Posted tagged ‘IRS’

What Happens If We Abolish the IRS?

November 25, 2013

By George W. Connelly

Hardly a day goes by when some politician or editorial person doesn’t suggest that we don’t need the IRS or should simply do away with it.  Most of them come in connection with suggestions for changing the tax system to something like a national retail sales tax.  What these people fail to understand, and this writer is not challenging the sincerity of their views, is that without the IRS, our tax gap would explode geometrically.  We call our system a “voluntary” one, but we remain short of “volunteers”: there are simply too many people and businesses who don’t get around to filing tax returns, depositing their taxes, paying with those returns, and sometimes filing false returns.  This circumstance is not limited to income tax:  it is also present for state sales taxes, employment taxes and excise taxes.  As annoying as an IRS audit can be, and as unpleasant as some IRS employees can be to deal with, the reality is that the system does not “enforce itself.”

Those who clamor for an alternative system forget that some agency is going to need to be there to collect it.  Sometimes we hear the suggestion that state agencies can handle a national retail sales tax.  Most of them are undermanned and underfunded as they presently exist, and several states have no sales tax in place to which the federal tax could be surgically attached.  Those of us in the tax profession who deal with the IRS frankly prefer dealing with IRS personnel and the administrative system in place over what we encountered in the state regimes, including this writer’s experience in New York and Texas.

This writer knows that as long as we have a federal tax system, we’re going to have the Internal Revenue Service or some equivalent.  As they say, a rose by any other name … would smell as sweet.  Changing the name of the IRS to something else will not remove the tax man.  No matter what we call him, his job will never change.  Meanwhile, calls for abolishing the IRS simply distract the attention that needs to be placed on making the IRS more effective.

Who Audits TIGTA?

November 22, 2013

By George W. Connelly

The Inspector General for Tax Administration, TIGTA, has been in the news a lot lately. In addition to tracking down misbehaving IRS employees and misbehaving representatives, an important role of this organization seems to be examining every aspect of the operation of the Internal Revenue Service and publishing a critical report about it. Lately, it seems that TIGTA has been publishing an average of two a week, virtually all of which have been critical of the performance of the Internal Revenue Service. Two recent ones, however, deserves some close examination and cause this writer to wonder if TIGTA may not be crossing the line of objectivity.

The first alleges that the IRS is not properly pursuing return preparers who have made mistakes in preparing returns where the earned income tax credit (EITC) has been claimed. Anyone familiar with the EITC knows there are several reasons why this criticism rings hollow. The first is a dirty little secret: EITC is an acronym for “welfare,” and has no place in the Internal Revenue Code. If our executive and legislative branches had any courage at all, they never would have put it there, but they recognize that parts of the American public view welfare as a “four letter word,” so it’s been tucked away in the Internal Revenue Code and dumped on the IRS to administer.

The second reason is well known to anyone who has attempted to navigate the labyrinth of rules relating to the application of the law and eligibility for this credit. It is like a scene out of an old Marks Brothers movie. A well-meaning and professional as most TIGTA agents I have come to know are, I would defy any of them to pass an EITC exam—applying it to several fact situations—without making an error.

The third point very simply is that the IRS does not set its own budget, but rather Congress does, and Congress has simply not allotted enough funds for each and every one of the functions that TIGTA doesn’t seem to think the IRS is doing well enough. The ideal solution—removing the EITC from the Internal Revenue Code, and charging some other agency with properly administering it, seems lost upon TIGTA, and as noted above seems to be an example of criticizing an already overburdened and embattled agency.

The other recent study was to the effect that the IRS is misinterpreting the law in such a manner that it “misses” penalties that should be applied to erroneous refund claims, tax returns, and other matters. Anyone who has represented people before the Internal Revenue Service or prepared returns will find this a mindboggling announcement in light of the fact that penalties seem to be applied during audits for little more than that sake of applying penalties, and unfortunately, judicial opinions about whether the penalty should have been applied in the first place often cannot be reconciled with one another when similar facts appear to be present. The reality exists that many of the penalties are not sustained, and TIGTA does not seem to take that element of the process into account.

Hopefully, TIGTA has not interpreted its role to be critic in residence rather than a source of constructive solutions for addressing the problems which exist in the IRS. It plays an indispensable role as monitor of the IRS, but perhaps it’s falling short when it omits important elements from its reports.

 

Houston – 36th Annual Tax and Business Planning Seminar

October 30, 2013

This must-attend seminar will help ensure that you are as ready as the IRS for 2014. Hosted by Best Lawyers-ranked Tier One taxation law firm Chamberlain, Hrdlicka, White, Williams & Aughtry, the event will feature presentations by Patrick Jankowski, CCR, Vice President, Research, Greater Houston Partnership, and more than 14 experts from Chamberlain Hrdlicka’s labor, transactional, planning, and tax controversy practices. Attendees can earn CLE/CPE/CFP credit.

December 5, 2013
Houston Marriott Westchase
Houston, Texas

Click here to register online

Click here for more information

Atlanta – 28th Annual Tax and Business Planning Seminar

October 28, 2013

This must-attend seminar will help ensure that you are as ready as the IRS for 2014. Hosted by Best Lawyers-ranked Tier One taxation law firm Chamberlain, Hrdlicka, White, Williams & Aughtry, the event will feature presentations by named shareholder David Aughtry, a former IRS trial attorney and the firm’s leading tax litigator for nearly 30 years, and 15 other experts from Chamberlain Hrdlicka’s labor, transactional, planning and tax controversy practices. Attendees can earn CLE/CPE/CFP credit.

