Here are some of the Commissioner’s Comments yesterday at:

IRS/GEORGE WASHINGTON UNIVERSITY
24TH ANNUAL INSTITUTE ON CURRENT ISSUES IN
INTERNATIONAL TAXATION
WASHINGTON, DC
DECEMBER 15, 2011

The full text of the speech is below, but here are a few comments I had issues with:

From the Commissioner’s Speech:
“For example, when a U.S. corporation shifts income to a low-tax jurisdiction, we need to look at the entire structure that was created to accomplish this. We need to understand the overall planning paradigm... What's motivating the company...What are the benefits...What are the most aggressive positions ...How are they managing tax exposure.. .In other words, we have to understand what they are trying to accomplish.”

Ron: Are you kidding me? Are you really unaware what tax planning is trying to accomplish? Let me help you! It is to legally avoid our monstrous, unethical, immoral, politically motivated, worldwide (versus territorial, like the rest of the world) income tax system. Does that help?

From the Commissioner’s Speech:
“Allocation of resources will also follow more closely the way in which taxpayers plan and adopt tax positions. In other words, the strategy mirrors the tax planning paradigm.”

Ron: Written in pure, pompous, non-sense like a bureaucratic technocrat on a government salary.

From the Commissioner’s Speech:
“Let me give you a more granular sense of what I mean.

When we engage multinational business taxpayers, we need to think about strategy differently, depending on whether we're looking at an outbound situation - a U.S.-based company with operations abroad - or an inbound situation - a foreign-based company with U.S. operations.”

Ron: The problem is, Dear Commissioner, you send out auditors with no real business experience who don’t know a debit from a credit, and yet are trying to analyze a multi-billion $ accounting systems… and who fall back to endless checklists to fake an understanding of complex situations. They arrive late, take long lunches, constant smoking breaks, constant vacations, holidays and pregnancy leaves; can’t write and don’t know the Internal Revenue Code or the Regulations very well. Finally after months of spinning, the older supervisors come in and “cherry-pick” poorly developed (or completely unlawful conclusions) on issues for a “quick kill” to show they have accomplished something. Often, the settlement of the issues is based on horse-trading when the client knows the real issues were completely missed, and they we are happy to concede a few issues just so that the IRS team can self-praise themselves in self-delusion on a job completely botched and leave the poor taxpayer in peace. The taxpayer’s Tax Department and Board of Directors have a small, private celebration on surviving the whole farce without too much financial impact. This story is repeated over-and-over throughout Corporate America. You can ask for all the Schedules UTP you want, but many of your people couldn’t spot a real tax issue if it was painted on their forehead because they are far too busy planning their early retirement. Until that changes, your Ivory Tower strategy is “bird-cage liner.” Sadly, many taxpayers who are cheating and deserve to be punished are “triaged” out, because figuring out their complex illegal strategies takes some real intelligence and diligence by the auditors.

I can’t tell you how many times in face-to-face audits, the auditor has passed on a REAL issue, because it was too close to lunch time.

While everything is your speech is accurate, until you fix the hiring, training, supervision and retention problems, your just rearranging deck chairs on the Titanic.

From the Commissioner’s Speech:
“As I mentioned, as FTA chair, I am very focused on governments moving from information sharing to real, coordinated action. To that end, last year the U.S. led an effort to develop a protocol for joint audits, where two or more countries conduct a single audit of a taxpayer.

We thought that the benefits for both governments and taxpayers of a joint audit could be substantial. It could reduce taxpayer burden - especially for large multinational corporations that must face audits in multiple jurisdictions on the same set of transactions. It could provide these taxpayers with a timesaving and less resource intensive way to address the tax consequences of a transaction on a bilateral or even multilateral basis. And just as important to a swift resolution of issues, the joint audit could provide certainty for the taxpayer today and in the future.

At the same time we were developing a protocol for joint audits through the FTA, I asked our IRS team to find opportunities to start some joint audits immediately.

Ron: OMG! A “joint audit!” You are actually suggesting the IRS conduct audits for England and Germany and France? Congratulations, you have given up our national sovereignty. Them’s fighting words, Mr. Commissioner! If the taxpayer volunteers for a joint audit of a complex transfer pricing issue, that’s fine. But a mandatory joint audit…I think is unconstitutional, at least!

Full Speech:

PREPARED REMARKS OF DOUGLAS H. SHULMAN COMMISSIONER OF INTERNAL REVENUE BEFORE THE IRS/GEORGE WASHINGTON UNIVERSITY 24TH ANNUAL INSTITUTE ON CURRENT ISSUES IN INTERNATIONAL TAXATION
WASHINGTON, DC
DECEMBER 15, 2011

Good afternoon and it's good to be at the IRS/GW Annual Institute on Current Issues in International Taxation which is now one of the preeminent venues to talk about international tax issues. This is a very important dialogue for all of us who want a healthy U.S. tax system.

Today, I would like to talk about a new sensible and strategic approach to international tax issues. It brings into tight focus efficiency, effectiveness, working smarter and a realtime resolution of issues - which I am working to integrate and apply throughout the IRS' operations - not just for international tax issues.

And we've already taken steps in that direction aided by some very innovative programs and strategies for both individuals and corporations operating in an often uncertain and shifting global environment.

Ever since I became Commissioner, I have made it clear that I draw a sharp distinction between the IRS and Treasury creating ground rules for corporations operating in a global environment and individuals hiding money and assets in bank secrecy jurisdictions.

Before I get to our overall strategic approach to international issues, let me begin with our multi-pronged and integrated approach to combating individual offshore non-compliance and how we're turning up the pressure on those not paying taxes on overseas assets. Our approach to offshore tax evasion follows a natural course...cleaning up the abuses of the past and then mining and leveraging the data we receive to mount a greater attack on the abuse.

