2008 IRS REPRESENTATION UPDATE©
By: Robert E. McKenzie 1. A CHANGING IRS TC "1. A CHANGING IRS" \f C \l "1" More Compliance Centers to Cease Processing Returns: 1.10 TC "More Compliance Centers to Cease Processing Returns:" \f C \l "2" Because of electronic filing the IRS is gradually eliminating its return processing centers. The closure schedule is as follows. · · Philadelphia, Memphis & Holtsville no longer process Andover 10-09 Atlanta 10-11
As of October, 2011 there will be 2 returns processing centers for business returns and 3 returns processing centers for individual returns. Each of the remaining compliance centers will continue performing correspondence audits and collection activities. Shrinking IRS Workforce 1.15 TC "Shrinking IRS Workforce" \f C \l "2" As a result of Congressional cuts in IRS budgets its workforce continues to shrink in 2007. It’s workforce has shrunk from about 100,000 in 2002 to about 87,000 in 2007.
Table 30. Internal Revenue Service Personnel Summary, by Employment Status, Budget Activity, and Selected Type of Personnel, Fiscal Years 2006 and 2007 Employment status, budget activity, and selected type of personnel 2006 [r] Average positions realized  2007 Number of employees at close of fiscal year 2006 [r] 2007
Internal Revenue Service, total Employment status: Full-time permanent Other
Commissioner Everson Resigns 1.20 TC "Commissioner Everson Resigns" \f C \l "2" IRS Commissioner Mark Everson resigned on April 18, 2007. Mr. Everson left the IRS to become president of the American Red Cross. He resigned from that position within months in the midst of a sex scandal. During his tenure with the IRS, Everson dramatically increased IRS enforcement activity. Audits more than doubled and there was an even more dramatic increase in IRS enforced collection actions. Mr. Everson also shifted IRS audit resources to examine the returns of high income taxpayers. He also initiated an aggressive program to find and eliminate tax shelters. New IRS Commissioner 1.25 TC "New IRS Commissioner" \f C \l "2" In March, 2008 the Senate unanimously confirmed IRS Commissioner Douglas H. Shulman. He promised would work to ensure that the tax agency is fair, and he would concentrate both on enforcement and service. "For the majority of Americans who pay their taxes willingly and on time, there must be clear guidance, accessible education and outstanding service," he said in a statement. "For taxpayers who intentionally evade paying taxes, there must be rigorous enforcement programs." Shulman has been vice chairman of the Financial Industry Regulatory Authority, previously known as the National Association of Securities Dealers. He also has served on the bipartisan National Commission on Restructuring the Internal Revenue Service. New Circular 230 Rules 1.30 TC "New Circular 230 Rules" \f C \l "2" In September the Treasury and the IRS announced new Circular 230 rules. The revisions to would modify: · · · the definition of practice, eligibility for enrollment, and the rules concerning contingent fees, conflicts of interest, standards with respect to tax returns and documents, affidavits and other papers, sanctions, discovery, publicity, and appeals.
IRS Expands Access to e-Services Products 1.40 TC "IRS Expands Access to e-Services Products" \f C \l "2" Effective November 1, 2007 all federally authorized tax professionals and electronic return originators are allowed to use these e-Services products: Disclosure Authorization, Electronic Account Resolution and Transcript Delivery. When first launched in the summer of 2004, the e-Services incentive products were reserved for those who e-filed 100 or more individual returns. e-Services Products for Practitioners 1.50 TC "e-Services Products for Practitioners" \f C \l "2" e-Services is a suite of Internet products that allow third-party customers to conduct specific business activities with the IRS electronically and are an incentive product to promote IRS e-File. All users must register and provide information to be used online during secure sessions. Registration is confirmed via postal mail. A PIN is mailed directly to the registrant. Other secure features of e-Services are: · · · · · · Principals/responsible officials on the application can delegate access to individual e-Services. All users are authenticated against IRS records. Passwords must be changed every six months. Passwords are known only to the user. Every transaction is recorded. Transactions are reviewed for access violations.
Taxpayer Identification Number (TIN) Matching 1.60 TC "Taxpayer Identification Number (TIN) Matching" \f C \l "2" TIN Matching is a pre-filing service offered to payers and/or authorized agents who submit any of six information returns subject to backup withholding (Forms 1099-B, INT, DIV, OID, PATR, and MISC). With Interactive TIN Matching authorized payers can match up to 25 payee TIN and name combinations against IRS records prior to submitting an information return. Bulk TIN Matching allows payers and/or authorized agents filing any of the six information returns to match up to 100,000 TIN and name combinations. In order to participate in TIN Matching, payers must be listed in the IRS Payer Account File (PAF) database. If your firm has not filed information returns with the IRS in one of the past two tax years, the application will not be available to you at this time. Tax Professionals are eligible to use the following incentive products: Disclosure Authorization 1.70 TC "Disclosure Authorization" \f C \l "2" Eligible tax professionals may complete authorization forms, view and modify existing forms, and receive acknowledgement of accepted submissions immediately--all online. Disclosure Authorization allows tax professionals to electronically submit Form 2848, Power of Attorney and Declaration of Representative, and Form 8821, Tax Information Authorization. This e-service expedites processing and issues a real-time acknowledgment of accepted submissions. Electronic Account Resolution 1.80 TC "Electronic Account Resolution" \f C \l "2" Electronic Account Resolution allows tax professionals to expedite closure on clients’ account problems by electronically sending/receiving account related inquiries. Tax professionals may inquire about individual or business account problems, refunds, installment agreements, missing payments or notices. Tax professionals must have a power of attorney on file before accessing a client’s account. The IRS response is delivered to an electronic secure mailbox within 3 business days.
Transcript Delivery System 1.90 TC "Transcript Delivery System" \f C \l "2" Eligible tax professionals may use Transcript Delivery System to request and receive account transcripts, wage and income documents, tax return transcripts, and verification of non-filing letters. A new product (the Record of Account) combines both the Return Transcript and Account Transcript in one product. Tax Professionals can request the products for both individual and business taxpayers. Use the TDS application to resolve your clients' need for return and account information quickly, in a secure, online session. Tax professionals must have a Power of Attorney authorization on file with the IRS before accessing a client's account (or use Disclosure Authorization to file an authorization on a new client and obtain TDS information immediately).
Taxpayer Identification Number (TIN) Matching 1.100 TC "Taxpayer Identification Number (TIN) Matching" \f C \l "2" TIN Matching is a pre-filing service offered to payers and/or authorized agents who submit any of six information returns subject to backup withholding (Forms 1099-B, INT, DIV, OID, PATR, and MISC). With Interactive TIN Matching authorized payers can match up to 25 payee TIN and name combinations against IRS records prior to submitting an information return. Bulk TIN Matching allows payers and/or authorized agents filing any of the six information returns to match up to 100,000 TIN and name combinations. In order to participate in TIN Matching, payers must be listed in the IRS Payer Account File (PAF) database. If your firm has not filed information returns with the IRS in one of the past two tax years, the application will not be available to you at this time. 2. TAXPAYER ADVOCATE TC "2. TAXPAYER ADVOCATE" \f C \l "1" National Taxpayer Advocate Releases Report To Congress 2.10 TC "National Taxpayer Advocate Releases Report To Congress" \f C \l "2" In January 2008 National Taxpayer Advocate Nina E. Olson released a report to Congress. Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(III) requires the National Taxpayer Advocate to describe at least 20 of the most serious problems encountered by taxpayers. This year’s report describes 26 problems and provides status updates on three other issues: the IRS’s Private Debt Collection (PDC) initiative, its collection strategy, and its Questionable Refund Program (QRP). Each of the most serious problems includes the National Taxpayer Advocate’s description of the problem, the IRS’s response, and the National Taxpayer Advocate’s final comments and recommendations. This format provides a clear picture of which steps have been taken to address the most serious problems and which additional steps the National Taxpayer Advocate believes are required. The 29 problems described in the report are as follows: 1. The Impact of Late-Year Tax-Law Changes on Taxpayers. In recent years, Congress has made significant changes to the tax code in December that apply to the current tax year (e.g., the “extenders bill” in December 2006 and the Alternative Minimum Tax (AMT) “patch” in December 2007). The IRS currently finalizes Form 1040 and its accompanying instructions in early November, and tax software companies finalize their shrink-wrapped software packages around the same time. If Congress changes the law after those products have been finalized, significant problems arise. Because of systemic limitations and to minimize taxpayer confusion, the IRS generally does not update Form 1040 or its accompanying instructions after initial publication. As a result, taxpayers filing paper returns are particularly likely to complete their returns without taking into account late-year changes. Taxpayers who purchase shrink-wrapped software have the option of downloading a “patch” to update their software, but some taxpayers do not do so. As a
result, some taxpayers who prepare their returns electronically also do not take late-year changes into account. In Tax Year 2006, Congress waited until after the Form 1040 package and shrink-wrapped tax software products had been finalized to “extend” several popular tax deductions. Taxpayers ultimately claimed these deductions about 1.4 million times less frequently than in tax year 2005, when the deductions were included in the Form 1040 instructions and built into all tax software. Thus, it appears that numerous taxpayers did not claim tax deductions to which they were entitled simply because they did not know about them. Late-year tax-law changes also place enormous stress on the IRS’s ability to deliver a successful filing season. The National Taxpayer Advocate recommends that the Treasury Department and the tax-writing committees create a formal process by which IRS estimates of the filing-season impact of significant tax legislation are transmitted to the tax-writing committees at several points during the year, perhaps on June 30, September 30, and monthly thereafter. 2. Tax Consequences of Cancellation of Debt Income. When a taxpayer is unable to pay a debt and the creditor cancels some or all of it, the amount of the canceled debt is generally treated as taxable income to the taxpayer. Debt cancellation arises in numerous contexts, such as when a taxpayer defaults on an automobile loan or a credit card bill, and affects a significant number of taxpayers. In 2006, creditors issued to borrowers nearly two million Forms 1099-C, Cancellation of Debt, reporting canceled debts. The tax treatment of canceled debts is extremely complex and poses a significant challenge to affected taxpayers. If the lender incorrectly values property, the amount of canceled debt it reports will be wrong. If the taxpayer is insolvent (i.e., the taxpayer’s liabilities exceed the taxpayer’s assets), the canceled debt is excludable from gross income up to the amount of insolvency. Our review of IRS forms, instructions, and publications reveals that the IRS does not provide adequate guidance to taxpayers or practitioners. IRS personnel will not prepare tax returns for taxpayers who have received a Form 1099-C even if the taxpayers are otherwise eligible for such assistance. The National Taxpayer Advocate makes 11 recommendations to provide greater assistance to taxpayers, including a recommendation that the IRS treat questions about canceled debts as “in scope” at its walk-in sites and a recommendation that the IRS develop a publication on the tax treatment and reporting of cancellation of indebtedness income that consolidates all relevant information in one place. 3. The Cash Economy. Income from the “cash economy” – taxable income from legal activities that is not subject to information reporting or withholding – is the type of income most likely to go unreported. Unreported income from the cash economy is probably the single largest component of the tax gap, likely accounting for over $100 billion per year. Noncompliance in the cash economy is difficult for the IRS to detect. Thus, the IRS should be using different strategies to address this problem than it uses to address noncompliance in other areas. The National Taxpayer Advocate has identified a number of steps that the IRS can take to address this problem without additional legislation. While the IRS can never achieve full compliance, these recommendations should help the IRS make significant progress in improving compliance in the cash economy. 4. User Fees: Taxpayer Service For Sale. The IRS lacks a consistent strategy for the user fees charged to taxpayers. This makes many basic services unaffordable to the public, in part because the IRS often neglects or is slow to waive fees for lower income taxpayers. The IRS collects about $180 million in user fee receipts annually, mostly from the installment agreement fee, and it uses this revenue to pay for taxpayer services,
information technology, and other program costs. The National Taxpayer Advocate believes that the IRS should employ strong criteria for establishing and setting fees, along with vigilant oversight and review of existing fees. Otherwise, taxpayers’ access to service may be reduced and their rights harmed as the IRS establishes new fees and raises others to make up for budgetary shortfalls. Privacy and Protection of Taxpayer Information 5. The Use and Disclosure of Tax Return Information by Preparers to Facilitate the Marketing of Refund Anticipation Loans and Other Products with High Abuse Potential. Tax return preparers use the preparation process to sell a variety of products to their clients. The sale of certain commercial products, such as refund anticipation loans (RALs), refund anticipation checks (RACs), and audit insurance, is disproportionately targeted toward low income taxpayers and may exploit those taxpayers’ trust in their preparers and their own lack of financial sophistication. Some preparers who market RALs also have a financial incentive to inappropriately inflate refund amounts. To the extent that problems arise with a RAL or similar product, taxpayers may incorrectly assume there are problems with the administration of the tax laws. Within the existing statutory framework of IRC § 7216, the Treasury Department has the discretion to restrict the ability of preparers to obtain taxpayer consent to either use or disclose tax return information in the marketing of RALs, audit protection, and similar products. 6. Identity Theft Procedures. The National Taxpayer Advocate first raised her concerns about the IRS’s identity theft procedures in her 2005 Annual Report to Congress. While the IRS has made some improvements, it has not done enough to improve procedures for victims of identity theft or to secure its filing system from fraudulent filers. The IRS’s identity theft measures are reactive rather than proactive and require taxpayers to contact the IRS and work their way through layers of employees until they reach someone with authority to adjust their accounts. Too often, victims of identity theft receive more scrutiny from the IRS than perpetrators, such as those who use the electronic filing system and bank account direct deposit to commit refund fraud. The IRS should make a PIN process mandatory for all electronic filers, increase the security of direct deposits, and generally take a more taxpayer-centric approach to identity theft and put procedural and preventive changes on a fast track. 7. Mortgage Verification. When closing on a mortgage, borrowers often must consent to disclose certain tax information in order to verify their income, including signing a blank copy of Form 4506-T, Request for Transcript of Tax Return, which gives the lender access to four years of tax information for 60 days from the date on the form. However, the information disclosed is not subject to the same protection and limits on use as other taxpayer information, which raises numerous privacy concerns. The IRS should revise Forms 4506, 4506-T, and 8821 (and their instructions) to state in clear and plain language that taxpayers should not sign a blank or incomplete form. for which the information can be used by third parties. Tax Return Preparers and Representatives 8. Transparency of the Office of Professional Responsibility. The IRS’s Office of Professional Responsibility (OPR), which is charged with regulating tax practitioners, has not published sufficient guidance or procedures to assure the public that it operates fairly and independently. If there is any question about OPR's independence from the IRS, practitioners (and taxpayers) may fear OPR will serve as an extension of the IRS