Wednesday, November 13, 2013
Cobb Galleria Centre
Atlanta, Georgia

Click here to register online.

Click here for more information.

Filing Tax Returns During the Silly Season

October 7, 2013

For my fellow procrastinators whose federal tax returns are on extension, with the October 15th deadline rapidly approaching, perhaps the burning question has crossed your mind, “If I file electronically while the government is shut down, will my return be accepted?”  Yes, I can happily report that a return electronically submitted to the IRS at 3:43 p.m. this day was “accepted for filing” at 4:04 p.m., efficiency approaching a Michael Phelps-like performance. Perhaps the IRS has designed a system that operates better when it is staffed only by computers rather than by people.  Rube Goldberg, eat your heart out.

Filing Your Tax Return

–Phil Karter

Before You Abandon That Underwater House, Read This!

July 24, 2013

By George W. Connelly

The Tax Court recently issued a Summary Opinion, Malonzo v. Commissioner of Internal Revenue, T.C. Summ. Op. 2013-47, involving an individual who was underwater on her mortgage, and who abandoned the property, subsequent to which the mortgage loan was foreclosed.  She took no formal steps to transfer title or provide the lender with notice of her intention to abandon the residence, but just stopped making payments.  The residence was later resold by the lender who sent her a Form 1099-A, Acquisition or Abandonment of Secured Property, reflecting as income the outstanding balance of her mortgage less the amount for which the property was resold.

The IRS determined that she had received a long-term capital gain, based upon the difference between the balance of the mortgage and her adjusted basis in the property.  She, in turn, filed an amended return in which she reported an ordinary loss from the abandonment of the residence equal to roughly the difference between her adjusted basis and the depreciation recaptured from a period in which she rented the home.

The Tax Court concluded that the abandonment of this property and the subsequent foreclosure was a “sale or exchange” under the Internal Revenue Code,” so the gain or loss would be capital.  As such, the Court concluded she was not entitled to an ordinary loss (and fortunately not ordinary gain either!) because the property was subject to a mortgage which was satisfied.  As such, the IRS determination was sustained.

The best lesson to learn here is that before one takes the action taken by Ms. Malonzo, it is worth spending some time with a qualified tax adviser who can explain exactly what the ramifications will be.

How Does IRS Police Its Own Lawyers?

July 15, 2013

By George W. Connelly

The IRS employs many lawyers and employees of the IRS Office of Chief Counsel are its principal legal staff who number 1560, of whom about 550 work in the IRS National Office in Washington, while the balance work in offices around the country.  They provide legal advice to the Commissioner of Internal Revenue and the local IRS offices, and they act as the lawyer for the Commissioner of Internal Revenue in all Tax Court cases.  In addition, some are specially designated to assist United States Attorneys in bankruptcy, summons enforcement and other civil cases.

In 1998, a Chief Counsel’s Professionalism Program was established, to ensure that the office fully complies with Treasury directives, and that all allegations of misconduct are promptly and thoroughly investigated.  All allegations or evidence of an employee’s serious or significant failure to comply with accepted standards must be referred to the Deputy Chief Counsel (Operations), and the most serious matters must be referred to the Office of the Treasury Inspector General for Tax Administration (TIGTA).

The IRS Office of Chief Counsel recently released reports on the subject of professionalism for the years 2009 through 2012, and the findings – which are broken between TIGTA and non-TIGTA cases – are worth noting.

The kinds of TIGTA cases include situations such as an employee lost a government laptop, misused the IDRS system to seek address information about an ex-spouse of the employee’s child, used Office of Chief Counsel letterhead to write a letter to a court on behalf of a personal friend who was being sentenced on tax-related charges, and one who used the Government computer to send emails on a private, non-work related matter which created the impression that they were acting in an official role.  The results of the investigations were as follows:

2008

2009

2010

2011

2012

Cases not substantiated

15

11

18

16

15

Employees separated before reviewcompleted

2 retired

5 resigned

0 retired

0 resigned

0 retired

0 resigned

  7

  0

Substantiated

15

28

15

27

25

Undetermined

  1

  1

  0

  0

  0

               TOTAL

38

40

33

50

40

Of those cases, the nature of the disciplinary action was reported for 2009-2011 as follows:

2009

2010

2011

2012

Counseling

Written-3

Oral-2

Written-1

Oral-8

Written-4

Oral-16

Written-1

Oral-20

Admonishment

  0

  2

  3

  1

Reprimand

  1

  1

  1

  1

Suspension

  1

  2

  3

  0

Removal

  0

  0

  0

  2

Downgrade

  0

  0

  0

  0

               TOTAL

14

27

  7

25

The reports also described the actions in non-TIGTA cases which fell in similar classifications.  The kinds of non-TIGTA cases which arose involved failing to file a proper tax return – overlooking interest income; failure to comply with deadlines imposed by the Tax Court; taking leave without authority; and a verbal altercation in an open office area involving racial terms and profanity.  In 2010, disciplinary action was taken in 97% of such cases, 100% in 2011, and 100% in 2012.

Given all the attention received for the Section 501(c)(4) situation, it is comforting to see that professionalism is not being ignored within the Office of Chief Counsel.  It will be interesting to see how all of the current allegations are dealt with in this framework.


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