Indeed, we have been scouring the vast quantity of data we received from all of our different offshore programs and other sources. This data mining has already proved invaluable in supplementing and corroborating prior leads, as well as developing new leads, involving numerous banks, advisors and promoters from around the world. I can tell you that we now have additional cases and banks in our sights.

A good example of our offshore successes is our work with a major Swiss bank, where for the first time in history, a bank secrecy jurisdiction turned over thousands of names and account numbers. The bank also agreed to pay hundreds of millions of dollars in fmes, penalties, interest and restitution as part of a deferred prosecution agreement with the U.S. government.

However, as I have said from the beginning, our offshore work has never been about one bank or one country. We've produced results and will continue to produce results through other elements of our offshore program, such as our voluntary disclosure programs. Last February, I announced a special voluntary disclosure initiative designed to bring more offshore money back into the U.S. tax system and help people who had money in offshore accounts to get current with their taxes.

This new effort - which expired on September 9th - gave those hiding money in foreign accounts a tough but fair way to resolve their tax problems once and for all. And it gave these individuals a chance to come in before we find them. Indeed, I framed the new disclosure initiative as the best chance for people to get back into the system... back into compliance... so they properly report and pay their taxes for years to come.

Just like its 2009 ground-breaking predecessor, the second program was a great success and has now pushed the total number of voluntary disclosures up to 33,000 since 2009. Not only are we bringing people back into the U.S. tax system, we are bringing revenue into the U.S. Treasury while at the same time turning the tide against offshore tax evasion. While we are not through with the cases, we have already brought billions of dollars into the U.S. Treasury and there is more to come. Just as importantly as the dollars we bring in through these efforts, we have changed the risk calculus. Americans now understand that if they try to hide assets overseas, the chances of being caught will only continue to grow. They now have to seriously consider, "Is this worth it?"

Today, banks are much less willing to facilitate offshore evasion than they were in the past and advisors are asking more questions of their clients regarding offshore accounts. Indeed, individuals now find it more difficult to find an advisor who would suggest such a risky approach and a bank that would accept the money under secrecy conditions. People who may consider hiding money offshore should also take note of ours and the Department of Justice's success record when it comes to criminal prosecutions. People hiding assets offshore have received jail sentences running from months to years, and they have been ordered to pay hundreds of thousands and even millions of dollars. I think it's fair to say that we are well on our way to deterring the next generation of taxpayers from using hidden bank accounts to cheat on their taxes. Through our ongoing efforts, we are demonstrating that the world has become a smaller place... that we will eventually find you if you are hiding assets overseas.

Moreover, through these rigorous efforts, the average American taxpayer can have confidence that the tax system is fair. I cannot overemphasize how important this is to our time-honored system of voluntary compliance. Combating international tax evasion is also a coordinated global effort on multiple fronts, including new international tax information agreements and increased collaboration with other governments and tax authorities.

As many of you know, I currently chair the OECD's Forum on Tax Administration, which is comprised of 43 tax commissioners worldwide, including all the G-20 nations. Since I became FTA chairman, one of my priorities has been to increase the dialogue and information sharing between countries - both formally and informally - and to use the power of collaboration to act upon that information in a coordinated fashion.

We believe this government-to-government coordinated action and dialogue represent a global commitment and one of the best strategies to put an end to offshore noncompliance that deprives our respective nations of precious revenues and forces honest taxpayers to pick up the tab.

Before I turn to what I believe is a new and sensible way to approaching and resolving international business tax issues, let me say a few things about the Foreign Account Tax Compliance Act, also known as FATCA.

Congress wrote and passed FATCA to give us tools to combat offshore tax evasion. Since the law was passed, we have put out three pieces of guidance laying out a practical framework and timeline for implementation, such as phasing in the statute's requirements.

I have also directly engaged executives from banks and financial institutions around the globe, as have my colleagues at the Treasury Department and IRS. We have listened to their major concerns that generally fall into two categories. First, is the conflict between FATCA and other countries' laws. Second, is the difficulty in implementing and administering the withholding requirements for passthru payments and the potential burden they place on foreign financial institutions.

We have taken these conversations very seriously and you can expect new proposed regulations from us soon after the new year that take into account the implementation concerns we have heard. One goal of these regulations is to address these concerns and provide a way forward to allow responsible corporate citizens to work through these tricky issues in a practical fashion.

Now, let me shift to our new approach to large business taxpayers operating in a global environment. But first, some context is in order. I am a big believer that government needs to understand business objectives and strategy to do its job well. We need to understand where companies are making legitimate decisions to manage tax exposure and where they may push the envelope ... and we need to not put undue burdens on companies.

To this end, we are shifting our approach to be more strategic, and to view taxpayers through the prism of their business objectives and tax planning strategies. This is a real change.

We traditionally viewed and pursued international issues through the lens of individual code sections. But this occluded our view of the larger, more meaningful picture. We were only getting a slice of it. .. and that needs to change.

For example, when a U.S. corporation shifts income to a low-tax jurisdiction, we need to look at the entire structure that was created to accomplish this. We need to understand the overall planning paradigm... What's motivating the company...What are the benefits...What are the most aggressive positions ...How are they managing tax exposure.. .In other words, we have to understand what they are trying to accomplish.

So, we are shifting our approach to be more strategic and to view taxpayers through their business objectives and tax planning strategies. The end game is to try to develop a way of organizing our international compliance programs to:
• Indentify the highest compliance risks among our taxpayer base;
• Work cases as effectively and efficiently as possible;
• Not waste our and taxpayers' time on issues that do not pose compliance risk; and
• Find appropriate ways to resolve cases as soon as possible.