enforcement function and arbitrarily target practitioners who are appropriately advocating for taxpayers. This belief would chill zealous advocacy by practitioners and harm taxpayers as well. OPR should improve both the reality and perception of its independence and establish reasonable limits on its discretion by issuing guidance on which practitioners can rely. This guidance should more directly address who is subject to regulation by OPR, what conduct is prohibited, how OPR follows up on referrals, how OPR will adjudicate an allegation (including policies governing practitioner access to information that could bear on the result), and what penalties OPR will seek for a given offense. 9. Preparer Penalties and Bypass of Taxpayers’ Representatives. The IRS should more effectively use the tools at hand to address incompetent or unscrupulous tax return preparers. It has collected just slightly more than 20 percent of the preparer penalties it has assessed under IRC §§ 6694 and 6695 during the past six years, and that is inadequate. The IRS also places taxpayers at risk by failing to enforce the civil and criminal penalties under IRC §§ 6713 and 7213. The IRS should also find a way to systemically check whether all individuals identified on Electronic Return Originator (ERO) applications as Principals, Responsible Officials, and Delegated Users have unpaid preparer penalties assessed against them. The IRS’s authority to bypass taxpayer representatives exists to protect taxpayers against incompetent or unethical practitioners Finally, the National Taxpayer Advocate is concerned about the higher standards of conduct recently added to IRC § 6694, which may affect the way tax preparers dispense advice and create conflicts of interest between preparers and their clients. Taxpayer Service Issues 10. Taxpayer Service and Behavioral Research. The IRS has more quality research on taxpayer service at its disposal than ever before. As part of the Taxpayer Assistance Blueprint (TAB), the IRS conducted extensive research on taxpayers’ needs, preferences, behavior, and willingness to use certain services. The National Taxpayer Advocate has also commissioned studies to identify ways to improve the tax system. The IRS now needs to test and apply the findings of these studies. The IRS should develop a behavioral research lab that can test and enhance IRS products, thereby improving taxpayer service. By applying existing findings and developing a better understanding of taxpayer behavior, the IRS can also improve voluntary compliance 11. Service at Taxpayer Assistance Centers. The development of the TAB helped the IRS learn more about taxpayer needs, preferences, and willingness to use services at the Taxpayer Assistance Centers (TACs or “walk-in sites”). Despite this blueprint and the knowledge that some taxpayers will always need face-to-face service, taxpayers who visit TACs continue to experience difficulties making appointments, obtaining return preparation assistance, and making payments. The National Taxpayer Advocate commends the IRS for a recent change to the Internal Revenue Manual (IRM) allowing any taxpayer visiting a TAC to receive a copy of his or her account transcript (up to the last three years) regardless of urgency or reason. However, the National Taxpayer Advocate recommends that the IRS also take other steps to help taxpayers who travel to TACs, such as providing same-day service and not turning them away or referring them elsewhere. 12. Outreach and Education on Disability Issues for Small Business/SelfEmployed Taxpayers. People with disabilities have always struggled to find employment, largely because of the numerous barriers facing this population. Some
professionals believe there is an increasing trend among people with disabilities to address these barriers by becoming self-employed or owning their own small businesses. One of the most significant obstacles facing these individuals in starting their own businesses is the inaccessibility of business materials and information. Therefore, it is vital that the IRS take steps to ensure that tax administration is not a barrier to disabled individuals entering business, but rather, is a resource for these entrepreneurs. 13. Exempt Organization Outreach and Education. The U.S. tax-exempt sector consists of more than 1.6 million organizations (not including most churches). These exempt organizations (EOs) are diverse in size, ranging from large hospitals and universities to small volunteer-run charities. Approximately half of all EOs have all-volunteer staffs and another third have fewer than ten employees. Smaller EOs frequently lack professional tax guidance. The IRS has increased enforcement actions against EOs and the resources dedicated thereto. However, resources devoted to EO education and outreach, which were never adequate, have continued to decline. The National Taxpayer Advocate believes the IRS can and should do more to help EOs, particularly small organizations, comply with the complex requirements to which they are subject. 14. Determination Letter Process. Unreasonable delays in the processing of applications for exemption from federal income tax have persisted for several years. Three years after the National Taxpayer Advocate raised concerns about these delays in the 2004 Annual Report to Congress, the processing time for many organizations’ applications still exceeds the IRS’s goal. These delays can have a serious, detrimental effect on charitable organizations’ finances and activities. Examination Issues 15. EITC Examinations and the Impact of Taxpayer Representation. Many taxpayers have difficulty navigating the IRS examination process, particularly in regard to the EITC. A study requested by the National Taxpayer Advocate found that taxpayers retain significantly more of their EITC if they have representation during the examination. The results suggest the IRS examination strategy is flawed. Changes to the existing strategy are necessary to ensure that procedural barriers do not prevent taxpayers from receiving the EITC to which they are entitled. To ease the process, the IRS should increase communication with taxpayers, simplify correspondence and disabled taxpayers, adopt the use of affidavits, and improve the process of transferring cases from campuses to field offices. In addition, the IRS should work to promote available taxpayer services. 16. Nonfiler Program. In fiscal year (FY) 2006, the IRS established an executive group to oversee an enterprise-wide strategy to address nonfilers, but it has not implemented sustainable plans to increase filing compliance. The present IRS emphasis on automated systems and reductions in face-to-face service contributes to high rates of default assessments (in the Automated Substitute for Return program), low collection percentages, and downstream consequences in the form of TAS casework. The National Taxpayer Advocate urges the IRS to develop a more balanced strategy of research, service, and enforcement to increase filing compliance. 17. Automated Underreporter Program. The Automated Underreporter (AUR) program plays a critical role in reducing the nation’s tax gap by verifying reporting compliance for taxpayers who have filed returns and potentially failed to report all
income. In FY 2007, AUR closed more than 4.5 million cases and assessed $5.1 billion in additional tax. Given that AUR maintains an inventory of over 15 million cases at any given time, it is important for both the IRS and the taxpayer that the program be as accurate and effective as possible. Yet AUR has the highest rate of abatement of any compliance program and generates large numbers of TAS cases, most of which result directly from the IRS’s failure to adequately or timely address taxpayer responses to AUR contacts. The National Taxpayer Advocate recommends that the IRS make every effort to ensure that only those taxpayers who have underreported income are affected by the program, respond timely to correspondence, promptly process amended returns, and significantly improve the level of service on the AUR toll-free telephone lines. 18. The Accuracy-Related Penalty in the Automated Underreporter Units. The IRS has been increasing its reliance on the AUR program to systemically match payments that third parties report on Forms W-2s, 1099s, and similar documents against income that taxpayers report on their tax returns. The AUR program is vital to tax administration and reducing the nation’s tax gap. However, the AUR’s practice of automatically imposing the negligence penalty without the exercise of discretion by IRS personnel is problematic. The law requires IRS managerial approval of all penalties before assessment unless the IRS is able to “automatically calculat[e] the penalty through electronic means.” The IRS takes the position that if within the past three years the taxpayer failed to report amounts from the same type of information return which is at issue in the current year, the AUR may automatically impute negligence. This is a per se negligence standard. Negligence is a finding that requires an analysis of the taxpayer’s intent and a review of whether the taxpayer had reasonable cause. It is doubtful that Congress, which sought to ensure managerial review for penalty determinations in general, intended to provide a different rule for the negligence penalty. Taxpayers and the IRS would clearly benefit from some form of human review. Further, data suggests that while the AUR is proposing negligence penalties more frequently, the AUR experiences a high reversal rate – substantially higher than the IRS campuses or Field Examination units. The National Taxpayer Advocate urges the IRS to add a level of human review to the proposed AUR negligence penalty and develop a comprehensive program to review the overall effectiveness of utilizing the AUR to assess the penalty. 19. Audit Reconsiderations. In FY 2006, the IRS closed audit reconsiderations of tax assessments exceeding $1.7 billion by abating over $1.2 billion of those original audit assessments. The audit reconsideration process constitutes rework, since the IRS previously audited the taxpayers and assessed tax on the same tax period(s). The IRS’s strategic goals of reducing cycle time and improving detection of noncompliance need to be balanced against taxpayers’ need to receive clear communication and accurate resolution of tax controversies. The IRS’s failure to convey its goals to employees in a balanced fashion results in rework in the form of audit reconsiderations. The National Taxpayer Advocate urges the IRS to promote one-stop customer service among employees and to utilize the most effective means of communication to resolve tax issues in a timely manner. 20. Audits of S Corporations. While the IRS is struggling to develop a comprehensive strategy to address S corporation noncompliance, taxpayers are burdened by the S corporation election process and K-1 matching program errors. In addition, a significant number of S corporations classify all payments to their officers as “distributions” rather than “wages,” effectively avoiding employment tax liabilities. The National Taxpayer Advocate urges the IRS to increase the number of S corporation asset ranges to improve classification and return selection, and establish a tracking system to assess the final tax effect of S corporation adjustments and related issues such as
employment tax results. The IRS also should establish an outreach campaign and a soft contact letter test to address the officer compensation issue. Collection Issues 21. FPLP Levies on Social Security Benefits. The IRS has a legal right to attach federal payments of taxpayers not meeting their tax obligations through the Federal Payment Levy Program (FPLP). However, the IRS must employ proper safeguards to ensure that taxpayers with the greatest potential for hardship are identified and removed from the program before the IRS issues a levy. Although the IRS agreed to conduct additional research to address the National Taxpayer Advocate’s longstanding concerns with the FPLP, these efforts are not keeping pace with the rapid increase in FPLP levies on taxpayers’ Social Security benefits. In FY 2007, the IRS received in excess of 1.74 million levy payments that attached to Social Security benefits – an increase of almost 24 percent from FY 2006. Yet rather than developing an automated process to screen out low income or other taxpayers who are experiencing economic hardship, the IRS is actually seeking to expand the FPLP to other federal payments commonly associated with a taxpayer’s sole or primary source of income. The National Taxpayer Advocate strongly recommends that the IRS postpone FPLP expansion on any payments associated with retirement income until a suitable “low income and hardship” filter has been created and successfully tested. 22. Third Party Payers. When third party payers do not file required employment tax returns or make required deposits, employers remain liable for the underlying tax, interest, and penalties and may face significant economic difficulties. The IRS generally has no recourse other than to initiate collection of unpaid employment taxes from the employers. Not only are employers forced to pay the amount of their employment tax liability twice (once to the failed third party payer and again to the IRS), but they may also be liable for interest and penalties. The National Taxpayer Advocate recommends that the IRS assume a greater role in protecting taxpayers’ interests and assisting taxpayers in third party payer cases by developing “global” remedies for situations where large numbers of taxpayers share common facts. A global approach would provide a common starting point for relief, regardless of where the case is worked within the IRS. 23. Employment Tax Treatment of Home Care Service Recipients. Many elderly and disabled individuals receive home care and support services administered through a variety of state and local government health and welfare programs. Often, elderly and disabled home care service recipients (HCSRs) who participate in these programs fall into the category of common law employers, and they are required to apply highly technical and complex employment tax rules to determine their employer tax status and responsibilities. Elderly and disabled HCSRs can suffer substantial financial hardships when state and local government agencies contract out program responsibilities, including payroll functions, to intermediary service organizations (ISOs) that fail to properly report, file, and pay employment taxes. As a result, the elderly and disabled HCSRs – as the common law employers – remain liable for the tax, interest, and penalties. The National Taxpayer Advocate proposes a legislative change and a series of administrative steps that, if adopted, will complement and bolster the actions taken by the IRS to significantly mitigate the problems affecting HCSRs and minimize the downstream impact of ISO failures on elderly and disabled individuals. 24. Offers in Compromise. The IRS’s Offer in Compromise (OIC) program is no longer being used to any significant extent as a viable collection alternative. Between FY 2001 and FY 2007, offer receipts declined by 63 percent and the number of accepted
offers declined by 70 percent. The National Taxpayer Advocate believes that the long-term success of the OIC program is best served by maximizing the number of cases in which the IRS is able to complete the investigation and make a decision to accept or reject the offer on its merits. However, for the IRS to achieve its policy goals and reap the benefits of a successful OIC program, it must first minimize the extent to which policies intended to deter taxpayers from submitting incomplete or unrealistic offers do not also discourage taxpayers from submitting good ones. In order to do so, the National Taxpayer Advocate recommends the IRS ensure all IRS Collection employees can identify when accepting an OIC is a “win-win” situation for taxpayers and the government. Moreover, the IRS should revitalize its OIC outreach efforts to taxpayers and practitioners to better assist them with the submission of reasonable and appropriate offers. The key to success of the OIC program is to identify those taxpayers for whom an offer is an appropriate collection alternative and ensure they are aware of the OIC process and do not face unreasonable barriers in the submission of an offer. 25. Inadequate Training and Communication Regarding Effective Tax Administration Offers. Although the IRS has the ability to accept an OIC on the basis of “effective tax administration” (ETA), it has done very little to educate the public or its employees about how or when it will use this authority. As a result, eligible taxpayers may not be applying for OICs based on ETA, and IRS employees may not recognize situations when these offers are appropriate. Thus, the IRS needs to do more to ensure that all collection employees know when an ETA offer may be a viable collection alternative. The IRS also needs to conduct more in-depth external outreach to educate taxpayers and practitioners about when the IRS will accept an ETA offer. 26. Assessment and Processing of the Trust Fund Recovery Penalty (TFRP). Employers are responsible for withholding and remitting to the IRS certain trust fund taxes, including income and Federal Insurance Contributions Act (FICA) taxes from payments to employees, as well as certain federal excise taxes. When these monies are not paid as required, the law provides for the assessment of a TFRP, which can have disastrous economic consequences for those deemed to be responsible persons. However, the IRS has failed to consistently adhere to its own quality standards for investigating these cases. Despite almost a decade of negative findings by the Government Accountability Office (GAO), the IRS has yet to implement an effective or reliable system for the accounting and application of payments, credits, and offsets. The National Taxpayer Advocate makes several recommendations designed to improve the timeliness, fairness, and quality of the process. Status Updates 27. Private Debt Collection. The Private Debt Collection initiative is failing in most respects. It is not meeting revenue projections; its return on investment is dismal; the private collection agencies (PCAs) are no better at locating or collecting tax liabilities than the IRS itself; the IRS has failed to require the PCAs to disclose their taxpayer-related procedures to the public to the same extent as the IRS, which shields the program from adequate congressional and public scrutiny; and the IRS is sending the PCAs new cases (because the number of “easy” cases is smaller than projected) and these new cases may require the exercise of discretion and judgment in collection matters that is appropriately the sole province of the IRS. For these reasons, the National Taxpayer Advocate once again calls for the initiative’s repeal. 28. IRS Collection Strategy. The National Taxpayer Advocate has continually urged the IRS to employ a collection strategy that effectively and efficiently balances the goals
of tax collection, taxpayer service, and tax compliance. We are mindful of the difficulties the IRS faces when carrying out its collection strategy and properly administering the tax system, which requires a delicate balance between customer service and enforcement. Although the IRS’s collection strategy has improved over the past year, significant work remains to be done. We continue to believe that more emphasis by the IRS on providing timely service to taxpayers with tax delinquency problems and employing more flexibility in the use of available collection payment alternatives (e.g., installment agreements, partial payment installment agreements, and OICs), are necessary to deliver an effective, balanced, and service-oriented program. 29. Questionable Refund Program. The IRS established the Questionable Refund Program (QRP) in 1977 to prevent the payout of false refund claims. Historically and presently, the IRS’s Criminal Investigation (CI) function has managed the program, though the vast majority of the work is civil. In the 2005 Annual Report, the National Taxpayer Advocate identified the QRP as the second most serious problem facing taxpayers, and documented fundamental flaws with the program. While CI and the IRS responded with improvements, QRP cases still rank among the top five reasons that taxpayers seek TAS assistance. The National Taxpayer Advocate recommends that the IRS expeditiously transfer oversight of the program to the civil side of the IRS and further reduce the volume of legitimate taxpayer refunds that the QRP inappropriately delays The Most Litigated Tax Issues 2.20 TC "The Most Litigated Tax Issues" \f C \l "2" IRC § 7803(c)(2)(B)(ii)(X) requires the National Taxpayer Advocate to identify the ten tax issues most often litigated in the federal courts and to classify those issues by the category of taxpayer affected. The following is a table the most litigated as determined by TAS:.
