Category Archives: Dealing with the IRS

Taxpayer Advocate ‘From the Government, and Here to Help’

In 1996, the law allowed for the creation of the Office of the Taxpayer Advocate (in replacement of the former Office of the Taxpayer Ombudsman), whose functions are:

  1. To assist taxpayers in resolving problems with the Internal Revenue Service;
  2. To identify areas in which taxpayers have problems in dealings with the Internal Revenue Service;
  3. To the extent possible, propose changes in the administrative practices of the IRS to mitigate those identified problems; and
  4. To identify potential legislative changes which may be appropriate to mitigate such problems.

In 1997, the National Commission on Restructuring the Internal Revenue Service called the Taxpayer Advocate the “voice of the taxpayer.”

In 1998, Congress renamed the Taxpayer Advocate as the National Taxpayer Advocate, provided that the National Taxpayer Advocate could not be an officer or employee of the IRS for two years preceding or five years following his or her tenure, and provided for Local Taxpayer Advocates in each state of the Union.

When you find yourself getting nowhere in your dealings with the bureaucrats, try contacting your Taxpayer Advocate!

Will the Tax Protesters Never Learn?

Is there no end to the parade of tax protestors who actually think they can make up (or more commonly, simply repeat) specious and fallacious arguments which seemingly justify their position that income taxes are illegal, and they need not pay them?

Another recent example:  James R. Garber v. Commissioner, TC Memo 2012-47, wherein the Court found for the government, concluding that the taxpayer “advanced frivolous arguments primarily for the purpose of delay and require(d) that he pay a penalty of $1,000 to the United States,” and further actually warned him that larger penalties could ensue if this taxpayer were to return to the Court and advance frivolous or groundless arguments in the future!

This particular chap made many “unfounded” arguments (to again use the Court’s word), apparently leading him to his conclusion that no statutes render him liable for Federal income taxes. Seems Mr. Garber thought that the IRS “has not been able to provide him with ‘any Section of the IRS code which makes (him) liable’ ” for the (income) tax, and that “a resident of the fifty states may choose to file a return thereby assessing himself or he ‘may’ choose not to do so.”

Changes to IRS Power of Attorney Form

Just a few months ago, IRS released a new version of Form 2848, “Power of Attorney and Declaration of Representative,” along with five pages of instructions.

Taxpayers will notice a significant revision in the new form. In the case of individuals who filed a joint Federal income tax return, each spouse will now be required to execute a separate Form 2848, rather than both spouses signing the same Form as in the past. Since the revised form (under this new scheme) has been published, we hear IRS has had some processing problems in keeping track of the separate forms filed by spouses. They say they are “working on” the situation.

Presumably the reason for this change is in the interest of protecting taxpayers – situations might arise (though unlikely) in which one preparer representing both spouses as power of attorney finds him or herself in a conflicted position with respect to the parties. The requirement that each spouse, separately, authorize his or her representative allows for an opportunity to discuss this eventuality. Nonetheless, the new procedure seems unduly burdensome in application to most if not all situations.

Taxpayer Advocate Service — Here to Help

Believe it or not, everything the IRS does is not necessarily bad for your health!  Some folks don’t realize that they actually do have a “voice” within IRS:  called the National Taxpayer Advocate.

This is an independent organization within IRS, whose mission is to help taxpayers who may be experiencing economic harm, or taxpayers seeking help in resolving problems with IRS and not having any success with the “normal” IRS channels of communication.

The Taxpayer Advocate Service (TAS) is free to all taxpayers, and exists in the form of at least one local TAS office in every state, the District of Columbia and Puerto Rico.  The usual way to start a TAS contact is to complete IRS Form 911, “Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order)”.

And beyond helping you with your specific case situation, also look to TAS for “systemic advocacy” in helping you deal with the IRS morass.  The TAS Office of Systemic Advocacy:

  • addresses issues which impact multiple taxpayers
  • works with individuals, businesses and nonprofits
  • analyzes IRS systems, policies and procedures
  • assesses taxpayer burden and taxpayer rights issues
  • proposes solutions or legislative changes, and
  • monitors progress toward the solutions.

Check out IRS Publication 1546 for more info on the TAS.

Got Your IRS Refund Yet?

IRS just can’t figure out why they have so many refund checks returned every year.  In a recent news release, they note that they are sitting on more than 99,000 refund checks, accounting for over $153 million, and just don’t know where to find the related taxpayers, since the checks were returned as “undeliverable” by the Post Office.

If that’s you, still looking for your refund from last year, check out the “Where’s My Refund” link on the IRS website:  www.irs.gov.

IRS notes that undelivered refund checks average $1,547 this year.  And they go on to suggest that a way to avoid this problem is for taxpayers to instruct IRS (when they file their annual return either in paper or electronically) to deposit the money directly into the taxpayer’s bank account.  This sounds good, but we’re not particularly in favor of giving anybody (least of all the IRS) personal bank account information.  You never know — the day may come when you owe taxes and can’t pay – in that instance, you may look up one day and find that the meager balance in that bank account of yours has been tapped by Uncle Sam.  Not good.

Back to the unclaimed refund issue — don’t fall for e-mail or other contacts which you may receive from unknown sources claiming that they know IRS owes you money, and asking for personal or banking information so that you can claim your dough.  IRS does NOT contact taxpayers by e-mail for this or any other reason.

IRS Tentacles Extend to Electronic Records

If you think IRS’ longstanding audit techniques have been intrusive, get ready for the era of IRS Chief Counsel Advice 201146017 (link goes to PDF file).

The Counsel comments on a number of issues related to IRS’ ability to summon a taxpayer’s original electronic data files or backup files to obtain information including who, when, and how the information was created.

