Handling the IRS Audit

The IRS conducts examinations or audits in several ways.  These include the correspondence audit, the office audit, and the field examination.  This article includes tips on representing a client under audit by the IRS.” By Larry Jones, Tax Attorney

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The Correspondence Audit

 Correspondence audits are done pursuant to specific programs undertaken at the Campus level.  If the audit identifies issues which cannot be effectively handled at the Campus, then the return is transferred to the field for the audit.  While correspondence  audits are generally less significant than the major audits because of the small and routine matters typically handled in these audits, if they are not handled correctly, significant consequences may ensue.  Within the correspondence audit program are a number of ongoing programs which the Campuses undertake.

 The Office Audit

When a tax return has been selected for office examination, generally the examination of the return will be conducted at the office of the IRS.  Normally a taxpayer will find an office examination has begun when he has received a letter or telephone call from the IRS informing him of such examination and that the IRS wants further records and information.  Returns selected for office examination present issues which require some analysis and judgment in addition to verification of records.  The office audit is conducted by a Tax Compliance Officer (TCO) at the office of the IRS.

The Field Examination

Field examinations involve returns with more complex issues, thereby requiring examination by someone more knowledgeable in the field of accounting and the Internal Revenue laws.  Field examinations are conducted by Revenue Agents and are normally performed at the taxpayer’s place of business where the Revenue Agent can examine the taxpayer’s books and records to make a determination of the taxpayer’s correct taxable income and correct tax liability.  The Revenue Agent is supposed to make an appointment with the taxpayer at a time and place that will be convenient for the taxpayer.  The arrangement of the time and place can be done by telephone; however, the telephone contact cannot be used to verify items appearing on the income tax return.

Tips for a Successful Audit

The goal of the IRS in auditing returns is to find unallowable deductions, and/or unreported income.  This will cause a taxpayer to pay more tax to the IRS.  The taxpayer’s goal is to minimize or eliminate any additional tax.  Whenever the Revenue Agent determines income has been unreported or improper deductions have been taken, the taxpayer should never admit anything until a full evaluation of the Revenue Agent’s position can be made.    Things to remember.

1. Common Sense – Always use common sense when dealing with the IRS.

2. Communication – Communicate with the client and the IRS. Ask the client and the IRS many questions. If you do not understand something, then continue asking questions. Prepare the client for the audit before the audit:

● Educate clients as to type of records they need to keep.

● Help clients set up good procedures and systems–a good source of new business.

● Have periodic meetings with clients to review procedures and questionable items. Include other advisors in these meetings.

3. Preparation – When the client is notified about the audit, meet with the client and discuss the following:

● What is involved in the representation.

● The chances the client has for success.

● Fee that you will charge the client.

● Need for power of attorney.

● Documents needed for the audit.

● What documents might be available.

● Contact between the client and the IRS.

● Engagement letter with the client.

● The possibility of settlement.

● The possibility of retaining an expert to assist in the audit.

● Designation of someone at the client’s place of business to be the contact with the Revenue Agent.

Once the client is notified about the audit, meet with the Revenue Agent. This first meeting with the Revenue Agent may be the most important meeting of the entire audit. Consider the following:

● Be prompt, courteous, and friendly. Many Revenue Agents are treated with a hostile attitude. Try and treat the Revenue Agent the same way you expect to be treated.

● Be confident, positive, and establish your credibility with the Revenue Agent. Be honest and do not mislead the Revenue Agent. It is important to let the Revenue Agent know that you are a competent tax professional.

● Let the Revenue Agent know that you will be cooperative, but that you will also represent your client to the fullest.

● You need to be in control from the beginning.

● Examine the statute of limitations.

The Revenue Agent in a field audit is supposed to know the issues when the audit begins. Of course, the Revenue Agent may add issues as the audit progresses. If the Revenue Agent does not know the issues when the audit begins, then you should request that the Revenue Agent follow the Internal Revenue Manual, and the meeting should be rescheduled after the Revenue Agent has done his homework.

4. Presentation – After preparation, determining how to present the information is extremely important. Many different factors must be considered in determining how to present the client’s information.

5. Persistence – Do not give up easily when representing a client before the IRS. Exhaust all avenues before giving up.

6. Fully develop the facts and law after learning from the Revenue Agent what issues are being audited. Before negotiating with the IRS, consider doing at least the following:

● Look at all alternatives which will solve the client’s problems.

