one for the informed and one for the uninformed."
--Judge Learned Hand
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"There are two systems of taxation in our country: one for the informed and one for the uninformed." --Judge Learned Hand
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| Gross Tax Gap at $450 Billion | Jan, 2012 | |||||
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The gross tax gap, based on IRS estimates for 2006, reached $450 billion reflecting an 83.1% voluntary compliance rate. After enforcement and late payments, the net tax gap was reduced to $385 billion (or an 85.5% compliance rate). The gross tax gap was previously estimated to be $345 billion (or an 83.7% voluntary compliance rate) for 2001, and the net tax gap was an estimated $290 billion (or an 86.3% compliance rate).
IRS defines the tax gap as the amount of tax liability faced by taxpayers that is not paid in a timely manner. The tax gap has three components: non-filing, underreporting, and underpayment. Underreporting across taxpayer categories accounted for an estimated $376 billion of the gross tax gap in 2006, up from $285 billion in 2001. Tax non-filing totaled $28 billion in 2006, an increase of $1 billion over the 2001 amount. Underpayment of tax rose to $46 billion, compared to $33 billion in the previous study. “Overall, compliance is highest where there is third-party information reporting and/or withholding,” IRS said. “But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006,” the agency added. The news release can be viewed on the IRS website at http://www.irs.gov/newsroom/article/0,,id=252038,00.html. |
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| IRS Wants to Expand its Levy Capability | Dec, 2011 | |||||
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Under current law, only salary, wages and federal payments such as Social Security
can be continuously levied from the date that the levy is issued until it is released.
The IRS is asking Congress to grant it the legislative authority
to issue continuous levies on four additional categories of payments: Royalties, rents,
nonemployee compensation and shares of fishing boat proceeds paid to crew members.
For the 12-month period ending January 31, 2011, IRS Revenue Officers issued 662,076 levies involving 140,786 taxpayers. Taxpayer assets (such as bank accounts) were the levy sources for 546,181 (82 percent) of the levies, while 115,895 (18 percent) of the levies were assessed against taxpayer wages (continuous wage levy). |
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| Paypal and Merchant Account Withholding Starts in 2012 | May, 2011 | |||||
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Paypal: If a payee doesn’t give a valid tax ID number, 28% backup withholding
is required after 2011 only if the payee has more than 200 transactions. The rules
for 1099s are different. Beginning with the 2011 tax year, 1099 forms must be filed
for payees with over 200 transactions and more than $20,000 in sales volume a year.
Merchant Accounts: Starting in 2012, if a merchant has a bad tax ID number, credit and debit card firms must start 28% backup withholding. There is no small-seller exemption in this situation. |
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| Roni ‘The Tax Lady’ Deutch | May, 2011 | |||||
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A California state trial judge in April froze the assets of Roni “The Tax Lady” Deutch and ordered her to appear in June
on charges she shredded millions of documents and failed to refund $435,000 owed to clients in violation of a
November, 2010 injunction in the state attorney general's lawsuit claiming her firm “swindled clients.”
Hours after a May 12th news conference at which Deutch claimed the State Bar of California was driving her into bankruptcy and hurting her clients, the state bar responded by announcing that it had initiated disciplinary proceedings against her. Deutch’s court-appointed lawyer asked permission to withdraw from the case citing Deutch's failure to communicate, cooperate, and follow legal advice. Beware of tax settlement companies that advertise on TV and radio. Most want large fees up front and you are initially talking with sales person - not people who understand tax or will work on your case. |
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| Social Security Administration Changes | Apr, 2011 | |||||
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The Social Security Administration (SSA) has announced that it is no longer mailing out annual earnings statements
to workers. The statements show how much workers have paid into the Social Security system and how much they are scheduled
to receive in retirement benefits. The SSA said that the decision was made “in light of the current budget situation.”
It advises workers to estimate their retirement benefits using the “Retirement Estimator” on its website. Workers may
use the “Retirement Estimator” if they have enough Social Security credits to qualify for retirement benefits and are
not: (1) currently receiving Social Security benefits on their own Social Security record; (2) age 62 or older and
receiving benefits on another Social Security record; or (3) eligible for a pension based on work not covered by Social
Security.
