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Monthly Newsletter for ncpeFellowship Members Vol. 3 No. 6 June 2012

Remarks from Beanna

May 1, 2012 the ncpeFellowship celebrated its 2-year anniversary. I do not want you to think I forgot it but the May 1 edition of Taxing Times was so full of tax information I didn’t want my appreciation to you to be lost.

I thank you. The last two years has been a great thrill for me to work on the Fellowship web site and to try and provide this wonderful tax professional community what it needs. In addition to the great tax education you have come to expect from ncpe, you now have a portal to resources and information that a tax professional not only needs but can use in their practices.

I hope with the aftermath of April 15th over you will be able to review the revisions to the web site at www.ncpefellowship.com. Look at the resources and tools for you.

I know many of you were disappointed at the late release of the 2011 Fall Update and it is with a great apology that these went out late. Revisions were included to make the CD up to date and easy for you to install and use. Measures have taken place to not have this reoccur and I believe technology to be our friend to be of more timely use to you.

2012 will see continued changes. The Fellowship will be offering more on-line presentations for CE and you will find Beanna Whitlock as an approved CE provider for both EAs and RTRPs. Like ncpe education, the Fellowship will offer the same quality programs at a discounted price to members of the Fellowship.

Now that is a lead in if there ever was one. Members; we need more and we want members just like you – great tax professionals who will appreciate what the Fellowship means and has to offer.

As announced, every 3 months a reward of an ncpe seminar will be given to the member who brings in the most new members and to a member whose name is chosen from those referring new members. This period runs May 1 – July 31, 2012. Make sure your referral calls the ncpeFellowship office to say who referred them.

Enhancements continue and while we try to determine what you need, hearing from you is better. If you need a Form, a Worksheet, a Letter just let me know and we will see what we can do.

I enjoyed your tax issues during the filing season and those just after. While I am happy to help with generic tax issues, if you or your client has a specific tax issue they need researched remember the ncpe Tax Research Department is available all year long at a very reasonable fee.

It will be a busy summer for tax professionals as we anticipate many Congressional changes in the tax law. Remember “tax simplification” of a few years ago? It sent my two daughters to college. When Congress talks “tax simplification” I know it can get even worse than it currently is.

I took my RTRP examination on May 4, 2012 and was relieved to see the “Congratulations” when I completed the examination. This was no slam dunk. Many questions were not in the area of tax that I am familiar with and I was very pleased to have passed although as an EA I did not have a requirement to take the test. The experience let’s me know that this is not just a cursory approval of all in the business of tax.

Again, I thank you for a rewarding 2 years. For many or you it is time to pay your dues - $120 keeps the newsletter, resources, court cases and tools coming.

Go to www.ncpeFellowship.com and JOIN NOW. I will know it is a renewal. Or you can fax me credit card information at 775-787-7518 or you can mail your check to:

ncpeFellowship10580 N. McCarran Blvd #115-386Reno, NV 89503

Whatever the future of taxation holds, we are in this together as members of the Fellowship.

Beanna

Beanna@ncpefellowship.com or 775-787-7518

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Use Resources and Toolsfor Tax Professionals

On Our WebsitencpeFellowship.com

Remarks from Beanna

Tax NewsAmerica’s Most Outrageous Tax Loopholes The Florida Rent-a-Cow Credit Washington’s DIY Cigarette Discount The Arkansas Credit for Naturally Destroyed Automobiles The Accelerated Depreciation of NASCAR Tracks The Limbless in Oregon Tax CreditThe Bottom LineCongress Introduces Bill to Increase Tax Preparer PenaltiesCompanies Urge Postponement to New IRS Offshore Tax Dodger RulesRepublicans in Senate Block Bill on Student Loan RatesIllegal Immigrants Getting Bigger Tax RefundsLarge Accounting Firms Aggressive but Monitoring Regulation, Complexity and Human Capital

People in the Tax NewsDeveloper’s Ex-wife: Guilty, Your HonorKim Kardashian – Annulment or Divorce?Wirth Pleads Guilty in Tax Evasion CaseFeds Bust Three Former Football Players on ID-theft and Tax-related Fraud ChargesDirector Sentenced to Prison after Abusing Film Tax CreditsFacebook’s Eduardo Saverin Gives Up Citizenship: Shrewd Tax Move?Medical Doctor Pleads Guilty in Federal Court to Filing False Income Tax ReturnCalifornia, US to Bank Millions in Taxes on Facebook IPOHow Apple Sidesteps Billions in Taxes

IRS NewsIRS Updates Substitute Forms W-2c and W-3c RequirementsIRS and the Budget DeficitTIGTA Report: IRS Customer Service is Problematical for Identity Theft VictimsIRS Considering Delaying Tax Refunds until Summer to Deal with Growing Crime of Identity TheftIRS Service to Taxpayers is Faulted

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IRS Deputy Commissioner Beth Tucker Testifies Before Senate Finance Committee on PTIN ApplicantsIRS Releases 2013 Inflation Adjustment Figures for Health Savings AccountsIRS Addresses Permissible Return and Return Information Disclosures in Identity Theft Cases

Thoughts from the Ragin CajunJerry R. Riles

Tax Pros in TroubleOwner of NJ Payroll Firm Sentenced for Tax EvasionElizabeth Tax Preparer Found Guilty in Scheme Seeking $22 Million in RefundsLas Vegas Tax Preparer Pleads Guilty to Bilking IRS, U.S. Attorney AnnouncesEighth Circuit Agrees that CPA Was UnderpaidPreparers Accused of Tax FraudRoyal Palm Beach Man to Pay $570,000 for Filing False Tax ReturnsUSDJ: Federal Court Shuts Down Texas Tax Return PreparerShiloh Tax Preparer Sentenced to 46 Months in PrisonConecuh Woman Gets Probation for Selling Social Security Numbers to Corrupt Tax PreparerThree Charged in Stealing Identities and Money from InmatesFederal Authorities have Charged a New Jersey Man with Using the Identification of a Deceased Tax Preparer to Fill Out Fraudulent Tax ReturnsKickback Scheme Lands Metro-east Tax Preparer in Federal Prison

Tax Advocacy & Tax ProfessionalsIRS Veteran On Innocent Spouse CasesSupreme Court Rules Couple Must Pay Taxes on Sale of Bankrupt Farm

Wayne’s WorldThe Education Season

Sponsor of the MonthTaxWorks

Tax Quotes & Funnies

National Center for Professional Education Fellowship

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Tax NewsAmerica’s Most Outrageous Tax Loopholes

Say what you want about the loopholes that corporations exploit to escape taxes - at least they aren’t cutting off their employees’ arms to do it. Though the Florida Rent-a-Cow scam might be the latest entry on the long list of ridiculous techniques people use to avoid paying taxes, it certainly isn’t the dumbest way that get out of paying Uncle Sam every April.Whether it’s due to poorly worded amendments or just horribly outdated tax codes, nearly every state in the union offers some insane way for its residents to dodge paying taxes. And while many of these loopholes, like Hawaii’s “Exceptional Tree” exemption, are only good for a few thousand dollars a year, some of them are costing their respective states - and the IRS - millions of dollars in revenue every year. Here’s a look at some of the craziest ways people avoid paying taxes today.

The Florida Rent-a-Cow Credit

A 1959 reform to Florida’s property tax codes dramatically lowered the rates for “agricultural” land in order to encourage more farmers to work within the urban-sprawl-ridden state. However, a loophole in the law meant that anyone could legally qualify their land as farmland by stocking it with a few cows. As a result, the Walt Disney Corporation and Florida’s other major landowners have found a way to collectively dodge $950 million a year in county taxes by hiring “Rent-a-Cow” ranchers to let their livestock graze on soggy lots and acres of carefully-mowed grass. Even celebrities like Tom Cruise dodge property tax on their vacation homes by letting a few sheep hang out on the lawn. Though several attempts have been made to close the loophole over the years, they’ve been crushed by Florida’s agriculture lobby every time.