● Prepare a separate memo on each issue, setting forth the facts and the law. Start each memo on a separate page. You can then give those which are necessary to the Revenue Agent.

● Stay away from attacking the IRS and telling them why they are wrong. The memo should be positive and explain why the facts and/or law are in favor of the client. If necessary to comment on the position of the IRS, do so at the end in a brief paragraph.

7. After accomplishing all of the above, the next step is making the presentation to the Revenue Agent.

● Presentation to the IRS is extremely important. In most cases this should be done at the end of the audit at a settlement conference. However, it may be necessary to present some information as the audit progresses.

● Even the most prepared representative can fail, if the facts and law are not presented in the proper manner. There is no easy answer as to how to prepare and present clients’ cases to the IRS. Each case is different, and good preparation and presentation comes only through experience in dealing with the IRS and knowledge of the tax laws and IRS procedures.

Remember, the goal of the IRS in auditing returns is to find unallowable deductions, and/or unreported income. The taxpayer’s goal is to minimize or eliminate any additional tax.

The Tax Alliance Conference planning committee is preparing to bring  excellent speakers to the conference in 2019.  Be sure to check our website for updates and plan to attend the conference  June 4-7, 2019.

 

Navigating the Maze of Tax Reform

“Trying to navigate the maze of tax reform can be frustrating and seem challenging and almost impossible at times. “  By Trenda Hackett, CPA

As I’m sure you are aware, the Tax Cuts and Jobs Act, also known as the TCJA, was signed into law on December 22, 2017.  Most provisions of the Act are not effective until January 1, 2018 or later. However, some provisions are retroactively effective.

I’d like to take this opportunity to highlight some of those retroactive items that you should be aware of as you approach this tax season. While this is not intended to be a detailed explanation regarding these topics, I will suggest areas that may require additional research if you think they may impact you, or any of your clients.

Some Retroactive Items

Medical Expense Deduction:  The AGI threshold on medical expense deductions is reduced to 7.5% for all taxpayers for tax years beginning after December 31, 2016 and ending before January 1, 2019.

State and Local Property Taxes:  Because of the $10,000 limit starting in 2018 on the deduction for state and local property taxes, many taxpayers prepaid 2018 property taxes in 2017. However, the IRS has announced that 2018 property taxes are not deductible in 2017 unless they were assessed prior to 2018. In addition, prepayment in 2017 of 2018 state income tax did not create a 2017 deduction.

Mortgage Interest:  A mortgage interest deduction for interest paid on the first $1 million of acquisition debt was previously allowed on Schedule A. Although the Act lowered to $750,000 the amount of acquisition debt for which interest may be deducted, the $1 million acquisition debt limit is grandfathered for loans taken out prior to December 15, 2017. This deduction is also available if an existing mortgage is refinanced or if a taxpayer had a binding written contract prior to December 15, 2017 for purchase of a principal residence, for which closing occurred prior to January 1, 2018.

Disaster Area Losses:  

  • As it relates to net disaster losses from 2016 disaster areas, the $100 casualty floor has been increased to $500 for 2016 and 2017, and the 10% of AGI deduction is no longer applicable.
  • Taxpayers that do not itemize for 2016 or 2017 are retroactively allowed to deduct 2016 disaster area losses by adding the net disaster loss to the standard deduction.
  • Favorable tax treatment is provided for qualified 2016 disaster area losses; and qualified 2016 disaster distributions can be included in gross income over a three-year period of time. 2016 disaster area victims may make penalty-free early retirement plan withdrawals.

Depreciation:  Previously, bonus depreciation was established at 50% for 2017 and was scheduled to be phased out completely in subsequent years. However, under the Act, bonus depreciation is increased to 100% for property acquired and placed in service after September 27, 2017 and before January 1, 2023 (or 2024 for certain property with longer production periods).  Bonus depreciation is also extended to used property and to acquisitions of real estate, but is once again scheduled to be phased out starting in 2023 and completely eliminated by 2027. Previously completed cost segregation studies may need to be revised to reflect the changes in bonus depreciation.

Update on Extenders

You or your clients may have been hoping for extension to 2017 of some items that had been set to expire as of December 31, 2016. Unfortunately, none of the following items were extended to 2017:

  • Builders credit for energy-efficient homes
  • Deduction for energy-efficient commercial buildings
  • Mortgage insurance premium deduction
  • Qualified tuition and fees deduction

2018 and forward

There are a few other notable items that you should be cognizant of during the 2018 filing season or in planning for 2018 going forward.

