How to Pay Zero Taxes, 2018: Your Guide to Every Tax Break the IRS Allows

By Jeff A. Schnepper

You earned it, you keep it! The #1 guide to paying less to the IRS every year. For more than three decades, How to Pay Zero Taxes has been helping people like you make tax time less draining, on both your emotions and your finances. You can save more money than you ever imagined when you have the right information—and that’s exactly what tax expert Jeff Schnepper provides. This engagingly written guide makes even most complex information easy to understand, delivering valuable advice on everything from converting personal expenses into business deductions to avoiding (or surviving) an audit. Fully updated for 2018, How to Pay Zero Taxes covers all the latest tax changes. You'll learn how to take advantage of IRS-sanctioned deductions, shelters, credits, exemptions, and more. Plus, you'll find hundreds of insider tips designed to lower your tax bill. Whether you're a tax professional or a home filer, this book will help you pay less to the IRS this year-and every year. Focus on what matters most: tax saving, not tax preparation. How to Pay Zero Taxes provides everything you need to know about: * New tax laws—including surcharges on earned and unearned income * Exemptions, credits, and exclusions * Special capital gains and dividends rules * Increased IRA and retirement plan limits * Job hunting and relocation expenses * Theft and casualty losses * Child care and elder care * Educational and Roth IRAs

• Language: English
• Publisher: McGraw-Hill Education
• Release date: Dec 8, 2017
• ISBN: 9781260115819

Book preview

Also by Jeff A. Schnepper

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Inside IRS

Professional Handbook of Business Valuation

New Bankruptcy Law

Can You Afford to Retire?

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This book is normally dedicated to my mogul,

Barbara, who taught me how to love, and to

my children, Brandy, Joshua, Allison, Mario,

and Jonelle, who gave me five more reasons why.

If I had the choice of doing it all over again,

I would begin by loving you again.

Also normally dedicated to the memory

of Frisco T. D. Schnepper, Tiger T. C. Schnepper, Fred T. C. Schnepper, and to Bruno,

who now give me paws,

BUT

Forget it, guys . . . This one’s

for my Bianca Rose Conlin,

and her brothers Drew Ethan Conlin, Tyler Evan Conlin,

Spencer Henry Conlin, and Owen Bae Alexander Conlin

and their cousins Dylan Simon Schnepper and Aubrey

Anne Schnepper, who have redefined my universe!

Contents

ACKNOWLEDGMENTS

CHAPTER 1

Tax Insanity

CHAPTER 2

Is It Legal?