Washington’s DIY Cigarette Discount

Though prepackaged cigarettes sold in Washington state are subject to the same high taxes as they are in every other state, a loophole in Washington’s tax rate on straight loose leaf tobacco isn’t nearly so harsh. As a result, many convenience stores have opened up “Roll Your Own” stations where customers can buy the tobacco and rolling papers at a massive discount and use a machine in the store to roll a carton’s worth of cigarettes - 20 packs of 20 cigarettes, 400 smokes in total - within 10 minutes for half the price of a standard carton. According to the Seattle Times, this loophole is causing the state to miss out on $12 million in revenue every year.

The Arkansas Credit for Naturally Destroyed Automobiles

If you live in Arkansas and your new car is destroyed in an earthquake or hurricane, then you’re in luck. A stipulation in the state’s tax codes allows anyone whose vehicle is destroyed in a natural disaster to receive a tax break. The only stipulations

are that the car must be reduced to less than 30% of its retail value and the owner must have made payments on it in the last 180 days. That’s hardly a replacement for the car that got swallowed by the schism in the earth, but at least the victims will have a good story to tell at their next party, right?

The Accelerated Depreciation of NASCAR Tracks

A 2008 reform to the federal bailout legislature, known as TARP, included a very generous tax break for the owners of NASCAR’s racing tracks. Instead of writing off the costs of their “motorsports facilities” over the 39 years that the government estimates it will take for the tracks to depreciate, NASCAR owners are allowed to write off their properties in seven. Thanks to the accelerated depreciation, track owners dodge a collective $40 million in federal taxes every year.

The Limbless in Oregon Tax Credit

If you or your spouse have permanent and complete loss of the use of two or more of your limbs and live in Oregon, then congratulations - you’ve just earned $50. Under the state’s Credit for the Elderly or the Disabled, any state resident with permanent and complete loss of the use of at least two limbs is entitled to a $50 tax credit every year. In order to claim the benefit, any applicant must first have an official form signed by a health official confirming the applicant’s disability before he or she files his or her taxes. If anything, you would think this would be the one loophole that Oregon would make a little more lucrative, but, on the bright side, anyone without the use of two or more limbs can also qualify for the state’s Severe Disability tax break.

The Bottom Line

The only certain things in life may be death and taxes, but for as long as we continue to be taxed you can be certain that some Americans will go to ridiculous lengths to avoid paying them. Whether they’re blatantly exploitive or just laughably inefficient, the numerous loopholes in America’s various tax codes are costing our state and federal governments millions of dollars every April. When we finally get around to closing them, people will probably just figure out another way to dodge paying their taxes.

Congress Introduces Bill to Increase Tax Preparer Penalties

A bipartisan group of lawmakers have introduced legislation that would increase the penalties on tax preparers who defraud taxpayers and the Internal Revenue Service by altering tax returns for personal benefit without their clients’ knowledge.

The bill, known as the “Fighting Tax Fraud Act,” was introduced by Rep. Erik Paulsen, R-Minn., who joined fellow members of the House Ways and Means Committee, Chairman Charles Boustany, R-La., ranking Democratic member John Lewis, D-Ga., and ranking member Jim McDermott, D-Wash., insponsoring the bill. Paulsen referred to the bill during a

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subcommittee hearing devoted to identity theft and tax fraud.The bill would essentially double the current penalties for tax preparers who are involved with identity theft, with the goal of giving the IRS greater incentive to prosecute this type of theft. The legislation came from a recommendation from National Taxpayer Advocate Nina Olson.

Erik Paulsen

“Taxpayers put good faith in the tax preparers who they hire to file their annual forms,” Paulsen said in a statement. “If a preparer willfully commits fraud against their client, and ultimately the government, they should be held responsible. This is a common-sense, good government measure that will cut down on the amount of waste, fraud and abuse in the federal tax system. I look forward to seeing this legislation move through the Ways & Means Committee and enacted into law.”

Paulsen hosted a seminar for senior citizens last week in Minnesota to give them advice on how to protect themselves against identity theft. He said in the hearing that it was a packed house. He also has co-sponsored legislation with Rep. Sam Johnson, R-Texas, to remove the Social Security number from Medicare ID cards as a way of protecting seniors against identity theft.

“Taxpayers who are defrauded by their tax preparers should not be left holding the bag,” said Lewis. “Today we are sending a strong message to tax preparers who defraud innocent taxpayers that the federal government will not tolerate fraud. This bill ensures that errant preparers will be met with increased penalties and heightened IRS enforcement. I am pleased that members of the Ways and Means Committee worked in a bipartisan fashion on this occasion to crack down on tax fraud.”

Olson pointed out during the hearing that it was necessary to increase the preparer penalties in order to obtain restitution. “The IRS has seen many more of these schemes coming in involving return preparers that are filing tax returns after the taxpayer has approved the return,” said Olson. “They [the taxpayers] actually have a copy of what they think is going to be filed. The preparer alters the return in some way and then uses the split refund procedure to get the difference in the additional refund deposited into their account. The taxpayer doesn’t find out about this until much later. They get the refund

that they are expecting, and it’s only when the IRS comes out trying to collect this erroneous refund from the taxpayer that they find out the return has been altered. We learned that to go after the preparer, you have some very low-dollar civil penalties that are really about negligence, and then you have a very expensive route to try to build a case to get to the Department of Justice to get restitution for the dollars that are lost to the public fisc. What we tried to propose was some kind of civil penalty that would really serve as restitution, that you could build the case that the preparer had in fact committed this act that was willful and fraudulent, and then the preparer would be 100 percent liable for the amount that was erroneously taken out. So it fills a gap in our ability to be able to recover what the public fisc is out, and it also heightens the risk to the preparer in engaging in this activity.”

Companies Urge Postponement to New IRS Offshore Tax Dodger Rules

Financial institutions from around the world called for delay and changes to soften proposed U.S. rules to combat offshore tax evasion at an Internal Revenue Service (IRS) hearing.

Government tax officials gave no indication about how they would respond to the businesses’ requests and said the final rules were on track to be ready within three to four months.

With just months to go before implementation of the Foreign Account Tax Compliance Act, representatives from a range of businesses complained that FATCA’s rules would cause confusion and reporting errors that could destabilize markets.

Enacted by Congress in 2010, FATCA is intended to help the IRS gather information about Americans’ accounts holding more than US$50,000 in assets in foreign banks and other institutions.

Since the law was signed, businesses have been fighting for more leniency. Proposed FATCA rules issued in February did limit its scope somewhat and delayed some start dates.

The law is coming at a time when cash-strapped governments around the world are trying to collect more tax revenue under existing law, rather than raise tax rates. Congress’ Joint Committee on Taxation has estimated FATCA will bring US$792 million a year more to the federal government.

As proposed, the FATCA rules would require most banks and financial institutions worldwide to gather information and disclose it to the IRS. Its first phase is set to begin in 2013.

“This is having far-reaching consequences that I don’t think the Congress anticipated,” said Michael Edwards, chief counsel with the World Council of Credit Unions Inc., an industry group.

Jacob Braun, a Bank of New York Mellon managing director, called on tax officials to delay FATCA’s start date until 2014. He said financial institutions would need at least 12 to 18 months to get ready for the law once it was finalized.

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The United States is working with other countries to set up information sharing agreements to ease the burden of compliance, said Jesse Eggert, associate international tax counsel at the U.S. Treasury Department.

The Treasury Department announced in February proposed pacts with five European countries to become “FATCA partners.” For nations not invited to become FATCA partners, institutions in those countries must cooperate on their own with the IRS.