  • Distributions up to $10,000 per student from Section 529 Plans can now be applied to public, private, or religious elementary and secondary schools rather than being strictly for higher education.
  • A new Section 199A deduction equal to 20% of qualified business income may be available to trusts or individuals that own sole proprietorships, partnerships, or S corporations. The deduction may be limited based on taxable income, capital gains, or business income.
  • The maximum corporate tax rate is 21%; and corporate alternative minimum tax has been eliminated.
  • Like-Kind Exchanges are no longer allowed for personal property, with a transitional rule provided for 2017.
  • No entertainment expense deduction is allowed for activities generally considered to be entertainment, amusement, or recreation. The 50% deduction limit for meals has been expanded to include meals that meet the employer convenience or de minimis rules.
  • After 2017, the following itemized deductions have been eliminated: employee business expenses, tax preparation fees, investment interest expense, and personal casualty and theft losses (other than those related to federally declared disaster areas).

In addition to the retroactive elements of the Tax Cuts and Jobs Act mentioned above relative to 2017 returns and the few mentioned for 2018 and beyond, there are changes for individuals that include new tax brackets, an increased standard deduction, the elimination of personal exemptions for the taxpayer and dependents, and the repeal of the individual mandate under the Affordable Care Act  and changes for businesses that include limits on the deduction for business interest and other items . There are significant changes to international tax and pass-through entities such as partnerships and S corporations as well as changes to estate and gift tax and pension and benefits.

Want to learn more about Tax Reform that impacts you or your clients?  The Tax Alliance Conference planning committee will have speakers highlighting Tax Reform changes during our June 5–7, 2018 conference.  They  will be on hand to answer your questions and help you get through the maze of tax reform.  Join us for the conference!  We don’t believe you will find better CPE especially when you consider the cost!  Check it out at www.taxalliance.org.

 

IRS Requiring Personal Information from Tax Professionals

“With all of the scams and attacks against tax professionals, the IRS is now requiring us to share our personal identifying information – social security number and date of birth- when we contact them on behalf our clients.” – by Trenda Hackett, CPA

If you have called the Practitioner Priority Service line or any toll-free IRS number after January 3, 2018, you may have been surprised to be asked by the IRS representative to provide your social security number and date of birth to authenticate who you are.  While this additional layer of security may be due to recent scams concerning tax professionals – in particular issues reported about compromised CAF numbers –  the IRS has not indicated whether this measure would be temporary or permanent.  In fact, the IRS has not released a formal statement concerning this matter; however they have reached out directly to the tax professional community via an email from its  Stakeholder Liaison offices.

In a recent email from the Stakeholder Liaison office to the tax professional community, the IRS wrote:

“The IRS continues to review its procedures to better protect sensitive taxpayer data. As part of this effort, the IRS will request additional information from tax professionals who contact us through the Practitioner Priority Service or any toll-free IRS telephone number.

This procedural change will require tax practitioners to provide personal information so that our customer service representatives may confirm their identities. This additional information may include data such as your Social Security number and your date of birth. This personal information, in addition to the CAF number, is necessary to verify the identities of the person to whom we are releasing taxpayer information.

We’ve also made an update to Form 2848, Power of Attorney, and Form 8821, Tax Information Authorization, that will require you to inform your client if you are using an Intermediate Service Provider to access client transcripts via the Transcript Delivery System. A box must be checked if you are using a third party. We define Intermediate Service Providers as privately owned companies that offer subscriptions to their software and/or services that the taxpayer’s authorized representative can use to retrieve, store, and display tax return data (personal or business) instead of obtaining tax information directly from the IRS. The IRS must know who is using our tools; and taxpayers must know when a party other than their authorized representative is involved in accessing their sensitive data.

We realize there have been a number of changes for tax professionals in recent weeks. But each change is intended to enhance protections for you and your clients. Unfortunately, business as usual is no longer an option. Cybercriminals are well-funded, persistent and adept at stealing data from outside the IRS and using it to eventually file fraudulent tax returns. As cybercriminals evolve, so must we.

As part of our efforts, we also have strengthened protections for IRS e-Services. If you are an e-Services account holder, we urge you to immediately upgrade your account through our new two-factor identity verification process. Some of you may need to complete this process by mail which could add 10 days or more to the process. Please, do not wait until the start of filing season or until you have an urgent need for one of the e-Services tools before updating your account.