CHAPTER 3

How Our Tax System Works

CHAPTER 4

Exclusions—Tax-Free Money

A    Alternatives to Earned Income

1.  Hospitalization Premiums

2.  Group Life Insurance Premiums

3.  Group Legal Services Plans

4.  Accident and Health Plans

5.  Employee Death Benefits

6.  Merchandise Distributed to Employees on Holidays

7.  Expenses of Your Employer

8.  Meals and Lodgings

9.  Employee Discounts

10.  Workers’ Compensation

11.  Cafeteria Plans and Flexible Spending Accounts

12.  Dependent Care Assistance Program

13.  Employer Educational Assistance

14.  Employee Awards

15.  Clergy Housing Allowance

16.  Miscellaneous Fringe Benefits

B    Donative Items

17.  Gifts, Bequests, and Inheritances

18.  Scholarships and Fellowships

19.  Prizes and Awards

20.  Qualified Charitable Distributions (QCDs)

C    Investors

21.  Interest on State and Municipal Obligations

D    Benefits for the Elderly

22.  Public Assistance Payments

23.  Social Security and Other Retirement Benefits

24.  Annuities

25.  Sale of Your Home

E    Miscellaneous Individual Exclusions

26.  Carpool Receipts

27.  Damages

28.  Divorce and Separation Arrangements

29.  Life Insurance

30.  Qualified State Tuition (§529) Programs

31.  Your Home—The Mother of All Tax Shelters!

32.  Disabled Veteran Payments

33.  Exclusion of Income for Volunteer Firefighters and Emergency Medical Responders

34.  Unemployment Benefits

35.  Homeowner Security

36.  Reimbursed Costs to Parents of Children with Disabilities

37.  Wrongful Conviction and Incarceration

38.  Restitution Payments

39.  Frequent Flier Miles

40.  Hurricane Sandy

41.  Cancellation of Indebtedness

42.  Medicaid Payments for Foster Care of Related Individuals

43.  ABLE Accounts

F    Schedule of Excludable Items

CHAPTER 5

Credits—Dollar-for-Dollar Tax Reductions

A    Estimated Tax and Withholding Exemptions

B    Credits

44.  The Earned Income Credit

45.  Excess Social Security Tax

46.  The Child and Dependent Care Credit

47.  Credit for the Elderly or Permanently and Totally Disabled

C    Special Credits

48.  Work Opportunity Credit (Formerly Targeted Jobs Tax Credit)

49.  Welfare to Work Credit

50.  Research Tax Credit

51.  Orphan Drug Tax Credit

52.  Adoption Assistance

53.  Hope Scholarship Credit

54.  American Opportunity Tax Credit

55.  Lifetime Learning Credit

56.  Child Tax Credit

57.  Disability Credits

58.  Health Insurance Credit

59.  Saver’s Credit

60.  Small Employer Credit

61.  Electric Vehicle Credit

62.  Credit for Residential Energy Efficient Property

63.  Energy Saving Home Improvement Credit

64.  Hybrid Vehicles Credit

65.  Telephone Tax Refund

66.  First-Time Home Buyer Credit

67.  Making Work Pay Tax Credit

68.  Plug-in Electric Drive Vehicle Credit

69.  Plug-in Electric Vehicle Credit

70.  Conversion Kits

71.  Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed against AMT

72.  Small Business Health Insurance Credit

73.  Small Business Health Care Credit

74.  Foreign Tax Credit

75.  The Premium Tax Credit

CHAPTER 6

Above the Line Deductions

A    Deductions for Adjusted Gross Income

76.  Trade and Business Deductions

77.  Employee Business Expenses of Actors and Other Performing Artists

78.  Employee Business Expenses

79.  Alimony

80.  Interest on Qualified Education Loans

81.  Retirement Plan Payments

82.  Self-Employment Tax

83.  Health Insurance Deduction for Self-Employeds

84.  Moving Expenses

85.  Clean Fuel Vehicles

86.  Deduction for Qualified Higher Education Expenses—Tuition and Fees

87.  Legal Fees

88.  Classroom Materials

89.  Medical Savings Accounts (Archer Medical Savings Accounts)

90.  Health Savings Accounts

91.  Sales Tax Deduction on Motor Vehicles

CHAPTER 7

Below the Line Deductions

A    The Importance of Filing Status

B    Tax Planning with Itemized Deductions

92.  Medical Expenses

93.  Income Taxes

94.  Real Property Taxes

95.  Personal Property Taxes

96.  Interest

97.  Mortgage Insurance

98.  Charitable Contributions

99.  Casualty Losses

100.  Theft Losses

101.  Miscellaneous Trade and Business Deductions of Employees

102.  Job Loss Insurance

103.  Travel Expenses

104.  Transportation Expenses

105.  Meals and Entertainment Expenses

106.  Gifts

107.  Reimbursable Employee Business Expenses

108.  Educational Expenses

109.  Limit on Itemized Deductions

C    Schedules of Deductions

110.  Medical Deductions

111.  Deductible Taxes

112.  Charitable Deductions

113.  Casualty and Theft Loss Deductions

114.  Miscellaneous Deductions

115.  Employee Miscellaneous Deductions

116.  Investor Deductions

CHAPTER 8

Traditional Tax Shelters

A    Deferral and Leverage

117.  Real Estate

118.  Fees in Public Real Estate Partnerships

119.  Oil and Gas

120.  Equipment Leasing

121.  Single-Premium Life Insurance

122.  Cattle Feeding Programs

123.  Cattle Breeding Programs

124.  Tax Straddles

125.  Art Reproduction

126.  Noncash Gift Shelters

127.  Municipal Bond Swaps

B    How to Analyze a Tax Shelter

128.  Getting Out of the Tax Shelter

129.  Master Limited Partnerships

130.  Abusive Shelters

CHAPTER 9

Super Tax Shelters

A    Family Shifts

131.  Unearned Income of Minor Children

132.  Outright Gifts

133.  Clifford Trusts

134.  Interest-Free Loans

135.  The Schnepper Shelter: Gift Leasebacks

136.  The Schnepper Deep Shelter

137.  Family Partnerships

138.  Family Trusts

139.  The Schnepper Malagoli Super Shelter

140.  Employing Members of the Family

141.  Author’s Delight

B    Running Your Own Business

142.  Your Home

143.  Your Car

144.  Meals and Entertainment

145.  Travel and Vacation

146.  Gifts

147.  Advertising

148.  Deductible Clothes

149.  Creative Deductions—Busting the IRS

150.  Medical Premiums

151.  Borrowing from Your Company

152.  Miscellaneous Corporate Advantages

CHAPTER 10

Investment Planning to Save Taxes

153.  Short Sales

154.  Broad-Based Index Options and Regulated Futures Contracts (RFCs)

155.  Wash Sales

156.  Premiums on Taxable and Tax-Exempt Bonds

157.  Original Issue Discount (OID)—Taxable Bonds

158.  Original Issue Discount (OID)—Tax-Exempt Bonds

159.  Market Discount

160.  Municipal Bond Swaps

161.  Employee Options—Nonqualified

162.  Incentive Stock Options

163.  Year-End Stock Sales

164.  Fund Strategies

165.  Dividends

166.  Tax-Exempt Income

167.  Old Prices

168.  Alternative Minimum Tax for Individuals

169.  U.S. Savings Bond Exclusion

170.  Madoff Losses

171.  Collars—Tax Free Lock in Your Gain

CHAPTER 11

Last-Minute Tax Planning

172.  Defer Taxes

173.  Accelerate Expenses

174.  Accelerate Special Deductions

175.  Dependents and Personal Exemptions

176.  Phase-out of Exemptions

177.  Timing Strategies

178.  Retirement Plans

179.  Individual Retirement Plans (IRAs)

180.  H.R. 10 or Keogh Plans

181.  Marital Status

182.  The Goldinger Deferral

CHAPTER 12

The Economic Growth and Tax Relief Reconciliation Act of 2001

183.  Marginal Rate Reductions

A    Individual Income Tax Rate Structure

B    Phase-out of Restrictions on Personal Exemptions

C    Phase-out of Itemized Deductions

184.  Tax Benefits Relating to Children

A    Increase and Expand the Child Tax Credit

B    Extension and Expansion of Adoption Tax Benefits

C    Child Care Credit

185.  Marriage Penalty Relief Provisions

A    Standard Deduction Marriage Penalty Relief

B    Expansion of the 15 Percent Rate Bracket for Married Couples Filing Joint Returns

C    Marriage Penalty Relief and Simplification Relating to the Earned Income Credit

186.  Education Incentives

A    Modifications to Education IRAs

B    Private Prepaid Tuition Programs; Exclusion from Gross Income of Education Distributions from Qualified Tuition Programs

C    Exclusion for Employer-Provided Educational Assistance

D    Modifications to Student Loan Interest Deduction

E    Eliminate Tax on Awards Under the National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program

F    Deduction for Qualified Higher Education Expenses

187.  Pension and Individual Retirement Arrangement Provisions

188.  AMT Relief

189.  Health Insurance for Self-Employed

190.  Income Tax Treatment of Certain Restitution Payments to Holocaust Victims

191.  Estate, Gift, and Generation-Skipping Transfer Tax Provisions

A    Phase-out and Repeal of Estate and Generation-Skipping Transfer Taxes; Increase in Gift Tax Unified Credit Effective Exemption

B    Expand Estate Tax Rule for Conservation Easements

C    Modify Generation-Skipping Transfer Tax Rules

D    Availability of Installment Payment Relief

192.  Sunset

CHAPTER 13

The Job Creation and Worker Assistance Act of 2002

193.  Bonus Depreciation

194.  Net Operating Losses

195.  Classroom Materials

196.  Electric Vehicle Credit

197.  Work Opportunity Tax Credit

198.  Welfare to Work Tax Credit

199.  Archer Medical Savings Account

200.  Liberty Zone Benefits

CHAPTER 14

The Tax Relief Reconciliation Act of 2003

A    Rate Reductions

B    The Marriage Penalty

C    The Alternative Minimum Tax

D    Child Tax Credit

E    Dividends/Capital Gains

F    Deduct Your SUV—Election to Expense

CHAPTER 15

Income Averaging and Hurricane Tax Breaks

CHAPTER 16

2006 Tax Reform

A    The Tax Increase Prevention and Reconciliation Act of 2005

B    The Pension Protection Act of 2006

C    Tax Relief and Health Care Act of 2006

CHAPTER 17

Tax Reform, 2007–2008

A    The Mortgage Forgiveness Debt Relief Act of 2007

B    The New Debt Relief Act

C    The Economic Stimulus Act of 2008

D    The Heroes Earnings Assistance and Relief Act of 2008

E    The Housing and Economic Recovery Act of 2008

CHAPTER 18

2009 Tax Changes

201.  Making Work Pay Tax Credit

202.  Reducing the COBRA Bite

203.  First-Time Home Buyer Credit Expanded

204.  American Opportunity Tax Credit

205.  Energy Credits

206.  Plug-in Electric Drive Vehicle Credit

207.  Plug-in Electric Vehicle Credit

208.  Conversion Kits

209.  Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed Against AMT

210.  AMT Patch

211.  Earned Income Credit

212.  Child Tax Credit

213.  Section 529 Plans

214.  Unemployment Benefits

215.  Qualified Transportation Benefits

216.  Estimated Taxes

217.  Motor Vehicle Sales Tax

218.  Business Depreciation

219.  NOL Carrybacks

CHAPTER 19

More Tax Changes

A    The Hiring Incentives to Restore Employment (HIRE) Act of 2010

B    The Patient Protection and Affordable Care Act

C    Small Business Jobs Act of 2010

D    The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

E    American Tax Relief Act of 2012

F    Tax Increase Prevention Act of 2014

G    The ABLE Act

H    More Changes

CHAPTER 20

How to Avoid/Survive an IRS Audit

APPENDIX A

Cost Recovery/Depreciation

APPENDIX B

Business Use of Listed Property

APPENDIX C

Auto Leases

INDEX

Acknowledgments

I wish to thank Nancie Crook, Barbara Thomassian, Pat Berenson, Ronnie Smith, and Anne McVay, without whom this book could not have been written, and the U.S. Congress and the IRS, without whom this book wouldn’t have been needed.