3. ENFORCEMENT TC "3. ENFORCEMENT" \f C \l "1" Highlights of 2008 Enforcement 3.10 TC "Highlights of 2008 Enforcement" \f C \l "2" The IRS continues increase its enforcement activities. he IRS enforcement efforts increased again in fiscal year 2007. For instance, during 2007 the IRS audited 84 percent more returns of individuals with incomes of $1 million or more than during 2006. Overall, enforcement revenue reached $59.2 billion, up from $48.7 billion in 2006 and nearly $34.1 billion in 2002. Individual Enforcement 3.20 TC "Individual Enforcement" \f C \l "2" Audits of individuals with incomes of $1 million or more increased from 17,015 during fiscal year 2006 to 31,382 during fiscal year 2007, an increase of 84 percent. One out of 11 individuals with incomes of $1 million or more faced an audit in 2007. Overall, the total individual returns audited increased by 7 percent to 1,384,563 in 2007 from 1,293,681 in 2006. That’s the highest number since 1998. High Income Taxpayers 3.30 TC "High Income Taxpayers" \f C \l "2" Audit rates increased in 2007, both for overall individual rates and for higher-income taxpayers. Audits of individuals with incomes over $200,000 reached 113,105 returns, up 29.2 percent from the prior year total of 87,885. The IRS increased audits
of individual returns with income of $100,000 or more, auditing 293,188 of these returns in 2007, up 13.7 percent from last year’s total of 257,851. Businesses 3.40 TC "Businesses" \f C \l "2" In the business arena, the IRS continued efforts to review more returns of flow-through entities – partnerships and S Corporations. Its business numbers reflect that it has placed more emphasis in the growing area of these flow-through returns. While large corporate audits are down slightly, it has increased its focus on mid-market corporations – those with assets between $10 million and $50 million dollars. The IRS enforcement budget in 2007 was similar to the budget in 2006, and in times of flat budgets, the agency cannot increase activity across the board but instead addresses the areas where there is growth and potential risk. Audits of S Corporations increased to 17,681 during 2007, up 26 percent from the prior year’s total of 13,984. Audits of partnerships increased to 12,195 during 2007, up almost 25 percent from the prior year’s total of 9,777. Audits of mid-market corporations increased to 4,473, up 6 percent from last year’s total of 4,218. Audits of businesses in general rose to 59,516, an increase of almost 14 percent from the prior year’s total of 52,223. Although the audits of large corporations dipped slightly in 2007 to 9,644 audits, the number of audits is up 14 percent from the fiscal year 2002 level. Collection Enforcement 3.50 TC "Collection Enforcement" \f C \l "2" at the IRS also showed increases:
Overall, some of our most common enforcement tools
The IRS filed 3.8 million levies and almost 700,000 liens during 2007, an increase from the previous year and a substantial increase from five years earlier. Electronic Filing IRS Webpage 3.60 TC "Electronic Filing IRS Webpage" \f C \l "2" More taxpayers chose to file electronically in 2007 than during the prior year, with 57 percent of individual tax filers choosing to e-file in 2007, up from 54 percent in 2006. More people visited the IRS internet site, IRS.gov. The IRS site was accessed more than 217 million times in 2007, up more than 10.5 percent from the same period in 2006. Enforcement Revenue Collected 1
(Dollars in Billions) Collection Examination
FY 1998 $21.3 $12.5 $1.4 $35.2
FY 1999 $21.3 $10.0 $1.6 $32.9
FY 2000 $22.1 $10.2 $1.5 $33.8
FY 2001 $24.3 $7.9 $1.6 $33.8
FY 2002 $24.4 $7.9 $1.8 $34.1
FY 2003 $24.8 $10.7 $2.2 $37.6
FY 2004 $25.7 $14.7 $2.7 $43.1
FY 2005 $26.6 $17.7 $3.1 $47.3
FY 2006 $28.2 $17.2 $3.3 $48.7
FY 2007 $31.8 $23.5 $3.9 $59.2
Document Matching Total
Staffing for Key Enforcement Occupations4 FY 1999 6,516 FY 2000 5,538 FY 2001 5,376 FY 2002 5,502 FY 2003 5,076 FY 2004 5,156 FY 2005 5,249 FY 2006 5,627 FY 2007 5,662
FY 1998 Revenue Officers 6,796
Revenue Agents Special Agents Total
13,708 3,045 23,550
13,085 2,942 22,543
12,542 2,752 20,832
12,092 2,735 20,203
11,743 2,868 20,113
11,780 2,834 19,691
11,811 2,778 19,746
12,192 2,771 20,211
12,778 2,780 21,185
12,816 2,709 21,187
1 Enforcement revenue collected in a fiscal year includes tax, interest, and penalties from multiple tax years. Some enforcement activities can take more than a year to close and may generate revenue over several years, so it is generally inappropriate to compare revenue collected in a given fiscal year to the staffing available for that same year. 2 Includes any revenue collection attributable to IRS Appeals activities. 3 Includes the Information Reporter Program (IRP) and the Automated Underreporter (AUR) Program. 4 Enforcement staffing levels presented in Full Time Equivalents (FTE).
Income $1 Million and Higher
FY 2004 Field Correspondence T o t a l Examinations Returns Filed in Prior CY* Coverage 5,857 3,719 9,576 190,372 5.03% FY 2005 7,166 5,669 12,835 210,280 6.10% FY 2006 9,312 7,703 17,015 270,161 6.30% FY 2007 12,259 19,123 31,382 339,138 9.25%
Income $200,000 and Higher FY 2004 FY 2005
Field Correspondence Total Examinations Returns Filed in Prior CY* Coverage
* CY = Calendar Year
FY 2006 FY 2007
36,059 51,499 87,558 43,640 69,465 113,105
3,400,435 3,942,702 2.57% 2.87%
Income $100,000 and Higher
Field Correspondence Total Examinations Returns Filed in Prior CY* Coverage FY 2002 64,955 47,308 112,263 13,020,183 0.86% FY 2003 67,439 71,940 139,379 13,193,122 1.06% FY 2004 70,452 95,769 166,221 13,277,077 1.25% FY 2005 84,326 134,882 219,208 13,970,598 1.57% FY 2006 112,484 145,367 257,851 15,447,964 1.67% FY 2007 127,544 165,644 293,188 16,599,800 1.77%
Total Individual Returns
Field FY 2002 205,134 FY 2003 206,457 Correspondence Total Examinations Returns Filed in Prior CY* Coverage
*CY = Calendar Year
FY 2004 197,388 810,486 1,007,874 130,134,277 0.77%
FY 2005 247,235 968,073 1,215,308 130,576,852 0.93%
FY 2006 302,959 990,722 1,293,681 132,275,830 0.98%
FY 20 311,3 1,073,2 1,384,563 134,421,400 1.03
538,747 743,881 129,444,947 0.57%
642,839 849,296 130,341,159 0.65%
Subchapter S Returns (Form 1120-S)
FY 2002 11,646 Returns Examined Returns Filed in Prior CY* Coverage
*CY = Calendar Year
FY 2003 9,695 3,191,108 0.30%
FY 2004 6,402 3,369,122 0.19%
FY 2005 10,417 3,523,934 0.30%
FY 2006 13,984 3,715,249 0.38%
FY 2007 17,657 3,909,730 0.45%
Partnership Returns (Form 1065) FY 2002 5,543 2,165,011 0.26% FY 2003 7,871 2,271,755 0.35% FY 2004 6,226 2,405,361 0.26% FY 2005 8,489 2,546,439 0.33% FY 2006 9,777 2,720,290 0.36% FY 2007 12,195 2,934,597 0.42%
Returns Examined Returns Filed in Prior CY* Coverage
*CY = Calendar Year
Examination - Large Corporation Return Closures and Coverage Rates
Assets $10 Million and Higher Total Returns Examined Returns Filed in Prior CY* Coverage By Asset Class $10 Million < $50 Million Returns Examined Coverage 2,540 7.8% 1,987 6.2% 2,864 9.4% 3,535 12.3% 4,218 14.2% 4,473 15.0% FY 2002 8,443 59,602 14.2% FY 2002 FY 2003 7,125 58,974 12.1% FY 2003 FY 2004 9,523 56,883 16.7% FY 2004 FY 2005 10,829 54,091 20.0% FY 2005 FY 2006 10,591 56,847 18.6% FY 2006 FY 2007 9,644 57,357 16.8% FY 2007
$50 Million < $100 Million Returns Examined Coverage 865 10.7% 782 9.8% 965 12.9% 1,148 16.4% 999 13.8% 801 11.4%
$100 Million < $250 Million Returns Examined Coverage 1,289 16.0% 1,026 12.9% 1,308 16.9% 1,287 17.5% 1,085 14.0% 946 12.1%
$250 Million and Higher Returns Examined Coverage 3,749 34.4% 3,330 29.8% 4,386 39.8% 4,859 44.1% 4,289 35.3% 3,424 27.2%
Collection Enforcement Actions
FY 2001 Levies Liens Seizures 674,080 426,166 234 FY 2002 1,283,742 482,509 296 FY 2003 1,680,844 544,316 399 FY 2004 2,029,613 534,392 440 FY 2005 2,743,577 522,887 512 FY 2006 3,742,276 629,813 590 FY 2007 3,757,190 683,659 676
Criminal I nvesti gation s
FY 2002 Investigations Initiated Information & Indictments 3,906 1,924 FY 2003 4,001 2,128 FY 2004 3,917 2,489 FY 2005 4,269 2,406 FY 2006 3,907 2,319 FY 2007 4,211 2,323
FY 2002 Tax and Tax Related Nontax (illegal) Narcotics Total Incarceration Rate Avg M 991 483 659 2,133 91.5% 19 FY 2003 1,336 521 684 2,541 91.5% 19 FY 2004 1,439 719 879 3,037 92.2% 21 FY 2005 1,434 658 767 2,859 91.2% 22 FY 2006 1,343 756 621 2,720 91.5% 22 FY 2007 1423 866 548 2837 90.20% 22
Nonfiler Criminal Enforcement.
FY 2007 Investigations Initiated Prosecution Recommendations Indictments/Informations Sentenced Incarceration Rate* Avg. Months to Serve 516 300 266 278 80.6% 38 FY 2006 562 322 307 270 80.0% 40 FY 2005 549 413 316 280 78.2% 34
Fiscal Year 2008 Criminal Cases
(October 1, 2007 - December 31, 2007) Investigations Initiated Prosecution Recommendations Information/Indictments Total Convictions Total Sentenced* Percent to Prison Average Months to Serve Taxpayer Service Electronic Filing (e-File) Rate -- Individual Returns Totals 882 670 602 504 498 85.9% 40
FY 2003 40%
FY 2004 47%
FY 2005 51%
FY 2006 54%
FY 2007 57%
Toll-Free Assistor Level of Service Toll-Free Tax Law Accuracy Toll-Free Customer Satisfaction Rating Web Page Visits on IRS.Gov (in millions) Online Refund Status Checks through 'Where's My Refund (in millions)
80% 82% 93% 102.6
87% 80% 94% 152.7
83% 89% 94% 176.5
82% 91% 94% 197.1
82% 91% 94% 217.8
State Information Sharing 3.70 TC "State Information Sharing" \f C \l "2" The IRS is engaged in extensive information sharing with state tax authorities which allows it to more effectively discover nonfilers and other tax omissions. The IRS Fed/State Program saves government resources by partnering with state government agencies to enhance voluntary compliance with tax laws. This includes facilitating the exchange of taxpayer data, leveraging resources, and providing assistance to taxpayers to improve compliance and communications. The IRS also assists state agencies by identifying and reporting information on emerging tax administration issues. This is accomplished through the IRS entering into agreements to share information with the state agencies. There are more than 900 joint efforts underway. Examples include the sharing of examination reports, abusive scheme data, and licensing verification. Federal Tax Returns and Return Information. 3.80 TC "Federal Tax Returns and Return Information." \f C \l "2" “Tax returns” include Form 1040, U.S. Individual Income Tax Return, as well as other income tax and information returns, such as Form 941, Employer’s Quarterly Federal Tax Return; Form 730, Tax on Wagering; Form 1120, U.S. Corporation Income Tax Return; various Forms 1099, U.S. Information Returns; and Form W-2, Wage and Tax Statement. The states in turn share similar return information with the IRS. Since states have extensive information on business revenue on sales tax returns that info is a valuable resource for discovering nonfiling and underreporting. Return Information 3.90 TC "Return Information" \f C \l "2" “Return information” includes everything else that has anything to do with a person’s potential tax liability. Examples are any information extracted from a return like names of dependents, business location, or bank account information; the taxpayer's name, mailing address, or identification number; information on whether a return has been or will be examined or subject to any other investigation; information contained on transcripts of accounts or on IRS computer systems; the fact of filing a return; and whether a taxpayer has a balance due account. IRS Study Provides Tax Gap Estimate 3.100 TC "IRS Study Provides Tax Gap Estimate" \f C \l "2" Internal Revenue Service officials have announced that they have updated their estimates of the Tax Year 2001 tax gap based on the National Research Program (NRP). The updated estimate of the overall gross tax gap for Tax Year 2001 – the difference between what taxpayers should have paid and what they actually paid on a timely basis – comes to $345 billion. This figure falls at the high end of the range of $312 billion to $353 billion per year, an estimate released in March, 2005. Sources of Misreporting 3.110 TC "Sources of Misreporting" \f C \l "2" Though the net misreporting percentage varies by category of income, the rates reflect that compliance is highest where there is third-party reporting
or withholding. Simply stated, compliance is highest where there is third-party reporting. For example, one percent of all wage, salary, and tip income is misreported, contributing an estimated $10 billion to the tax gap. In contrast, nonfarm sole proprietor income, which is reported on a Schedule C and is subject to little third-party reporting or withholding, has a net misreporting percentage of 57 percent, contributing about $68 billion to the tax gap. Understanding the Tax Gap 3.120 TC "Understanding the Tax Gap" \f C \l "2" The Internal Revenue Service developed the concept of the tax gap as a way to gauge taxpayers’ compliance with their federal tax obligations. The tax gap measures the extent to which taxpayers do not file their tax returns and pay the correct tax on time. Components of the Tax Gap 3.130 TC "Components of the Tax Gap" \f C \l "2" components: nonfiling, underreporting and underpayment. Nonfiling occurs when taxpayers who are required to file a return do not do so on time. Underreporting of tax occurs when taxpayers either understate their income or overstate their deductions, exemptions and credits on timely filed returns. Underpayment occurs when taxpayers file their return but fail to remit the amount due by the payment due date.
The tax gap can be divided into three
Underreporting 3.140 TC "Underreporting" \f C \l "2" Of these three components, underreporting of income tax, employment taxes and other taxes represents about 80 percent of the tax gap. The single largest sub-component of underreporting involves individuals understating their incomes, taking improper deductions, overstating business expenses and erroneously claiming credits. Individual underreporting represents about half of the total tax gap. Individual income tax also accounts for about half of all tax liabilities. Underreporting Is Largest Component 3.150 TC "Underreporting Is Largest Component" \f C \l "2" Underreporting noncompliance is the largest component of the tax gap. Preliminary estimates show underreporting accounts for more than 80 percent of the total tax gap, with non-filing and underpayment at about 10 percent each. Individual income tax is the single largest source of the annual tax gap, accounting for about two-thirds of the total. For individual underreporting, more than 80 percent comes from understated income, not overstated deductions.