In the future, we will be asking each e-Service user to sign a new user agreement intended to ensure that all tax professionals understand their security obligations. We will share this information with you in advance.

Protecting you and your clients from identity theft is a paramount issue for us. But we can’t do it alone. We need your help and your understanding as we continue to review and enhance our procedures. “

As of the date of this blog post, the IRS has not released a formal statement about this change in procedure.  Stay tuned for blog updates about this matter.

Want to learn more about changes the IRS is making that impact you?  The Tax Alliance Conference planning committee is bringing several speakers from the IRS to our June 5–7, 2018 conference.  They will be on hand to answer your questions, join us for the conference.   We don’t believe you will find better CPE especially when you consider the cost!  Check it out at www.taxalliance.org.

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Collection Due Process – When Can The Non-lawyer Use it?

“We need to take advantage of every tool possible in representing our clients before the IRS. One important tool is Collection Due Process but can you use it if you are not an attorney?”  –  by Patti Logan, EA

OK, I am not an attorney nor am I a tax court practitioner so can I use the collection due process (CDP) procedures to help my client?

Back in 1998, Congress granted taxpayers the right to take a proposed levy or a filed lien to the United States Tax Court.  The idea was to have the court look at whether filing a lien or proposing a levy is an abuse of discretion.  And if it is, the Court will disagree with the IRS’s actions and allow the taxpayer to resolve the case another way.

IRS will send your client one letter or notice proposing a levy and offering them a chance to appeal the proposed levy.  Or within 5 days of filing a Notice Of Federal Tax Lien, the IRS has to send the taxpayer a notice of the filing which also gives them the right to appeal the filing.  If your client disagrees with either action, they have the right to take the issue to Appeals and then if the case still cannot be resolved, the taxpayer can file a petition to the U. S. Tax Court after IRS Appeals has issued a determination.

Back to my original question, if the taxpayer is represented by a CPA or EA who has not passed the U. S. Court Practitioner exam, can they really use the CDP?  Yes!  Appeals will hear our case just like an attorney’s presentation.

During the process though, as the representative, you MUST be prepared to present an alternative resolution to the case.  That means that you and your client have to be prepared to give Appeals all the information they need to make a determination in your client’s favor.  Normally since you are working with collection, you will have to prepare a collection information statement, Form 433A, Form 433B, Form 433F, Form 433-A(OIC) or Form 433-B(OIC).  If Appeals schedules a hearing for your client and you want an installment agreement, and offer in compromise or propose that the account be reported as uncollectible because your client cannot afford to meet their current obligations as well as pay the back taxes, Form 433 is what Appeals will review.

Ok, let’s look at an example:  John Smith came to your office because he owes $49,000 in individual income taxes.  He claims that he cannot afford to pay the taxes and pay for his current living expenses.  While interviewing him, you discover that although he is able to earn almost $10,000 a month in 1099-MISC income, he also has young-onset Parkinson’s.  He wants to have a deep brain stimulation surgery which is used to treat the debilitating motor symptoms of the disease.  The cost of the surgery is covered by his health insurance but he has to re-train his brain which means he is expected to be out of work for six months.  He has saved $50,000 for his living expenses while he is unable to work.

You have prepared a Collection Information Statement which shows the $50,000 in savings but you have also included a letter from his physician, the physical therapist and occupational therapist supporting John’s claim that it will take approximately six months until he can return to work.

Sounds good, right?  Well, the revenue officer (RO) assigned the case says that he cannot tell whether John is really going to have the surgery.  The RO said that IRS does not allow future expenses if there is no track record of those same expenses.  You meet with the revenue officer and the group manager hoping to convince them that this is a different type of situation and that it is appropriate to report the account as uncollectible rather than to force him to cash in his savings to pay taxes.  The reply you get from IRS is a Notice Of Intent To Levy and Notice of Right of Hearing.  What is that?  It is John’s ticket to Appeals and then to the Tax Court.

So you file the request for a hearing, Form 12153, Request for a Collection Due Process or Equivalent Hearing, with the revenue officer and ask to go to Appeals.  Generally it takes about 2 to 3 months before the appointment for the Appeals’ hearing.  During this time, you should review your case with a critical eye.  Does the material support the collection resolution you are proposing?  Is there anything else you could add?  Would it be beneficial for the IRS to meet your client?  Can you get a face-to-face meeting or will IRS require you to do a video conference?