I also want to thank Sayes B. Block, for his encouragement and professional guidance; Sandi Walker, April Napolitano, and Anne Rigney, for their typing and editorial assistance; my editors at McGraw-Hill, Mary Glenn, Jane Palmieri, Patricia Amoroso, Tania Loghmani, Zach Gajewski, Patricia Wallenburg, Maki Wiering, and Cheryl Ringer; and Sri Haran, CPA, Robert Doyle, Steve Leimberg, Jeff Kelvin, Joel Petchon, John McFadden, Kenn Tacchino, Bill Rotella, George Hasenberg, Frank Kesselman, John Oxley, Stephen D. Leightman, Noeleen McLoughlin, Julian Egnaczyk, Ed Caldwell, CPA, Al Blum, Brian Hans, Harry K. Sorenson, CPA, Patrick O’Rourke, CPA, S. Scott Davison, Rose Thompson, Lilly Thompson, Claire Davison, Allison Schnepper, Zulma Lombardo, Morris Abraham, Richard and Janice Schank, Mark S. Fineberg, CPA, Anthony Lyras, and Ron Campbell for their professional assistance; and Simba T.C. Schnepper Conlin, Bruno T.D. Conlin, and Fred T.C. Schnepper, who give me reason to paws. Special thanks to Stephanie Davison-Thompson and Brian Lance for research and editorial assistance, Bill Fox for his investment insights, Ray Palmucci for his guidance and care of my San Diego assets.

CHAPTER 1

Tax Insanity

Our income tax system is overly complex. It distorts investment decisions and encourages people to put money into schemes to reduce their tax bills instead of into enterprises to create jobs and help our economy grow.

BILL BRADLEY, New Jersey senator (1984)

"The words of such an act as the Income Tax . . . merely dance before my eyes in a meaningless procession: cross-reference, exception upon exception—couched in abstract terms that offer no handle to seize hold of—leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out the net, against all possible evasion; yet at times I cannot help recalling a saying of William James about certain passages of Hegel: that they were, no doubt, written with a passion of rationality; but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness. . . ."

JUDGE LEARNED HAND, Thomas Walter Swan, 57 Yale L.J. 167, 169 [1947].

Q: What’s the difference between Obama’s cabinet and a penitentiary?

A: One is filled with tax evaders, blackmailers, and threats to society. The other is for housing prisoners.

—DAVID LETTERMAN

I don’t believe in a law to prevent a man from getting rich; it would do more harm than good.

ABRAHAM LINCOLN

Politicians tax the middle class for the same reason some people rob banks. That’s where the money is.

FORBES MAGAZINE

May 11, 1992

If our current tax strucure were a TV show, it would either be ‘Foul-ups, Bleeps and Blunders,’ or ‘Gimme a Break.’ If it were a movie, it would be ‘Revenge of the Nerds’ or maybe ‘Take the Money and Run.’ And if the IRS ever wants a theme song, mabye they’ll get Sting to do ‘Every breath you take, every move you make, I’ll be watching you.’

PRESIDENT REAGAN, in remarks to students at Northside High School, Atlanta, Georgia, June 6, 1985

2017 – POLITICS AGAIN TRUMPS ECONOMICS

As this is being written, Congress is debating a major overhaul of our tax system. Please go to www.mhprofessional.com/Schnepper for updates on major law changes.

2017 was the year when facts depended on who said it and in what context. It was also the year where the primary objective of each political party was to keep the other from achieving anything of value regardless of whether they agreed with the final objective . . . just make sure the other guy doesn’t get any credit. In the middle of this chaos, President Trump has proposed an outline for a major overhaul and simplification of our whole tax system . . . including a refocus of the IRS from enforcement to service.

Nevertheless, How to Pay Zero Taxes, 2018 needs to step back from wish it were so to deal with the tax code, court cases, and regulations as they exist today. You can’t play the game unless you know the rules and the agency that enforces them—the Internal Revenue Service. In that context, let’s review the effectiveness of that agency as detailed by the Treasury Inspector General for Tax Administration (TIGTA) and the Government Accounting Office (GOA) during the last year:

•   The IRS spent $12 million for subscriptions for a Microsoft enterprise e-mail system that, as it turned out, it could not use. The purchase was made without first determining project infrastructure needs, integration requirements, business requirements, security and portal bandwidth, and whether the subscriptions were technologically feasible for the IRS. . . . Really?

•   IRS employees sent hundreds of unencrypted e-mails containing sensitive taxpayer information, and some used personal e-mail accounts for official agency business. I guess they thought it was OK as long as they were not running for president and the Russians didn’t object.

•   IRS examination function personnel did not always follow collectibility procedures, coordinate with the collection function, nor measure the collectibility of assessments.

•   The IRS paid more than $27.2 million in potentially erroneous refunds or tax credits to 1,938 taxpayers who claimed frivolous tax arguments in tax year 2014. Frivolous tax arguments are those that have no basis in fact or in tax law. That’s not too bad considering. . . .

•   The IRS made about $25 billion in erroneous tax credit payments in 2016. Almost $17 billion of that was for the earned income credit.

•   The IRS incorrectly disallowed about $54,000 in educator expense deductions and $1.5 million in residential energy credits in 2016 because of errors in the process.

•   The IRS’s electronic record retention policies did not consistently ensure that records were retained and produced when requested.

•   A June 2017 report revealed that more than 24,000 fraudulent returns with more than $1.3 billion in claimed refunds were filed with prisoner Social Security numbers.

•   An estimated $4.3 billion in refundable tax credit payments were issued improperly during fiscal year 2016. At 5 percent interest, that’s over $589,000 per day!

•   The IRS Automated Non-Master File (ANFL), which contains roughly $4.5 billion in unpaid tax, penalties, and interest due from taxpayers, is subject to calculation errors and inefficient processing.

•   In October of 2016, additional improvements were still needed to strengthen the IRS Electronic Authentication Process controls, which allowed fraudsters to gain access to about 724,000 taxpayer accounts in May of 2015.

•   The IRS is vulnerable to the loss of laptop computers. Improved controls are also needed to account for the issuance and return of contractor employee laptop computers, which may contain sensitive taxpayer information.

•   In 2016, TIGTA identified weaknesses within the IRS cybersecurity program in which three areas need significant improvement—Information Security Continuous Monitoring, Configuration Management, and Identify and Access Management. There were identified weaknesses in electronic authorization process controls, physical security controls, and backing up and restoring data.

•   The IRS answered 79 percent of the telephone calls it received on its Account Management (AM) telephone lines that were routed to telephone assistors. That’s up from 72 percent from 2016. In addition, time spent on hold declined from 11.1 minutes in 2016 to 6.5 minutes during the 2017 filing season.

