A recent audit (issued September 19, 2012) by the Treasury Inspector General for Tax Administrating (TIGTA) found that IRS isn’t quite on the ball when it comes to consistent application of abatement of failure to file (FTF) and failure to pay (FTP) penalties.

It’s not widely known that since 2001, IRS has had “administrative waiver” capability, pursuant to which FTF and FTP penalties for taxpayers who had demonstrated full compliance over the prior three years could be waived.  The purpose for granting the waiver, called a First-Time Abate (FTA), is to reward past tax compliance and promote future tax compliance.  But most taxpayers with compliant tax histories are not offered and do not receive the FTA waiver, according to TIGTA, who estimated that for tax year 2010, about 250,000 taxpayers with FTF penalties and some 1.2 million taxpayers with FTP penalties did not receive penalty relief even though they qualified under the FTA waiver criteria.

TIGTA estimated the unabated penalties totaled more than $181 million, and further that the FTA waiver is not used to its full potential as a compliance tool because it is granted to taxpayers before they demonstrate full compliance by paying their current tax liability.

The pending expiration of the “Bush tax cuts” should make most folks give thoughtful consideration to their capital gain tax planning, as the year comes to a conclusion.

This year, long-term capital gains are taxed at a maximum of 15%, though that rate will move upward in 2013 absent Congressional action. Not to mention the imposition of the new 3.8% “unearned income Medicare contribution tax” which will also apply in 2013 to realized capital gains (as well as other forms of income). Say you own some appreciated stock which you think may continue to grow even more in value. Consider selling in 2012, pay the favorable 15% tax rate, and then buy the stock back, which will therefore also increase your tax basis in the repurchased stock.

Likewise, if you are planning on selling your primary residence, and are among the fortunate few whose residence has appreciated in value to the extent that your long term capital gain upon sale may exceed the $500,000 joint filer exclusion, try to close before year end in order to secure that favorable 15% tax rate and avoid the 3.8% Medicare surtax which would also apply to a transaction of this nature.

Sometimes, it seems that no matter what you do via the usual channels of communication, you get absolutely nowhere in dealing with the behemoth IRS. If that is you, consider the Taxpayer Advocate Service (TAS), an independent organization within the IRS, whose mission is to helptaxpayers who are experiencing economic harm because of IRS actions, taxpayers who are seeking help in resolving problems with the IRS, and those who believe an IRS system or procedure is not working as it should. The TAS helps taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation.

The TAS service is free, and there is at least one TAS office in every state. Check out Publication 1546 – “Taxpayer Advocate Service – Your Voice at the IRS”, and if you need help, call (toll free) 1-877-777-4778.

The alternative minimum tax (AMT) was enacted decades ago, to attempt to assure that folks with the power to orchestrate their tax liability, and assure that they paid little or none, would be trapped, and thus be required to pay at least something.

But according to the Congressional Research Service (CRS), unless Congress acts (Who would expect they will, given their recent track record?), the combined effects of inflation and reductions in the “regular” income tax rate will cause something like 30 million taxpayers (approximately 20% of all taxpayers) to be trapped by AMT in 2012!

The problem seems to be that Uncle Sam has become just a little too happy to receive AMT revenues – according to CRS, if AMT were repealed without some other adjustments to the regular income tax scheme, the lost revenue would be over $1.3 trillion between 2011 and 2022 if the “Bush tax cuts” are not extended, and over $2.7 trillion if they are.

So you’re self-employed and are under IRS audit and getting nowhere with your auditor.

You might consider the IRS’ “fast track” settlement process.  It’s generally available for all cases under the jurisdiction of IRS SB/SE (Small Business/Self Employed) program, and there is no limitation on the dollar amount associated with the issue.

You and your auditor jointly complete an Application for Fast Track Settlement (Form 14017) and the auditor submits it to his or her Group Manager.  If the application is approved (certain issues don’t qualify), you will go before a Fast Track Settlement Appeals Official, schooled in dispute resolution techniques, and whose job it is to find a resolution agreeable to you and IRS, and to find it quickly.

If no resolution can be reached, the taxpayer still retains all of the otherwise applicable appeal rights associated with any audit situation.

Check out IRS Publication 5022 for more details.