In the case of our client, John Smith, meeting him would be great but IRS is saying that they can get the information they need to resolve the case just by reading the doctor’s and therapists’ reports.  No matter how you try to convince them that you need them to meet your client, Appeals refuses.  The settlement officer assigned the case then tells you that he is upholding the IRS’s proposal to levy.

After the hearing IRS sends a determination letter that supports the IRS’s intention to levy John’s savings.  The next step would be to file a petition to the U. S. Tax Court.  You are not an attorney so does that mean John is out of luck?  No.  You could turn the case over to a tax attorney, send John to a low income tax clinic or John could file a pro se petition to court.  What happens then?  If John files his own petition, the U. S. Tax Court will notify the IRS Counsel.  That gives you, his representative, another bite at the apple to convince IRS again that a levy is an abuse of discretion.

Want to learn more about the Collection Due Process?  The Tax Alliance Conference planning committee is bringing an excellent speaker, Frank Agostino, to our June 57, 2018 conference.  He will cover CDP’s in much more depth.  If you want to learn exactly how to  request and prepare for a CDP hearing and take the necessary actions afterwards, join us for the conference.   We don’t believe you will find better CPE especially when you consider the cost!  Check it out at www.taxalliance.org.

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IRS Provides Tax Relief for Victims of Hurricane Harvey

The Internal Revenue Service announced this week that individual and business filers who are victims of Hurricane Harvey whose returns are under a valid extension, have until January 31, 2018 to file certain tax returns and make certain tax payments.

Effective date of Relief:  This relief is effective for tax filing and payment deadlines that occurred beginning on August 23, 2017.

Postponement Period:  August 23, 2017 – January 31, 2018

Texas Counties Eligible for Relief:  See IRS Disaster Relief Page for up to date information

How is Relief Granted: The IRS automatically grants relief (late filing and late payment penalty) to a taxpayer with an IRS address of record located in the disaster area.

Caution: Taxpayers should be very careful not to change their address of record with the IRS to their current address due to relocation.

What does this mean for your individual and business clients?

Individuals:

  • 2016 federal income tax returns with a valid extension until October 16, 2017 are now due January 31, 2018.
  • Estimated tax payments with an original due date of September 15, 2017 and January 16, 2018 are now due January 31, 2018.

Businesses:

  • 2016 federal income tax returns with a valid extension until September 15, 2017 or October 16, 2017, are now due January 31, 2018.
  • Calendar and fiscal year businesses with estimated tax payments due that falls within the postponement period are now due January 31, 2018.
  • Quarterly payroll and excise tax returns with an original due date of October 31, 2017 are now due January 31, 2018.
  • Failure to deposit penalties will be waived for late paid payroll and excise tax deposits due on or after August 23, 2017 and before September 7, 2017, if deposits are made by September 7, 2017

IMPORTANT NOTE:  If you have clients that do not reside in the disaster area but their records necessary to meet a tax deadline occurring during the postponement period are located in the disaster area, they are eligible for relief.

For more information, see the entire IRS News Release (IR-2017-135) on the IRS website.

Visit the Tax Alliance Conference page for more information and updates and register for the 2018 Tax Alliance Conference in Plano, TX, June 5 – 7, 2018.

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Remember the Six Year Rule For Collections

As tax professionals, we get clients with various types of tax problems.  But somehow those with collection issues are some of the most difficult.  A common scenario is a client owing a large amount of taxes, say $100,000 in personal income taxes.  During the initial meeting, the client says he can reasonable pay between $1500 and $2000 a month.  Of course, being the experienced Enrolled Agent, CPA, or Attorney, you want to see his financial documents to see how well his perspective meets with reality.  So you guide him on what documents are needed to determine what his monthly payment will be.

You get his bank statements various monthly expenses, pay stubs, and other financial documents.  You diligently fill out the appropriate Form 433.  Suddenly you see that amount on line 50 of the Form 433A computes $5500 in monthly discretionary income.  So he can pay $1500 – $2000 a month.  But the problem is that the IRS’ perspective (not necessarily reality) is going to be that he should pay $5500 a month.

Well, before you call and give your client the bad news, you might want to refer to a few legal sources.  The first is IRC 6330(c)(3)(c), which states “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.”  Of course, this is a bit vague and might seem like a difficult argument to make.  How is requesting the taxpayer to pay the full amount on the Form 433 overly intrusive?