•   But, despite answering a higher percentage of calls, assistors actually answered 25 percent fewer calls in 2017 than in 2016. Had they received the same number of calls in 2017 as in 2016, the IRS would have answered only 54 percent of taxpayer calls. The fiscal year 2018 IRS budget projects that the agency will answer only 39 percent of calls routed to telephone helpers next year.

•   The IRS only answered 40 percent of the 2.7 million calls it received in fiscal 2017 from taxpayers seeking to make payments, down from 36 percent the prior year. The wait time also increased from 11 minutes in 2016 to 47 minutes in 2017.

•   Want to see a live IRS agent? You now need an appointment to receive any assistance at any of the 376 Taxpayer Assistance Centers (TACs) operated by the IRS. Call 844-545-5640 to schedule an appointment or you will be turned away.

•   From January 2015 through March 2016, the IRS brought back more than 10 percent of the 2,000 employees who were terminated or separated from the agency while under investigation for a substantiated conduct or performance issue.

•   Taxpayers who go to the IRS Office of Appeals for collection due process issues are still misclassified and receive the wrong type of hearing.

•   Up to 14 Fair Tax Collection Practices violations at the IRS were identified in 2015.

•   Between fiscal 2015 and 2016, calculation errors caused the IRS to underpay 900 employees and overpay 600 more. Based on a sample of IRS employees who received salary increases of more than 10 percent for promotion into management positions between fiscal 2006 and 2015, 31 percent of sampled employees were not paid correctly.

•   The IRS Whistleblower Office does not have appropriate controls in place for sufficient oversight of claims processing.

•   $17.1 million was unlawfully seized by the IRS and forfeited to the government allegedly in violation of the Bank Secrecy Act. In a TIGTA civil forfeiture sample of 278 investigations, 91% of them were found to be businesses where the funds were obtained legally.

•   During the 2016 filing season, the IRS doled out $1.2 million less in a property tax credit than taxpayers were owed. It was because the IRS failed to make computer program changes first highlighted in 2015. Because of another computer problem, 5,600 direct deposits did not properly convert to paper checks.

•   In 2016, the IRS’s information security program was not fully effective due to program issues.

•   Most people (57%) who claimed the health coverage tax credit on their 2015 returns did not qualify for that credit. Good news! The IRS correctly determined the amount of the allowable premium tax credit 93 percent of the time in 2015 and 97 percent of the time in 2016.

•   The IRS failed to accurately impose a fee for failure to file a return for 85 accounts worth more than $1.7 million, overcalulated the penalty fee on 153 accounts totaling about $89,000, and underassessed the fee on 227 accounts, totaling about $354,000.

•   About 1.1 million taxpayers were victims of employment-related identity theft—which happens when a taxpayer’s identity is stolen to get a job—from February 2011 to December 2015. More than 800,000 victims were harmed just in 2015. Yet in June 2017 the IRS processes were still not sufficient to identify and assist all employment theft victims.

•   As of September 30, 2016, the IRS had only 98 employees conducting education and outreach to the 62 million small business and self-employed taxpayers, and only 365 employees for the nearly 125 million individual taxpayers.

•   A 2016 GAO report on IRS audits led House Ways & Means Chairman Brady and Oversight Subcommittee Chairman Roskam to conclude that the findings show that the agency does not have protections in place to ensure that taxpayers are treated fairly when being selected for audits.

•   The number of IRS employees working taxpayer correspondence cases and answering phone questions fell about 11 percent between fiscal years 2013 and 2015. This was despite taxpayer services funding increasing 9 percent, to $198 million, between fiscal years 2013 and 2016.

•   Since 2001 to the end of 2016, there have been almost 5,900 legislative tax changes . . . more than one a day.

•   In 2017, we spent close to $1 trillion more for taxes than for food, clothing, and housing combined.

•   From the gang that couldn’t shoot straight––one of the IRS’ fabled successes is the takedown of gang leader Al Capone for tax evasion. The agency lent the new Mob Museum in Las Vegas a prized possession from its collection of historical artifacts—a handgun once owned by Mr. Capone. One small problem . . . it was the wrong gun!

•   According to Ibis World, the U.S. tax preparation industry generates $8.9 billion in annual revenue. My children thank you!

•   Interesting news! The Tax Revolution Institute has created a new website, AuditIRS.com, to collect personal experiences from taxpayers about their encounters with the IRS, and it plans to conduct an audit of the IRS’s treatment of taxpayers.

•   Good news! From January to April 2016, the IRS stopped $1.1 billion in fraudulent refunds claimed by identity thieves on more than 171,000 tax returns, compared to $754 million in fraudulent refunds claimed on 141,000 returns for the same period in 2015.

•   Better news! During fiscal 2016, the IRS stopped more than $6.5 billion in fraudulent refunds on the 969,000 tax returns confirmed to be filed by identity thieves. Complaints of ID theft fell 46 percent in 2016 from the previous year, dropping to 376,500.

•   Crazy news! Hope and belief beat out experience every time. That’s why people keep getting married over and again—full disclosure—I have a sister-in-law who has been married ten times! After being discontinued twice before because of complaints about harassment of taxpayers and low success in collections, our Congress has reinstated a program to hire four private collection agencies to help collect unpaid federal income tax debts. The IRS has contracted with these collection agencies: Pioneer, in Horseheads, NY; Conserve, in Fairport, NY; Performant, in Livermore, CA; and CBE Group, in Cedar Falls, IA.

Who picked these debt collectors? In a letter to Pioneer, Senator Sherwood Brown (D-OH), Senator Benjamin Cardin (D-MD), Senator Jeff Merkley (D-OR), and Senator Elizabeth Warren (D-MA) expressed concerns that Pioneer may be:

1.  failing to adequately protect taxpayers from criminals posing as IRS agents;

2.  pressuring taxpayers into risky financial transactions;

3.  violating the Fair Debt Collections Practices Act (FDCPA) and provisions of the Internal Revenue Code, and

4.  violating IRS guidelines and provisions of Pioneer’s contract.

The Senators were particularly concerned because Pioneer’s parent company, Navient, abused federal student loan borrowers through its Education Department student loan servicing contracts.

In addition, this private collection program will surely be hampered by telephone scammers who pretend to be from the IRS in order to embezzle funds from unknowing taxpayers. Criminals impersonating IRS employees have stolen $55 million from more than 10,300 individuals in the last three years.

The IRS solution? TIGTA released a new flyer and a new poster warning taxpayers about potentially fraudulent calls from IRS imposter employees. You can always make an appointment to see them at any local IRS office . . . but don’t try without an appointment.

IF YOU DO GET A CALL, ASK THEM TO SEND YOU A LETTER. THE REAL IRS NEVER MAKES A CALL UNTIL LETTERS HAVE BEEN SENT.

Call the TIGTA Hotline at 800-366-4484 for complaints and questions about IRS private debt collectors.

2016 – A NEW PRESIDENT AND CONTINUING CHAOS

2016 was the year we elected a new president, and now almost half the voters are contemplating moving out of the country. Throw in global warming and your best long-term investment may well be land in Canada.

2016 was also the year the House of Representatives Committee on Oversight and Government Reform voted to censure and impeach IRS Commissioner John Koskinen for lying to Congress. I’m not sure I understand. I thought the inability to tell the truth was a prerequisite to being a politician.