Allocation of resources will also follow more closely the way in which taxpayers plan and adopt tax positions. In other words, the strategy mirrors the tax planning paradigm. Let me give you a more granular sense of what I mean. When we engage multinational business taxpayers, we need to think about strategy differently, depending on whether we're looking at an outbound situation - a U.S.-based company with operations abroad - or an inbound situation - a foreign-based company with U.S. operations.

That may sound obvious to many, but the point is to recognize the obvious drivers of tax behavior and to then ensure we strategically align our resources and train our people, consistent with basic behavioral patterns.

The same is true of individual taxpayers, but let me focus on business taxpayers to give you a better understanding.

For outbound situations - those U.S.-based companies with foreign operations corporate planning tends to revolve around four key goals:
• First is income shifting, typically accomplished through transfer pricing around transactions such as intellectual property transfers.
• Second is deferral planning. We have to make sure that deferral of U.S. tax on foreign earnings is justified under our subpart F regime.
• Third is foreign tax credit management of the foreign tax expenses of a U.S. corporation's foreign subsidiaries.
• And fourth is repatriation, which centers around strategies for low- or tax-free return to the U.S. of profits accumulated offshore.

These are some of the key international tax planning elements of U.S. multinational corporations, and they happen to be where we see the most controversy.
For inbound activities of foreign-based multinational enterprises, the major issues include:
• First, dealing with the threshold question of jurisdiction to tax. Under our domestic law and treaties, what level of activity exposes the foreign enterprise to U.S. tax?
• Second, income shifting. This is the mirror image of outbound income shifting, and here, too, the objective typically is to allocate income away from U.S. taxing jurisdiction.
• Third is inbound financing, which is often used by a foreign group to strip income through interest deductions or parental guarantee arrangements.
• And, fourth, repatriation and withholding, which can include strategies on reducing withholding on the repatriation of the cash back to the foreign horne office.

While there are multiple and somewhat varying elements under each of these broad categories of corporate planning activities or behaviors, these core areas are where the mass of international tax planning occurs, and the basic themes and goals are very similar across companies.

If we understand a taxpayer's objectives, we will then be able to look at international transactions in context. We are trying to train our examiners, agents, lawyers and other experts to view a company through these lenses, understanding the company's tax objectives and profit drivers. We are establishing internal networks of experts to help our personnel when they come across issues that are unfamiliar to them. And we are trying a variety of new ways to bring international examiners, lawyers, economists and other experts together in teams to work strategic issues collaboratively. A good example is our new Transfer Pricing Practice. In the past, our transfer pricing enforcement resources and compliance tools have been disaggregated - a bit scattered through our various field and national office functions, and this has made it impossible to operate strategically based on risk assessment and business insight. So we decided we needed to work transfer pricing as a single, fully-integrated program, where our experts are working together closely in the area under strong leadership. We now have a single executive in our Large Business and International Division dedicated to transfer pricing with responsibility to develop and coordinate our transfer pricing strategy, training and operational approaches to key transfer pricing matters arising in field examination. We have also put our Competent Authority and the Advance Pricing Agreement program under the same executive, to ensure that they are fully aligned on these interrelated issues. And these units will work closely with our international lawyers in our Chief Counsel operation. But whether it's transfer pricing or any other international tax issue, ultimately, we are trying to follow the business logic of tax planning, rather than just identifying the code sections that might apply to any given bespoke transaction.

This is a major shift in our approach. I think it is the right way to go. But it will take time. Companies will need to adjust to this approach, and we're just beginning to learn to think differently about how to approach analysis and examinations of international issues. I would also posit that when we are successful in making this major shift, we will do our job much better and companies will benefit from a more meaningful and focused dialogue about issues. We want to spend time on issues that really matter and understand what companies are really doing. We don't want to spend time on the wrong issues. I think most companies would be happier with an IRS that cuts to the chase, challenges the right stuff, and knows what's really at stake.

Let me end by giving you a great real life example of how many of the issues I have mentioned come together. As I mentioned, as FTA chair, I am very focused on governments moving from information sharing to real, coordinated action. To that end, last year the U.S. led an effort to develop a protocol for joint audits, where two or more countries conduct a single audit of a taxpayer.

We thought that the benefits for both governments and taxpayers of a joint audit could be substantial. It could reduce taxpayer burden - especially for large multinational corporations that must face audits in multiple jurisdictions on the same set of transactions. It could provide these taxpayers with a timesaving and less resource intensive way to address the tax consequences of a transaction on a bilateral or even multilateral basis. And just as important to a swift resolution of issues, the joint audit could provide certainty for the taxpayer today and in the future.

At the same time we were developing a protocol for joint audits through the FTA, I asked our IRS team to find opportunities to start some joint audits immediately. We started several joint audits, and let me talk about one. This year, we conducted a joint audit with another country of one of our CAP taxpayers that involved a transfer pricing issue. We resolved the issue bilaterally for the CAP year, and we also were able to provide the taxpayer with a bilateral Advance Pricing Agreement to cover future years.

And we did this all in six months - which on its face may seem like a long time - but is nothing compared to what the taxpayer and taxing authorities would have spent without the joint audit process.