Recall that IRS has always been empowered to examine books, papers, records and other data for purposes of ascertaining the correctness of any return, making a return if none has been made, determining the tax liability of any person, and collecting that liability.

In this electronic age, however, it seems IRS existing authority isn’t perceived as broad enough.  The CCA guidance stands for the proposition that the phrase “books, papers, records, and other data” expressed in IRC Section 7602 was more than broad enough to encompass the compelled production of the electronic documents themselves.  And a taxpayer’s offer to provide paper copies may be construed as insufficient from IRS’ point of view.

Further, the CCA believes it can similarly summon such data from a third party, such as the taxpayer’s accountant.

Big Brother never stops watching.

IRS Behavior Needs Polishing

There is a certain concept known as “professionalism” which the IRS obviously hasn’t embraced.

Seems the Government has recently sent letters (Letter 4809 – Rev 10-2011) to tax preparers (CPAs, in particular) observing that “You are receiving this letter because the returns you prepared for clients during the most recent filing season have a high percentage of attributes associated with returns typically containing inaccuracies and misinterpretations of tax laws.”

Thank you very much for your kind recognition of the fact that CPAs have not only undergone rigorous college (and in many cases postgraduate) education, annually subject themselves to 40 hours per year (or more), typically, of continuing education in order to comply with  state(s) requirements and, in most polls conducted by respected organizations, consistently rate higher than any other professionals as the most ethical of all professional advisors.

The letter goes on…”Tax return preparers are expected to be knowledgeable in tax law and prepare accurate returns while exercising due diligence.”

Thank you, government bureaucrats, for your sage commentary.  We licensees are well aware of our professional requirements.  And we can hardly wait for your visits of “Some tax return preparers who receive this letter beginning in November to confirm compliance with return preparer requirements.”

Your condescending “hope” that this letter has “heightened your awareness of your responsibilites as a tax return preparer and provided you with information on how you can meet your obligations” is most unwelcome.

IRS Eases ‘Innocent Spouse Relief’ Rules

The IRS announced this week that it is scaling back its restrictions on filing for innocent spouse relief, making it easier for taxpayers to stay off the hook for tax debts and other tax-related shenanigans committed by their spouses.

When you file a joint income tax return, the law makes both you and your spouse responsible for any tax debts and other liability. Innocent spouse relief is meant to help taxpayers who didn’t know — and had no reason to know — that their spouse was underpaying taxes or failing to pay taxes altogether. Until this week, people trying to qualify for equitable relief as an innocent spouse had to file their request within two years of the time that the IRS’s collection efforts first began.

So, what was the problem with the old two-year limit? It wasn’t unusual for a truly innocent spouse to be unaware of their not-so-innocent spouse’s tax problems (including the IRS’s collection efforts) for over two years. And under the old rules, if you discovered your spouse’s wrongdoing too late (after that two-year window had closed), the IRS said your innocent spouse claim was SOL.

Get details on this week’s IRS announcement here, and for everything you ever wanted to know about innocent spouse claims, check out IRS Publication 971: Innocent Spouse Relief.

Deadline Looms on Offshore Voluntary Disclosure

            If you’re deliberating over whether to take the government up on its offer to allow you to- albeit by August 31, 2011, take note of a few of the draconian penalties for not doing so – which may get your attention.

  1. Failure to file Form TD – 90-22.1 (Report of Foreign Bank and Financial Accounts – generally referred to as “FBAR”) – the greater of $100,000 or 50% of the total balance of the account, per violation.
  2. Failure to file Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) – 35% of the gross reportable amount
  3. Failure to file Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner) – 5% of the gross value of trust assets.
  4. Failure to file Form 5471 (Annual Information Return of U.S. Persons With Respect to Certain Foreign Corporations) – $10,000, plus an additional $10,000 for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
  5. Failure to file Form 5472 (Information Return of a 25% Foreign-Owned  U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) – $10,000, plus an additional $10,000 for each month the failure continues  beginning 90 days after the taxpayer is notified of the delinquency.
  6. Failure to file Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation) – 10% of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
  7. Failure to file Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) – $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after a taxpayer is notified of the delinquency.

And these onerous exactions over and above the “usual” penalties for failure to file, failure to pay, and fraud under IRC Section 6651.

Bottom line – the IRS is serious in letting taxpayers know that they expect all foreign arrangements to be reported, and related taxes timely paid.

So You Say You Want a Private Letter Ruling?

Maybe so — but be sure you understand what you are getting.

A private letter ruling (PLR) is a written statement by the IRS to a specific taxpayer in response to a written inquiry, which generally requests guidance as to the tax effects of a specific contemplated transaction. Significantly, a PLR is only binding with regard to the requesting taxpayer and may not be cited (officially) as precedent which is in any way binding on IRS. The IRS’ instructions to its people states that PLRs “may not be used as precedents in the dispositions of other cases but may be used as a guide with other research material in formulating an area office position on an issue.” (IRM 4.10.7.2.10)

Although PLRs are technically only binding on the requesting taxpayer, they do reflect the attitude of the Service on given issues, and have been cited by the Supreme Court, and various other levels of the Federal Courts as evidence of IRS’ position on a matter.

Contrast the PLR with a technical advice memorandum, or TAM issued by IRS. These documents are issued by the IRS national office, generally at the request of the IRS Appeals Division, though taxpayers can request that the examining or appeals officer (in a tax audit situation) seek technical advice on an issue.

TAMs are not precedent that is binding on IRS, but some courts have likewise cited them as supporting a taxpayer’s position and revealing IRS’ interpretation of the law. (Buckeye Power Inc. v. U.S., 1997, Ct Fed Cl 79 AFTR 2d 97-2794)