2016 was also the year in which the annual extenders game came to a halt. The extenders were a series of fifty some odd tax provisions that pretty much on an annual basis Congress would wait till the last minute to renew—and then renewed only for a short period of time. They included a group of deductions such as the $250 above the line allowance for teachers’ expenses, the deduction for state sales taxes, the mortgage insurance premium deduction, the tuition and fees deduction, the forgiven mortgage debt exclusion, the nonbusiness energy credits, etc. The Protecting Americans from Tax Hikes (the PATH Act), passed in the last two week of December 2015, extended several provisions through 2016 and made others permanent. See page 657 for details.

Here are some of the indignities suffered by the IRS in 2016 as revealed by the General Accounting Office (GAO) and the Treasury Inspector General for Tax Administration (TIGTA):

•   Because of a programming error impacting more than 13,000 returns in 2013, over $27 million in refunds were erroneously issued.

•   A computer programming error and the ineffective monitoring of potentially fraudulent tax returns resulted in the erroneous release of more than $46 million in refunds during 2014.

•   In an analysis of 2011 data, it was found that the IRS failed to assess $200 million in fines and penalties for employer improper wage reporting. The IRS just didn’t send out the bill!

•   It was revealed that in 2011 the IRS paid out $3.6 billion in fraudulent refunds, growing to $5.8 billion in 2013. In June 2015, the IRS website got hit with thieves stealing information on about 100,000 taxpayers to generate $39 million in fraudulent refunds.

•   The IRS Electronic Fraud Detection System was developed in 1994 and remains the IRS’s main system for detecting fraudulent returns. The failure to phase out this old system with a developed new one could cost taxpayers an estimate additional $18 million per year to run both systems.

•   Half of the IRS-approved free e-file services failed the IRS’s security and privacy mandated standards. Among those who failed were 1040.com, 1040Now.net, FileYourTaxes.com, Free1040TaxReturn.com, Online Taxes at OLT.com, and Jackson Hewitt Online.

•   IRS employee, Nakeisha Hall, who worked for the Taxpayer Advocate Service, where her job was to help taxpayers resolve their identity theft problems, pleaded guilty to identity theft. She got 9 years in prison.

•   The new IRS fraud detection system failed to detect $313 million in fraudulent identity theft refunds in 2015.

•   The IRS took an average of 70 days to accommodate requests by disabled employees. It should have been done in 15 days, absent extenuating circumstances.

•   More than a dozen IRS employees misused their government-issued charge cards.

•   The IRS is not ensuring that keys, identification badges, and other security items are collected from employees who leave the agency.

•   By the end of 2016, the IRS plans to eliminate the walk-in option at Taxpayer Assistance Centers (TAC), migrating to an appointment only system.

•   The IRS is conducting a pilot program under which it will not accept tax payments from walk-in taxpayers. Now you need an appointment to pay your bill!

•   Nearly one third of the 4.6 million taxpayers who received an advanced premium tax credit for insurance coverage bought on a health care marketplace didn’t report the credit on their returns.

•   The IRS has failed to adequately test a database that will house all taxpayer information for the Affordable Care Act–related reporting requirements.

•   The IRS’s computer system miscalculated the allowable Premium Tax Credits for more than 27,000 taxpayers who received subsidies for health insurance under the Affordable Care Act in 2015.

•   The IRS cannot adequately identify certain U.S. and foreign citizens who fail to pay Social Security taxes.

•   The IRS allowed nearly $95 million in potentially improper foreign tax credits between tax years 2010 and 2012.

•   Tax preparers who were given identification numbers by the IRS and allowed to practice in 2015 may have owed more than $367 million in taxes.

•   Many of the special personal identification numbers issued by the IRS to protect victims of identity theft may have been stolen.

•   About 724,000 taxpayer accounts were breached by hackers targeting the IRS’s Get Transcript application, 390,000 more than the agency previously reported.

•   The IRS failed to fully redact Social Security Numbers and Employer Identification Numbers from hundreds of its Offer in Compromise files that are available to the public.

•   The IRS, which has 2,316 special agents, spent nearly $11 million on guns, ammunition, and military style equipment. That’s nearly $5,000 in gear for each agent.

•   Because of IRS failures, taxpayers received $572 million in excess Obamacare tax credits.

•   The IRS needs to improve the management of its backup and restoration process.

•   The IRS needs to strengthen certain internal controls for audit selection. Currently the IRS uses over 30 methods, called workstreams, to identify and review tax returns that may merit an audit. The returns were initially identified through seven sources, which include referrals, computer programs that run filters, rules, or algorithms to identify noncompliant taxpayers.

•   The IRS did not always follow its own procedures when selling some of the property it seized for unpaid taxes.

•   The IRS’s Automated Collection System lacks key controls for selecting which delinquent tax cases to pursue.

•   Section 1204 of the IRS Restructuring and Reform Act of 1998 (RRA 98) mandates that managers evaluating employees not use any record of tax enforcement results (ROTER). Employees should not get promotions and awards based upon the amount of money they get from taxpayers at an audit. TIGTA found multiple instances in a 2015 report where these rules were not followed.

•   In fiscal 2014, the IRS reported payments of $65.2 billion for the earned income tax credit (EITC). The IRS estimated that 27.2 percent, or $17.7 billion of those program payments were improper.

•   During the 2015 filing season in 2016, the IRS estimated it may have paid $30 million to fraudsters who filed approximately 7,200 tax returns that passed through the Taxpayer Protection Program to identify fraudulent returns.

•   The Taxpayer Protection Program (TPP) was set up to protect identity theft. Its false positive rate for 2015 was 36.6 percent, which means that 760,000 legitimate refunds were stopped.

•   During the 2016 filing season, the TPP only answered 22.7 percent of more than 4.4 million calls. Nearly four out of five calls were not answered.

It wasn’t just the IRS that had its problems. On April 6, 2016, former US Tax Court Judge Diane Kroupa and her husband were indicted for conspiracy to commit tax evasion and obstruction of an IRS audit.

There was some positive news:

•   The GAO found that the IRS was generally successful in collecting delinquent taxes from current and retired federal employees. The IRS identified 304,665 federal employees and retirees who owed approximately $3.54 billion in unpaid taxes at the end of fiscal 2014.

•   Federal income tax collection rose 10.5 percent in 2015. The $3.2 trillion collected from all federal taxes in 2015 was the highest on record.

•   Good news if your identity has been stolen. The value of identity protection services provided by an entity whose data has been breached is NOT taxable income to the breach victim.

•   During its pilot in calendar year 2014, the Return Review Program identified 10,348 identity theft cases, totaling $43 million in refunds and an additional 350,000 potentially fraudulent returns that were not detected by the existing fraud detection system.

•   IRS spending on conferences, meetings, and events was only $22.2 million in fiscal 2014, down 87.5 percent from the prior year.

•   From January through April 2016, the IRS stopped $1.1 billion in fraudulent refunds claimed by identity thieves on more than 171,000 tax returns. That compares to $754 million in fraudulent refunds claimed on 141,000 returns for the same period in 2015.