Published reports say that the SSA is working on providing the annual earnings statements electronically, possibly by the end of 2011. The U.S. Treasury has announced that it is phasing out the mailing of Social Security checks to retirees. Beginning May 1, anyone newly applying for Social Security, Veterans Affairs, or other federal benefits will need to choose an electronic payment method. Paper checks will no longer be an option. People currently receiving their federal benefits by paper check must switch to direct deposit by March 1, 2013. |
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| Taxes Based on IRS Filed SFR Can't Be Discharged in Bankruptcy | Mar, 2011 | |||||
| Taxes shown on IRS prepared Substitute for Return (SFR) aren’t discharged in bankruptcy, a United States Bankruptcy Court says. When a couple didn’t file tax returns, the IRS audited them and assessed taxes against them based on SFRs the agency prepared. The couple later filed for Chapter 7 bankruptcy and claimed the tax bill should be wiped out. The court disagreed and refused to extinguish their tax liability (Cannon, D.C., Ga.). | ||||||
| Employee Business Deductions | Feb, 2011 | |||||
| A television news anchor cannot deduct the cost of her business clothing that she wore only on TV, the Tax Court says, even though she felt the clothes were too conservative to be suitable for everyday wear. It also nixed write-offs she took for the cost of makeup, manicures, contact lenses, news magazines, teeth whitening, cable TV and a gym membership. It doesn’t matter that her employer required her to maintain a professional appearance and to keep abreast of breaking news events. They’re still all nondeductible personal expenses (Hamper, TC Summ. Op. 2011-17). | ||||||
| Why New 1099 Reporting Requirements | Feb, 2011 | |||||
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The Congressional Research Service (CRS) reports state the purpose of the 1099 information reporting amendments is to reduce the tax gap, because the existence of an information return generally encourages the voluntary reporting of taxable income and may also facilitate the enforcement and collection of taxes on income that is not voluntarily reported. IRS data indicates the largest contributor to the individual tax gap is underreporting by single-owner businesses, which also contributes to the employment tax gap. For instance, in 2001, only 1.2% of wages, salaries, and tips (which are subject to substantial reporting and withholding requirements) were underreported. However, in the same year, 57.1% of nonfarm sole proprietor income, which is subject to little or no information reporting, was underreported.
The Joint Committee on Taxation has estimated that the new information reporting requirements will generate $17.1 billion in increased revenue over a 10-year period. This averages approximately $1.7 billion per year, which would reduce the estimated tax gap ($356 billion in 2010) by .5%. Most of the reduction in the tax gap expected to result from the expanded requirements is attributable to what the CRS calls the “cost-benefit structure of tax evasion.” In deciding whether to evade taxes, businesses are thought to weigh the potential benefit of evasion against the potential consequences. The new reporting requirements are expected to increase businesses' actual or perceived probability of being audited, therefore increasing the risk of attempted tax evasion. |
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| Children and Roth IRAs | Jan, 2011 | |||||
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If your child or grandchild will be toiling at a summer job, making a Roth IRA payin for him or her this year is a great idea. The limit is $5,000, but not more than the child's earnings. That sum counts toward the $13,000 annual gift exclusion ($26,000 for couples) in 2011.
The Roth can grow into a tidy sum for the child. A 16-year-old with $5,000 in a Roth IRA that earns 7% each year will have $137,000 at age 65 and $193,000 at age 70. If the child works for a few summers and annual contributions are made, future totals will be much larger. Roths are tax favored, too. All payouts after 59˝ are tax free. And since payins, but not earnings, can be taken free of tax at any time, the child can pull them out in the future to help purchase a first home. |
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| IRS announces 2011 standard mileage rates | Nov 2010 | |||||
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Beginning Jan. 1, 2011, the standard mileage rates for cars (also vans, pickups or panel trucks) will be:
51 cents per mile for business 19 cents per mile for medical or moving purposes 14 cents per mile in service of charitable organizations |
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| New Hire Reports require employment date starting June 8, 2011 | ||||||
| 42 USC 653a(b)(1)(A), as amended by Section 802 in the Claims Resolution Act of 2010 (HR 4783) Newly-adopted legislation requires employers to include “the date services for remuneration were first performed by the employee” on state new hire reports, effective June 8, 2011. Currently, only the following information must be included on new hire reports: (1) the name, address, and Social Security number of the new employee; and (2) the employer's name, address, and federal employer identification number (EIN). | ||||||
| Bad check penalty may now be assessed on electronic payments | Jul 2, 2010 | |||||
| Under IRC §6657, if a check submitted as a deposit of taxes is not honored by the issuing institution, the taxpayer is subject to a “bad check penalty” equal to either: (1) 2% of the amount of the check; or (2) the lesser of $25 or the amount of the check, if the check is less than $1,250. The penalty will not apply if the person tendered the check in good faith and with reasonable cause, believing that the check would be duly paid. | ||||||
| Increased penalty for failure to file partnership or S corporation returns | Jan 1, 2010 | |||||
| Civil penalties apply for failure to file a partnership and S corporation returns. The penalty is a statutory dollar amount times the number of partners or shareholders for each month (or fraction of a month) that the failure continues, up to a maximum of 12 months. The base amount on which a penalty is computed for a failure with respect to filing either a partnership or S corporation return for a tax year beginning after Dec. 31, 2009, increases from $89 to $195 per partner or shareholder. | ||||||
| IRS enforcement statistics show increase in levies and liens | Dec 22, 2009 | |||||
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IRS's enforcement actions in fiscal year 2009 increased over FY 2008, but the enforcement revenue collected showed a significant decline from the previous two years.