Noncompliance Rising 3.160 TC "Noncompliance Rising" \f C \l "2" Overall, the noncompliance rate is from 15 percent to 16.6 percent of the true tax liability. The old estimate, derived from compliance data for Tax Year 1988 and earlier, was 14.9 percent. Areas Where Compliance Has Decreased 3.170 TC "Areas Where Compliance Has Decreased" \f C \l "2" compliance appears to have worsened are:
Among the areas where taxpayer
Reporting of net income from flow-through entities, such as partnerships and S corporations Reporting of proprietor income and expenses, such as gross receipts, bad debts and vehicle expenses Reporting of various types of deductions Areas With Improved Compliance 3.180 TC "Areas With Improved Compliance" \f C \l "2" Among the areas where compliance seems to have improved is the reporting of farm income. Overall, compliance is highest where there is third-party reporting and/or withholding. For example, most wages, salaries and tip compensation are reported by employers to the IRS through Form W-2. Preliminary findings from the NRP indicate that less than 1.5 percent of this type of income is misreported on individual returns. IRS researchers anticipate identifying other specific areas of deterioration and improvement in the coming months as they complete the detailed analysis of the study’s data. New DIF Formulas 3.190 TC "New DIF Formulas" \f C \l "2" The IRS has done a preliminary update of its DIF formulas for 2006 and when fully updated formulas become available for use, IRS employees will be better positioned to select returns for examination that have the greatest likelihood of underreporting. Using such an approach better ensures that IRS audits are focused on the returns most in need of examination. This not only improves IRS efficiency, but it also assures taxpayers that others are paying their fair share. It also lessens the likelihood that those with accurate tax returns will receive the same
degree of scrutiny.
Tax Year 2001 Gross Tax Gap by Type of Tax and Type of Noncompliance (in $ billions) Type of Noncompliance Type of Tax Individual Income Tax Corporation Income Tax Employment Tax Estate & Gift Tax Excise Tax TOTAL Percent Distribution Nonfiling Gap 25 # # 2 # 27 7.8% Underreporting Gap 197 30 54 4 # 285 82.5% Underpayment Gap* 23.4 2.3 5.0 2.1 0.5 33.3 9.7% Amount 245 32 59 8 1 345 TOTAL Percent Distribution 71.1% 9.3% 17.0% 2.4% 0.1% 100.0%
* Since the underpayment gap figures are generally actual amounts rather than estimates, they are presented here to the closest $0.1 billion. # No estimates are available for these components. Amounts may not add to totals due to rounding. See Figure 1 regarding the reliability of estimates
Businesses More Likely to Not Comply. 3.200 TC "Businesses More Likely to Not Comply." \f C \l "2" Most of the understated income comes from business activities, not wages or investment income. Compliance rates are highest where there is third-party reporting or withholding. Preliminary findings show less than 1.5 percent of wages and salaries are misreported. NRP Subchapter S Corporation Study Overview 3.210 TC "NRP Subchapter S Corporation Study Overview" \f C \l "2" continues its NRP of S corporations. The study has the following elements:
During 2008 the IRS
Random Sample consists of approximately 5,000 returns from Small Business/Self-Employed (SB/SE) and Large & Mid-Size Business (LMSB) taxpayers covering two tax years, TY2003 and TY2004. The study follows the standard NRP methodology: – – – IRS is preparing “case built” files for key cases. IRS is classifying returns to identify specific issues that must be examined. Examiners have the ability to expand scope of the audit, if warranted.
Each tax year will have an examination cycle of approximately 24 months. The TY 2003 portion of the sample (1,200 returns) is complete, and these cases are now in the hands of Revenue Agents. NRP is selecting the TY 2004 (3,800 returns) portion of the sample. Expect results by December 2008
Tax Year 2001 Gross Tax Gap by Type of Tax and IRS Operating Division (in $ billions)
IRS Operating Division Small Business / SelfEmployed Total IndiCorporviduals ation 195 N/A 40 39 1 8 0 243 70.5% 27.1% N/A 6 7 N/A 7 N/A 0 14 257 4.0% 74.5% 5.3% 22.3% 195 6 47 39 8 8 0 34 9.8% 8.0% Tax‑ Large & Exempt Mid-Size & Gov’t Busines Entities N/A 25 8 N/A 8 N/A 0 N/A 1 4 N/A 4 N/A 0 4 1.2% 3.4% TOTAL
Type of Tax
Wage & Investment 50 N/A 0 N/A 0 # 0 50 14.5% 12.1%
Tax Gap 245 32 59 39 20 8 1 345 100.0%
NonCompliance Rate 20.9% 18.5% 8.1% 51.9% 3.0% 22.9%
Individual Income Tax Corporation Income Tax * Employment Tax S e l f - Employment FICA and FUTA Estate & Gift Tax Excise Tax † TOTAL Gap Percent of Total Noncompliance Rate
* Unrelated Business Income Tax is shown as corporation income tax. † Includes underpayment gap only. # No estimate is available for this component. Amounts may not add to totals due to rounding. Zeros indicate amounts less than $0.5 billion. See Figure 1 regarding reliability of estimates.
Tax Year 2001 Individual Income Tax Underreporting Gap and Net Misreporting Percentage (NMP) Associated with Income and Offset Line Items
Type of Income or Offset Net Misreporting Percentage † 18% 11% 4% 1% 4% 4% 12% 7% 4% 11 % 6% 12% 64% 64% 43% 57% 72% 51% 18% 4% -21 % -51% 6% 5% 5% 26%
Underreporting Gap ($B) 197 166 56 10 2 1 1 * 4 * 1 11 3 23 109 68 6 13 22 15 -3 -4 1 14 4 17 *
Total Underreporting Gap Underreported Income Non-Business Income Wages, salaries, tips Interest income Dividend income State income tax refunds Alimony income Pensions & annuities Unemployment compensation Social Security benefits Capital gains Form 4797 income Other income Business Income Non-farm proprietor income Farm income Rents & royalties Partnership, S-Corp, Estate & Trust, etc. Overreported Offsets to Income Adjustments SE Tax deduction All other adjustments Deductions Exemptions Credits Net Math Errors (non-EITC)
† The amount of income or offset misreported divided by the amount that should have been reported. The NRP contains an adjustment for income amounts that were underreported, but does not have a corresponding adjustment for offset amounts that were not claimed. * Less than $0.5 billion. § Taxpayers understate this adjustment because they understate their self-employment income and, thereby, their self-employment tax. Therefore, the gap associated with this item is negative.
Tax Year 2001 Individual Income Tax Underreporting Gap and Net Misreporting Percentage (NMP) Associated with Income and Offset Line Items, By Visibility Groups Net Misreporting Percentage † 18% 1% 1% 5% 4% 4% 12% 4% 11 % 6% 9% 18% 7% 12% 5% 5% 54% 57% 72% 51 % 64% 64% -21 % 26% 26%
Visibility Group Type of Income or Offset Total Underreporting Gap I t ems Subject t o Subst ant ial Information Reporting and Withholding Wages, salaries, tips Items Subject to Substantial Information Reporting Interest income Dividend income State income tax refunds Pensions & annuities Unemployment compensation Social Security benefits Items Subject to Some Information Reporting Partnership, S-Corp, Estate & Trust, etc. Alimony income Capital gains Deductions Exemptions Items Subject to Little or No Information Reporting Non-farm proprietor income Farm income Rents & royalties Form 4797 income Other income Total statutory adjustments Not Shown on Figure Credits
Underreporting Gap ($B) 197 10 10 9 2 1 1 4 * 1 51 22 * 11 14 4 110 68 6 13 3 23 -3 17 17
† The aggregate amount of income or offset misreported divided by the sum of the absolute values of the amount that should have been reported. The estimates of the amounts that should have been reported account for underreported income that was not detected by the audits, but do not have a corresponding adjustment for unclaimed offsets (e.g., deductions, exemptions, statutory adjustments, and credits) that were not detected. * Less than $0.5 billion. § Since credits are offsets to tax, it is difficult to combine them with income and income offset items when calculating a combined NMP.
2008 Budget 3.220 TC "2008 Budget" \f C \l "2" The Administration’s 2009 budget proposal is for a $11.6 billion operating budget. The Congress has approved a a 2008 budget which provides $10.9 billion with increases for enforcement and to pursue the tax gap. 2009 Budget Proposals 3.230 TC "2009 Budget Proposals" \f C \l "2" The FY 2009 President’s Budget request for the IRS increases funding as part of a strategy to improve compliance by focusing on the following priorities: Improving voluntary compliance and reducing the tax gap by: Increasing front-line enforcement resources, Improving taxpayer service options, Enhancing research, and Implementing legislative and regulatory changes. Maintaining balance between taxpayer service and enforcement. Investing in technology to improve infrastructure, modernize, and increase the productivity of existing resources. Enforcement Program
3.240 TC "Enforcement Program" \f C \l "2" IRS continues its emphasis on tax enforcement, increasing collections of delinquent tax debt from $33.8 billion in 2001 to an all-time high of $59.2 billion, yielding a 5.6 to 1 return on investment for all IRS activities in 2007. Revenue growth has been the greatest in the areas of corporate taxes and high income individual taxes. The FY 2009 President’s Budget request for the enforcement program is $7,487,209,000, an increase of $489,983,000 or 7 percent over the FY 2008 enacted level. As in the past three budget requests, the Administration proposes to include these enforcement increases as a Budget Enforcement Act.
Overview - Abusive Return Preparer 3.250 TC "Overview - Abusive Return Preparer" \f C \l "2" The IRS continues to expand and enhance its abusive preparer program. The program was developed to enhance compliance in the return-preparer community by engaging in enforcement actions and/or asserting appropriate civil penalties against unscrupulous or incompetent return preparers. Bad preparers are a significant problem for both the IRS and taxpayers. Return preparer fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. This includes inflated requests for the special one-time refund of the long-distance telephone tax. Preparers may also manipulate income figures to obtain tax credits, such as the Earned Income Tax Credit, fraudulently. In some situations, the client (taxpayer) may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on their tax returns. However, when the IRS detects the false return, the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties.
Abusive Preparers Investigations Initiated Prosecution Recommendations Indictments/Informations Sentenced Incarceration Rate* Avg. Months to Serve FY 2007 218 196 131 123 81.3% 19 FY 2006 197 153 135 109 89.0% 18 FY 2005 248 140 119 118 85.6% 18
Audits of 30 Clients 3.260 TC "Audits of 30 Clients" \f C \l "2" Another aspect of the IRS preparer program is identifying suspect preparers and audited their clients. If during an examination a revenue suspects that some of the deficiencies on a return were caused by the preparer she can refer the matter to an area coordinator. After review the coordinator can initiate a project on the preparer. The preparer is sent a letter notifying her that she has been selected for a project and 30 of her client's returns are audited. If significant deficiencies are found then the IRS may choose one of several courses of action including: Referral to Criminal investigation Referral to the office of professional liability Preparer penalties Referral to Department of justice to seek an injunction ordering the preparer to cease filing tax returns. Money Laundering and BSA 3.270 TC "Money Laundering and BSA" \f C \l "2" IRS agents are now working with the Financial Crimes Enforcement Network ( FinCEN ) seeking out money laundering and Bank Secrecy Act ( BSA )violations. Almost 500 agents have been reassigned to these duties. Many taxpayers have unwittingly
run afoul of these money laundering and BSA laws.
Foreign Bank Account Reports 3.280 TC "Foreign Bank Account Reports" \f C \l "2" Under the Bank Secrecy Act, U.S. residents or a person in and doing business in the United States must file a report with the U.S. Treasury if he or she has a financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year. Taxpayers comply with this law by noting the account on their tax return and by filing Form 90-22.1, the Foreign Bank and Financial Account Report (FBAR). Willfully failing to file an FBAR report can be punished under both civil and criminal law. Foreign account owners must remember that they may have to report their accounts to the government, even if the accounts do not generate any taxable income. The Bank Secrecy Act requires U.S. persons who own a foreign bank account, brokerage account, mutual fund, unit trust, or other financial account (person having a financial interest in, signature authority, or other authority over one or more accounts in a foreign country, and an aggregate value of all foreign financial accounts exceeding $10,000 at any time during the calendar year) to file a Form TD F 90-22.1. The FBAR is not an income tax return and should not be mailed with any income tax returns. The FBAR must be mailed on or before June 30 of the following year; 2006 FBARs are due by June 30, 2007. Civil penalties can and are being assessed for non-compliance . Money Services Business Registration Requirements 3.290 TC "Money Services Business Registration Requirements" \f C \l "2" According to the January 2006, U.S. Money Laundering Threat Assessment report, many money services businesses (MSBs) are not registering with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) despite the fact that the law started requiring such registration in 2001. MSBs that fail to register, or to renew their registrations, may be subject to civil and criminal penalties under the Bank Secrecy Act. Businesses that are considered MSBs for registration purposes are those that act in one or more of the following capacities: The term money services business includes: Currency dealers or exchangers who exchange more than $1,000 for any one customer on any day. Check cashers who cash checks totaling more than $1,000 for any one customer on any day. Issuers of traveler’s checks, money orders or stored value who issue more than $1,000 in traveler’s checks, money orders or stored value for any one customer on any day. Sellers of traveler’s checks, money orders or stored value who sell more than $1,000 in traveler’s checks, money orders or stored value for any one customer on any day. Redeemers of traveler’s checks, money orders or stored value who redeem more than $1,000 in traveler’s checks, money orders or stored value for any one customer on any day. Money transmitters. U.S. Postal Service.
Penalties 3.300 TC "Penalties" \f C \l "2" The civil penalty for failure to meet the registration requirement is $5,000 for each violation. Each day that the violation continues represents a separate violation. Also, reporting false or materially incomplete registration information can trigger a civil penalty of $5,000 per day. Criminal penalties for willful violation of the law can include fines and imprisonment. Filing FinCEN Form 107 3.310 TC "Filing FinCEN Form 107" \f C \l "2" MSBs should send completed FinCEN Forms 107 to the IRS Detroit Computing Center to the attention of Money Services Business Registration at P.O. Box 33116, Detroit, Michigan 48232-0116. Has Your Client Implemented an Anti-Money Laundering Compliance Program? 3.320 TC "Has Your Client Implemented an Anti-Money Laundering Compliance Program?" \f C \l "2" The USA PATRIOT Act, passed In October 2001, amended the Bank Secrecy Act (BSA) to require all businesses defined in the BSA as financial institutions to implement an anti-money laundering (AML) program. Many of these businesses had not been subject previously to BSA regulation. So far, the entities that are subject to AML program requirements include: banks and other depository institutions (such as credit unions); securities broker dealers; casinos; money services businesses; mutual funds; operators of credit card systems; dealers in precious metals, precious stones, and jewels; and the insurance industry. Patriot Act 3.330 TC "Patriot Act" \f C \l "2" In 2002, pursuant to Section 352 of the USA PATRIOT Act, FinCEN issued final regulations to require that all Money Services Businesses (MSBs) have an effective AML compliance program. This regulation (31 CFR 103.125) defines an effective program as one designed to prevent the MSB from being used to facilitate money laundering and the financing of terrorist activities. An MSB’s AML program must be commensurate with the risks posed by the location, size, nature and volume of the financial services provided by the MSB. Each MSB’s AML compliance program must be in writing and must have fully implemented it. Form 8300 3.340 TC "Form 8300" \f C \l "2" The general rule is that you must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if your business receives more than $10,000 in cash from one buyer as a result of a single transaction or two or more related transactions. The information provided by Form 8300 provides valuable information to the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN) in their efforts to combat money laundering. This is an important effort, since money laundering is a tool that assists many individuals who participate in various criminal activities, ranging from tax evasion to terrorist financing to drug dealing, to hide the proceeds from their illegal activities.