Republicans in Senate Block Bill on Student Loan Rates

Senate Republicans to block consideration of a Democratic bill to prevent the doubling of some student loan interest rates, leaving the legislation in limbo less than two months before rates on subsidized federal loans are set to shoot upward.

Along party lines, the Senate voted 52 to 45 on a key procedural motion, failing to reach the 60 votes needed to begin debating the measure. Senator Olympia J. Snowe, the moderate Republican from Maine who is retiring, voted present.

Senators said quiet negotiations had begun to resolve the impasse, but Democrats sought to raise the political pressure, vowing to take to the Senate floor to show the cost of inaction for students in their states.

“Mitt Romney says he supports what we’re trying to do. I’d suggest he pick up the phone and call Senator McConnell,” said Senator Harry Reid of Nevada, the Senate majority leader, referring to the Senate Republican leader, Mitch McConnell of Kentucky.

Republicans blamed Democrats for the impasse and suggested that they were manufacturing a political controversy instead of working out differences in private.

“We all agree we’re not going to let the rate go up,” Mr. McConnell said.

The vote was the Senate Republicans’ 21st successful filibuster

of a Democratic bill this Congress, which started in January 2011. Republicans have blocked consideration of President Obama’s full jobs proposal, as well as legislation repealing tax breaks for oil companies, helping local governments pay teachers and first responders, and setting a minimum tax rate for households earning more than $1 million a year. Republicans say the measures were flawed and potentially harmful to the economic recovery.

But the student loan filibuster may be the highest-profile stalemate yet, because unlike those earlier bills, this one is not likely to be abandoned. Mr. Obama has elevated the issue by hammering Republicans on it for weeks. American students took out twice the value of student loans in 2011, about $112 billion, as they did a decade before, after adjusting for inflation. Over all, Americans now owe about $1 trillion in student loans. In 2010, such debt surpassed credit card debt for the first time.

The bill in limbo addresses only part of that burden. Graduate students with Stafford loans pay a higher rate, as do students with unsubsidized Stafford loans. Most undergraduates take out both unsubsidized and subsidized loans.

Republicans say they want to extend Democratic legislation passed in 2007 that temporarily reduced interest rates for low- and middle-income undergraduates who receive subsidized Stafford loans to 3.4 percent from 6.8 percent. But the Republicans would not accept the Senate Democrats’ proposal to pay for a one-year extension by changing a law that allows some wealthy taxpayers to avoid paying Social Security and Medicare taxes by classifying their pay as dividends, not cash income.

“They want to raise taxes on people who are creating jobs when we are still recovering from the greatest recession since the Great Depression,” said Senator Lamar Alexander, Republican of Tennessee, who instead wanted to pay for the rate decrease by eliminating a fund for preventive health care in Mr. Obama’s health care law..

Before the vote, Senate Democrats arrayed college students to plead for a yes vote, including Clarise McCants, 21, a junior at Howard University in Washington who said she pulled herself out of a troubled neighborhood in North Philadelphia and relies on $13,500 in Stafford loans for her tuition.

“I know I’m not the only one with dreams,” she said. “I’m here to ask Congress, ‘Don’t double my rate.’ ”

Republicans have not always been so averse to closing the loophole that the Senate bill addresses. In 2004, when it emerged that John Edwards, then a vice-presidential hopeful, had classified himself as a “subchapter S corporation” to pay himself dividends rather than income, conservatives criticized him for avoiding payroll taxes.

But the Democratic line of attack has been complicated by the House’s actions. Shrugging off a veto threat, the House passed an extension of the subsidized rate last month, paid

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for with the preventive health care fund. Thirteen Democrats voted for the bill, making up for the 30 Republicans who voted no because they opposed federal subsidies for an interest rate that they believed should be set by market forces. Those Democratic defections put the House bill over the top and fortified Republican arguments that the Senate Democrats were now to blame for the stalemate.

Representative Steny Hoyer of Maryland, the House minority whip, said Tuesday that those Democratic votes were driven by politics, not substance. “They didn’t want that 30-second ad” attacking them for opposing a rate-subsidy extension, he said. “That was not a demonstration at all for the funding source.”

Republicans made clear they would go on offense, blaming Democrats if interest rates doubled July 1.

“Instead of compounding the problem with more bad policies that raise taxes on small businesses and raid Social Security and Medicare, we must work together to prevent a rate increase on students and make it easier for job creators to hire them when they graduate,” Senator Roy Blunt, Republican of Missouri, said after the vote.

Illegal Immigrants Getting Bigger Tax Refunds

Millions of illegal immigrants are getting a bigger tax refund than you.

Bob Segall, of WTHI reports finding a massive tax loophole that provides billions of dollars in tax credits to undocumented workers and, in many cases, people who have never stepped foot in the United States. And you are paying for it.

Inside his central Indiana office, a longtime tax consultant sits at his desk, shaking his head in disbelief.

“There is not a doubt in my mind there’s huge fraud taking place here,” he said, slowly flipping through the pages of a tax return.

The tax preparer does not want you to know his name for fear of reprisal, but he does want you to know about a nationwide problem with a huge price tag.

He came to 13 Investigates to blow the whistle.

“We’re talking about a multi-billion dollar fraud scheme here that’s taking place and no one is talking about it,” he said.

The scheme involves illegal immigrants -- illegal immigrants who are filing tax returns.

How it works

The Internal Revenue Service says everyone who is employed in the United States - even those who are working here illegally - must report income and pay taxes. Of course, undocumentedworkers are not supposed to have a social security number.

So for them to pay taxes, the IRS created what’s called an ITIN, an individual taxpayer identification number. A 9-digit ITIN number issued by the IRS provides both resident and nonresident aliens with a unique identification number that allows them to file tax returns.

While that may have seemed like a good idea, it’s now backfiring in a big way.

Each spring, at tax preparation offices all across the nation, many illegal immigrants are now eagerly filing tax returns to take advantage of a tax loophole, using their ITIN numbers to get huge refunds from the IRS.

The loophole is called the Additional Child Tax Credit. It’s a fully-refundable credit of up to $1000 per child, and it’s meant to help working families who have children living at home.

But many undocumented workers are claiming the tax credit for kids who live in Mexico - lots of kids in Mexico.

“We’ve seen sometimes 10 or 12 dependents, most times nieces and nephews, on these tax forms,” the whistleblower said. “The more you put on there, the more you get back.“

The whistleblower has thousands of examples, and he brought some of them to 13 Investigates. While identifying information such as names and addresses on the tax returns was redacted, it was still clear that the tax filers had received large tax refunds after claiming additional child tax credits for many dependents.

“Here’s a return right here: we’ve got a $10,3000 refund for nine nieces and nephews,” he said, pointing to the words “niece” and “nephew” listed on the tax forms nine separate times.

“We’re getting an $11,000 refund on this tax return. There are seven nieces and nephews,” he said, pointing to another set of documents. “I can bring out stacks and stacks. It’s just so easy it’s ridiculous.” 20 kids = $30,000.

Several undocumented workers who confirmed it is easy.

They all agreed to talk with WTHR investigative reporter Bob Segall and a translator as long as WTHR agreed not to reveal their identity.

One of the workers, who was interviewed at his home in southern Indiana, admitted his address was used this year to file tax returns by four other undocumented workers who don’t even live there. Those four workers claimed 20 children live inside the one residence and, as a result, the IRS sent the illegal immigrants tax refunds totaling $29,608.

13 Investigates saw only one little girl who lives at that address (a small mobile home). We wondered about the 20 kids claimed as tax deductions?

“They don’t live here,” said the undocumented worker. “The

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other kids are in their country of origin, which is Mexico.”

He later explained none of the 20 children have ever visited the United States - let alone lived here.

So why should undocumented workers receive tax credits for children living in a foreign country, which is a violation of IRS tax rules?