The Sixth Circuit Court of Appeals has recently held that severance payments are not subject to FICA (U.S. v. Quality Stores, Inc.)\

The court found that the severance payments in this case qualified as supplemental unemployment compensation benefits (SUB) under IRC Section 3402(o), which treats certain nonwage payments as if they were wages for income tax withholding purposes.

The Federal Circuit previously reached a contrary result, so it may be that the Supreme Court will eventually be asked to reconcile the matter.

The Sixth Circuit reasoned that the definition of wages should be the same both for income tax withholding and FICA purposes.  And since Congress didn’t regard SUB payments as wages for income tax withholding, but treated them only “as if” the payment were wages for purposes of federal income tax withholding, it could not have regarded them as wages for FICA purposes.

A bit of hair-splitting?

Those are the immortal words of the Tax Court, in the matter of Brenda F. Bartlett (TC Memo 2012-254, September 4, 2012).

Seems Ms. Bartlett prepared her own tax return for 2008 – using the famous TurboTax software – and managed to understate her tax liability by about $44,000, largely due to an understatement (over $100,000) of a pension distribution.

The taxpayer acknowledged the errors, but maintained that she reported all of her income and that the mistakes made were “honest mistakes” resulting from her lack of familiarity with the TurboTax program.  She further claimed that she used the audit portion of the TurboTax program, believing the audit portion would catch any mistakes she otherwise might make.

Needless to say, the Court was unimpressed, noting that TurboTax is only as good as the information entered.  As such, the taxpayer did not qualify for any reasonable cause relief for any portion of the resulting underpayment.

 The “tax protestor” community, out there, just refuses to give up, as we were recently reminded by an August decision of the Tenth Circuit Court of Appeals (Richmond v. Comm).

Taxpayer Richmond claimed that he is “a citizen of Kansas that earned a living through activities occurring solely under the jurisdiction of Kansas” and that he has not received “income,” as that term is defined for tax purposes, because he has not “engag(ed) in optional, or privileged activities that fall under Federal jurisdiction and result in a meaningful gain.” He further asserts that he “has lawfully met the criteria of maintaining status as a NonTaxpayor for which all withholding collected while voluntarily participating in taxation programmes set forth via Tax or revenue Acts are to be refunded as the result of filing a tax return. Appellant is not a Taxpayor, and it is proper as a NonTaxpayor to file a return that is a list of zeros to receive a refund of all withholding that were collected while voluntarily participating in taxation programmes…”

Needless to say, the Court concluded that Mr. Richmond’s arguments are “meritless” and “frivolous,” and that Mr. Richmond cannot elect “nontaxpayer” status.

No surprise.

IRS recently announced that a planned “power outage” (for systems maintenance and upgrading) over the upcoming Labor Day weekend should not hold back your income tax preparation/reporting efforts completely.

• The main toll-free telephone lines will be completely unavailable after 4 p.m. (eastern) on Friday, August 31 until noon on Tuesday, September 4.  But IRS folks who do answer the phones from early Thursday, August 30 until 4 p.m. Friday will be able to answer tax law questions, but will be unable to access or update tax account information.
• Taxpayer Assistance Centers will remain open for their regular hours during the outage period, offering answers to tax law questions, help with preparation of returns, and other limited services.
• You will be able to make payments through the electronic federal tax payment system, though your account will not be updated until after the outage period.
• And don’t forget IRS’ “Interactive Tax Assistant,” which will be available at www.irs.gov throughout the outage period, to help with your tax law and other questions.

According to a recent audit report by the Treasury Inspector General for Tax Administration (TIGTA), IRS is doling out big bucks to identity thieves.

IRS has reported that it detected something like $6.5 billion in fraudulent refunds for processing year 2011.  TIGTA thinks there could be as much as $5.2 billion more, and that IRS could issue $21 billion in fraudulent tax refunds over the next five years!

Some of the factors leading to this mess, per TIGTA:

• Delayed access to third-party income and withholding information – such delays make it difficult for IRS to detect fraudulent tax refunds at the time tax returns are processed.
• IRS has not developed processes to obtain and use the third-party information that is available at the time tax returns are filed.
• The use of direct deposits, including debit cards, to claim fraudulent tax refunds increases the risk that the IRS will not detect identity theft.

Nice to know that IRS management agrees with TIGTA’s recommendations and has taken, or plans to take corrective action.  IRS does not agree, however, with the suggestion that potentially $21 billion in fraudulent refunds might go out the door over the next five years.