•   Since January 2016, the IRS Identity Theft Victims Assistance function experienced a marked drop of 48 percent, which includes identity theft affidavits filed by victims.

•   Because of low incomes or refundable credits, 44 percent of Americans paid no federal income tax.

2015 – EXTENDERS AGAIN AND A TOUGH YEAR FOR THE IRS

Insanity has been defined as doing the same thing over and over again and expecting different results. Yet year after year, we elect the same representatives back to Congress expecting them to legislate and govern and all they do is play politics (that’s from the Greek poli meaning many and tics meaning bloodsuckers).

Once again, the extenders expired only to be renewed in the last two weeks of the year. Last year’s extender legislation had a shelf life of less than a carton of eggs. Signed into law on December 18, 2014, the provisions expired less than two weeks later. See page 653 for details on the 2014 extensions.

I Actually Felt Bad for the IRS in 2015

Clearly Congress is unhappy with the IRS. Clearly Congress has no idea what it is doing. There is no dispute that the IRS officials have acted inappropriately and potentially criminally in multiple occasions in the past. But, instead of coming down hard on the individuals responsible, Congress has punished the institution by severely slashing its budget at the same time the Affordable Care Act substantially increases its responsibilities. Less money to do more work. The results would be obvious to a fifth grader but maybe I’m giving our representatives too much credit.

Here are some of the indignities suffered by the IRS in 2015 as reported by the General Accounting Office (GAO) and the Treasury Inspector General for Tax Administration (TIGTA):

•   Remember the 24,000 missing Lois Lerner e-mails tied to alleged IRS political targeting? More than 1,000 previously unreported e-mails have been recovered but as much as 23,000 more are still missing since backup data in 422 disaster recovery tapes were erased months after a preservation order and a subpoena to retain them were issued. It’s a destruction of evidence according to House Oversight and Government Reform Committee Chairman Jason Chaffetz of Utah.

•   The IRS bragged about preventing $24.2 billion in fraudulent identity theft refunds last year. But then it was revealed that the IRS did pay out $5.8 billion in fraudulent claims. That’s more than twice my daughter’s clothes budget for a year!

•   The GAO noted that weaknesses remain in information security control that could affect the confidentiality, integrity, and availability of financial and sensitive taxpayer data, as a result of which—

•   Hackers broke through the security program used to protect taxpayer data on the IRS’ Get Transcript Online System and stole past tax return information, including Social Security numbers, from more than 334,000 tax returns.

•   If you are a victim of identity theft, go to www.IdentityTheft.gov for checklists as to what to do and file Form 8821-A. However, according to the TIGTA, the IRS has not always responded with accurate, timely information to requests from law enforcement officials to help identity theft victims.

•   The IRS awarded $18.8 million in contracts to 17 corporations that owed back taxes in fiscal 2012 and 2013 despite a law specifically prohibiting such contracts with firms with unpaid tax debts.

•   Identity theft fraudulent returns using TurboTax software caused its owner, Intuit, Inc., to suspend the filing of state tax returns. Massachusetts and Vermont actually suspended issuing tax refunds in an abundance of caution.

•   Between fiscal years 2010 and 2015, the IRS budget was reduced by more than $1.2 billion. This has resulted in a 21 percent reduction of Automated Collection Service (ACS) contact representatives and 28 percent of Field Collection revenue officers. The IRS is answering 25 percent fewer taxpayer telephone calls since 2011 and taxpayers who actually got through waited an average of eight minutes longer to speak with a representative. In fiscal 2014, 35.6 percent of phone calls to the IRS went unanswered and 50 percent of correspondence with the agency was not handled in a timely manner. During the 2015 tax filing season, the IRS’ over-loaded phone system hung up on more than 8 million calls from taxpayers. According to a Ways & Means report, the time IRS employees spent on union activities would have allowed for an additional two million plus in taxpayer assisted phone calls. In fiscal 2014, revenue officers closed 34 percent fewer cases and collected $222 million (7 percent) less in revenue than in 2011. Fiscal year computer downtime reached 66,448 hours, the equivalent of losing 32 full-time employees for the year. The IRS currently employs about 90,000 people, of which only about 2,000 are under the age of 30, and about 650, less than 0.01 percent, were born after 1990—not a recipe for sustainment. More than half of the IRS work force is over age 50, and about 40 percent will be eligible to retire in 2019. Because of budget cuts, the IRS will continue its hiring freeze and expects to lose through normal attrition approximately 3,000 additional full-time employees in fiscal year 2015. That would bring the total reduction in full-time staffing since fiscal year 2011 to over 18,000, while the amount spent on employee training for those left has been cut by 83 percent.

•   While funding and employees have crumbled, over the past decade the number of individual tax returns have jumped 11 percent, business returns are up 18 percent, and phone calls to the IRS have soared 70 percent.

•   According to the Treasury Department, every $1 cut from the IRS enforcement budget results in a loss of $6 in additional revenue.

•   Adjusted for inflation, the IRS will have as much money as it did in 1998, when it processed 30 million fewer returns. According to IRS Commissioner John Koskinen, such budget cuts will result in the loss of $2 billion in revenue through enforcement cut backs.

•   In 2015, budget prevented the IRS from distributing paper forms in libraries and most post offices. In fact, the IRS actually ran out of preprinted tax forms and reportedly didn’t even have the extra blank paper to print out more forms.

•   Computer upgrades will also suffer. According to the IRS Commissioner, We still have applications that were running when John F. Kennedy was president.

•   Nevertheless, the IRS managed to find $8.3 million to spend on market research, office furniture, fitness equipment, and nearly $4,000 for toy give-away items.

•   Between October 2003 and September 2013, the IRS found that more than 1,500 employees were willfully not complying with our tax law. Over this period, 620 employees resigned, retired, or were terminated. However, others were rewarded with cash bonuses, promotions, and paid time off.

•   In fiscal 2014, the IRS gave out $2.8 million in bonuses to employees who had conduct issues or owed back taxes.

•   In fiscal 2012, the IRS handed out $5.6 billion in bogus education tax credits.

•   Between fiscal years 2003 and 2013, the IRS paid out as much as $148 billion in improper Earned Income Tax Credits.

•   Between 2011 and 2013, the IRS may have allowed $167.7 million in questionable fuel tax credits.

•   IRS ethics attorney Takisha Brown was disbarred for intentionally misappropriating funds and making false statements. So much for IRS ethics.

•   In 2015, approximately 800,000 taxpayers received from the government incorrect tax information on their Form 1095-A relating to health insurance subsidies and couldn’t correctly file their tax returns.

•   GAO investigators filed 12 fraudulent applications for health insurance tax credits under the Affordable Care Act (ACA). Eleven of the twelve were approved!

•   The IRS failed to maintain effective internal control over financial reporting because of continuing material weakness in internal control over unpaid tax assessments.

•   According to a TIGTA audit of the agency, the IRS has failed to take adequate measures to safeguard tax information disclosed to other agencies.

•   The IRS was also found to have failed to do background checks on some private contractors who handled confidential taxpayer information, exposing more than a million taxpayers to an increased risk of fraud and identity theft.

•   The Centers for Medicare and Medicaid Services said in February 2015 that it had sent incorrect Forms 1095-A, Health Insurance Marketplace Statement, needed to reconcile subsidies with actual incomes on your 2014 tax return, to more than 800,000 people.