“If the opportunity is there and they can give it to me, why not take advantage of it?” the worker said.

Other undocumented workers in Indiana told 13 Investigates the same thing. Their families are collecting tax refunds for children who do not live in this country. Several of the workers say they were told it was legal for them to claim the tax credit for a child who does not live in the United States.

IRS was repeatedly warned.

“The magnitude of the problem has grown exponentially,” said Russell George, the United States Department of Treasury’s Inspector General for Tax Administration (TIGTA).

And he says the IRS has known about the problem for years.George has repeatedly warned the IRS that additional child tax credits are being abused by undocumented workers. In 2009, his office released an audit report that showed ITIN tax filers received about $1 billion in additional child tax credits. Last year, the inspector general released a new report showing the problem now costs American tax payers more than $4.2 billion.

“Keep in mind, we’re talking $4 billion per year,” he said. “It’s very troubling.”

What George finds even more troubling is the IRS has not taken action despite multiple warnings from the inspector general.

“Millions of people are seeking this tax credit who, we believe, are not entitled to it,” said the inspector general. “We have made recommendations to [IRS] as to how they could address this, and they have not taken sufficient action in our view to solve the problem.”

Other information obtained from the TIGTA audits include:

* Claims for additional child tax credits by ITIN filers haveskyrocketed during the past decade, from $161 million in 2001to $4.2 billion in tax year 2010.* Undocumented workers filed 3.02 million tax returns in 2010.72% of those returns (2.18 million) claimed the additional child tax credit.* In 2010, the IRS owed undocumented workers more inclaimed additional child tax credits than it collected from thoseworkers in taxes.

Agency responds - sort ofWhat does the IRS have to say about all this?

The agency sent a statement, defending its policy of paying tax credits to illegal immigrants.

“The law has been clear for over a decade that eligibility for these credits does not depend on work authorization status or the type of taxpayer identification number used. Any suggestion that the IRS shouldn’t be paying out these credits under current law to ITIN holders is simply incorrect. The IRS administers the law impartially and applies it as it is written,” the statement said.

George disagrees with that position and believes the IRS should be doing more to prevent undocumented workers from getting billions in US tax dollars.

“The IRS is not doing something as simple as requesting sufficient documentation from people seeking this credit,” he said. “Once the money goes out the door, it’s nearly impossible for the IRS to get it back.”

Over the past month, WTHR has tried to ask the IRS more questions about its efforts to prevent abuse involving additional child tax credits.

Despite repeated phone calls, e-mails and a visit to IRS headquarters in Washington, the agency said none of its 100,000 employees had time to meet with 13 Investigates for an interview. An IRS spokeswoman said all staff were too busy because of the tax filing deadline in mid-April.

Apparently, the IRS doesn’t have time to respond to some tax preparers, either.

Last year, whistleblowers noticed dozens of undocumented workers had used phony documents and false income to claim tax credits. He reported all of it to the IRS.

“These were fraudulent, 100% fraudulent tax returns, but I got no response; absolutely none. We never heard a thing,” he said. “To me, it’s clear the IRS is letting this happen.”

The IRS says it can do nothing to change the current system unless it gets permission from Congress. In other words, according to the IRS, closing the loophole would require lawmakers to pass a new law specifically excluding illegal immigrants from claiming additional child tax credits.

The big questions now: Is Congress willing to do that?

Full statement to WTHR from the Internal Revenue Service:

The law has been clear for over a decade that eligibility for these credits does not depend on work authorization status or the type of taxpayer identification number used. Any suggestion that the IRS shouldn’t be paying out these credits under current law to ITIN holders is simply incorrect. The IRS administers the law impartially and applies it as it is written. If the law were changed, the IRS would change its programs accordingly. The IRS disagrees with TIGTA’s recommendation on requiring additional documentation to verify child credit

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claims. As TIGTA acknowledges in this report, the IRS does not currently have the legal authority to verify and disallow the Child Tax Credit and the Additional Child Tax Credit during return processing simply because of the lack of documentation. The IRS has procedures in place specifically for the evaluation of questionable credit claims early in the processing stream and prior to issuance of a refund. The IRS continues to work to refine and improve our processes.

Large Accounting Firms Aggressive but Monitoring Regulation, Complexity and Human Capital

Complexity and competition in the public accounting profession will rise as businesses demand more, better, faster, and cheaper.

Working in teams and harnessing data will become more critical. Services in areas of assurance, audit, tax, and advisory work will remain the core, while emerging international markets will open up risk and opportunities and, operationally, demand a balance between leveraging local talent and providing globally consistent services.

These were some of themes on the minds of leaders from eight major accounting firms who gathered for a panel discussion at the AICPA’s spring Council meeting in Washington.

Firm executives are bullish about the future of the profession and public company auditing. They are seeing signs of optimism and a willingness to invest and grow among their clients. And, while upbeat, the panelists were outspoken about the level of scrutiny public company auditors are under and its potential impact on the future of the profession.

Ten years after the Sarbanes Oxley Act of 2002 imposed new regulations on public company auditors, additional measures, such as mandatory audit firm rotation, are being debated in the U.S. and Europe.

“We’re going through a period of change,” said Bill Freda, vice chairman and senior partner at Deloitte LLP, pointing to what he described as an unprecedented level of stress in the public company audit space.

But Freda and the other panelists are confident the pendulum will swing back. Meanwhile, the firms are working to keep the discussion focused on changes that would make an impact on audit quality and protect investors and capital markets.

“If it enhances audit quality, we ought to be for it,” said John Veihmeyer, chairman and CEO of KPMG LLP. He said he worries some of the measures under discussion by the PCAOB and European Commission would not improve audit quality and would have unintended consequences, including a level of regulation and second-guessing that would create barriers to attracting and retaining top talent to accounting.

The firm leaders, who have insight into the C-suite and board

room through the public and private companies they serve, said they sense resilience and optimism. But Veihmeyer said the euro-zone crisis, uncertainty in Washington in the run-up to the presidential election, and the potential for a major eruption in the Middle East that would disrupt trade are weighing on the minds of business leaders.

The financial sector is stronger, private equity and deal-making are heating up, and companies appear to be ready to pull the trigger on technology investments, said Chuck Allen, CEO of Crowe Horwath LLP.

But much of the global business outlook “depends on where you sit,” said Steve Howe, managing partner, Ernst & Young. Howe is seeing optimism in the U.S. His firm’s fastest growing market is Brazil and he sees great potential in the BRIC countries. But he called Europe a day-to-day concern. “It’s quite variable,” Howe said.

As public accounting firms expand internationally, providing consistent quality across different and often sprawling markets will be a challenge, panelists said. One way Deloitte is meeting the challenge is through Deloitte University, a staff education initiative designed to cement a single global culture, Freda said.

Grant Thornton is focusing on continuous improvement to its methodologies in audit and tax, said Lou Grabowsky, the firm’s chief operating officer. Meanwhile the firm is tracking indicators of quality and developing processes to benchmark its professionals and discover roots of problems through data mining.

KPMG’s Veihmeyer said one of the biggest challenges facing leaders in public accounting is making sure their teams have enough time to serve complex clients.

Jean Hobby, a national assurance sector leader at PwC U.S., said globalization will put an increased importance on one aspect of the human capital equation: diversity.

“It’s now a necessity,” Hobby said. “Ten years from now it will be an absolute requirement.” Some gains in diversity in the profession will happen organically, she said, while others will need leadership to encourage.

People in the Tax NewsDeveloper’s Ex-wife: Guilty, Your Honor

The ex-wife of commercial real estate developer Jeffrey Wirth pleaded guilty to filing a false federal tax return in an alleged tax evasion scheme that funded a lavish lifestyle.