Filing Form 8300 3.350 TC "Filing Form 8300" \f C \l "2" If you are required to file Form 8300 for a transaction, you must do so by the 15th day after the date the cash transaction occurs. Meeting the proper filing requirements is very important, since there are potential civil and criminal penalties for failure to file Form 8300. SAR's 3.360 TC "SAR's" \f C \l "2" Money services businesses and banks are required to report any transactions they deems as suspicious. The MSB's file a Suspicious Activity Report with the Detroit Computing Center. The author has had clients who came under scrutiny for the following activities: The purchaser of a tavern was required to pay in cash. He went to his bank on multiple occasions over a period of weeks to secure cash in amounts of less than $10,000 in order to accumulate the purchase price. An immigrant who did not fully trust banks accumulated cash of about $150,000 saving monies from cashing her pay checks. She purchased a condo and needed a cashier's check for the closing She went to a bank and deposited $20,000 and was required to file a CTR. The teller told her that if she deposited less than $10,000 there would be no need to file a report. Over a period of days she deposited cash in smaller amounts sufficient to accumulate money to purchase her downpayment via cashier's check. During a divorce a man accumulated cash in an effort to secret it from his soon to ex-spouse. After the divorce he began depositing the money with a stock broker in amounts less than $10,000. The IRS issued a forfeiture notice to the man's broker and has confiscated over $400,000. The client has filed a claim and faces extended litigation and a criminal investigation. Client was an used car dealer who sold cars for cash amounts in excess of $10,000 and failed to file CTR's. He was indicted and convicted of money laundering and the IRS has initiated forfeiture proceedings against all of his assets. He is currently in prison awaiting sentencing.
Money Laundering Investigations Investigations Initiated Prosecution Recommendations Indictments/Informations Sentenced Incarceration Rate* Average Months to Serve
FY 2007 1678 1275 1017 758 87.9% 62
FY 2006 1443 1248 1016 800 88.1% 74
FY 2005 1639 1338 1147 782 88.4% 62
Bank Secrecy Act (BSA) Investigations Investigations Initiated Prosecution Recommendations Indictments/Informations Sentenced Incarceration Rate* Average Months to Serve
FY 2007 590 396 361 335 76.4% 33
FY 2006 554 437 364 332 75.3% 43
FY 2005 546 379 359 310 83.2% 42
4. EXAMINATION TC "4. EXAMINATION" \f C \l "1" More Audits of Wealthy 4.10 TC "More Audits of Wealthy" \f C \l "2" The IRS increased its audits of individuals with incomes of $1 million or more increased from 17,015 during fiscal year 2006 to 31,382 during fiscal year 2007, an increase of 84 percent. One out of 11 individuals with incomes of $1 million or more faced an audit in 2007. Audits of individuals with incomes over $200,000 reached 113,105 returns, up 29.2 percent from the prior year total of 87,885. Examination Reengineering 4.20 TC "Examination Reengineering" \f C \l "2" Changes to the tax law, technology, and the business environment necessitated the IRS to make changes to its examination process. SB/SE initiated Examination Reengineering in order to improve the quality and consistency of its examinations across the country. SB/SE gathered feedback from multiple sources to design the new field and office examination processes. Since 2003 the IRS has been implementing this new process. Some of the features of the reengineered field examination process are:
Clearly communicated expectations of both the taxpayer and field agent through mandatory discussions between the revenue agent and taxpayer regarding the specific examination issues, required documentation, and a mutually agreed upon date to complete the examination. At the beginning of each examination, field agents and their managers will meet to discuss the agent’s approach to the examination, the plan to close the examination, and the mutual commitment date arrived at with the taxpayer. Field agents will use standardized templates for every examination issue to gather the information necessary to resolve issues. Agents will use a standardized guide when deciding if additional issues need to be added to the examination. The agent will explain to the taxpayer if any additional issues are included in the examination. Some of the features of the reengineered office examination process are: Clearly communicated expectations of both the taxpayer and the examiner prior to the initial appointment. Office examiners will provide the taxpayer with focused document requests that specifically identify the information needed. Improved flexibility in the scheduling process will enable examiners and taxpayers to reduce the time it takes to complete an examination. Office examiners will use standardized templates for every examination issue to gather the information necessary to resolve issues. Examiners will use a standardized guide when deciding if additional issues need to be added to the examination. The examiner will explain to the taxpayer if any additional issues are included in the examination. The Dirty Dozen 4.30 TC "The Dirty Dozen" \f C \l "2" Each year the IRS announces its Dirty Dozen and urges people to avoid these common schemes: The 2008 list is as follows: 1. Phishing Phishing is a tactic used by Internet-based thieves to trick unsuspecting victims into revealing personal information they can then use to access the victims’ financial accounts. These criminals use the information obtained to empty the victims’ bank accounts, run up credit card charges and apply for loans or credit in the victims’ names. Phishing scams often take the form of an e-mail that appears to come from a legitimate source. Some scam e-mails falsely claim to come from the IRS. To date, taxpayers have forwarded more than 33,000 of these scam e-mails, reflecting more than 1,500 different schemes, to the IRS. The IRS never uses e-mail to contact taxpayers about their tax issues. Taxpayers who receive unsolicited e-mail that claims to be from the IRS can forward the message to a special electronic mailbox, [email protected]
, using instructions contained in an article titled “How to Protect Yourself from Suspicious E-Mails or Phishing Schemes.” Remember: the only official IRS Web site is located at www.irs.gov. 2. Scams Related to the Economic Stimulus Payment Some scam artists are trying to trick individuals into revealing personal financial information that can be used to access their financial accounts by making promises relating to the economic stimulus payment, often called a “rebate.” To obtain the payment, eligible individuals in most cases will not have to do anything more than file a 2007 federal tax return. But some criminals posing as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment. For instance, a potential victim is told by phone or e-mail that he or she is eligible for a rebate but must provide a bank account number (or similar information) to get the payment. If the target is unwilling, the victim
is then told that he cannot receive the rebate unless the information is provided. Individuals should remember that the only way to get a stimulus payment is to file a 2007 tax return. The IRS urges taxpayers to be extra-vigilant. The IRS will not contact taxpayers by phone or e-mail about their stimulus payment. 3. Frivolous Arguments Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. Most recently, the IRS expanded its list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of these positions on the list are subject to a $5,000 penalty. The most recent update of the list of frivolous positions includes: misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending, erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States, a nonexistent “Mariner’s Tax Deduction” related to invalid deductions for meals and the misuse of the fuel tax credit (see below). The complete list of frivolous arguments is on the IRS Web site at IRS.gov. 4. Fuel Tax Credit Scams The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty. 5. Hiding Income Offshore Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions. 6. Abusive Retirement Plans The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed. 7. Zero Wages Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. 8. False Claims for Refund and Requests for Abatement This scam involves a request for abatement of previously assessed tax using Form 843, “Claim for Refund and Request for Abatement.” Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return
Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service." 9. Return Preparer Fraud Dishonest tax return preparers can cause many problems for taxpayers who fall victim to their schemes. These scam artists make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Some preparers promote the filing of fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years. Taxpayers should choose carefully when hiring a tax preparer, especially one who promises something that seems too good to be true. 10. Disguised Corporate Ownership Some people are going as far as forming domestic shell corporations in certain states for the purpose of disguising the ownership of a business or financial activity. Once formed, these anonymous entities can be used to facilitate underreporting of income, non-filing of tax returns, engaging in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance. 11. Misuse of Trusts For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust. 12. Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property. In addition, IRS examiners are seeing an upturn in instances where taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations. IRS Still Watches Scams That Fall Off the List 4.40 TC "IRS Still Watches Scams That Fall Off the List" \f C \l "2" While the IRS has seen a decline in the occurrence of some of these scams, other problems, such as abuse of the American Indian Employment Credit and misuse of structured entity credits, continue to be areas of concern. The absence of a particular scheme from the Dirty Dozen should not be taken as an indication that the IRS is unaware of it or not taking steps to counter it. 5. APPEALS TC "5. APPEALS" \f C \l "1" Strategic Priorities: 5.10 Appeals has set forth the following as its strategic priorities for 2008: Increase taxpayer awareness of the Appeals process and their rights within the process Increase taxpayer awareness of alternative dispute resolution programs Improve our processes to meet customer needs and expectations and to reduce the length of the Appeals process while spending the right amount of time with each taxpayer Promote employee productivity, engagement, and satisfaction
Campus Appeals Program 5.20 TC "Campus Appeals Program" \f C \l "2" The campus appeals program diminishes taxpayer rights. Any appeal from a compliance generated notice is assigned to the campus appeals program. The campus appeals personnel are poorly trained and lack field experience. Their incompetence starkly contrasts with the well trained experienced former revenue agents and revenue officers assigned to the local appeals offices. When your client receives a notice from a campus allowing an appeal your protest should always request that your client be given a face to face conference in your local office.
6. USEFUL INFORMATION FOR PRACTITIONERS TC "6. USEFUL INFORMATION FOR PRACTITIONERS" \f C \l "1" Whistleblower Reforms 6.10 TC "Whistleblower Reforms" \f C \l "2" Tax Relief and Health Care Act of 2006 reforms the reward program for individuals who provide information to IRS regarding violations of the tax laws for information provided on or after the enactment date. Specifically, the Act establishes a reward range for such 'whistleblowers' of 15% to 30% of proceeds collected by IRS (subject to certain exceptions) where the amount in dispute exceeds $2,000,000. It also provides IRS with regulatory authority to create a Whistleblower Office to administer the program. ( Code Sec. 7623, as amended by Act Sec. 406) An above-the-line deduction is allowed for attorneys' fees and court costs related to whistleblower rewards (Code Sec. 62(a)(21), as amended by Act Sec. 406(a)(3)). Director Appointed 6.20 TC "Director Appointed" \f C \l "2" Stephen Whitlock has been appointed director and his office will be responsible for assessing and analyzing incoming tips. After determining their degree of credibility, his office will assign the information to the appropriate IRS office for further investigation. As program director, Whitlock’s key responsibilities include: Establishing the strategic direction of the program Defining specific goals and operating guidelines Communicating and implementing guidance to ensure the office’s success Prior to his new appointment, Whitlock served since May 2003 as the Deputy Director of the IRS Office of Professional Responsibility, which administers the regulations governing the practice of attorneys, CPAs, and other tax professionals. From March 1999 until May 2003, he was the director of the IRS
Commissioner’s Complaint Processing and Analysis Group. Mortgage Relief Act 6.30 TC "Mortgage Relief Act" \f C \l "2" The Mortgage Relief Act, effective for indebtedness discharged on or after Jan. 1, 2007 and before Jan. 1, 2010, generally allows taxpayers to exclude up to $2 million of mortgage debt forgiveness on their principal residence. Specifically, under the Mortgage Relief Act, gross income doesn't include any discharge of qualified principal residence indebtedness. (Code Sec. 108(a)(1)(E)) Qualified principal residence indebtedness is acquisition indebtedness under Code Sec. 163(h)(3)(B) with respect to the taxpayer's principal residence, but with a $2 million limit ($1 million for married individuals filing separately). (Code Sec. 108(h)(2)) “Principal residence” has the same meaning as under the home sale exclusion rules of Code Sec. 121. (Code Sec. 108(h)(5)) Acquisition indebtedness of a principal residence is indebtedness incurred in the acquisition, construction, or substantial improvement of an individual's principal residence that is secured by the residence. It includes refinancing of debt to the extent the amount of the refinancing doesn't exceed the amount of the refinanced indebtedness. (Joint Committee on Taxation JCX-86-07) Basis Reduction 6.40 TC "Basis Reduction" \f C \l "2" The basis of the taxpayer's principal residence is reduced by the excluded amount, but not below zero. (Code Sec. 108(h)(1)) Qualified Principal Residence Indebtedness 6.50 TC "Qualified Principal Residence Indebtedness" \f C \l "2" If any loan is discharged, in whole or in part, and only part of the loan is qualified principal residence indebtedness, the mortgage forgiveness exclusion applies only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before the discharge) which is not qualified principal residence indebtedness. (Code Sec. 108(h)(4)) The exclusion doesn't apply to a loan discharged on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the taxpayer's financial condition. The exclusion also doesn't apply to a taxpayer in a Title 11 bankruptcy. (Code Sec. 108(h)(3)) An insolvent taxpayer (other than one in a Title 11 bankruptcy) can elect to have the mortgage forgiveness exclusion not apply and can instead rely on the Code Sec. 108(a)(1)(B) exclusion for insolvent taxpayers. (Code Sec. 108(a)(2)) Misclassified Workers 6.60 TC "Misclassified Workers" \f C \l "2" Employees working for employers who failed to withhold Social Security and Medicare taxes should use new Form 8919 to report and pay their share of these taxes. This includes section 530 employees — that is, people who work for employers claiming relief from federal payroll taxes under section 530 of the Revenue Act of 1978. It also includes employees who are treated as independent contractors but who have received a determination letter from the IRS which states they are employees. Workers who believe they are misclassified as independent contractors can file Form SS-8 with the IRS and request a determination of their worker classification. For employees, the Social Security tax rate is 6.2 percent and the Medicare tax rate is 1.45 percent. Normally, employers withhold these taxes from workers’ pay, match these amounts and turn over the combined amounts to the IRS. Workers, properly classified as independent contractors, should not use Form 8919 but instead, continue to use Schedule SE. IRS Publication 1779 has further details on employee versus independent contractor status.