•   The Internal Revenue Service’s total tax debt inventory has increased 23 percent since 2009 to $380 billion, according to a 2015 GAO report, while the agency’s collection staff has declined 23 percent after years of budget cuts.

•   The study also found the IRS lacks adequate internal controls over its largely automated tax collection processes. The automated Inventory Delivery System, or IDS, categorizes and routes cases based on many factors, such as type of tax and amount owed.

MEMORIES OF 2014

I guess IRS now stands for I’m Really Sorry. In an age where every keystroke lives forever, it appears that what the agency called a catastrophic failure followed by the routine recycling of backup tapes, wiped out 2 years’ worth of e-mails belonging to former IRS official Lois Lerner, who has been under Congressional and Justice Department investigation. Try using that the computer ate my records defense at your next audit.

The IRS had other things to be sorry about:

•   It was revealed that the IRS mailed out fraudulent refunds worth $3.6 billion in 2013. That was at least better than the $5.2 billion it paid out in 2012. I still have difficulty understanding how it could miss the half million dollars the agency mailed to a single address in Bulgaria used on 700 different income tax returns. Really, Bulgaria?

•   It was also revealed that the IRS may have disclosed as many as 100,000 Social Security numbers (along with names and addresses) on its website. Oops. . . . On the other hand, more than 3,000 IRS employees are working on identity theft cases and the agency has assigned 35,000 more employees to work with taxpayers to look for warning signs and help victims.

•   Forget calling the IRS for help. In fiscal 2013, only 61 percent of calls to IRS customer service representatives were answered with a 17.6-minute waiting time. The waiting time as of March 2014 was 16.8 minutes, better, but almost double the 8.8-minute hold in fiscal 2009. However, about 70 percent of calls were eventually answered in 2014. Thanks for waiting.

•   Don’t write either. More than 50 percent of written correspondence from taxpayers in fiscal 2013 was not answered within time frames set by the agency.

•   Love getting letters from the IRS? Approximately 4,000 retirement plan sponsors received erroneous penalty notices. At least the Service sent out letters of apology. No sponsor, legal, or accounting fees were reimbursed.

•   A National Small Business Association survey reported that more than half the businesses spend more than 40 hours per year dealing with federal taxes. Forty percent reported spending more than 80 hours, or 2 full weeks. More than a quarter of the respondents spend more than $10,000 per year on tax compliance.

•   According to the American Action forum, compliance with IRS requirements takes 7.7 billion hours and costs $170.4 billion in labor each year.

•   According to IRS estimates, more than 4,000 changes were made to the Internal Revenue Code just between 2000 and 2010.

Government agencies with IRS oversight were less than pleased as well. The Treasury Inspector General for Tax Administration (TIGTA) had the following issues:

•   Taxpayer privacy? In one study, the TIGTA found that in more than half the cases taxpayers’ authorized representatives were bypassed, unauthorized disclosures to third parties, or numerous processing errors were made.

•   Amend your returns carefully. The TIGTA estimated that the IRS may have issued more than $439 million in potentially erroneous refunds claimed on 187,421 amended returns during fiscal 2012. The TIGTA estimated $2.1 billion in bad refunds over the next 5 years.

•   Did you have your 2013 return prepared by the staff of the Internal Revenue Service’s Volunteer Program? You were subject to a 49 percent inaccuracy rate based upon one audit. It’s at least 2 percent better than the 47 percent inaccuracy rate for 2012 volunteer-prepared returns.

•   Another audit exposed sensitive taxpayer information had been disclosed and taxpayer rights violated in 16.4 percent of Freedom of Information/Privacy Act requests.

•   The TIGTA found continuing difficulties in IRS handling of collection due process cases.

•   Scanning of documents continues to plague the IRS. One audit found 24 percent of the documents scanned incomplete, illegible, or inaccurate.

•   From 2003 to 2012, the IRS paid at least $110 billion and as much as $132.6 billion in improper earned income credits. That’s at least $11 billion a year, or more than the $9.5 billion Congress will spend on the Department of Commerce in the 2013–2014 fiscal year.

•   The TIGTA estimated another $11.4 billion potential loss over 5 years from fraudulent use of stolen Employer Identification Numbers (EINs).

•   Almost 700 employees of companies contracting with the IRS owe $5.4 million in federal tax debt.

•   The IRS may have forgone up to $1.5 billion in unassessed penalties for erroneous tax refund or credit claims from June 3, 2012, to May 2, 2013.

•   The IRS now has responsibilities under the Affordable Care Act (ACA). Unfortunately, the IRS’s existing fraud detection system may not be capable of identifying ACA refund fraud or schemes prior to the issuance of tax return refunds.

•   The IRS has failed to make adequate progress in allowing taxpayers to access their tax account information online as required by law.

•   The IRS has failed to pursue up to $53 million in potentially improper claims for the Qualified Retirement Contributions credit.

•   Nearly half the tax returns on which individuals claimed tax deductions for alimony payments did not match up with the former spouse’s tax return showing an alimony gap of over $2.3 million in 2010 alone.

•   Between October 1, 2010, and December 31, 2012, more than 2,800 IRS employees with recent substantiated conduct issues resulting in disciplinary action received more than $2.8 million in monetary rewards and more than 27,000 hours in time off awards. Among these, more than 1,100 IRS employees with substantiated federal tax compliance problems received more than $1 million in cash rewards and more than 10,000 hours in time off awards.

The Government Accountability Office (GAO) had its own concerns:

•   An audit of the IRS’s fiscal year 2013 financial statements revealed eight new internal control deficiencies.

•   The IRS budget has been cut to below 2009 levels. While the IRS has taken short-term steps to address budget cuts, it doesn’t have a strategy to operate in an uncertain budget environment over the long term or to stem declining performance.

•   The IRS has been erroneously double charging some taxpayers for user fees in installment agreement arrangements, causing them to pay the same fee twice.

•   The IRS is plagued by significant and material inaccuracies when it comes to financial reporting on unpaid tax assessments resulting in almost $11 billion in adjustments to its 2013 gross revenues balance. I had a client who was audited for being off $11 in dividend revenue, and they wanted a penalty. Don’t look for fairness in the Internal Revenue Code.

•   Sensitive taxpayer data remains at risk due to system weakness at the IRS. Such data is vulnerable to inappropriate and undetected use, modification and disclosure that could affect the confidentiality, integrity, and availability of financial and sensitive taxpayer data.

All was not bad. There was some positive news:

•   Senate Minority Leader Mitch McConnell (R-Ky.) introduced a bill to allow parents who have baby cribs and other child care implements in their home offices to still claim the home office deduction despite failing the exclusive use test. As of this writing, the bill has not become law.

•   The IRS now recognizes all same sex marriages nationwide. That allows for joint filing of returns and qualification for spousal benefits. Domestic partnerships and civil unions still do not qualify to be considered as married for federal tax purposes.

•   In 2013, 78 percent of taxpayers were satisfied with their personal interactions with the IRS, up 2 percent from 2012.

•   According to the Tax Policy Center, 43.3 percent of Americans had a zero or negative income tax liability for 2013, up from 41.8 percent the prior year.

