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Robert E. McKenzieArnstein & Lehr LLP
120 S. Riverside Plaza Chicago, IL 60606
©2016
1
2016 IRS RepresentationUpdate
IRS Staffing for Key Enforcement Personnel
2010 2011 2012 2013 2014 2015
Revenue Officers
6,042 5,619 5,186 4,748 4439 3995
Revenue Agents
13,888 13,867 13,021 12,234 11,659 10,840
Special Agents 2,780 2,698 2,661 2,509 2437 2373
Total 22,710 22,184 20,868 19,491 18535 17,208
IRS Staffing
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
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
Taxpayer Bill of Rights PATH 2015
• 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
Taxpayer Advocate Report• 1. TAXPAYER SERVICE: The IRS Has Developed a Comprehensive “Future State” Plan
That Aims to Transform the Way It Interacts With Taxpayers, But Its Plan May Leave Critical Taxpayer Needs and Preferences Unmet .
• 2. IRS USER FEES: The IRS May Adopt User Fees to Fill Funding Gaps Without Fully Considering Taxpayer Burden and the Impact on Voluntary Compliance .
• 3. FORM 1023‐EZ: Recognition As a Tax‐Exempt Organization Is Now Virtually Automatic for Most Applicants, Which Invites Noncompliance, Diverts Tax Dollars and Taxpayer Donations, and Harms Organizations Later Determined to Be Taxable.
• 4. REVENUE PROTECTION: Hundreds of Thousands of Taxpayers File Legitimate Tax Returns That Are Incorrectly Flagged and Experience Substantial Delays in Receiving Their Refunds Because of an Increasing Rate of “False Positives” Within the IRS’s Pre‐Refund Wage Verification Program.
• 5. TAXPAYER ACCESS TO ONLINE ACCOUNT SYSTEM: As the IRS Develops an Online Account System, It May Do Less to Address the Service Needs of Taxpayers Who Wish to Speak With an IRS Employee Due to Preference or Lack of Internet Access or Who Have Issues That Are Not Conducive to Resolution Online.
• 6. PREPARER ACCESS TO ONLINE ACCOUNTS: Granting Uncredentialed Preparers Access to an Online Taxpayer Account System Could Create Security Risks and Harm Taxpayers
Taxpayer Advocate Report• 7. INTERNATIONAL TAXPAYER SERVICE: The IRS’s Strategy for Service on Demand
Fails to Compensate for the Closure of International Tax Attaché Offices and Does Not Sufficiently Address the Unique Needs of International Taxpayers .
• 8. APPEALS: The Appeals Judicial Approach and Culture Project IsReducing the Quality and Extent of Substantive Administrative AppealsAvailable to Taxpayers .
• 9. COLLECTION APPEALS PROGRAM (CAP): The CAP ProvidesInadequate Review and Insufficient Protections for Taxpayers FacingCollection Actions .
• 10. LEVIES ON ASSETS IN RETIREMENT ACCOUNTS: Current IRSGuidance Regarding Levies on Retirement Accounts Does Not AdequatelyProtect Taxpayer Rights and Conflicts With Retirement Security PublicPolicy.
• 11. NOTICES OF FEDERAL TAX LIEN (NFTL): The IRS Files Most NFTLsBased on Arbitrary Dollar Thresholds Rather Than on a Thorough Analysisof a Taxpayer’s Financial Circumstances and the Impact on FutureCompliance and Overall Revenue Collection
• 12. THIRD PARTY CONTACTS: IRS Third Party Contact Procedures DoNot Follow the Law and May Unnecessarily Damage Taxpayers’Businesses and Reputations.
Taxpayer Advocate Report• 13. WHISTLEBLOWER PROGRAM: The IRS Whistleblower Program Does Not
Meet Whistleblowers’ Need for Information During Lengthy Processing Times and Does Not Sufficiently Protect Taxpayers’ Confidential Information From Re‐Disclosure by Whistleblowers.
• 14. AFFORDABLE CARE ACT (ACA) – BUSINESS: The IRS Faces Challenges in Implementing the Employer Provisions of the ACA While Protecting Taxpayer Rights and Minimizing Burden.
• 15. AFFORDABLE CARE ACT (ACA) – INDIVIDUALS: The IRS Is Compromising Taxpayer Rights As It Continues to Administer the Premium Tax Credit and Individual Shared Responsibility Payment Provisions.
• 16. IDENTITY THEFT (IDT): The IRS’s Procedures for Assisting Victims of IDT, While Improved, Still Impose Excessive Burden and Delay Refunds for Too Long.
• 17. AUTOMATED SUBSTITUTE FOR RETURN (ASFR) PROGRAM: Current Selection Criteria for Cases in the ASFR Program Create Rework and Impose Undue Taxpayer Burden.
• 18. INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS (ITINs): IRS Processes Create Barriers to Filing and Paying for Taxpayers Who Cannot Obtain Social Security Numbers.
Taxpayer Advocate Report• 19. PRACTITIONER SERVICES: Reductions in the Practitioner Priority Service Phone
Line Staffing and Other Services Burden Practitioners and the IRS.
• 20. IRS COLLECTION EFFECTIVENESS: The IRS’s Failure to Accurately Input Designated Payment Codes for All Payments Compromises Its Ability to Evaluate Which Actions Are Most Effective in Generating Payments.
• 21. EXEMPT ORGANIZATIONS (EOs): The IRS’s Delay in Updating Publicly Available Lists of EOs Harms Reinstated Organizations and Misleads Taxpayers.