This result hits on many of the elements of our future vision for a well-functioning tax system in a global environment.
• Transparency: We started with a CAP taxpayer, who had already agreed that in exchange for opening their books to us, we would provide certainty before a return is filed.
• Real Time: We resolved a complex issue in six months, in this case moving the competent authority process into the audit - a huge contrast between a normal competent authority process which typically takes place long after the tax year or years in dispute.
• Certainty: We resolved the issue for the current year, but as importantly, through an Advance Pricing Agreement, agreed on a transfer pricing methodology for future years. This creates an environment in which the business does not have potential adjustments and planning uncertainty hanging over its head, and we know the issue is being dealt with correctly.
• Coordinated action between two governments: Unlike past practices, where each government might have negotiated hard after an audit adjustment was proposed by one of them, in this case the two governments worked together cooperatively to reach a mutually-acceptable principled resolution.

It was a win for the taxpayer and a win for us. It doesn't get any better than this and we're very happy about the outcome.

Let me end by saying that the way to make everything I have talked about work is to increase the dialogue between the private sector and IRS personnel. We need to spend time understanding your business and business objectives. More robust dialogue is in both of our interests. While this will take investment on both sides, I think it will lead to a healthier U.S. tax system in the long run.

The world of international tax is very dynamic: from our efforts to combat offshore tax evasion by individuals, to deeper coordination of action by sovereign governments, to our evolving strategy to work with the largest corporate taxpayers. Each strategy will depend on us continuing to innovate ... continuing to have dialogue outside of our agency...and continuing to always strive to work smarter. We are very focused on continuing to up our game in administering the tax laws in a global environment, and you can expect to see the same intensity of efforts in the years to come that you have seen in the past several years.

Thank you for listening and let me wish all of you the very best for the holidays and the New Year. I would be happy to take a few questions.

This Forbes article includes the following letter. Please click here to read the full Forbes article.

To view the IRS’s release please click here.

Update: 11/23/11 - The IRS Responds
View the Forbes article here.

Mr. Douglas Shulman
Commissioner
Internal Revenue Service
National Office
10th St & Pennsylvania Ave., NW
Washington, DC 20004

Dear Commissioner:

I don't take kindly to receiving your Letter 4809, enclosed.

Once again, and having read many of your speeches, you prove that the greatest threat to our country and our civilization is a salaried government employee who wraps himself in the flag, and while supposedly trying to "enforce the law" crushes our economy with bureaucratic processes.

Your letter stating that due to "a high percentage of attributes associated with returns typically containing inaccuracies and misinterpretations of the tax law" you feel the need, in some blanket campaign, to accuse me of improperly preparing tax returns. You supply a review of the rules and the penalties that apply to Tax Return Preparers.

The threat is a possible visit to my office.

Let me coach you on how to write a letter.

"Dear Tax Return Preparer:

Based on a mindless computer analysis, we have determined the obvious; in that you prepare tax returns for many clients who have rental properties. We are too dim-witted to understand that taxpayers often seek out tax preparers because they have rental properties and become subject to the Cost Recovery, Passive Loss and At-Risk Rules.

Therefore, we may stop by your office to discuss these tax returns concerning rental properties. When we stop by, I'm not sure what we will do, because you are not allowed to provide any confidential information without the consent of the taxpayer, and they are unlikely to consent to such a non-specific inquiry and without the initiation of an audit specifically of their returns for a specific year. Therefore, when my staff visits, we will most likely stare at each other in a desperate attempt to find some justification for wasting your time and paying the salary of the IRS employee.

Thank you for your cooperation."

All humor aside, I look forward to a visit from your hapless staff. In most cases when I respond to a Notice or audits, I end-up educating your employees on how the law and the IRS Forms work. We look forward to providing another training session.

In all seriousness, the accusatory tone of your letter was completely unnecessary. The non-specific nature of your request, what action you will take, and the lack of identification of the suspected problem leave me with no action to take. Further, as a tax preparer with 250 clients who sees to it that millions of tax dollars are accurately and timely paid each year, I find your letter insulting.

Nice Job!

Ronald H. Cohen, CPA

Between my address, my PTIN and my SSN, I'm confident you know how to contact me.

Department of the Treasury
Internal Revenue Service
Date: November 10, 2011

Ronald H. Cohen

Dear Tax Return Preparer,

You are receiving this letter because the returns you prepared for clients during the most recent filing season have a high percentage of attributes associated with returns typically containing inaccuracies and misinterpretations of tax law. The enclosed document addresses some income tax issues our review suggests you may have misunderstood or misinterpreted. Please review this information carefully.

Tax return preparers are expected to be knowledgeable in tax law and prepare accurate returns while exercising due diligence. In general, preparers may rely in good faith upon client-provided information but they may not ignore the implications of information known or reasonably suspected to be untrue, incomplete, inconsistent or inaccurate.

Both you and your clients may be adversely affected by incorrect returns. These consequences may include any or all of the following:

• If your clients' returns are examined and found to be incorrect, your clients may be liable for additional tax, interest, additions to tax and penalties.
• Tax return preparers who prepare a client return for which any part of an understatement of tax liability is due to an unreasonable position can be assessed a penalty of at least $1,000 per return (IRC section 6694(a)).
• Tax return preparers who prepare a client return for which any part of an understatement of tax liability is due to reckless or intentional disregard of rules or regulations by the tax preparer, can be assessed a penalty of at least $5,000 per return (IRC section 6694(b)).

We will visit some tax return preparers who receive this letter beginning in November to confirm compliance with return preparer requirements. If we select you for a visit, an IRS representative will contact you to schedule an appointment and to provide you with additional information about the topics we will cover.

In addition to your responsibility to exercise due diligence in preparing accurate returns for your clients, you should be aware of the IRS's tax return preparer requirements, including proper entry of a preparer tax identification number (PTIN) on all returns you prepare for compensation and adherence to electronic filing regulations. For more information on these requirements, visit our website at www.IRS.gov/taxpros.

We hope this letter has heightened your awareness of your responsibilities as a tax return preparer and provided you with infon11ation on how you can meet your obligations.