IRS Hotlines and Toll-Free Numbers
IRS Telephone Lines and Hours of Operation Service Telephone number Hours of operation
Practitioner Priority Service IRS Tax Help Line for Individuals Business and Specialty Tax Line e-Help (Practitioners Only)
(866) 860-4259 M–F, 8:00 a.m.–8:00 p.m., local time (800) 829-1040 M–F, 7:00 a.m.–10:00 p.m., local time (800) 829-4933 M–F, 7:00 a.m.–10:00 p.m., local time (866) 255-0654 M–F, 6:30 a.m.–6:00 p.m., CT (non-peak period) M-F, 6:30 a.m.–10:00 p.m, CT (1/12/2007 – 4/27/2007) and Saturdays 6:30 a.m. – 4:00 p.m., CT (1/12/2007 – 4/27/2007)
Refund Hotline Forms and Publications National Taxpayer Advocate Help Line Telephone Device for the Deaf (TDD): Forms, Tax Help, TAS Electronic Federal Tax Payment System Government Entities (TEGE) Help Line
(800) 829-1954 Automated service is available 24/7 (800) 829-3676 M–F, 7:00 a.m–10:00 p.m., local time (877) 777-4778 M–F, 7:00 a.m.–10:00 p.m., local time
(800) 829-4059 M–F, 7:00 a.m.–10:00 p.m., local time
(800) 555-4477 24/7
(877) 829-5500 M–F, 8:30 a.m. – 4:30 p.m., ET
TeleTax Topics and Refund Status (800) 829-4477 24/7 Forms 706 and 709 Help Line Employer Identification Number (EIN) (866) 699-4083 M–F, 7:00 a.m.–7:00 p.m., local time (800) 829-4933 M–F, 7:00 a.m.–10:00 p.m., local time
Excise Tax and Form 2290 Help Line(866) 699-4096 M–F, 8:00 a.m.–6:00 p.m., ET Information Return Reporting (866) 455-7438 M–F, 8:30 a.m.–4:30 p.m., ET
7. COLLECTION TC "7. COLLECTION" \f C \l "1"
Table 16. Delinquent Collection Activities, Fiscal Years 2004-2007 [Money amounts are in thousands of dollars.] 2004 (1) 36,659,487 6,170 5,179 5,368 5,981 50,680,546 2005 (2) 37,113,036 5,981 5,870 5,373 6,478 57,594,901 2006 (3) 40,813,309 6,478 6,100 5,504 7,074 69,555,590 2007 (4) 43,318,830 7,074 7,146 5,980 8,240 83,488,988
Activity Returns filed with additional tax due: Total amount collected  Taxpayer delinquent accounts (thousands): Number in beginning inventory Number of new accounts Number of accounts closed Ending inventory: Number Balance of assessed tax, penalties, and interest  Returns not filed timely: Delinquent return activity:
Net amount assessed  15,635,584 2,976,681 2,964 2,051 1,993 3,022 106 22,765,462 3,584,255 3,022 2,558 1,922 3,658 74 23,305,535 3,905,764 3,658 2,373 2,157 3,874 59 30,287,802 3,968,163 3,874 2,587 2,729 3,732 46
Amount collected with delinquent returns Taxpayer delinquency investigations (thousands) : Number in beginning inventory Number of new investigations Number of investigations closed Number in ending inventory Offers in compromise (thousands) : Number of offers received Number of offers accepted Amount of offers accepted Enforcement activity: Number of notices of Federal tax liens filed Number of notices of levy served upon third parties Number of seizures
20 275,331 534,392 2,029,613 440 19 325,640 522,887 2,743,577 512 15 283,746 629,813 3,742,276 590 12 228,975 683,659 3,757,190 676
Flawed Private Collection 7.10 TC "Flawed Private Collection" \f C \l "2" The National Taxpayer Advocate has issued several reports critical of the IRS private collection program which began in 2006. The advocate discusses the costs of the program which grants the collection agencies up to 24% of each collection and points out that we the taxpayers are paying more costs than the amount actually recovered by the program. This year, the program is projected to collect less than half of what the IRS initially projected. Nina E. Olson, head of the National Taxpayer Advocate Service, an independent arm within the IRS, testified to Congress earlier this month that the private debt-collection program will cost about $7.7 million to run this year and produce net revenues of about $11 million. The American Jobs Creation Act of 2004 provided for the use of private collectors to collect unpaid Internal Revenue Service taxes. In March, 2006 IRS announced that it has awarded contracts to the three firms it has selected from 33 bidders to participate in the first phase of its private debt collection initiative. Private collection began in the fall of 2006.One of the firms was subsequently removed from the program by the IRS. The private collectors do not have the power to initiate any enforced collection actions including liens and levies. The collection agencies are authorized to write to taxpayers demanding payment and to call taxpayers
demanding payment. The collection agencies are subject to the Fair Debt Collection Practices Act. Therefore, the agencies may not harass taxpayers at work and must cease contact with the taxpayer upon written demand that all further contact with the taxpayer cease. Online Payment Agreement (OPA) 7.20 TC "Online Payment Agreement (OPA)" \f C \l "2" The IRS has implemented a program to allow taxpayers to secure online payment agreements. The online application allows the taxpayer or her authorized representative (Power of Attorney) to self qualify, apply for an installment agreement, and receive immediate notification of approval. There may be times when you will need to mail in paperwork or speak with the IRS before it can determine your eligibility for an installment agreement. If that is the case, the OPA application will give you an address or a toll-free phone number to reach us. The maximum liability will be $25,000 and is limited to 1040 liabilities. On March 23, 2007 the IRS announced two recent enhancements which provide added functionality: the first permits individuals who have not yet received a bill to establish pre-assessed agreements on current tax year Form 1040 liabilities. The second allows practitioners with valid authorizations to remain in the application to request agreements for multiple clients. NOTE: For security purposes, you will automatically be logged out of OPA after 20 minutes of inactivity per page. Be sure to gather all the necessary information so that you are not automatically logged out of OPA before completing the required information. If you have difficulty entering the data required, please call the IRS at the number listed under “When should I call the toll-free number. “ https://sa2.www4.irs.gov/irfof/lang/en/eiapoalogin.jsp Disqualified Employment Tax Levies 7.30 TC "Disqualified Employment Tax Levies" \f C \l "2" The Small Business and Work Opportunity Tax Act of 2007 provided for modification of the collection due process procedures for employment tax liabilities. The new CDP tax law change amended I.R.C. §6330(f) to permit levy to collect employment taxes without first giving a taxpayer a pre-levy CDP notice if the levy is a "disqualified employment tax levy." This amendment became effective for levies served on or after September 22, 2007. A "disqualified employment tax levy" (DETL) as described in new section 6330(h), is a levy to collect a taxpayer's employment tax liability if that taxpayer or a predecessor requested a CDP hearing under section 6330 for unpaid employment taxes arising in the two-year period prior to the beginning of the taxable period for which the levy is served. If a DETL is served, then the taxpayer shall be given an opportunity for "the hearing described in this section within a reasonable period of time after the levy." The taxpayer may seek judicial review in the Tax Court of the determination resulting from the section 6330(f) post-levy hearing.
DETL 7.40 TC "DETL" \f C \l "2"
The IRS has issued a table setting forth the standards for DETL’s.
DISQUALIFIED EMPLOYMENT TAX LEVIES AND POST-LEVY CDP RIGHTS
Disqualified 1) A disqualified employment tax levy (DETL) is comprised of these three Employment Tax Levy components: a. It's a levy served to collect an employment tax liability; b. The levy is for taxes owed by a taxpayer or a predecessor who previously requested a CDP levy hearing; and c. The prior CDP hearing involved unpaid employment taxes that arose in the two year period before the period for which the levy is served. 2) Even if a taxpayer's employment tax liabilities meet the criteria for a DETL, this action is discretionary and we have the option to issue a pre-levy CDP notice for DETL periods, if the situation warrants. For example, the issuance of a pre-levy notice might be advisable if no IRC 6331(d) notice has been issued or there has been no contact with the taxpayer within the last 180 days. 3) A DETL can be issued if a predecessor of the taxpayer requested a CDP hearing that meets the criteria. Note: Predecessor hearing requests should not be used as a basis of a DETL until the term “predecessor” is defined in the CDP regulations. Prior Request for CDP 1) The prior request refers to a timely, processable CDP hearing request. Refer to IRM 5.1.9 for information regarding the timeliness and processability of CDP Hearing hearing requests. Even if the request is subsequently withdrawn, it qualifies as a prior hearing request. Note: Requests for an equivalent hearing or untimely requests for CDP hearings do not satisfy the requirement of having had a prior hearing request. Thus, if the taxpayer requests an equivalent hearing or submits an untimely request for a CDP hearing, that request cannot be used as a basis for a DETL. 2) The following can be used to determine if the taxpayer requested a prior CDP levy hearing involving unpaid employment taxes. a) First hand knowledge of a prior CDP levy hearing. In most instances involving pyramiding trust fund taxpayers, the revenue officer assigned the case will be aware of previously requested hearings. b) Case history. 3) A post-levy request for a CDP hearing made in response to a post-levy CDP notice also can constitute a prior CDP hearing request as a basis for a DETL. 4) The period(s) listed by the taxpayer on the CDP hearing request to be used as a basis of a DETL must be listed on a CDP levy notice preceding the request. Two-Year Look Back Period 1) In addition to seeing if the taxpayer requested a CDP levy hearing from a pre or post-levy CDP notice, we need to check to see if the hearing request involved employment taxes arising and ending within the two-year period before the beginning of the taxable period for which the DETL is served. Thus, the two-year look back period is measured from the beginning of the period for which the DETL is served. 2) If the taxpayer requested a CDP levy hearing for employment taxes arising during a calendar quarter that ended during the two-year period, the module meets the criteria for a DETL.
Examples: 7.50 TC "Examples:" \f C \l "2" Example 1:
Taxpayer owes for 4th quarter 2005 (quarter ended 12/31/2005) Taxpayer requested a timely CDP levy hearing Taxpayer accrues additional employment tax liability for the quarter ended 06/30/2006 Additional liability qualifies for DETL levy because the taxpayer requested a prior levy hearing for a quarter that ended (12/31/2005) within the two-year look back period (04/01/2004 thru 04/01/2006) Example 2: Taxpayer owes for 1st quarter 2006 (quarter ended 03/31/2006) Taxpayer requested a timely CDP levy hearing Taxpayer assessed additional employment tax liability for the quarter ended 12/31/2005 Additional liability does not qualify for DETL levy because the taxpayer requested a prior levy hearing for a quarter that ended (03/31/2006) outside the two-year look back period (10/01/2003 thru 10/01/2005) Example 3: Taxpayer owes for 1st quarter 2004 (quarter ended 03/31/2004) Taxpayer requested a timely CDP levy hearing. Taxpayer accrues additional employment tax liability for the quarter ended 06/30/2006 Additional liability does not qualify for DETL levy because the taxpayer did requested a prior levy hearing for a quarter that ended (03/31/2004) outside the two-year look back period (04/01/2004 thru 04/01/2006) Example 4: Taxpayer owes for 4th quarter 2005 (quarter ended 12/31/2005) Taxpayer requested an equivalent levy hearing Taxpayer accrues additional employment tax liability for the quarter ended 06/30/2006 Additional liability does not qualify for DETL levy. The taxpayer requested a prior levy hearing for a quarter that ended (12/31/2005) within the two-year look back period (04/01/2004 thru 04/01/2006). However, it was not a timely CDP levy hearing request.
Levy Procedures on DETL’s 7.60 TC "Levy Procedures on DETL’s" \f C \l "2" The IRS has issued the following table to provide guidance to its collection employees on the methods for levy on DETL’s. DETL Levies
Issuing a DETL If the tax period meets the criteria for issuing a DETL and levy action is determined to be appropriate, • Make sure the taxpayer received the Notice of Intent of Levy under IRC 6331(d). This is the CP 504 notice or the “Status 58” notice. If the CP 504 notice was not issued, issue the pre-levy CDP notice, L-1058. This meets the IRC 6331(d) and IRC 6330 requirement. • Document the case history regarding the DETL determination. For example, DETL to be issued for tax periods 01-200606 and 01-200609. TP qualifies for a DETL based on CDP levy hearing requested on 07/27/2007 for tax periods 01- 200512 and 01 200603. • Prepare and issue the DETL. Note: The group manager will need to issue the DETL on ICS. Post-Levy CDP Notice 1) If a DETL is served, issue the post-levy CDP notice when sending the taxpayer's copy of the levy. This should be done as soon as possible but no more than 10- days after the levy. If the Notice of Levy is mailed, allow time for the Notice of Levy to be received through the mail before issuing the post-levy CDP Notice but no more than 10-days after the levy is issued. Document in the ICS history the reason if the post-levy CDP notice is issued later than 10 days after issuing the DETL 2) Use Letter 1058(D), Notice of Levy and Notice of Your Right to a Hearing. Include a copy of the levy, Form 12153, Pub 594 and Pub 1660 with the letter. Note: If the taxpayer received a pre-levy CDP notice for the period being levied, do not issue a post-levy CDP notice. 3) The notice can be given in person, left at the taxpayer's home or business, or sent to the taxpayer's last known address by certified or registered mail. Note: Use registered mail only if the taxpayer is outside the United States. There is no international certified mail. Post-Levy DETL Hearing 1) The DETL post-levy hearing request is processed similar to other hearing requests. Refer Request to IRM 5.1.9 for processing hearing requests. 2) The same procedures regarding the suspension of the Collection Statute Expiration Date (CSED) apply. If a timely filed post-levy CDP hearing request is filed, the CSED is suspended. 3) Document, for the benefit of Appeals, either in the case history or on Form 12153A, whether continued collection action is planned. DETL during CDP Hearing for Periods Subject to the Hearing 1) A DETL may be served during a timely requested pre or post-levy CDP hearing or judicial review of such hearing to collect employment tax liabilities (DETL tax periods) subject to the hearing. Note: In determining if a DETL is permitted during the hearing or judicial review to collect employment taxes subject to the hearing, the request giving rise to the hearing cannot be used as a basis for the DETL. 2) A DETL may be served during a hearing or judicial review if it is appropriate. For example, a DETL may be served during a hearing or judicial review if collection is at risk (e.g., taxpayer's business is deteriorating or taxpayer is pyramiding). 3) If the DETL is to take place during the hearing, check IDRS for actions that may prohibit levy action, If no apparent TC codes, then contact the Appeals Team Manager of the assigned hearing officer preferably via e- mail regarding planned levy action. Determine whether Appeals has information that prohibits levy or may affects the decision to levy. 4) If the DETL is to take place during judicial review, contact the Counsel attorney assigned the case to advise him or her of the planned levy action and to determine if there is any new information that may affect the decision to levy.
Guaranteed Availability of Installment Agreements 7.70 TC "Guaranteed Availability of Installment Agreements" \f C \l "2" The Internal Revenue Service Restructuring and Reform Act of 1998 requires the Secretary to grant an installment agreement, at the taxpayer's option, if: the liability is $10,000, or less (excluding penalties and interest); within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an installment agreement under this provision; if requested by the Secretary, the taxpayer submits financial statements, and the Secretary determines that the taxpayer is unable to pay the tax due in full; the installment agreement provides for full payment of the liability within 3 years; and the taxpayer agrees to continue to comply with the tax laws and the terms of the agreement for the period (up to 3 years) that the agreement is in place.[Act § 3467; IRC § 6159) <$25,000 Liabilities 7.80 TC "<$25,000 Liabilities" \f C \l "2" The IRS has chosen to create a more liberal system that allows installment agreements of up to 5 years for balances of less than $25,000. New Form 433A 7.90 TC "New Form 433A" \f C \l "2" In January, 2008 the IRS issued a revised Form 433A. The form requires that those taxpayers who are employed to complete only the first 4 pages while self employed individuals must complete 2 additional pages. It also provides a more logical concise presentation of the taxpayer’s assets. New more Onerous Allowable Expense Standards 7.100 TC "New more Onerous Allowable Expense Standards" \f C \l "2" In October, 2007 the IRS the IRS revised its allowable expense standards to make them more onerous. In February, 2008 the IRS again revised the standards. Instead of establishing national standards which recognized the need for higher living expense for higher income families it began a system of one size fits all. It continued to fail to recognize the varying cost of living in different regions and communities and eliminated differentials for Hawaii and Alaska. It also added a new category of expenses for out-ofpocket health care expenses. Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer's and his or her family's health and welfare and/or production of income. The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family needs to live.