• 22. EARNED INCOME TAX CREDIT (EITC): The IRS Does Not Do Enough Taxpayer Education in the Pre‐Filing Environment to Improve EITC Compliance and Should Establish a Telephone Helpline Dedicated to Answering Pre‐Filing Questions From Low Income Taxpayers About Their EITC Eligibility.
• 23. EARNED INCOME TAX CREDIT (EITC): The IRS Is Not Adequately Using the EITC Examination Process As an Educational Tool and Is Not Auditing Returns With the Greatest Indirect Potential for Improving EITC Compliance.
• 24. EARNED INCOME TAX CREDIT (EITC): The IRS’s EITC Return Preparer Strategy Does
Not Adequately Address the Role of Preparers in EITC Noncompliance.
(Dollars in Billions)
2010 2011 2012 2013 2014 2015
Collection $29.10 $31.10 $30.44 $31.40 $33.20 $35.74
Examination $16.90 $12.40 $10.20 $9.83 $12.51 $7.32
Appeals $6.70 $6.50 $4.20 $6.83 $6.47 $6.00
Document Matching
$4.90 $5.20 $5.27 $5.29 $4.97 $5.14
Total $57.60 $55.20 $50.20 $53.35 $57.15 $54.20
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%
Exam Rate for SCorps & Partnerships
FYI 2013 FYI 2014 FY 2015
1065 Returns Examined
14,870 15,779 19,212
1065 Coverage ..42% .43% .51%
1120‐S Returns Examined
18,670 16,371 18,595
1120‐S Coverage
.42% .36% .40%
Collection2011 2012 2013 2014 2015
Levies 3,748,884 2,961,162 1,855,095 1,995,987 1,464,026
Liens 1,042,230 707,768 602,005 535,580 515,247
Seizures 776 733 547 432 426
Dumb & Dumber: Congress
• A 2015 Government Accountability Office report found that the Internal Revenue Service’s uncollected tax debts rose 23% since 2009 to $380 billion while the agency’s collection staff fell 23% during the same period after years of budget cuts.
Criminal Investigation
FY 2015FY 2014 FY 2013
Investigations Initiated3853 4297 5314
Prosecution Recommendations3289 3478 4364
Informations/Indictments3208 3272 3865
Convictions 2879 3110 3311
Sentenced* 3092 3268 2812
Percent to Prison 80.8% 79.6% 80.1%
Top Prosecution Priority
• Employment Taxes
Robert E. McKenzie 312 876 6927
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Robert E. McKenzie 312 876 6927
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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
2016 Budget
• President once again asked for increased IRS funding
• Congress once again severely underfund IRS & only marginally increased the taxpayer service budget 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
Dirty Dozen
• 1. Phone Scams
• 2. Phishing
• 3. Identity Theft
• 4. Return Preparer Fraud
• 5. Offshore Tax Avoidance
• 6. Inflated Refund Claims
Dirty Dozen
• 7. Fake Charities)
• 8. Hiding Income with Fake Documents
• 9. Abusive Tax Shelters
• 10. Falsifying Income to Claim Credits
• 11. Excessive Claims for Fuel Tax Credits
• 12. Frivolous Tax Arguments
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.
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
Whistleblowers
Whistleblower Forms
• Form 211
• Form 3949‐A
Offshore Program
• IRS began crackdown on offshore accounts in 2009
• In 2009 about 300,000 taxpayers filed an FBAR
• By 2015 that number had reached 1,163,229
• Form 114 filed with FINCEN
• Many must also file a Form 8939 with Form 1040
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 190,000 Foreign Banks to Share Tax Info with IRS
• Zwerner: Jury Determines 150% FBAR Penalty Applies
• Swiss banks cooperating with U. S.
• Expanding around the globe
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
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 114(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
Streamlined 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
6‐14 Banks That Will cause Taxpayers to Pay a Higher Penalty
• 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.
• As of 3‐25‐16 98 foreign financial institutions on IRS list for 50% penalty
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
ID Theft
• Form 14026
• Fax to: (978) 247‐9965.
• Mail to:
• Internal Revenue Service
P.O. Box 9039
Andover, MA 01810‐0939
Practitioner Priority Service
•1-866-860-4259
Private Collection• Congress wants more of it collected from taxpayers,especially what the IRS considers to be hard to collecttax bills. In fact, for some hard to collect bills, the lawnow requires—rather than just permits—the IRS to useprivate collectors. Many people think that having the IRSfarm out collection work to private contractors is a badidea. Last year, National Taxpayer Advocate NinaOlson advocated against it in this provision. She said the2006-2009 program using private collectors didn’t evenraise revenue.• Why was it passed ? 2 senators, Grassley & Schumerhave received large donations from private collectionagencies in their respective states. An example thatmembers of both parties are “for sale” to the highestcontributors.
Revocation or Denial of Passports
• In 2015 President signed an infrastructure bill. It adds a new section 7345 to the Internal Revenue Code.
• Taxpayers who owe more than $50,000 can be denied passports or have them revoked
• Not in an installment agreement or compromise
• Regulations not yet issued
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.
Offer Environment
2012 2013 2014Offers in compromise (thousands) [5]:
Number of offers received 64 74 68
Number of offers accepted 24 31 27
% Accepted 38% 42% 40%
Amount $ of offers accepted 195,652 195,379 179,354
Fresh Start
• Between 2009 and 2012 the IRS had a series of initiatives for struggling taxpayers
• The initiatives are known as Fresh Start
IRS Revised Rules for Streamlined InstallmentAgreements
• Announced 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.
• 72 months to pay up from 60 months
• Form 9465
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
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
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
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
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
HAVE A LESS
TAXING YEAR!!!!!
Thank You!!©2016