Sincerely,

David R. Williams
Director, Return Preparer Office

Enclosure:
[Target Area of Concern A, C or E]

Targeted Area of Concern
Schedule Supplemental Income and Loss

As a paid tax return preparer, you must take all necessary steps to file accurate federal individual income tax returns on behalf of your clients. These steps include reviewing the applicable tax law, and establishing the relevancy and reasonableness of income, credits, expenses, and deductions to be reported on the return. In general, a tax return preparer may rely in good faith without verification upon information furnished by the client. You may not, however, ignore the implications of information furnished to, or actually known by you, and you must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete. Additionally, a tax return preparer must make appropriate inquiries to determine the existence of facts and circumstances required as a condition for claiming a deduction or credit.

A review of the tax year 2010 individual income tax returns you prepared reveals that these returns contain a high percentage of attributes of returns typically found to have significant errors on Schedule E, Supplemental Income and Loss.

To prepare accurate Schedules E, you should ask your clients sufficient questions to determine that the expenses claimed are correct. Taxpayers may not fully understand the tax laws and may incorrectly believe they are entitled to claim deductions on Schedule E for non-qualifying expenditures. The most common Schedule E issues involve:

• Rental income and expenses not being properly reported.
• Rental depreciation not being correctly calculated.
• Limitations surrounding passive activities, basis and at-risk rules not properly considered or calculated

For more information on issues related to Schedule E, please visit www.irs.gov.

From:
http://www.facebook.com/IRStaxpros#!/notes/irs-return-preparer-office/whats-the-story-with-the-letters-sent-to-some-tax-preparers/190017904417862

Recently, the IRS sent letters to 21,000 preparers that called out specific areas that we thought were problematic. The letters were direct, and so have been the responses.

After talking to a number of tax professionals over the last few days, a couple of things are clear to me.

The letter struck the wrong tone for some preparers, and we will work on it.

This is our third letter to preparers in as many years. We tried to address concerns folks raised over the previous two. To make sure we responsive, we ran this version by external tax professional organizations and included their suggestions. We were trying to make sure we had it right. But, we still have room for improvement.

Keep in mind, however, we are trying to address folks out there who are preparing problematic returns.

Which brings me to my second point – perfecting our filters for identifying problematic preparers will take time. Once I describe it, you’ll see the challenge we’re facing. I know there are some practitioners asking why they got a letter even when they do a fine job of preparing returns. To explain this, it helps to understand our methodology.

Basically, we identified those areas on the tax return that have potential for abuse (such as Schedules A, C and E) and built filters on those areas. Those filters then identified preparers whose returns were at the extreme end of the scale. These were returns that had such unusual characteristics that there would have to be very unusual circumstances for them to be accurate.

And here’s where it gets difficult. We can identify the unusual returns but, sometimes, it’s very hard to know which ones are legit and which ones are not. We know only that the returns are not consistent with what we’d expect.

That's why there are some preparers who filed unusual returns – but for very good reasons – who heard from us.

So how should you interpret the letter if you fall into this category? Basically, you want to make sure you know why the returns might be unusual. For example, I spoke with a gentleman who noted he prepares returns in the jurisdiction with extremely high property taxes. Clearly, his returns will be very different from those of most tax return preparers because of this fact.

The other thing to keep in mind is that most preparers who received these letters got them for a very good reason; they were not doing quality work.

As I’ve spoken to people about this effort, it’s clear they think we should “go after” (their words, not mine) the bad guys. They’re fine with the letter as long as they (the good guys) don’t get one. Our challenge is to separate the good from the bad, to get better at sifting through the data.

Becoming successful in understanding problematic returns, identifying patterns among a preparer’s returns, and using that information effectively will take us time. We’re working on it – and learning a lot just these past few weeks. Please bear with us as we work to get it right. At the end of the day, we all want the same thing: to improve the quality of tax return preparation in this country.

Thanks for reading,

Dave Williams, Director, Return Preparer Office

From Ron: Well, I guess that is sort of an apology...

He is also missing the point that there is a way to separate the good return preparers from the bad ones. It's called an "audit" and following legal Due Process in examining a tax return.

Throwing stones without collecting all the facts will always make the IRS look foolish. He's trying to apply his Harvard background to apply a high-tech tool to a low-tech problem. People, lie, cheat and steal...the IRS should go after those people, absolutely...he will never accomplish his goal using a new algorithm trying to make up for the fact that the IRS has neither the manpower, nor the training, nor the employee retention to keep up with our complex laws the Congress and our Presidents have required them to enforce. It is a problem without a solution.

A visiting IRS hit squad cannot be used in place of real audits in all but the worst situations (fraudulent return mills) that get identified as a result of...ah, Audits!

Be careful not to refer a poor/old/disabled or frugal person to the free I.R.S. VITA (Volunteer Income Tax Assistance) program. That appears to be a bad idea. 61% of the tax returns they prepare are incorrect, per the Tax Inspector General for Tax Administration (the Treasury Department group the checks up on the IRS). That’s even worse than the chances of getting an accurate answer when you call the IRS, as they get it wrong about +30% of the time (per the IRS’s own study.) This just speaks to the core issue that the tax laws are too complex, and government organizations usually do more harm than good.