There are four types of necessary expenses: National Standards Out-of-Pocket Health Care Local Standards Other Expenses National Standards: These establish standards for reasonable amounts for five necessary expenses. Four of them come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey: food, housekeeping supplies, apparel and services, and personal care products and services. The fifth category, miscellaneous, is a discretionary amount established by the Service. It is $87 for one person up to $235 for 4 persons. The IRS allows a total of $262 per month for each member of the household above 4. Note: All five standards are included in one total national standard expense. Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. Generally, the number of persons allowed should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance. Local Standards: These establish standards for two necessary expenses: housing and transportation. Taxpayers will be allowed the local standard or the amount actually paid, whichever is less. A. Housing - Standards are established for each county within a state. When deciding if a deviation is appropriate, consider the cost of moving to a new residence; the increased cost of transportation to work and school that will result from moving to lower-cost housing and the tax consequences. The tax consequence is the difference between the benefit the taxpayer currently derives from the interest and property tax deductions on Schedule A to the benefit the taxpayer would derive without the same or adjusted expense. Housing costs include rent and/or house payments, taxes, repairs and utilities the IRM provides as follows: The utilities include gas, electricity, water, fuel, oil, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner's or renter's insurance, homeowner dues and condominium fees. Usually, this is considered necessary only for the place of residence. Any other housing expenses should be allowed only if, based on a taxpayer's individual facts and circumstances, disallowance will cause the taxpayer economic hardship. [ IRM 188.8.131.52 B. Transportation - The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership cost, and additional amounts for
operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs were derived from BLS data. If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has no car payment only the operating cost portion of the transportation standard is used to figure the allowable transportation expense. Under ownership costs, separate caps are provided for the first car and second car. If the taxpayer does not own a car a standard public transportation amount is allowed. Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required inspection, parking fees, tolls, driver's license, public transportation. Transportation costs not required to produce income or ensure the health and welfare of the family are not considered necessary. Consider availability of public transportation if car payments (purchase or lease) will prevent the tax liability from being paid in part or full. Public transportation costs could be an option if it does not significantly increase commuting time and inconvenience the taxpayer. Note: If the taxpayer has no car payment, or no car, question how the taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is only allowed the operating cost or the cost of transportation. [ IRM 184.108.40.206 ] C. Other Expenses. Other expenses may be considered if they meet the necessary expense test - they must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income. This is determined based on the facts and circumstances of each case. If other expenses are determined to be necessary and, therefore allowable, document the reasons for the decision in your history. D. Conditional expenses. These expenses do not meet the necessary expenses test. However, they are allowable if the tax liability, including projected accruals, can be fully paid within five years. E. National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer's basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file. Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayer's current year income tax return. Verify exemptions claimed on taxpayer's income tax return meet the dependency requirements of the IRC. There may be reasonable exceptions. Fully document the reasons for any exceptions. For example, foster children or children for whom adoption is pending. A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets.
H. Length. Revenue officers should consider the length of the payments. Although it may be appropriate to allow for payments made on the secured debts that meet the necessary expense test, if the debt will be fully repaid in one year only allow those payments for one year. [ IRM 220.127.116.11 ]
Five Year Test 7.110 TC "Five Year Test" \f C \l "2" The amount allowed for necessary or conditional expenses depends on the taxpayer's ability to full pay the liability within five years and on the taxpayer's individual facts and circumstances. If the liability can be paid within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses for up to one year in order to modify or eliminate the expense. (See IRM 5.14, Installment Agreements) [ IRM 18.104.22.168 ] 8. OFFER IN COMPROMISE TC "8. OFFER IN COMPROMISE" \f C \l "1" Number of Offers 8.10 The total number of proposed offer has halved from 128,000 in FY 2001 to 46,000 in FY 2007. The number of OICs accepted declined from 38,643 (or 34 percent) in FY 2001 12,000 in FY 2007 ( or 26%). The IRS has made it so difficult to secure an offer in compromise that many taxpayers and their representative no longer choose to propose a compromise.
Offer in Compromise Program
Offers in compromise (thousands) : Number of offers received Number of offers accepted Amount of offers accepted 2004 106,000 20,000 275,331,000 2005 74,000 19,000 325,640,000 2006 59,000 15,000 283,746,000 2007 46,000 12,000 228,975,000
Offer in Compromise Program Details 2001 – June, 2007
Fiscal Year FY01 FY02 FY03 FY04 FY05 FY06 June-FY06 June-FY07 % Change - YTD 07 vs 06 % Change - 06 vs 01 Received 125,390 124,033 127,769 106,025 74,311 58,586 43,739 34,740 -21% -53% Not Processable 16,185 32,897 30,406 38,553 22,713 16,733 11,503 7,663 -33% 3% Processable Return 27,751 50,492 49,079 32,358 20,068 12,350 9,652 7,772 -19% -55% Withdrawn and Terminated 16,654 13,621 8,431 7,859 7,377 5,407 4,265 3,470 -19% -68% 13,976 16,952 27,336 25,654 22,105 14,945 11,706 9,036 -23% 7% 38,643 29,140 21,570 19,546 19,080 14,734 11,405 8,959 -21% -62% Rejected Accepted Total Dispositions 113,209 143,102 136,822 123,970 91,343 64,169 48,531 36,900 -24% -43% Acceptance Rate 34% 20% 16% 16% 21% 23% 24% 24%
Offer in Compromise Forms 8.20 TC "Offer in Compromise Forms" \f C \l "2" In February, 2007 the IRS issued new offer in compromise forms which apply the provisions of TIPRA 2005 discussed below. Taxpayers proposing compromises based upon doubt as to collectibility of effective tax administration must submit revised Form 656. Taxpayers proposing an offer based upon doubt as to liability must now submit Form 656-L and a narrative setting forth defenses to the liability. To comply with the new downpayment requirements taxpayers must submit Form 656-PPV with the required downpayment. Tax Increase Prevention and Reconciliation Act of 2005 8.30 TC "Tax Increase Prevention and Reconciliation Act of 2005" \f C \l "2" The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), section 509, made major changes to the IRS OIC program. These changes affect all offers received by the IRS on or after July 16, 2006..TIPRA section 509 amends IRC section 7122 by adding a new subsection (c) “Rules for Submission of Offersin-Compromise.” Payments With Offers 8.35 TC "Payments With Offers" \f C \l "2" A taxpayer filing a lump-sum offer must pay 20% of the offer amount with the application (IRC 7122(c)(1)(A)). A lump-sum offer means any offer of payments made in five or fewer installments. A taxpayer filing a periodic-payment offer must pay the first proposed installment payment with the application and pay additional installments while the IRS is evaluating the offer (IRC section 7122(c) (1)(B)). A periodic-payment offer means any offer of payments made in six or more installments. Failure to Make Deposit 8.40 TC "Failure to Make Deposit" \f C \l "2"
Taxpayers can avoid delays in processing their OIC
applications by making all required payments in full and on time. Failure to pay the 20 percent on a lump-sum offer, or the first installment payment on a periodic-payment offer, will result in the IRS returning the offer to the taxpayer as nonprocessable (IRC section 7122(d)(3)(C) as amended by TIPRA). Not Refundable 8.50 TC "Not Refundable" \f C \l "2" The 20 percent payment for a lump-sum offer and the installment payments on a periodic-payment offer are “payments on tax” and are not refundable deposits (IRC section 7809(b) and Treasury Regulation 301.7122-1(h)). Specify Payments 8.60 TC "Specify Payments" \f C \l "2" Taxpayers may specify in writing when submitting their offers how to apply the payments to the tax, penalty and interest due. Otherwise, the IRS will apply the payments in the best interest of the government (IRC section 7122(c)(2)(A)). For most taxpayers it is in their best interest to apply the payment to their newest income tax liabilities as they may have already reached the maximum late pate payment penalty of 25% on older liabilities. The OIC application fee reduces the assessed tax or other amounts due. A taxpayer still must also submit a $150 application fee and may not specify how to apply the fee. Failure to Make Installment Payments 8.70 TC "Failure to Make Installment Payments" \f C \l "2" Taxpayers failing to make installment payments on periodic-payment offers after providing the initial payment will cause the IRS to treat the offer as a withdrawal. The IRS will return the offer application to the taxpayer (IRC section 7122(c) (1)(B)(ii)).A lump-sum offer accompanied by a payment that is below the required 20 percent threshold will be deemed processable. However, the taxpayer will be asked to pay the remaining balance in order to avoid having the offer returned. Failure to submit the remaining balance will cause the IRS to return the offer and retain the $150 application fee. Taxpayers filing periodic-payment offers must submit the full amount of their first installment payment in order to meet the processability criteria. Otherwise, the IRS will deem the offer as unprocessable and will return the application to the taxpayer along with the $150 fee.
Low Income Taxpayers 8.80 TC "Low Income Taxpayers" \f C \l "2" Under the new law, taxpayers qualifying as low-income or filing an offer solely based on doubt as to liability qualify for a waiver of the new partial payment requirements. Taxpayers qualifying for the low-income exemption or filing a doubt-as-to- liability offer only are not liable for paying the application fee, or the payments imposed by TIPRA section 509. A taxpayer seeking a waiver must submit Form 656-A with the offer. The monthly income levels to qualify are listed below: Deemed Accepted 8.90 TC "Deemed Accepted" \f C \l "2" The IRS will deem an OIC “accepted” that is not withdrawn, returned, or rejected within 24 months after IRS receipt. When calculating the 24-month timeframe, the IRS will disregard any time periods during which a liability included in the OIC is the subject of a dispute in any judicial proceeding (IRC section 7122(f) as amended by TIPRA). In five years the consideration period for deemed acceptance will become 12 months. Background 8.100 TC "Background" \f C \l "2" An offer in compromise is a settlement of a delinquent tax account for less than the full amount due. Sec. 7122 states that the IRS may compromise any civil or criminal case arising under the Internal Revenue Laws prior to reference to the Department of Justice for prosecution or defense. In the past very few offers were accepted because the standards were almost impossible to meet and the IRS really did not encourage them. But in 1992, the IRS decided that they had a major problem with accounts receivable inventory and a growing number of cases reported as currently not collectible. The new policy espoused by the IRS was that they would accept an OIC when it was unlikely that the tax liability could be collected in full and the amount offered reasonably reflected collection potential.
Supporting Documents 8.110 TC "Supporting Documents 8.110" \f C \l "2" The financial statements require the proponent to supply documentation for each item on the forms, i.e. pay stubs, car payment book, mortgages, pay stubs, charge account statements, and bank statements. The IRS considers smaller liability offers without conducting a field investigation, therefore it is requiring the proponent to supply all the info to make a decision without field verification. $150 Processing Fee 8.120 TC "$150 Processing Fee" \f C \l "2" The Internal Revenue Service now charges a $150 application fee for the processing of offers in compromise. The IRS expects that this fee will help offset the cost of providing this service, as well as reduce frivolous claims. The law authorizes federal agencies to charge fees to defray the costs of providing certain services. Guidelines encourage such fees for benefits beyond those provided to the general public. The IRS anticipates the fee also will reduce the number of offers that are filed inappropriately — for example, solely to delay collection — enabling the agency to redirect resources to the processing of acceptable offers. Offers based solely on hardship may seek a fee waiver. Addresses 8.130 TC "Addresses 8.130" \f C \l "2" All offers from taxpayers living in Alaska, Alabama, Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Mississippi, Montana, Nevada, New Mexico, Oregon, Tennessee, Texas, Utah, Washington, Wisconsin, or Wyoming must be filed as follows:
Wage earner or self employed without employees Then mail to: Memphis Internal Revenue Service Center COIC Unit PO Box 30803, AMC Memphis, TN 38130-0803 Other than wage earner or self employed without employees Then mail to: Memphis Internal Revenue Service Center COIC Unit PO Box 30804, AMC Memphis, TN 38130-0804
All other states submit offers as follows:
Wage earner or self employed without employees Then mail to: Brookhaven Internal Revenue Service Center COIC Unit PO Box 9007 Holtsville, NY 11742-9007 Other than wage earner or self employed without employees Then mail to: Brookhaven Internal Revenue Service Center COIC Unit PO Box 9008 Holtsville, NY 11742-9008
Determining Processability 8.140 TC "Determining Processability" \f C \l "2" The IRS campuses do an intensive review of each offer to determine if it is processable. The author believes that the IRS makes a concerted effort to return most offers to avoid the effort of performing a substantive consideration. An offer in compromise will be deemed not processable if one or more of the following criteria are present: A. Taxpayer Not in Compliance - All tax returns for which the taxpayer has a filing requirement must be filed. This rule applies even if a Service employee previously decided not to pursue the filing of the return under the provisions of Policy Statement P-5-133, because it was believed to have "little or no tax due" . In-business taxpayers must have timely deposited, filed and paid all required employment tax returns for the two (2) preceding quarters prior to filing the offer, and must be current with federal tax deposits for the quarter in which the offer was submitted. Note: Generally speaking, IRM 22.214.171.124.3(2) only requires employees to conduct a compliance check, confirm and document all tax periods were filed for the preceding 6 year period. The only exception would be if fraud were discovered during the course of the investigation. Even then it should be extremely rare to go beyond 6 years. IRM 126.96.36.199 discusses enforcement criteria, which states that if the taxpayer refuses to file, neglects to file, or indicates an inability to file, then the employees should determine to what extent enforcement should be used (e.g. summons, 6020(b), referral to Exam, or field, etc.). Filing requirements will normally be enforced for a 6 year period, which is calculated by starting with the tax year that is currently due, and going back 6 years. B. Taxpayer in Bankruptcy - An offer will not be considered during a bankruptcy proceeding. Note: IRM 188.8.131.52, Offers-in-Compromise and Bankruptcy (07-01-2002), states that "[t]oo many administrative and legal problems would be created if a tax liability was simultaneously the subject of a court-supervised bankruptcy case and the administrative offer-in-compromise process." Therefore, it is the policy of IRS that an offer will not be considered if a taxpayer is in bankruptcy. C. Taxpayer did not submit the offer on the current revision of Form 656 - The offer must be submitted on the most current revision of the Offer in Compromise Form 656. D. Taxpayer did not submit the most current revision of Forms 433-A and/or 433-B - The most current revision of the Collection Information Statement Forms 433-A and/or 433-B must be submitted with the offer. E. Taxpayer did not submit the application fee with the offer - The application fee of $150 or the signed Form 656-A, Income Certification for Offer in Compromise Application Fee, must be submitted with each Form 656 (Form 656-A applies to individual taxpayers only).