EXTENDERS—AGAIN!

The 2014 filling season was pushed back to January 31 because of delays caused by the government shutdown the previous October. We had another problem in 2015 because Congress played politics with the extenders again. These are a group of deductions such as the $250 above the line allowance for teachers’ expenses, the deduction for state sales taxes, the mortgage insurance premium deduction, the tuition and fees deduction, the forgiven mortgage debt exclusion, the nonbusiness energy property credits, etc., which expired after December 31, 2013, but which are traditionally extended for another 2-year period after the November elections. That means the IRS computers and all private tax preparation programs had to be redone, thereby creating additional costs and delays in filing. The provisions were extended on December 18, 2014.

See page 653 for details.

IN RETROSPECT, 2013 WASN’T THAT BAD

April is the cruelest month

T. S. ELIOT

It starts with laughter on April Fool’s Day—but by April 15, nobody is smiling.

The IRS had some issues in 2013:

•   The Internal Revenue Service reportedly posted the Social Security numbers of tens of thousands of people on the Internet before taking it down when a whistleblower pointed out the mistake.

•   The Treasury Inspector General for Tax Administration (TIGTA) found that IRS supervisors urged employees to ignore potential fraud when reviewing applications for Individual Taxpayer Identification Numbers (ITINs). The study showed 15,028 ITINs assigned to individuals with the same address in Dallas and $46.3 million in refunds sent to the same address in Atlanta. Another $7.3 million in refunds for allegedly 2,706 taxpayers went to the same single bank account.

•   The TIGTA also found that the IRS revenue agents failed to follow procedures designed to protect taxpayer rights during the tax collection process, did not follow guidelines on contacting taxpayers with representatives, and were not efficiently or effectively processing information referrals, including identity theft claims. Identity theft has increased by more than 650 percent from fiscal 2008 to fiscal 2012. At the end of fiscal 2012, the IRS had nearly 650,000 identity theft cases in its inventory.

•   Approximately 1.45 million taxpayers who qualified for relief from tax penalties totaling close to $181 million were never told they could get penalty abatement and never got it.

•   The IRS could not provide documentation for $394,430 paid for labor hours. Point that out in your next audit!

•   The IRS failed to save $527 million in erroneous tax credits for the Earned Income Credit and Additional Child Tax Credit due to inadequate IRS controls.

•   For the second year in a row, the IRS failed to comply with the provisions of the Improper Payments Elimination and Recovery Act.

•   Accounting errors by the IRS in calculating unpaid tax assessments created a risk of a material misstatement of the IRS’s financial statements.

•   The American Civil Liberties Union released documents showing that the IRS criminal division had been reading taxpayers’ e-mails without a warrant, in violation of the Fourth Amendment.

•   And then there were the IRS parties. During one conference, more than $50,000 was spent on receptions, including 28 bottles of wine for 41 guests. Then there was the almost $4,000 spent on giveaway items, including footballs, $418 in Kazoos, bathtub toy boats, and other novelty decorations. IRS credit cards were used to purchase romance novels, steaks, diet pills, and unspecified items from merchants affiliated with online pornography . . . your tax money at work!

•   The IRS spent about $50 million on 225 conferences during the 3 years between fiscal 2010 and 2012. The Small Business and Self-Employed division spent $4.1 million alone on a single conference in Anaheim, California. You should have been there. Speaker fees for presentations such as how seemingly random combinations of ideas can drive radical innovation totaled $135,350. One speaker was paid $17,000 to create six paintings. Three were donated to charity, two were given to conference attendees, and the sixth was lost. Then there were the videos that cost $50,107 to produce. They included a dance video showing IRS employees learning the cupid shuffle and a Star Trek parody, for which the set alone cost $2,400 and 11 hours of staff work (estimated to cost an additional $3,100). But, they did get a 1-minute finished video. We won’t even talk about the IRS video parody of Gilligan’s Island used to train 1,900 taxpayer assistance employees in 400 locations nationwide. As Maynard G. Krebbs would say, WORK? In addition to these large expenditures, the IRS spent $15,669 of your money on brief bags with free gifts and trinkets, $6,060 on lanyards and badge holders, $1,524 on engraved travel mugs and clocks, and $90 on sleeves for puzzle pieces.

•   And then there were the political issues. The supposedly politically independent IRS was found to have targeted conservative groups seeking tax exemption for extra scrutiny. The TIGTA found the inappropriate conduct inexcusable and Attorney General Eric Holder announced that criminal penalties may be sought in a Justice Department criminal investigation. Add that to the 24 IRS employees who were indicted for fraudulently obtaining more than $250,000 in government benefits and you have what some would call a rogue agency out of control.

There was some good news:

•   The IRS was in compliance with restrictions on the use of enforcement statistics to evaluate employees.

•   For fiscal 2012, the IRS collected $2.5 trillion but only spent about 48 cents for every $100 in revenue collected, which is the lowest cost since 2008.

•   Among households with incomes of less than $50,000, 55 million or 59 percent didn’t pay any federal income tax. Nonpayers made up 41 percent of all households.

•   IRS firings for misconduct fell to the lowest level since 2002.

•   Between fiscal 2009 and fiscal 2011, the total amount of outstanding taxes collected under the IRS Collection Program was 20 percent higher than before, with even fewer revenue officers on staff. Conversely, the IRS had grown slower in closing Offer-in-Compromise cases during the same period.

2012 WAS WHEN...

SHAMEFUL!

I don’t want to get on a rant here but our Congress has all the character of an egg yolk frying on the asphalt road behind my grandfather’s barn on a hot summer day. Since when did having a three-digit IQ disqualify someone from running for office? Are our choices limited only to the left-hand leg of the bell curve? As we crawl out of a recession, I’m reminded of my 92-year-old mother-in-law’s comment, "Recession? I lived through the depression of the 1930s and this is a depression." Does anybody think a sane businessperson would take the risk and invest and expand when the tax rules keep changing (maybe) and the cost of employee healthcare is subject to a new law that nobody understands and few agree upon.

When I wrote this, we were approaching what some called a fiscal cliff and others refered to as tax Armageddon. If Congress did nothing, we faced the biggest tax increase in the history of the Internal Revenue Code. Between the expiration of the Bush tax cuts (which were extended in 2010 for 2 years through 2012) and the expiration of the extenders, deductions would be lost, rates would increase, credits would disappear, and the marriage penalty would return in full force. The maximum tax on dividends would jump from 15 percent to as much as 43.4 percent! According to the Tax Policy Center, four out of five U.S. households would face an average of $3,701 more in taxes. Add mandated spending cuts to this tax hike and on January 1, 2013, we were scheduled to suffer an $8 trillion hit!

Here’s the part that really gets me angry. Everybody agreed on what should be done. But nobody in Congress had the backbone to do anything until after the November elections. So once again politics trumped economics and sanity. Once again hundreds of millions of dollars were wasted on reprogramming IRS computers and tax preparation programs at the last minute. More of your tax money was spent redoing IRS forms. It’s hard to play the game if the rules keep changing. It’s even harder if the rules change in December when the year is already up.

According to the Joint Committee on Taxation in March 2012, the prior cost of kicking the can down the road for