In a plea agreement reached in U.S. District Court-Minneapolis, Holly Claire Damiani, of Minneapolis, admitted that from “at least” 2003 through October 2006, she conspired with Wirth and their tax return preparer Michael James Murry to defraud

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the Internal Revenue Service by failing to report and pay their true income and tax obligations.

The 53-year-old Damiani calmly answered a series of questions posed to her by District Judge Ann Montgomery in a hearing that lasted about 35 minutes.

Married to Wirth from 1980 to 2008, Damiani said at the hearing that the duo used his company and other related businesses to fund a lavish lifestyle that included the $2 million purchase of an island in St. Alban’s Bay in Lake Minnetonka, and $3 million more to design and construct a mansion there. Damiani also said they plied more than $600,000 into a home near Cedar Lake in Minneapolis, and traveled the world, paid for cars and even dry cleaning -- all on the companies’ dime.

Wirth, of Plymouth and head of the Wirth Companies, a real estate company in Brooklyn Center, is best known locally as the developer of the Grand Lodge Hotel & Waterpark in Bloomington and the Grand Rios Hotel and Water Park in Brooklyn Park. He also spent an estimated $54 million turning the old Minneapolis Athletic Club into the luxury Grand Hotel Minneapolis.

Damiani, who has an accounting degree from the University of Minnesota, was an executive at Wirth Companies from 1988 to 2006.

According to Damiani, she and Wirth often recorded personal expenses as business expenses in an effort to understate the company’s true income for tax purposes. From 2002 through 2005, they each claimed that they earned only $12,000 a year in wages on their federal tax forms.

Damiani faces a maximum penalty of three years in federal prison. Montgomery will determine her sentence at a future hearing.

In indictments handed down last August, Wirth and Murry each face one count of conspiracy to defraud the United States. Wirth was charged with an additional two counts of filing a false individual tax return and two counts of filing a false corporate tax return.

Murry was charged with two counts of preparing a false corporate tax return and two counts of preparing a false individual tax return.

A jury trial of Wirth and Murry is scheduled for May 29. Damiani has been “assisting” the government in its investigation of her ex-husband and Murry, according to her attorney Andrew Luger of Minneapolis. She may be called as a witness in the trial, he said.

Damiani, through her attorney, declined to comment.

Kim Kardashian – Annulment or Divorce?

There is a difference between a divorce and an annulment. The courts grant a divorce to mark the end of a marriage that

was valid when entered into, whereas an annulment is for a marriage that at no time was valid (as when one of the parties was under the age of consent at the time of the marriage).

To a couple interested only in the fastest way to untie the knot, the question may seem to be an unimportant technicality. The Internal Revenue Service, however, think that there’s an important difference when Form 1040 time rolls around. According to an IRS ruling, if an annulment is retroactive, the couple was never married. Result: they had no right to file joint returns (Revenue Ruling 76-255).

Normally, the IRS doesn’t allow people who file joint returns to change their filing status and switch to separate returns once the filing deadline of April 15 (for most individuals) has passed. Revenue Ruling 76-255 deals with the rare circumstance in which joint filers can switch to separate returns. This ruling involved only a one-year marriage. Nevertheless, the theory would presumably apply regardless of the marriage’s length.

An annulment will deny the intent of the marriage union. The divorce acknowledges the marriage and ends it.

If taxpayers have filed married filing jointing and later have marriage annulled, the return must be amended. They were never married.

Wirth Pleads Guilty in Tax Evasion Case

Real estate developer Jeffrey Wirth pleaded guilty to conspiring to evade paying federal taxes in U.S. District Court.

The 53-year-old Plymouth man was indicted in August 2011 along with his ex-wife, Holly Damiani, and tax preparer, Michael James Murry, for defrauding the Internal Revenue Service by failing to pay their true tax obligations.

Wirth is the owner and CEO of The Wirth Cos., a Twin Cities-based commercial real estate firm that developed the Grand Hotel in downtown Minneapolis, the Grand Rios Hotel & Waterpark in Brooklyn Park and the Grand Lodge Hotel & Waterpark in Bloomington.

Wirth and Damiani used proceeds from the business to fund a “lavish lifestyle,” that included the $2 million purchase of an island in St. Alban’s Bay in Lake Minnetonka, and $3 million to design and construct a mansion on the plot of land. Another $600,000 was used to buy a home near Cedar Lake in south Minneapolis and tens of thousands of dollars were used for other personal and family expenses, according to the U.S. Attorney’s Office.

As a result, Wirth underpaid his tax obligation by $2.5 million to $7 million. Part of his plea involves paying an unspecified amount of restitution to the IRS.

Last week, Damiani pleaded guilty to one count of filing a false federal individual income tax return. She awaits sentencing. Murry’s case is pending.

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Wirth appeared in U.S. District Court in Minneapolis Friday before Judge Ann Montgomery. He faces a maximum penalty of five years in federal prison. Sentencing will occur at a later date.

His attorney, Chris Madel, said Wirth “is a good man who has employed thousands of Minnesotans. He stepped forward and did the right thing.”

Feds Bust Three Former Football Players on ID-theft and Tax-related Fraud Charges

Graduated from Miami Edison High in 1998 from Miami Edison High, where he starred as a defensive lineman…Redshirted at University of Miami in 1998, then played for the Hurricanes from 1999 through 2002…Played at UM with his younger brother Carlos, an offensive lineman, and the two were nicknamed “the Haitian Sensations’’…Drafted by the New York Giants 25th overall in the 2003 NFL Draft…Played five seasons with Giants; two with Oakland Raiders.

Louis Gachelin

Born December 1980 in Orange, Florida… Played defensive tackle for Miami Jackson High; graduated in 1999…Went on to play at defensive tackle and defensive end at Syracuse University, redshirting in 1999 and playing from 2000 through 2003...Signed as an undrafted free agent with New England Patriots in spring 2004, then waived; Played in NFL Europe with the Frankfurt Galaxy as defensive tackle in 2005…Half brother of NFL star defensive end Elvis Dumervil.

Michael Bennett

Born Aug. 13, 1978 in Milwaukee… Played running back for Wisconsin… Drafted by Minnesota Vikings 27th overall in 2001 – a former NFL teammate and friend of former University of Miami offensive tackle Bryant McKinnie…Other NFL teams included the New Orleans Saints, Kansas City Chiefs, Tampa Bay Buccaneers, San Diego Chargers and Oakland Raiders…Released by Raiders in September 2011.

FBI agents faked out a couple of ex-NFL football players and a former local high school star by setting up a check-cashing store “front” in North Miami, where the players are accused of cashing dozens of fraudulently obtained tax-refund checks and seeking a loan — all totaling hundreds of thousands of dollars.

The undercover operation, designed to block an alleged identity-theft and tax-refund scheme, sacked a pair of National Football League veterans and a Miami Jackson High graduate:

• William Joseph, a University of Miami defensive tackle whowas drafted in the first round by the New York Giants in 2003and last played with the Oakland Raiders in 2010.

• Michael Bennett, a University of Wisconsin running back whoalso was drafted in the first round by the Minnesota Vikings in2001 and finished his career with the Raiders in 2011.

• Louis Gachelin, a Miami Jackson High and SyracuseUniversity defensive lineman who signed as a free agent withthe New England Patriots in 2004. Gachelin never made thefinal roster.

Authorities say the latest tax-related fraud case, while unique because of the ex-NFL defendants, is yet another example of the escalating number of reported identity-theft crimes in South Florida and nationwide.

FBI agents arrested the three former players — Joseph, 32, of Miramar, Gachelin, 31, of Miramar, and Bennett, 33, of Tampa. The defendants were granted bonds by U.S. Magistrate Judge Robert Dube.

Arraignments were set for May 15. Their lawyers declined to comment.

As part of the investigation, the FBI also arrested five other defendants.