Note: The application fee is not required if the offer is filed solely on the basis of Doubt as to Liability. An offer cannot be returned for the sole reason that the cost of an investigation may exceed the amount offered.[ IRM 184.108.40.206.1] Full Pay Processing 8.150 TC "Full Pay Processing" \f C \l "2" The IRS is always looking for where it believes the taxpayer has the ability to full pay the liability. Its manual provides as follows: Taxpayers may submit an offer to compromise the liabilities based on Doubt as to Collectibility, yet indicate on their application an ability to pay the account in full. These cases, once determined to be processable, will be screened out. Absent any special circumstances they will be rejected with no further investigation or verification. The taxpayer will be directed toward the appropriate resolution for the delinquency. The rejection letter will be the first communication with the taxpayer. A decision to reject with appeals rights is adequately justified by the taxpayer's self-disclosed ability to pay in full. Initial Review 8.160 TC "Initial Review" \f C \l "2" For processable offers one of the first considerations is to determine if the taxpayer can pay in full. The following initial review should be conducted on all processable offers to make that determination. Complete the Full Pay worksheet using the taxpayer's figures only, as reflected on the CIS. Do not adjust any asset values or apply necessary expense standards. [ IRM 220.127.116.11]
Computation of Offer Amount 8.170 TC "Computation of Offer Amount" \f C \l "2" The IRS uses three different methods for determining the adequacy of an offer depending on the period of time the taxpayer proposes for payment of the offer amount. The methods are: · · · Cash (paid in 90 days or less), or Short-Term Deferred Payment (more than 90 days, up to 24 months), or Deferred Payment (offers with payment terms over the remaining statutory period for collecting the tax.). NOTE: In all three cases, the IRS will release any filed Notice of Federal Tax Lien once you have fully paid the offer amount and any interest that has accrued. Cash Offer 8.180 TC "Cash Offer" \f C \l "2" You must pay cash offers within 90 days of acceptance. You should offer the realizable value of your assets (quick sale value) plus the total amount the IRS could collect over forty-eight months of payments represent value of income). When the ten-year statutory period for collection expires in less than forty-eight months, you must use the Deferred Payment Chart shown in the instructions to Form 656. The Internal Revenue Service's method of determining the adequacy of an offer could be best expressed by: Quick Sale Value Plus Present Value of Income Equals Offer In Compromise (QSV + PVI = OIC) In applying this formula, the IRS determines the Quick Sale Value of all of the client's assets and then adds the amount of the present value of the taxpayer's ability to pay. It aggregates the two numbers to arrive at an Offer in Compromise amount. The following paragraphs will discuss the Internal Revenue Service's methodology for determining quick sale value and the present value of income. Short-Term Deferred Payment Offer 8.190 TC "Short-Term Deferred Payment Offer" \f C \l "2" This payment option requires you to pay the offer within two years of acceptance. The offer must include the realizable value of your assets in addition to the total amount the IRS could secure over sixty months (or the remainder of the ten-year statutory period for collection, whichever is less) through monthly payments. The IRS may file a Notice of Federal Tax Lien on tax liabilities compromised under short-term payment offers. Deferred Payment Offers 8.200 TC "Deferred Payment Offers" \f C \l "2" This payment option requires you to pay the offer amount within the remaining statutory period for collecting the tax. The offer must include the realizable value of your assets plus the amount the IRS could collect through monthly payments during the remaining life of the collection statute. The deferred payment option itself has three payment options: Option One is: Full payment of the realizable value of your assets within 90 days from the date the IRS accepts your offer and Your future income in monthly payments during the remaining life of the collection statute; Option Two is: Cash payment for a portion of the realizable value of your assets within
90 days from the date the IRS accepts your offer and Monthly payments during the remaining life of the collection statute for both the balance of the realizable value and your future income; Option Three is: The entire offer amount in monthly payments over the life of the collection statute. As with short-term deferred payment offers, the IRS may file a Notice of Federal Tax Lien. Corporate Trust Fund Liabilities 8.210 TC "Corporate Trust Fund Liabilities" \f C \l "2" The IRS has. recently changed its rules with respect to in business offers in compromise. It now requires that each potentially responsible officer of the company sign an agreement to assessment of the trust fund recovery penalty in advance of consideration of any corporate or LLC offer. The new system is extremely unfair because the IRS is requiring even those who should not be held liable for the TFRP to agree to liability and assessment. Only after the liability has been assessed against a non-responsible person may she file a claim for refund and defend against the penalty. The system is extremely unfair and represents an attempt to deprive officers of their statutory due process rights. Pursuit of Officers After Compromise. 8.220 TC "Pursuit of Officers After Compromise." \f C \l "2" Under this new system the IRS could compromise with the corporate entity based upon its ability to pay and then continue to pursue responsible officers for the remaining trust fund liability. The owners and officers would face continuing economic risk. The system also makes it impossible for a company that had a change in leadership to propound an offer in compromise. Prior officers would probably refuse to consent to the demands of the IRS that they waive their TFRP appeal rights thereby negating any opportunity for the company to have its offer considered by the IRS. Promote Effective Tax Administration 8.230 TC "Promote Effective Tax Administration" \f C \l "2" As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an offer in compromise should be accepted. Congress explained that these guidelines should allow the Service to consider:
· · ·
Hardship, Public policy, and Equity
Treasury Regulation 301.7122-1 authorizes the Service to consider offers raising these issues. These offers are called Effective Tax Administration (ETA) offers. Encourage Compliance 8.240 TC "Encourage Compliance" \f C \l "2" The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will: · · Believe the laws are fair and equitable, and Gain confidence that the laws will be applied to everyone in the same manner.
The Effective Tax Administration (ETA) offer allows for situations where tax liabilities · · The tax is legally owed, and The taxpayer has the ability to pay it in full
Only Available If There Is No Doubt As to Liability Or Collectibility 8.250 TC "Only Available If There Is No Doubt As to Liability Or Collectibility" \f C \l "2" An Effective Tax Administration (ETA) offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under Doubt as to Liability (DATL) and/or Doubt as to Collectibility (DATC). The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under Effective Tax Administration (ETA). Economic hardship standard of § 301.6343-1 specifically applies only to individuals. [IRM 18.104.22.168] Rules for Evaluating Offers to Promote Effective Tax Administration 8.260 TC "Rules for Evaluating Offers to Promote Effective Tax Administration" \f C \l "2" The determination to accept or reject an offer to compromise made on the ground that acceptance would promote effective tax administration within the meaning of this section will be based upon consideration of all the facts and circumstances, including the taxpayer's record of overall compliance with the tax laws. Factors 8.270 TC "Factors 8.270" \f C \l "2" Factors supporting (but not conclusive of) a determination of economic hardship include: · Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition; Although taxpayer has certain assets, liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses; and Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity
in those assets and disposition by seizure or sale of the assets would have sufficient adverse consequences such that enforced collection is unlikely Temp Reg 301.7122-1T(b)(4)(iv)(B)] Example 1. Taxpayer has assets sufficient to satisfy the tax liability. Taxpayer provides full time care and assistance to her dependent child, who has a serious long‑term illness. It is expected that the taxpayer will need to use the equity in her assets to provide for adequate basic living expenses and medical care for her child. Taxpayer's overall compliance history does not weigh against compromise. Example 2. Taxpayer is retired and his only income is from a pension. The taxpayer's only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. Taxpayer's overall compliance history does not weigh against compromise. Example 3. Taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of his liability under an installment agreement. Taxpayer also owns a modest house that has been specially equipped to accommodate his disability. Taxpayer's equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer's home has been specially equipped to accommodate his disability, forced sale of the taxpayer's residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. Taxpayer's overall compliance history does not weigh against compromise.
Undermine Compliance 8.280 TC "Undermine Compliance" \f C \l "2" Factors supporting (but not conclusive of) a determination that compromise would not undermine compliance by taxpayers with the tax laws include: · Taxpayer does not have a history of noncompliance with the filing and payment requirements of the Internal Revenue Code; Taxpayer has not taken deliberate actions to avoid the payment of taxes; and Taxpayer has not encouraged others to refuse to comply with the tax laws.[Temp Reg. 301.7122-1T(b)(4)(iv)(C)]
Exceptional Circumstances 8.290 TC "Exceptional Circumstances" \f C \l "2" The following examples illustrate cases where exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by taxpayers; and compromise of the liability would not undermine compliance by taxpayers with the tax laws: Example 1. In October of 1986, taxpayer developed a serious illness that resulted in almost continuous hospitalizations for a number of years. The taxpayer's medical condition was such that during this period the taxpayer was unable to manage any of his financial affairs. The taxpayer has not filed tax returns since that time. The taxpayer's health has now improved and he has promptly begun to attend to his tax affairs. He discovers that the IRS prepared a substitute for return for the 1986 tax year on the basis of information returns it had received and had assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill is more than three times the original tax liability. Taxpayer's overall compliance history does not weigh against compromise. Example 2. Taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax‑deductible IRA account for each of the last two years. Taxpayer learns that he can earn a higher rate of interest on his IRA savings by moving those savings from a money management account to a certificate of deposit at a different financial institution. Prior to transferring his savings, taxpayer submits an E‑Mail inquiry to the IRS at its Web Page, requesting information about the steps he must take to preserve the tax benefits he has enjoyed and to avoid penalties. The IRS responds in an answering E‑Mail that the taxpayer may withdraw his IRA savings from his neighborhood bank, but he must redeposit those savings in a new IRA account within 90 days. Taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, taxpayer learns that he has been misinformed about the required rollover period and that he is liable for additional taxes, penalties and additions to tax for not having redeposited the amount within 60 days. Had it not been for the erroneous advice that is reflected in the taxpayer's retained copy of the IRS E‑Mail response to his inquiry, taxpayer would have redeposited the amount within the required 60‑day period. Taxpayer's overall compliance history does not weigh against compromise.
" \f C \l "3"
Expense Food Housekeeping supplies Apparel & services Personal care products & services Miscellaneous Total
One Two Three Person Persons Persons $277 $28 $85 $30 $87 $507 $528 $60 $155 $53 $165 $961 $626 $61 $209 $58 $197 $1,151
Four Persons $752 $74 $244 $65 $235 $1,370
More than four persons For each additional person, add to four-person total allowance:
Additional Persons Amount $262
Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. Generally, the number of persons allowed should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance. Out-of-Pocket Costs Under 65 65 and Older Public Transportation $57 $144
National Ownership Costs One Car National Operating Costs One Car Northeast Region Boston New York Philadelphia Midwest Region Chicago Cleveland Detroit Minneapolis-St. Paul South Region Atlanta Baltimore Dallas-Ft. Worth Houston Miami Washington, D.C. West Region Los Angeles Phoenix San Diego San Francisco $235 $225 $280 $235 $183 $217 $186 $267 $187 $201 $226 $217 $228 $263 $275 $230 $211 $261 $232 $244 $261 $489
Two Cars $978
Two Cars $470 $450 $560 $470 $366 $434 $372 $534 $374 $402 $452 $434 $456 $526 $550 $460 $422 $522 $464 $488 $522
Illinois County Housing and Utilities forHousing and Utilities forHousing and Utilities forHousing and Utilities for Housing and Utilities for a a Family of 1 a Family of 2 a Family of 3 a Family of 4 Family of 5 or more 838 718 882 1,275 678 914 769 814 798 1,044 811 798 707 1,017 894 1,438 760 839 1,351 877 858 1,648 721 712 897 784 844 756 798 702 715 984 844 1,036 1,497 796 1,073 903 956 938 1,226 953 938 830 1,195 1,050 1,689 892 985 1,587 1,030 1,007 1,935 847 837 1,053 920 991 888 938 824 840 1,037 889 1,092 1,578 839 1,131 951 1,008 988 1,292 1,004 988 874 1,259 1,106 1,780 940 1,038 1,672 1,086 1,061 2,039 893 882 1,110 970 1,044 936 988 868 885 1,156 991 1,217 1,759 936 1,261 1,061 1,123 1,102 1,441 1,119 1,102 975 1,404 1,234 1,984 1,049 1,157 1,864 1,211 1,183 2,273 995 983 1,238 1,081 1,164 1,043 1,102 968 987 1,175 1,007 1,237 1,788 951 1,281 1,078 1,142 1,119 1,464 1,137 1,119 991 1,426 1,254 2,016 1,065 1,176 1,894 1,230 1,202 2,310 1,012 999 1,258 1,099 1,183 1,060 1,119 984 1,003
Adams Alexander Bond Boone Brown Bureau Calhoun Carroll Cass Champaign Christian Clark Clay Clinton Coles Cook Crawford Cumberland DeKalb De Witt Douglas DuPage Edgar Edwards Effingham Fayette Ford Franklin Fulton Gallatin Greene
Housing and Utilities forHousing and Utilities forHousing and Utilities forHousing and Utilities for Housing and Utilities for a a Family of 1 a Family of 2 a Family of 3 a Family of 4 Family of 5 or more 1,255 753 739 666 764 913 885 877 813 869 914 980 830 1,495 1,117 1,494 801 1,725 990 727 969 946 887 798 1,544 1,172 877 854 956 805 887 809 810 1,048 877 1,474 884 868 782 897 1,072 1,040 1,030 955 1,021 1,073 1,151 975 1,756 1,312 1,755 941 2,026 1,162 854 1,138 1,111 1,042 938 1,813 1,377 1,030 1,003 1,123 946 1,042 950 952 1,231 1,030 1,553 932 915 824 945 1,130 1,095 1,086 1,006 1,076 1,131 1,213 1,027 1,851 1,382 1,849 992 2,134 1,225 900 1,199 1,171 1,098 988 1,911 1,451 1,086 1,056 1,184 997 1,098 1,001 1,003 1,297 1,086 1,732 1,039 1,020 919 1,054 1,260 1,221 1,211 1,122 1,200 1,261 1,352 1,145 2,063 1,541 2,062 1,106 2,380 1,366 1,004 1,337 1,306 1,224 1,102 2,130 1,618 1,211 1,178 1,320 1,111 1,224 1,117 1,118 1,446 1,211 1,760 1,056 1,036 934 1,071 1,280 1,241 1,230 1,140 1,219 1,281 1,374 1,164 2,097 1,566 2,095 1,124 2,418 1,388 1,020 1,359 1,327 1,244 1,119 2,165 1,644 1,230 1,197 1,341 1,129 1,244 1,135 1,136 1,469 1,230
Grundy Hamilton Hancock Hardin Henderson Henry Iroquois Jackson Jasper Jefferson Jersey Jo Daviess Johnson Kane Kankakee Kendall Knox Lake La Salle Lawrence Lee Livingston Logan McDonough McHenry McLean Macon Macoupin Madison Marion Marshall Mason Massac Menard Mercer
Housing and Utilities forHousing and Utilities forHousing and Utilities forHousing and Utilities for Housing and Utilities for a a Family of 1 a Family of 2 a Family of 3 a Family of 4 Family of 5 or more 1,179 803 913 899 1,090 978 784 957 744 717 647 935 840 799 906 1,013 740 1,053 783 776 820 792 975 996 788 771 808 761 933 736 709 896 1,478 842 1,093 1,384 943 1,072 1,056 1,281 1,149 921 1,124 874 843 760 1,099 986 939 1,064 1,190 869 1,237 919 911 963 931 1,145 1,169 926 905 949 894 1,096 865 832 1,052 1,736 989 1,284 1,459 994 1,130 1,113 1,349 1,210 971 1,185 921 888 801 1,158 1,039 989 1,121 1,254 916 1,303 968 960 1,015 981 1,207 1,232 976 954 1,000 942 1,155 911 877 1,109 1,830 1,042 1,353 1,627 1,108 1,260 1,240 1,505 1,349 1,083 1,321 1,027 990 893 1,291 1,159 1,103 1,250 1,398 1,021 1,453 1,080 1,070 1,132 1,093 1,345 1,374 1,088 1,064 1,115 1,050 1,288 1,016 978 1,236 2,040 1,162 1,509 1,653 1,126 1,280 1,261 1,529 1,371 1,100 1,342 1,043 1,006 908 1,312 1,178 1,121 1,270 1,421 1,038 1,476 1,097 1,088 1,150 1,111 1,367 1,396 1,106 1,081 1,133 1,067 1,309 1,032 994 1,256 2,073 1,180 1,533
Monroe Montgomery Morgan Moultrie Ogle Peoria Perry Piatt Pike Pope Pulaski Putnam Randolph Richland Rock Island St. Clair Saline Sangamon Schuyler Scott Shelby Stark Stephenson Tazewell Union Vermilion Wabash Warren Washington Wayne White Whiteside Will Williamson Winnebago
Housing and Utilities forHousing and Utilities forHousing and Utilities forHousing and Utilities for Housing and Utilities for a a Family of 1 a Family of 2 a Family of 3 a Family of 4 Family of 5 or more 1,087 1,277 1,346 1,501 1,525
"REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS" AND
ROBERT E. MCKENZIE, ESQ.
ARNSTEIN & LEHR LLP 120 SOUTH RIVERSIDE PLAZA SUITE 1200 CHICAGO, IL 60606 312-876-6927 312-876-7318 fax
REPRESENTATION BEFORE THE COLLECTION DIVISION OF THE IRS