Treasury Inspector General for Tax Administration

Press Release

September 21, 2011
TIGTA - 2011-58
Contact: Karen Kraushaar
(202) 622-6500
karen.kraushaar@tigta.treas.gov
TIGTACommunications@tigta.treas.gov

TIGTA Finds Inaccurate Preparation of Tax Returns at Volunteer Tax Preparation Sites

WASHINGTON – Fewer tax returns are being prepared accurately at the Volunteer Program sites sponsored by the Internal Revenue Service (IRS), according to a new report by the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA found that the accuracy rates for tax returns prepared at Volunteer Program sites decreased sharply from the 2010 filing season. Of the 36 tax returns prepared for TIGTA auditors, only 14 (39 percent) were prepared correctly. Volunteers prepared the tax returns inaccurately because they did not follow all guidelines, used intake sheets incorrectly or, in some cases, knowingly modified the facts the auditors presented.

“The findings of this review are very troubling.” said J. Russell George, Treasury Inspector General for Tax Administration. “The Volunteer Program plays an important role in helping many taxpayers, notably those who have low incomes and the elderly, disabled, and limited-English proficient, participate in the tax system. Like all taxpayers, they deserve to have their tax returns prepared accurately. I am pleased that the IRS has agreed to our recommendations to address these problems,” George added.

The IRS’s Volunteer Income Tax Assistance, or VITA program, has existed since 1969. In Fiscal Year (FY) 2011, the IRS awarded a total of 179 organizations $12 million in Federal matching grants to help VITA sites file tax returns electronically and enhance training of the volunteers who staff the sites. A total of 87,602 volunteers prepared approximately 3.1 million individual income tax returns at 12,326 Volunteer Program sites in FY 2010.

The IRS has implemented an extensive quality review process in the program, but that process has limitations and may not be providing reliable results. Current steps and processes do not ensure the integrity of volunteers, even though the volunteers have access to taxpayers’ Personally Identifiable Information, such as Social Security Numbers, driver’s licenses and home addresses. According to the report, the IRS does have a process to “help ensure willful acts of fraud occurring at Volunteer Program sites can be reported, but improvements are needed.”

TIGTA made a series of recommendations designed to improve the quality and controls of the program. The IRS agreed to implement TIGTA’s recommendations.

Read the report.

I’m going to say what you’ve been thinking, but may be a little afraid to say.

This is opinion, not a recommendation.

Why should we continue to pay our taxes if the U.S. Government can’t maintain AAA credit rating?

Of course, the answer is because the laws of the country say we must, and so that the U.S. Government can function.

But, from a moral perspective, why would you and I continue to pay the largest financial organization on the planet (the U.S. Treasury), when they can’t maintain a AAA credit rating, and they have the power to:

a) Tax (and enforcement power to collect tax),
b) Borrow endless sums of money, and
c) Print money

With all those powers, shouldn’t we expect a AAA credit rating, as it has always been since 1941, and as it remains in the UK, France, Germany (previously destroyed in WWII), and close-by Canada, Aye?

Our taxes do not fully fund the operation of the Government by a 40% short-fall.  This situation can only continue because the U.S. Treasury can always borrow (or print) the money it needs.
…and even then, Congress and the Treasury are now deemed to not be credit worthy and responsible stewards of the national debt.

Why would rational people continue to support such an organization with their taxes?...and for how much longer?

Answer: Because for the now, we have no choice…for now.

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Standard mileage rates increase for last half of 2011. The IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is increased 4.5¢ from 51¢ to 55.5¢ per mile for business travel from July 1, 2011 to Dec. 31, 2011 to better reflect the real cost of operating an auto in this period of rapidly rising gas prices. This rate can also be used by employers to reimburse tax-free under an accountable plan employees who supply their own autos for business use, and to value personal use of certain low-cost employer-provided vehicles. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense also increases 4.5¢ for the last half of 2011 from 19¢ to 23.5¢ per mile.

FUTA surtax is no longer in effect. Beginning July 1, 2011, the 0.2% federal unemployment tax (FUTA) surtax is no longer in effect. Thus, the FUTA tax rate, before consideration of state unemployment tax credits, is now 6.0%. Employers need to separately track FUTA taxable wages paid before July 1, 2011, and FUTA taxable wages paid after June 30, 2011, since the FUTA tax rates are different during those two periods. Employers whose FUTA tax is more than $500 for the calendar year need to make quarterly FUTA deposits. The next quarterly payment is due on Aug. 1, 2011, but that payment is based on taxable wages paid through June 30, 2011, so it will be computed using the 6.2% FUTA tax rate. However, the payment after that is due on Oct. 31, 2011, and it will be computed using the 6.0% FUTA tax rate if legislation is not enacted to retroactively reinstate the FUTA surtax beginning July 1, 2011.

Two bonus depreciation deductions for one expenditure. Under IRS regulations, businesses that trade in machinery or equipment for which they claimed bonus depreciation may qualify for another bonus depreciation deduction on the remaining depreciable basis if they swap for like-kind property that also is eligible for bonus depreciation. In effect, the business gets two bonus depreciation deductions for its expenditure on the traded-in property.

Real estate professionals allowed late election to aggregate rental real estate interests. The IRS has provided guidance that allows certain real estate professionals to make a late election under the regulations to treat all interests in rental real estate as a single rental real estate activity for purposes of the passive activity loss (PAL) rules. This election can make it easier to currently deduct losses from real estate activities. As a general rule, the election is made by filing a statement with the taxpayer's original income tax return for the tax year. However, under new guidance, a taxpayer meeting certain conditions can make a late election on an amended return.

More courts treating basis overstatements as triggering 6-year limitations period. Late last year, the IRS issued final regulations under which an understated amount of gross income reported on a return resulting from an overstatement of unrecovered cost or other basis is an omission of gross income for purposes of the 6-year period for assessing tax and the minimum period for assessment of tax attributable to partnership items. The 6-year limitations period applies when a taxpayer omits from gross income an amount that's greater than 25% of the amount of gross income stated in the return. Several courts had held that a basis overstatement is not an omission of gross income for this purpose. In response to these decisions, the IRS issued the new regulations to clarify that an omission can arise in that fashion. Recently, two Courts of Appeals (the Tenth Circuit and the District of Columbia Circuit) have upheld the regulations. While the momentum clearly is in favor of the IRS on this issue, others courts have rejected the regulations. Ultimately, the Supreme Court will have to resolve the dispute.