Well, the second source is the Internal Revenue Manual and specifically section 5.14.1.4.1, which instructs the revenue officer to accept a proposed payment plan that will fully pay the tax debt within 6 years.  This is commonly referred to as the six (6) year rule.  The six-year rule allows for payment of living expenses that exceed the Collection Financial Standards, and allows for other expenses, such as minimum payments on student loans or credit cards, as long as the tax liability, including penalty and interest, can be full paid in six years.  There are some conditions, such as the collection statute shouldn’t be in jeopardy, the taxpayer’s expenses must be reasonable, and this generally only applies to personal income tax debts.

We’d love to hear your experience using the six year rule.  Visit the Tax Alliance Conference page for more information and updates.

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IRS Begins Implementing the FAST Act: What Will Your Client’s Transcript Show?

by Patti Logan, EA (Speaker at the Tax Alliance Conference)

IRS has begun identifying individuals with seriously delinquent debts so that their passports may be revoked.  What will your client’s tax  transcript show? 

“Intial levy imposed.” Have you seen it on any of your clients’ IRS account transcripts? I have. It suddenly appeared on 1040 transcripts for clients where we are working out a currently uncollectible (CNC) hardship closure or where they have already been reported CNC. I’ve spoken to an assistor who didn’t know what it was. I’ve spoken to Stakeholder Liaison but they didn’t know. A friend called the Practitioner Priority Service who said it was a “glitch.”  I was concerned about this annotation on the transcript because IRS is not allowed to levy if it would cause a hardship so they should not levy if they have already determined that it would be a hardship for the taxpayer to pay.   Since I had tried every other place I knew, I submitted the issue to Systemic Advocacy and guess what?  I got an answer within just a few days.

In 2015, Congress passed the Fixing America’s Surface Transportation Act (FAST).  Section 32101 of the FAST Act added IRC 7345 which charged IRS with the requirement to report individuals owing a “serious delinquent tax debt” to the State Department so that passports may be rejected or applications denied.  A “seriously delinquent tax debt” is one which is assessed, greater than $50,000 and sometime in the past either a levy has been served or a lien filed.  There are three exceptions: 1) Those individual taxpayers who owe more than $50,000 but have worked out a payment arrangement either through an installment agreement or an accepted offer in compromise; 2) When the collection of the debt is suspended because the individual has claimed innocent spouse  relief;  3) When collection is suspended because the individual has requested a Collection Due Process hearing due to a proposed levy or while the request is pending. The State Department will then revoke a passport or may deny a new application.

So what is this “Initial levy imposed” that we are finding on some of our clients’ account transcripts?   It is a first step in identifying which accounts meet the criteria of IRC 7345 for passport revocation, denial or limitation. As mentioned above, there are four criteria for individuals to be reported to the Secretary of State: 1) Tax must be assessed 2) taxpayer must owe over $50,000 3) a levy has been served in the past or 4) a lien was filed on the account. So, IRS came up with a new code transaction code 971 with action code 640 which shows up on the transcript with “initial levy imposed”. This just indicates an account that has had a levy served in the past. It is being put on all individual accounts where a levy has been served no matter if the taxpayer owes $50,000 or not. The other criteria must still be met. It is not telling the taxpayer that they have been reported to the Secretary of State but it is a first step. IRS should notify the taxpayer when their account is sent to the State Department. The only action available to fight this is to take it to court.

If you want to hear more about reading the codes on the IRS transcripts, join me at The Tax Alliance Conference June 6, 7 and 8, 2017.  For more information go to www.taxalliance.org.

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Why Tax Preparers Should Have Tax Representation Skills

Image result for images of tax representationThe tax profession is a rather wide profession.  One can provide a variety of tax services to their clients as well as specialize in specific industries and other areas of tax law.  In fact, a common division amount tax professionals is choosing between providing either tax preparation services or tax representation services.   However, from experience, having a good foundation in tax representation only strengthens ones tax preparation.

Of course, many tax preparers are likely asking “How does tax representation knowledge help me prepare tax returns?”  Well, consider this.  A self-employed client provides you their tax documents, such as a profit and loss statement showing revenue and expenses, assets purchased for the business, property taxes, mortgage interest, and various other documents.   You prepare the return, review it with the client, and file it.  A year or so later, the client calls and says they have a letter from the IRS, the infamous CP2000, saying they owe more taxes.

