement for amounts

between $25,000 and $50,000

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LAST FRESH START INITIATIVE• 5-21-12• Revises calculation of future income for OIC’s• Expands allowable expense categories• Liberalizes valuation of vehicles• Liberalizes valuation of assets used in business• Reduces use of dissipated asset theories• Reduces multiplier for determining future income

component of RCP

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Reduced Valuation of Assets

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

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

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

• Less use of dissipated asset theory– If liability did not exist at the time TP at time of transfer– Withdrawals from IRA’s & 401K’s to invest in a business if taxpayer

did not owe taxes at that time– 3 year period for asserting dissipated assets including the year of

submission

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Calculation of Future Income

•Offers to be paid in 5 or fewer payments use 12 as multiplier instead of prior 48– Example: TP can pay $300 per month the RCP is

$3,600 not $14,400

•Offers of 6 or more payments use 24 as multiplier instead of 60– Example TP can pay $300 per month the RCP

would be $7,200 not $18,000– A deferred offer can no longer exceed 24 months

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Future Income Component

•More expenses allowed– Student loan payments– Payments to state agencies proportional to federal

payment– Charge card payments– No longer only allow car payments to projected

payoff date– Extra $200 per month allowed for vehicles with

more than 75,000 miles or 6 years or older

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Summary of 5-21-12 Changes

•Offers will now be accepted for a lot lower amount

•New Form 656 & instructions for OIC’s•Most liberal OIC policies since adoption of

the allowable expense standards in the 90’s•The new policies can be used in negotiating

installment agreements also

Questions?

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