Joseph, Gachelin and those five defendants were charged with cashing a total of about $500,000 in fraudulently obtained tax-refund checks, forging signatures on the checks and unlawfully using identification documents such as a driver’s license. As part of the sting, the FBI charged 35 percent to 45 percent in fees to cash their checks with the bureau’s own funds.

Bennett, charged with wire fraud, tried to obtain a $200,000 loan on April 18 from the check-cashing store front, using a UBS financial statement falsely showing that he had $9 million in collateral for the loan, according to a criminal complaint. Ironically, it was Bennett’s former Raiders’ teammate, Joseph, who introduced him to the undercover store in North Miami.Joseph himself was tripped up by another defendant, Lanny Fried, 34, of Miami Lakes, who got caught trying to cash checks at the store front and then began cooperating with agents to target the former NFL player.

U.S. Attorney Wifredo Ferrer said identity theft is “America’s fastest-growing crime,” claiming countless legitimate consumers and taxpayers as victims.

“Organized criminals are stealing $5 billion and more by fraudulently claiming tax refunds,” said John V. Gillies, special agent in charge of the FBI’s Miami office.

Gillies took a slight jab at the Internal Revenue Service, which has been pressured by Congress to speed up electronic refunds but has not installed ample software protections against ID theft and fraud.

“Without proper safeguards, identity theft tax fraud has become a growing epidemic,” Gillies said.

Here’s the root of the problem: Scammers filing fabricated tax returns have exploited a hole in the IRS electronic filing system, according to the U.S. Government Accountability Office.

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The federal watchdog agency found that the IRS does not actually match tax returns to the W-2 income forms that employers file until months after the filing season ends on April 15. Employers file them at the end of February or early March,but the agency does not match them up with employees’incomes reported on 1040 forms until June.

That’s way too late to catch identity thieves who file false returns in others’ names early in the year.

Director Sentenced to Prison after Abusing Film Tax Credits

The director of two movies shot on Cape Cod has been sentenced to a maximum of three years in state prison after admitting he exaggerated expenses when he applied for Massachusetts film tax credits.

Daniel Adams pleaded guilty last month to larceny and making a false claim when he applied for state film tax credits for the 2008 movie “The Golden Boys,” with Bruce Dern and the late David Carradine, and “The Lightkeepers,” a 2009 movie starring Richard Dreyfuss and Blythe Danner.

Prosecutors said Adams overcharged the state by $4.7 million for expenses related to those movies. A Boston judge on Thursday ordered Adams to pay nearly $4.4 million in restitution and serve 10 years on probation after his prison sentence.

This case is one of several scandals nationwide involving abuses of film tax credit programs.

In January, filmmaker Harel Goldstein of Calabasas pleaded guilty to defrauding Iowa’s now-defunct film tax credit program. Former Iowa Film Office Director Tom Wheeler was convicted last year of one count of misconduct over his handling of state film tax credits. And in 2009, a former top film office official in Louisiana was given a two-year prison sentence for steering tax credits to a local producer.

Facebook’s Eduardo Saverin Gives Up Citizenship: Shrewd Tax Move?

Here’s a tax tip for Mark Zuckerberg: Give up your U.S. citizenship.

The 27-year-old Facebook Inc. founder could face a tax bill of more than $1 billion after the company’s initial public offering, expected next week.

His former Harvard classmate who is known as “the other Facebook founder” may have found a way to cut the bill. Eduardo Saverin, who now lives in Singapore, has given up his U.S. citizenship. Tax experts say it’s a shrewd move.

Saverin, who was immortalized in the film “The Social Network” as Zuckerberg’s contentious former friend and business partner, has a 4% stake in the company, according to the Who

Owns Facebook? website. His stake could be worth nearly $4 billion after the IPO.

“It’s definitely savvy tax planning,” said Edward D. Kleinbard, a professor of law at USC who specializes in federal tax policy and international taxation. “He can argue that the value of the Facebook shares in September, when he gave up his citizenship, were significantly less than the value that will be set at the IPO next week.”

Saverin’s spokeswoman said his decision to jump ship had nothing to do with the upcoming IPO and the potential tax liability.

“Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” Sabrina Strauss said in an emailed statement. “He plans to invest in Brazilian and global companies that have strong interests in entering the Asian markets. Accordingly, it made the most sense for him to use Singapore as a home base.”

Regardless, tax experts say that Saverin’s decision to renounce his U.S. citizenship has financial benefits.

Reuven Avi-Yonah, director of the international tax program at the University of Michigan’s law school, said it was likely that Saverin and the IRS will disagree on how much exit tax Saverin owes, but it could be as much as $150 million. That’s a big number, but it might still be less than the taxes Saverin would owe if he stayed in the country.

Saverin, 30, was born and raised in Brazil and moved to the United States in 1992. He became a U.S. citizen in 1998 and has spent the last four years living in Singapore.

Singapore does not have a capital gains tax, although it does tax income that is earned in the city-state, according to a government website.

Saverin is currently No. 634 on the Forbes list of billionaires, with an estimated wealth of $2 billion.

A recent profile of the notoriously media-shy Saverin published in the Wall Street Journal describes the him as a wealthy

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playboy who lives in a pricey penthouse apartment. The article described the local fascination with his every move as “Kardashian-like.”

Saverin is one of 1,780 former Americans who renounced citizenship last year and is at least the second billionaire to give up his U.S. passport in the last 20 years.

In the mid-1990s John Dorrance III, heir to the Campbell’s Soup fortune, renounced his U.S. citizenship and moved to Ireland before selling his 10.5% stake in the family business.

Medical Doctor Pleads Guilty in Federal Court to Filing False Income Tax Return

A medical doctor who once operated in the Utica and New Hartford areas has pleaded guilty in federal court to filing a false personal income tax return.

According to United States Attorney Richard S. Hartunian, Fadi J. Bejjani, 56, currently residing in Roseland, New Jersey, pleaded guilty to filing a false personal income tax return in tax year 2007.

Bejjani is a medical doctor who operated COPPS Medical, P.C., a pain management center located in Utica and laterin New Hartford. From 2005-2008, he received income thatcame to $538,110 over and above the income he reported onhis personal tax returns.

Authorities said this was accomplished by Bejjani directing that payments received by his medical practice, COPPS, be diverted and deposited into private or personal accounts rather than being deposited into the COPPS business account.

In his plea agreement, Bejjani admitted he failed to include $139,381 as income on his 2005 personal federal tax return, $127,532 as income on his 2006 personal federal tax return, $161,135 as income on his 2007 personal federal tax return, and $110,062 as income on his 2008 personal federal tax return. Bejjani knew the returns he filed each year were false because each substantially under reported his income for that year.

As a result, Bejjani owes $164,409 in back taxes for the years 2005-2008.

United States District Court Judge Norman A. Mordue scheduled sentencing for September 11, 2012 at 10 a.m. in Syracuse. Bejjani faces a maximum term of imprisonment of three years and a fine of $250,000. In addition, the defendant will be required to pay all back taxes due and owing for the tax years 2005-2008.

California, US to Bank Millions in Taxes on Facebook IPO

California has a friend who’s about to write a hefty personal check that could help ease the state budget crunch.

Mark Zuckerberg, the 27-year-old founder and chief executive of Facebook Inc., may have to pay the state $189 million in taxes after the Menlo Park, Calif., social networking company’s initial public offering of stock in two weeks, according to calculations from PrivCo, which researches private companies. The IPO could value Facebook at $96 billion.

The federal government will be in the money too, collecting an estimated $714 million in federal income taxes from Zuckerberg.

PrivCo calculated the windfalls using the high end of Facebook’s pricing range for its IPO of $35 a share. PrivCo expects Facebook to price its IPO as high as $40 a share, which would add tens of millions more to California and the federal government’s coffers.