In FY 2009 (FY 2008), IRS levies totaled 3,478,181 (2,631,038), liens totaled 965,618 (768,168), and seizures totaled 581 (610). In FY 2009 (FY2008), IRS garnered $48.9 billion ($56.4 billion) through enforcement actions with $26.9 billion through collection, $17.4 billion through examination, and $4.6 billion through document matching. In FY 2009, IRS examined 1,425,888 individual returns, which was 1% of the total returns filed. For individuals with income under $200,000, 1% of returns were examined. For those with income between $200,000 and $999,999, 2.89% of returns were examined. For those earning $1 million or more, 6.42% of returns were examined. A total of 9,951,648 business returns (small and large corporation returns, and Subchapter S and partnership pass through returns) were filed and 58,144 were examined for a coverage rate of 0.58%. The coverage rate for corporations with assets under $10 million was 0.85%, for corporations with assets of at least $10 million it was 14.55%, for Subchapter S corporations (Form 1120-S) it was 0.40%, and for partnership returns (Form 1065) it was 0.38%. |
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| Real Estate Transfers | Aug 2009 | |||||
| IRS watching real estate transfers [e-News for Tax Professionals, Issue No. 2009-31]: IRS's Estate and Gift Tax Program is now working with state and county authorities in several states to determine if real estate transfers reported to them are unreported gifts. "Although a tax may not be due, a gift tax return may be required for real estate transfers above the annual exclusion amount,” IRS said, adding that penalties are possible on all delinquent taxable gift returns filed. For information about estate and gift taxes go to http://www.irs.gov/businesses/small/article/0,,id=98968,00.html . | ||||||
| IRS to Conduct Corporate Matching Pilot | June 2009 | |||||
| The IRS will conduct a pilot program designed to match income from information returns to what is reported on the corporation’s tax return. Later this summer, the IRS will issue approximately 500 CP2030 notices to Form 1120 taxpayers that will notify them that the information the IRS has does not match what was reported to the IRS. | ||||||
| More Enforcement at IRS | May 2009 | |||||
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The Obama administration May 7, 2009, unveiled a budget that would provide the Internal Revenue Service
$12.126 billion in fiscal year 2010, including a hefty $4.904 billion for tax enforcement. According to budget
documents, that enforcement figure includes a request for $890 million for “enhanced tax enforcement activities.”
It is unclear whether this is a new audit technique.
The budget figure provides merely the latest indication that the Administration is serious about enforcing existing laws and closing the tax gap, both domestically and internationally. This is seen as being much more doable politically than raising taxes. |
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| IRS allowing only last 4 digits of SS Number | Nov 2008 | |||||
| The IRS will take another step toward thwarting identity theft in 2009 by allowing all but the last four digits of taxpayer ID numbers to be masked on W-2s, 1099s, and other information returns. The IRS already blocks out portions of Social Security numbers on documents that publicly record or release tax liens. | ||||||
| NonFilers owe more than $30 Billion | Nov 2008 | |||||
| IRS can’t tell whether it is making progress with nonfilers, according to Treasury inspectors. People who don’t file are a key tax gap component, costing the government more than $30 billion a year. IRS has no performance measures to monitor nonfilers’ future compliance. So within a year, IRS vows it will have a system to track whether the people it flagged are complying. | ||||||
| Seniors with regular IRAs | June, 2008 | |||||
| The IRS believes many folks age 70˝ and over don't take required minimum payouts. It plans to scrutinize Forms 5498 filed by IRA trustees to spot scofflaws. IRS will notify delinquents, telling them to take catchup distributions. | ||||||
| IRS is going after firms that misclassify workers | Feb, 2008 | |||||
| The IRS is unveiling an electronic matching system to identify firms issuing 1099s with payments of at least $25,000 to five or more workers who don't have any other sources of earned income. The Service suspects the contractors may be employees for tax purposes. Businesses meeting these criteria should expect employment tax audits. | ||||||
| IRS Free File Program is Faulty | June, 2007 | |||||
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The Treasury Inspector General for Tax Administration (TIGTA) tested the software of participating Free File
Alliance providers and discovered that some software did not always calculate tax amounts accurately.