If you’re a tax preparer who doesn’t provide representation skills, you might be quick to refer them to someone else.  But let’s just say you’re not that type of tax preparer.  So you ask to see the letter and you find out that the IRS is basing the additional tax assessment on a 1099K from Groupon.  So you tell your client to provide you with the monthly Groupon statements.  You total them up and realize Groupon was charging the client about 1/3 of the collected revenue as a fee, the notorious “marketing fee”, and depositing the net amount into the client’s bank account.  However, Groupon reported the gross revenue amount on the 1099K and of course, the client never expensed the 1/3 taken by Groupon taken as an expense.  After you prepare an amended return, you see the client doesn’t owe anything.  You then write and send a response on behalf of the client and the issue is resolved.

So how does this experience help a tax preparer?  Well, first it maintains credibility with the client.  If the client had been referred to someone else, it could have been viewed as the preparers fault and she may have lost a client.  Additionally, it demonstrates the tax professional’s skills, such as analyzing the IRS proposed assessment, proposing a solution, and working it to resolution with the IRS.  Finally, based on the experience, a professional tax preparer would learn and develop some additional due diligence steps moving forward, such as:

  • Ask clients if they accept credit card or other forms of payment where 1099Ks are issued and request all 1099Ks;
  • Reconcile all 1099Ks received by a client to total revenue reported by the client to make sure all reported income is on the return;
  • If the tax preparer sees a Groupon 1099K, she would likely ask for Groupon statements to compute the “marketing fee” for Groupon.

Of course, this is just one example.  Additional representation skills can help you better prepare those returns with incorrect 1099 MISC and other types of third party forms, assist clients who owe taxes but are not able to pay, and various other common taxpayer issues that arise during tax season.  When you have done this often enough, your clients will actually listen when you tell them to ignore various IRS press releases, such as “You don’t need your Form 1095 to file your 2015 tax return.”  We know you have  more than your share of clients who got IRS notices for that misinformation.

For more of tax tips and ideas, REGISTER NOW to attend the Tax Alliance Conference in Plano, TX June 6-8, 2017.

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Private Debt Collectors – Congress Tells IRS: Try, Try and Try AGAIN!

Are you ready to deal with the private debt collectors, again?  Yes, Congress has instructed IRS to contract with them again.

We have all heard the definition of insanity is doing something over and over again and expecting a different result.  Well, looks like Congress has decided to test that theory.  Once again, they have mandated that IRS use private debt collectors to attempt collection of “inactive tax receivables.”

These “inactive tax receivables” are defined as receivables that IRS has removed from active inventory because of lack of resources or inability to locate the taxpayer, more than 1/3 of the statutory period of collection has lapsed and the receivable has not been assigned to any employee of the IRS or a receivable that has been assigned to collection but more than 365 days have passed without interaction with the taxpayer or a third party in an effort to collect the tax.

However, the law went on to note which receivables will NOT be assigned to a private collection firm:

1)  If an offer in compromise is pending or active.

2)  If an installment agreement is pending or active.

3)  If the case has been classified as an innocent spouse case

4)  If the taxpayer is deceased, under aged 18, in a designated combat zone or a victim of tax-related identity theft.

5)  If the case is currently under examination, litigation, criminal investigation, or levy or,

6)  The case is currently subject to a proper exercise of a right to appeal.

According to IR-2016-125 dated September 26, 2016, IRS has contracted with four collectors to handle these accounts:  CBE Group, Conserve, Performant, and Pioneer.  The IRS will give each taxpayer and their representative written notice that their account is being transferred to a private collection agency.  Then the private collection agency will send a second, separate letter to the taxpayer and their representative confirming this transfer.

When reading about the Congressional mandate to use private debt collectors, one is immediately reminded of the phone scams where taxpayers who may not even owe taxes are contacted and threatened with law suits and even jail if they do not immediately pay the amount the scammers claim as taxes owed.  Congress has set some parameters that they hope will set the private collectors apart from the scammer.  Along with sending the two letters to the taxpayer and their representatives notifying them that the account has been transferred, the private debt collectors also are not allowed to ask for payment on a prepaid debit card. Hoping to reassure the taxpayers that their money is going to towards their delinquent taxes, the taxpayers contacted by the collectors will be notified of their ability to pay their taxes on irs.gov/payments and payment by check will be made payable to the U. S. Treasury and sent directly to the IRS not to the private collection agency.