“The funds are badly needed as California continues to suffer from budget deficits and could not have come at a better time for the state,” said Sam Hamadeh, PrivCo’s founder and CEO.And that’s just the payout from Zuckerberg. The windfall for California from all of the insiders cashing in on the IPO could net the state hundreds of millions more, Hamadeh said.

“More taxes will come due as more shares are sold beginning in December and well into 2013 after the traditional 180-day post-IPO ‘lock-up’ period expires,” he said. That’s when employees can sell even more shares, resulting in new capital gains taxes to California - and the IRS - with each new stock sale.

Facebook executives tailed by camera crews met with the company’s underwriters in New York on Friday to prepare for its investor road show, which begins Monday.

Facebook, which plans to list its stock on the Nasdaq Stock Market under the symbol FB, will hold a series of meetings around the country with institutional investors such as mutual funds, hedge funds and pension funds.

On Thursday, the company posted a glossy video on the Web outlining its presentations to investors.

If all goes as planned during the road show, bankers and executives will sit down May 17 to price the stock, which begins trading the next day.

Facebook got a “buy” recommendation Friday from Wedbush Securities Inc. and a target price of $44. Michael Pachter, an analyst at Wedbush in Los Angeles, gave Facebook its first rating since it announced plans Thursday to sell shares in a range of $28 to $35.

“At these prices, demand for Facebook shares will likely outstrip supply, and we expect the shares to trade up,” Pachter said in a note to investors.

“We think that given the huge upside potential for revenue and earnings growth, a $44 target price is warranted.”

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Pachter said he expected the growth in the already huge number of Facebook users would drive higher advertising revenue, and that mobile advertising would play an important role in capturing more ad dollars. He’s also bullish on the revenue Facebook gets from taking a cut of digital goods sold on its site through Zynga and other companies. Facebook keeps as much as 30 percent of the transactions.

California is hoping that Facebook will have a “Google effect” on the state’s economy. Capital gains tax receipts from stock sales rose to $54 billion in 2005 from $39.7 billion in 2004, the year Google Inc. went public, according to Franchise Tax Board figures.

When Facebook executives and employees cash in shares, the state takes a 10 percent cut of the profits.

In February, California legislative analyst Mac Taylor became the first state official to estimate what Facebook’s big Wall Street debut could mean for California’s ailing budget. He said the IPO could pump nearly $2.5 billion into state coffers in the next five years.

How Apple Sidesteps Billions in Taxes

Braeburn Capital, an Apple subsidiary in Reno, Nev., manages and invests the company’s cash. Nevada has a corporate tax rate of zero, as opposed to the 8.84 percent levied in California, where Apple has its headquarters.

Apple, the world’s most profitable technology company, doesn’t design iPhones here. It doesn’t run AppleCare customer service from this city. And it doesn’t manufacture MacBooks or iPads anywhere nearby.

Yet, with a handful of employees in a small office here in Reno, Apple has done something central to its corporate strategy: it has avoided millions of dollars in taxes in California and 20 other states.

Apple’s headquarters are in Cupertino, Calif. By putting an office in Reno, just 200 miles away, to collect and invest the company’s profits, Apple sidesteps state income taxes on some of those gains.

California’s corporate tax rate is 8.84 percent. Nevada’s? Zero.

Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year. As it has in Nevada, Apple has created subsidiaries in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letterbox or an anonymous office — that help cut the taxes it pays around the world.

Almost every major corporation tries to minimize its taxes, of course. For Apple, the savings are especially alluring because the company’s profits are so high. Wall Street analysts predict Apple could earn up to $45.6 billion in its current fiscal year —

which would be a record for any American business.

Apple serves as a window on how technology giants have taken advantage of tax codes written for an industrial age and ill suited to today’s digital economy. Some profits at companies like Apple, Google, Amazon, Hewlett-Packard and Microsoft derive not from physical goods but from royalties on intellectual property, like the patents on software that makes devices work. Other times, the products themselves are digital, like downloaded songs. It is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers. A downloaded application, unlike a car, can be sold from anywhere.

The growing digital economy presents a conundrum for lawmakers overseeing corporate taxation: although technology is now one of the nation’s largest and most valued industries, many tech companies are among the least taxed, according to government and corporate data. Over the last two years, the 71 technology companies in the Standard & Poor’s 500-stock index — including Apple, Google, Yahoo and Dell — reported paying worldwide cash taxes at a rate that, on average, was a third less than other S.& P. companies’. (Cash taxes may include payments for multiple years.)

Even among tech companies, Apple’s rates are low. And while the company has remade industries, ignited economic growth and delighted customers, it has also devised corporate strategies that take advantage of gaps in the tax code, according to former executives who helped create those strategies.

Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.

Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan. As it stands, the company paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent. (Apple does not disclose what portion of those payments was in the United States, or what portion is assigned to previous or future years.)

By comparison, Wal-Mart last year paid worldwide cash taxes of $5.9 billion on its booked profits of $24.4 billion, a tax rate of 24 percent, which is about average for non-tech companies.

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IRS News

IRS Updates Substitute Forms W-2c and W-3c Requirements

Requirements regarding the preparation and submission of substitute forms for Form W-2c, Corrected Wage and Tax Statement, and Form W-3c, Transmittal of Corrected Wage and Tax Statements, have been issued by the IRS. The IRS has also noted that the requirements will be reproduced as the next revision of IRS Publication 1223, General Rules and Specifications for Substitute Forms W-2c and W-3c.

Changes to note

The advance (EIC) payment is eliminated for tax years beginning after December 31, 2010. Box 9, Advance EIC payments, has been eliminated from the 2011 Form W-2 (including Forms W-2GU, and W-2VI). This will not affect current versions of Forms W-2c and W-3c, as corrections to previously filed Forms W-2 (including Forms W-2GU, and W-2VI) reporting Advance EIC payments in Box 9 are required to be filed for a period of four years after the original reportable tax year.

The SSA is changing the name Substitute black-and-white Copy A and W-2c forms to Substitute black-and-white FormsW-2c (Copy A) and W-3c.

The SSA requires checkboxes to be included in Box c Kind of Payer, Kind of Employer, Third-party sick boxes, and the “X” for the “Yes/No” area above the signature area for Forms W-3c forms. Checkboxes will be included in Box e and Box 13 of the Form W-2c (Copy A).

Box b of Form W-3c has been expanded to include an additional line for name, address, and Zip code.

Box c of Form W-3c has been expanded to include a new section, “Kind of Employer” and contains five new checkboxes. All filers are required to check one of the new checkboxes.

A separate box is provided for third-party sick pay, and it is moved from the Kind of Payer box.

The IRS website will now be referred to as IRS.gov rather than www.irs.gov.

There were editorial changes. Redundancies were eliminated as much as possible.

IRS and the Budget Deficit

The federal government recorded an estimated budget deficit of $721 billion in the first seven months of fiscal year (FY) 2012, the Congressional Budget Office (CBO) said in estimates released on May 7. (Monthly Budget Review) This was $149

billion less than the deficit for the same period in FY 2011. Were it not for the timing of certain payments, the deficit at this point “would have been only $92 billion smaller,” CBO said. Total receipts for the current fiscal year were $74 billion (or 6%) higher than for the same period last year. “However, they were roughly $20 billion below the amounts CBO anticipated when it prepared its most recent budget projections in March,” the budget review said.

Through April, total receipts from individual income taxes grew by $32 billion (or 5%) over last year. Withheld individual income taxes increased by $21 billion (or 4%), “reflecting growth in wages,” CBO said. Non-withheld payments rose by $9 billion. “Corporate taxes paid so far this fiscal year, largely reflecting corporations’ activity in 2011, increased by $32 billion (or 40%),” CBO said. These receipts were lower than CBO’s March baseline estimate. This was attributed to “lower than expected” final payments made in March for tax year 2011 and estimated payments made in April for 2012.