Regulations would toughen tax rules for owners of bankrupt disregarded entities. A taxpayer whose debts are forgiven generally has cancellation of debt (COD) income subject to exceptions including one for bankruptcy and one for insolvency. Some taxpayers have taken the position that the bankruptcy exception is available if a grantor trust (trust used in family or business planning) or disregarded entity (e.g., a single-member limited liability company taxed directly to owner) is under the jurisdiction of a bankruptcy court, even if its owner is not. Similarly, some taxpayers have contended that the insolvency exception is available to the extent a grantor trust or disregarded entity is insolvent, even if its owner is not. The IRS has issued proposed regulations that would clarify that the bankruptcy exception is available only if the owner of the grantor trust or disregarded entity is subject to the bankruptcy court's jurisdiction, and the insolvency exception is available only to the extent the owner is insolvent. They would apply to COD income occurring on or after the date they are published as final regulations.

Trust's investment advice fees. The Supreme Court has held that investment advisory fees paid by a trust were deductible only to the extent that they exceeded 2% of the trust's adjusted gross income (AGI). Thus, such expenses didn't qualify for the exception to the 2% of AGI limit in the tax law for costs paid or incurred in connection with the administration of a trust or estate that wouldn't have been incurred if the property weren't held in the trust or estate. However, for the sake of administrative convenience, the IRS has provided that, until final regulations are issued, nongrantor trusts and estates will not have to “unbundle” a fiduciary fee (i.e., separate the fee into components that are subject to the deduction limit and those that aren't). As a result, until the regulations are issued, affected taxpayers can deduct the full amount of a bundled fiduciary fee without regard to the 2% floor.

IRA trustees weren't liable for Madoff losses. A district court has dismissed all claims brought by holders of self-directed individual retirement accounts (IRAs) against the IRA trustees for losses incurred by the IRAs for investments with Bernard Madoff's firm. A number of individuals owned self-directed IRAs with IRA agreements that clearly stated that they were solely responsible for making investment decisions in connection with the funds in their IRAs, and that the IRA trustees would not provide any investment advice. Pursuant to instructions given by these IRA owners, the IRA trustees sent IRA funds to Bernard Madoff's brokerage firm, Bernard L. Madoff Investment Securities LLC, for investment in securities. These funds were ultimately lost in Madoff's ponzi scheme. The IRA owners sought to hold the IRA trustees responsible for their role in the losses that the IRAs sustained. The action asserted claims under federal common law based on Internal Revenue Code sections governing IRAs, and state law negligence, contract, and unjust enrichment claims. However, the court rejected all such claims.

Another Appeals Court upholds IRS's time limit on spousal relief requests. Married joint return filers are jointly and severally liable for the tax arising from their returns. Innocent spouses may request relief from this liability in certain circumstances. An IRS regulation states that a request for equitable innocent spouse relief must be no later than two years from the first collection activity against the spouse. The Tax Court had found this regulation invalidly imposed a time limit. However, the Court of Appeals for the Fourth Circuit has reversed the Tax Court and upheld the regulation (as have the Courts of Appeals for the Third and Seventh Circuits).

Nonspouse real estate transfers under scrutiny. A recent court case reveals that the IRS has discovered a pattern of taxpayers failing to file gift tax returns for real property transfers between nonspouse related parties. As a result, it launched a compliance initiative to capture data from states and counties regarding real property transfers taking place between nonspouse family members for little or no consideration during the period of Jan. 1, 2005, through Dec. 31, 2010. While the IRS has faced hurdles in attempting to force California to release the data, a number of states have voluntarily done so. These include Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington, and Wisconsin. Thus, individuals who transferred real property to nonspouse family members should make sure that required gift tax returns were filed and file amended returns if they weren't.

From Ron: Our current tax system in the United States is a dysfunctional embarrassment to Capitalism and the precepts of a free country. Heres a path forward:

The blog assumes you reported within your tax return income, deductions and credits that are a reasonably correct interpretation of the law. We are, in no way, encouraging or assisting any taxpayer that is attempting tax evasion or fraud.

Dealing With A Tax Audit:

1) Be cooperative and polite, always. Getting upset at the IRS auditor will do you no good and can make matters much, much worse. The IRS auditor can impose criminal (i.e., go to jail) charges if you start screaming and/or swearing or ignoring them. Let me be clear: Disagreeing is OK and is much different than ignoring.

2) Have a clear and concise command of:

a) The facts of what happened in the transactions you are discussing.
b) For a business: What was your accounting of the transaction in your books?
c) Have all the supporting documents you can think of available to show the auditor if requested. Don’t volunteer information that is not requested.

Important Point: After a few questions, if the auditor sees you are very organized and have complete, cogent answers, they often limit the number of questions they ask, since it appears you have your “act together.”

3) Have knowledge and command of the law (Internal Revenue Code Sections, Regulations, IRS Publications) involved with all the important items on your tax return. BUT DON’T SHARE THAT KNOWLEDGE WITH THE AUDITOR…more on this later.

Important Point: The auditor has a limited amount of time to deal with your audit. I cannot tell you how many times IRS auditors have unexpectedly dropped/ignored issues they were pursuing (where the taxpayer clearly owed taxes), for no reason other than they ran out of time. Never stall in working with an IRS agent, just don’t rush.