It behooves anyone representing taxpayers before the IRS or preparing tax returns to stay up to date on the progress of the private debt collectors.   For more information, IRS has set up a webpage at  https://www.irs.gov/businesses/small-businesses-self-employed/private-debt-collection.

For more of tax tips and ideas and to hear directly from the IRS, come to the Tax Alliance Conference in Plano, TX, June 6-8 of 2017.

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By submitting this form, you are consenting to receive marketing emails from: Tax Alliance Conference, Kyle Coleman, Dallas, TX, 75248, http://www.taxalliance.org. You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact

Tax Professionals Beware!

The 2017 tax filing season is here!

Thieves have already geared up to file millions of fraudulent tax returns before the real taxpayer.  In a previous IRS CID presentation, the IRS indicated that thieves filed as many as 17 million tax returns on the first day of the filing season.  As the IRS, states, and tax industry continue the fight to combat identity theft by putting mechanisms in place to halt the processing of tax returns and freeze refunds due to potential identity theft, thieves will naturally seek other ways to steal taxpayer information and file fraudulent returns to get them through the system as legitimate returns.

IRS is warning tax professionals to secure their systems and protect their client data.  Through the Protect Your Clients; Protect Yourself campaign launched in September 2016 via the Security Summit partnership between IRS, states, and tax industry, the IRS has issued a series of tax tips geared toward educating and assisting tax professionals in protecting themselves and protecting their client’s data.

So you are not caught by surprise, let’s recap some of the email scams against tax professionals that you should be on the lookout for:

IR-2017-03, January 11, 2017 –  New Two Stage Email Scheme – In this scam tax professionals receives one email that asks the tax professional a question such as, “I need a preparer to file my taxes”; if the tax professional responds a second email is received with a PDF attachment or embedded web address where tax professional think they are downloading a potential client’s tax info but in reality thieves are collecting preparer’s email address and password and other information.

IR-2016-145, Nov. 4, 2016 – New e-Services Scam – The subject line for the fraudulent email is “Security Awareness for Tax Professionals.” The “From” line is “Your e-Services Team.” It has both an IRS logo and an e-services logo that hyperlinks to a URL verified as a phishing site. Thieves attempt to steal e-Services username and passwords.

Special Edition Tax Tip – September 23, 2016Fake Tax Bill Scam – Scammers emailing fake tax bills in the form of CP2000 notice related to the Affordable Care Act (ACA) requesting information regarding 2014 coverage and requesting checks be made out to I.R.S. and sent to “Austin Processing Center”. Please be aware that IRS requests checks be made out to Department of Treasury instead of I.R.S. and also there is no such IRS center called the “Austin Processing Center”.

IR-2016-119, September 2, 2016Thieves are able to access tax professional’s computers and use remote technology to take control, accessing client data and completing and e-filing returns but directing refunds to criminals’ own accounts.

IR-2016-103, August 11, 2016Email scheme mimicking tax software providers attempting to trick recipients into clicking on a bogus link appearing to be an update to their software package but really downloading a program to track the tax professional’s keystrokes to eventually steal information.

The following tips are suggested to protect yourself and your client from a data breach:

  1. Make sure your virus software is up to date and run a security scan to search for viruses and malware.
  2. Use encryption software to safeguards your client’s sensitive financial data such as tax returns or other tax information stored on your hard drive.
  3. Protect your wireless network with a strong password.
  4. Never use public Wi-Fi to share sensitive data. (Note: If Wi-Fi does not require password, it’s probably not secure.)
  5. Use strong passwords (minimum of 8 characters including lower and upper case letter, number, and special character) for both computer access and access to your tax software.
  6. Do not click or open any attachments from unknown senders.
  7. Create internal policies and educate staff members about the dangers of phishing scams in the form of emails, texts, and phone calls.
  8. Review any software your employees use to remotely access your network and/or your IT support vendor uses to remotely trouble shoot technical problems and support systems.
  9. Monitor your PTIN for any suspicious activity.  (Click here for IRS Instructions)
  10. Back up data periodically via your protected cloud storage or separate disk.

If you suffer a data breach or other security incident, see IRS Protect Your Clients; Protect Yourself Tax Tip Number 7, January 18, 2016 to determine next steps.

For more of tax tips and ideas and to hear directly from the IRS, come to the Tax Alliance Conference in Plano, TX, June 6-8 of 2017.