The software is a partnership between 19 software companies and the IRS. It is available for free to taxpayers with AGIs of $52,000 or less, but only 3% of all taxpayers used it in 2006. The report highlighted a number of problems including that one quarter of the software programs did not allow taxpayer to take either the EITC or the child and dependent care credit without taking the dependency exemption. There were not sufficient interview questions to help the taxpayer determine eligibility for the dependency exemption in 45% of the software. The report encourages the IRS to establish a program to determine the accuracy of the tax software before next filing season. However, the IRS has rejected the recommendation that they provide tax law accuracy testing of the software, stating that "testing of commercial tax preparation software to determine its accuracy in applying the tax law would be a monumental challenge". |
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| IRS Launches On-Line Workshop for Exempt Organizations | ||||||
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The IRS launched a new Web-based version of its popular Exempt Organizations Workshop covering tax compliance
issues confronted by small and mid-sized tax exempt organizations.
The free online workshop–Stay Exempt–Tax Basics for 501(c)(3)s–consists of five interactive modules on tax compliance topics for exempt organizations: * Tax-Exempt Status – How can you keep your 501(c)(3) exempt? * Unrelated Business Income – Does your organization generate taxable income? * Employment Issues – How should you treat your workers for tax purposes? * Form 990 – Would you like to file an error-free return? * Required Disclosures – To whom do you have to show your records? Users can access this new training program at www.stayexempt.org. Users can complete the modules in any order and repeat them as many times as they like. The online training website does not require registration and its visitors will remain anonymous. |
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| Installment Agreement Fees Increase | ||||||
| The IRS issued final regulations increasing the user fees for submitting an installment agreement. The fees increase from $43 to $105 on January 1, 2007. The user fee for low-income taxpayers and taxpayers who pay through a direct debit program remains at $43. The user fee for restructuring an installment agreement increases from $24 to $43. | ||||||
| When Rental Income is Not Rental Income | ||||||
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Here is one from the “boy that’s a bummer” file. Have you seen the reality show Extreme Makeover Home Edition?
If not, it is a show that builds a new home for a deserving family. What a great idea, a free new home.
Not exactly. In this particular case, the show’s producers paid rent in the amount of $50,000 to the family
for the use of their home. Section 280A(g) provides, in part, that rental income from a residence that is
rented for less than 15 days during the year is excluded from the taxpayer's gross income. Based on that,
it would appear the homeowners received $50,000 in tax-free income. Not so.
The IRS, in an information letter, pointed out that Section 74(a) states that gross income includes amounts received as prizes and awards, and that under Reg. 1.74-1(a), taxable prizes and awards specifically include amounts received from radio and television giveaway shows. So there you have it, rental income is not always rental income. In this particular case, it was a taxable prize. |
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| Treasury inspectors have uncovered massive noncompliance with S Corps | ||||||
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36,000 one-owner S corporations with profits of $100,000 or more paid NO payroll taxes on the profits because no salary was taken. Ditto for 40,000 S corporations with profits in the $50,000-$100,000 range. This costs the government about $15 billion a year in payroll tax revenue. Although the IRS now has a special audit project for cases where S owners take unreasonably low pay, it lacks the staff to audit all these firms.
Treasury is recommending that Congress close the loophole. It wants to subject to employment taxes all ordinary operating gains of S corporations that accrue to more-than-50% owners and their relatives. With all the talk about Social Security's solvency, any plan to raise the system's revenues will get serious consideration by Congress. |
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| Tax Preparation Qualifications | ||||||
| IRS-licensed enrolled agents and certified public accountants must pass training and certification requirements. But the unenrolled preparer doesn’t have to have any training to set up shop. "Unenrolled preparers are responsible for the most number of cases where filers get into trouble," said Dianne Glass, the IRS's Taxpayer Advocate for South Texas. "They don't have anyone to regulate them, any testing requirements, or any continuing education requirements to stay up on tax law." | ||||||
| "Pennies on the Dollar" Claims - IR-2004-17 | Feb. 3, 2004 | |||||
| WASHINGTON — The Internal Revenue Service today issued a consumer alert advising taxpayers to beware of promoters’ claims that tax debts can be settled for “pennies on the dollar” through the Offer in Compromise Program. Some promoters are inappropriately advising indebted taxpayers to file an Offer in Compromise (OIC) application with the IRS. This bad advice costs taxpayers money and time. An Offer In Compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances. “This program serves an important purpose for a select group of taxpayers. But we are increasingly concerned about unscrupulous promoters charging excessive fees to taxpayers who have no chance of meeting the program’s requirements,” said IRS Commissioner Mark W. Everson. “We urge taxpayers not to be duped by high-priced promises.” The OIC may be considered only after other payment options have been exhausted. If taxpayers are unable to pay their taxes in full, there are other payment options, such as monthly installment agreements, that must be explored before an OIC can be submitted. | ||||||