4) Do not argue or engage in speculation with the auditor. You do not need to defend yourself. Just provide/repeat all the facts. You must give them all the facts and your calculations.

If they ask you for the IRS Code Sections you relied upon, you do NOT need to give that information. The auditor must determine the proper law.

Many times, earlier in my career, I have tried to defend my clients by providing a legal analysis. Even when I was 100% right, the auditor would often tell me I was wrong without providing a reason…with comments like “Well, I’ve been an IRS Agent for 27 years, so I know what is right.” Rubbish!

So, rather, now, I ask them to provide the law to me. I make them defend their position. I am under no obligation to defend my position after I have provided 100% of the relevant facts. See how that shifts the dynamics of the audit? This is a BIG mental shift in how to approach an IRS auditor and it is very successful.

IRS Publication 556, Page 4:

“Any proposed change to your return will be explained to you or your authorized representative. It is important that you understand the reasons for any proposed changes. You should not hesitate to ask about anything that is unclear to you.

The IRS must follow the tax laws set forth by Congress in the Internal Revenue Code. The IRS also follows Treasury Regulations, other rules, and porcedures that were written to administer the tax laws.”

I have often pulled out a copy of Publication 556, page 4 and showed the auditor. All they can say is: “You’re right. I’ll get you an explanation.”

Note: It does not say you have to explain your legal position to them! In fact, the IRS presumption is that you are not smart enough or qualified to form a legal position, in any case.

IF YOU CAN’T COME TO AN AGREEMENT

If you come to a complete disagreement with the auditor, it is 100% appropriate to tell the auditor: “I disagree with your conclusion.”

If they ask: “Why?” It is appropriate to say: “because you have misinterpreted the law.” If they ask: “In what way have I misinterpreted the law?” You say: “All I will say is that you have it wrong. Please write-up your position and me and my tax advisor will review it.”

Important Point: IRS auditors hate to write-up an explanation of their tax position. The law is complex and writing such memos takes endless hours. But you, as a taxpayer, have a complete right to a full explanation of the IRS’ legal position.

So, I often say to auditors: “I disagree. So, write-it up and we’ll review it.”

Now, you control the audit, because the IRS auditor realizes the audit will not end in the allotted 3 hours and could go on forever. His/her supervisor will later ask, what is taking so long?

As a result, now YOU command the pace of the audit and it is all absolutely legal and appropriate.

Later, after reviewing the IRS auditor’s write-up (at a second meeting or telephone call), you simply say: “We do not find your write-up compelling and continue to believe you are wrong. If you persist to recommend this adjustment, we are putting you on notice that we will appeal this audit to the Appeals Division. Unless you reverse your conclusion on this issue, we have no desire to discuss this issue further as we will review it again with an Appeals Officer.”

As a result, now YOU have moved the audit out of the control of the auditor and on to the Appeals Division. It is often not expensive or time consuming to appeal and you have every right to do so. The auditor is now more time-stress as he/she realizes they are not going to be able to close this audit and collect some money. The auditor does not want you to appeal the case. The auditor gets scored for their performance based on the number of cases they close. Further, down the road, they will have to provide info to the Appeals Division, which will take more time.

Many times, this approach has resulted in the IRS auditor dropping the disputed issue. They are under too much pressure to have audits drag on.

If you have made a mistake or error, please consider admitting the error and resolving it. That is the right thing to do.

If you have a reasonable position in a tax area where the law is unclear (they’re many), you may want to further consider this advice:

If you don’t have perfect supporting facts on the issue, try to spend/use time discussing the relevant law that supports your position with the auditor (again, this is only for an issue where you are not 100% confident of your position…if you are confident, don’t discuss the law. You are not required to teach them the law.)

If the law is unclear and does not specifically support your position, spend/use time with the auditor discussing/repeating the facts. If they’ve heard enough, they’ll tell you.

If you are in big trouble (large amounts of unpaid tax or clear intent of tax evasion), go talk to a tax attorney to defend you. We can’t help with cases of intentional tax evasion or fraud.

In summary:

1) Make sure you are right in what you filed.

2) Cooperate fully in providing the facts and computations. Don’t volunteer information that was not asked for.

3) Be very organized.

4) Don’t stall, but don’t rush. The auditor generally has only 3 hours for your Form 1040 case. They same advice applies for larger audits, although the IRS has more time.

5) Don’t provide or argue legal rules. After you have given them all the facts, you can legally sit back and just repeat that you disagree. You have no obligation to educate the tax auditor on what law/rules should be applied to your facts.

6) If you come to a disagreement respectfully say: “Write it up, and I’ll review it.” You have a right to a written explanation.

7) After you receive the write-up, politely inform the auditor that you will appeal the whole case if they continue to pursue that tax adjustment. That’s your right.

8) Unclear facts? Discuss the law. Unclear law? Discuss the facts. Note, I said “unclear.” If you are flat wrong, do the right thing.

9) I didn’t mention, which is often recommended, to ask for the IRS auditors’ Case Manager to go over the head of the auditor. I didn’t mention that because most Case Managers for small 1040 audits will mindlessly support the auditors’ conclusion even if they are 100% wrong. I have found discussing an Appeal is much more effective and will be reported to the Case Manager…at which time the Case Manager may tell the auditor to drop the issue…so the Case Manager won’t look bad on his case record if the audit is appealed. They really want to close cases.

See: http://www.irs.gov/pub/irs-pdf/p556.pdf for the IRS Publication on Audits for more information from the IRS.

I hope this information is helpful. It comes from almost 30 years of experience in these matters and, I think, is very helpful.

Please give us a call if you'd like assistance.