TIGTA Report: IRS Customer Service is Problematical for Identity Theft Victims

Taxpayers whose identities are stolen receive confusing and conflicting instructions from the Internal Revenue Service (IRS) and delays of sometimes longer than a year to resolve their tax problems, resulting in increased burden for the victims, according to a report released publicly by the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA conducted its review because of significant recent growth in tax-related identity theft cases and reports of problems that taxpayers are encountering with the IRS when attempting to resolve their cases. As of December 31, 2011, the IRS’s Incident Tracking Statistics Report showed that 641,052 taxpayers have been affected by identity theft in Calendar Year 2011 (versus 270,518 in 2010). The growth in these cases has overwhelmed IRS resources and burdened taxpayers. Problems TIGTA found include:

* The IRS does not work identity theft cases timely and cantake more than a year to resolve them.

* Communications between the IRS and victims are limitedand confusing, and victims are asked multiple times tosubstantiate their identity.

* When taxpayers call the IRS to advise it that their electronictax return was rejected because it appears another individualhas already filed a tax return using their identity, the IRSinstructs them to mail in a paper tax return with the Form14039, IdentityTheft Affidavit, attaching supporting identitydocuments. However, the IRS has been processing these taxreturns using standard processing procedures and does notprioritize them.

* Identity theft guidelines and procedures are dispersedamong 38 different Internal Revenue Manual sections. Theseguidelines are inconsistent and conflicting, and not all functionshave guidelines on handling identity theft issues.

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* The IRS makes little use of the data from the identity theftcases to identify any trends that could be used to detect orprevent future refund fraud.

“TIGTA found that the IRS’s current methods for handling identity theft cases are insufficient and taxpayers deserve better,” said J. Russell George, the Treasury Inspector General for Tax Administration. “As the Federal Trade Commission has reported that identity theft continued to be the number one consumer complaint last year, and the most common form of reported identity theft involves government documents, the IRS must make handling these cases a priority,” he added.

TIGTA recommended that the IRS: 1) establish accountability for the Identity Theft Program; 2) implement a process to ensure that IRS notices and correspondence are not sent to the address listed on the identity thief’s tax return; 3) conduct an analysis of the letters sent to taxpayers regarding identity theft; 4) ensure taxpayers are notified when the IRS has received their identifying documents; 5) create a specialized unit in the Accounts Management function to exclusively workidentity theft cases; 6) ensure all quality review systems used by IRS functions and offices working identity theft cases are revised to select a representative sample of identity theft cases; 7) revise procedures for the Correspondence Imaging System screening process; and 8) ensure that programming is adjusted so that identity theft issues can be tracked and analyzed for trends and patterns.

The IRS agreed with all of TIGTA’s recommendations. It has established a governance structure to oversee its identity theft initiatives and plans to expand its identity theft indicator codes identifying claims of identity theft. The IRS further plans to review its suite of identity theft letters and to update its guidance instructing employees to notify taxpayers acknowledging receipt of documentation. The IRS currently has specialized units in the Accounts Management function working only identity theft cases. Finally, the IRS plans to create a specific quality review for identity theft cases and is currently evaluating options for enhancing its ability to track and analyze the fraudulent identity theft information removed from a taxpayer account.

IRS Considering Delaying Tax Refunds until Summer to Deal with Growing Crime of Identity Theft

Tax season might be over, but there could be big changes to it. Instead of waiting a few weeks for a refund, you could wait a few months. That’s one proposal being discussed on Capitol Hill as Congress debates how to fix a massive problem that’s hurting innocent taxpayers.

IRS identity theft is rampant, and already impacted 460,000 taxpayers, including Katie Angle. She did her taxes with TurboTax, but filed her taxes on paper to avoid any fees. Angle expected it might take longer since she didn’t file electronically. She waited two months, and still no refund. Finally, she called TurboTax.

“She said have you ever lived in Georgia? My heart sunk, and I said no I haven’t,” Angle explained.

Without the information from TurboTax, Angle wouldn’t know anything. Angle said the IRS never even contacted her about the compromised return.

“They’re treating me like the criminal instead of the victim,” Angle said.

When you’re a victim, it can take up to a year to get your money, even though the thief made out with money. Angle said she was told the alleged thief got off with more than six times more money than her typical refund. So, how does this happen without the IRS noticing the inflated refund?

The IRS told Congress in March it’s catching “some” of the fraud, but it simply can’t stop all identity theft. The agency is doing what it can with the current staffing and funding, which some note needs to be dramatically increased. As of early March, the IRS said 215,000 questionable returns were stopped. However, only one in seven of those taxpayers who had their return stopped could actually get through to the IRS. Those who did, waited on hold for over an hour.

One Congressional leader at the hearing called the hour wait “unconscionable.” Congressional representatives are the only ones who can really help victims. We contacted Congresswoman Betty Sutton’s office on behalf of Angle. Your representative can help get answers on your return that nobody else can due to privacy issues.

Angle doesn’t think enough is being done to help victims.

“It’s insane how many hours I spent on the phone, and I just get no answers,” Angle said. There are privacy issues, too, which are being worked out to share data with victims and law enforcement.

“It should be noted that the existing rules for protecting taxpayer privacy often make it difficult for us to provide easy access to information that may be useful for local law enforcement. We are, however, developing a procedure by which we will be able to share falsified returns with local law enforcement by way of obtaining a privacy waiver from the innocent taxpayer,” IRS Deputy Commissioner Steven Miller told a Congressional committee.

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There have been indictments for IRS related identity theft, but it’s a time consuming problem and many victims never seen someone prosecuted. In fiscal year 2011, the IRS Criminal Investigation team spent 225,000 hours looking into identity theft. This year, that is expected to double.

One solution discussed on Capitol Hill is to delay refunds until summer so the IRS can compare returns and more easily spot fraud.

“Such a shift would allow the IRS sufficient time to review every suspicious return. More importantly, the IRS would have at its disposal the full arsenal of information reporting databases- including complete data on wages and withholding, interest income, dividends, capital gains and partnership income - and could better detect and resolve discrepancies andquestionable returns,” said National Taxpayer Advocate NinaE. Olson.

The advocate noted such a change would be a big cultural shift and could financially hurt millions of taxpayers who depend on a refund soon after they file.

“Alternatively, if we prefer not to delay the processing of refunds for six months but still insist on greater fraud detection than the IRS is currently able to manage, then Congress would need to authorize significantly more funding for the IRS,” Olson said. “It is unrealistic to expect the IRS to keep up with its increasing workload without either allocating a corresponding increase in resources or extending the timeframe in which to conduct the necessary wage and withholding verification.”

It’s a delicate balance the IRS and Congress are trying to figure out. Identity theft is a complicated problem, and it’s unclear why so many taxpayers are becoming victims.

During testimony in congress it was noted that identity theft is now part of organized crime.

IRS Service to Taxpayers is Faulted

While IRS continues to improve its processing of tax returns and stresses the benefits of electronic filing, the agency’s performance is lacking when it comes to providing service over the telephone and responding to paper correspondence, a senior Government Accountability Office (GAO) official told the Senate Finance Committee on April 26. (GAO-12-652T)

“IRS officials attribute the lower performance to other funding priorities,” said James White, GAO’s director of strategic studies. Specifically, during the period of fiscal year (FY) 2007 through FY 2012 (planned), the percentage of callers seeking and receiving live assistance declined from 82.1% to 61%, the average wait time for callers increased from 4.4 to 18.8 minutes, and the percentage of paper correspondence not resolved within 45 days rose from 17% to 35% (in FY 2011).

“To improve the taxpayer experience and voluntary compliance, IRS has a range of options,” White said. Among White’s suggestions were the following: IRS can provide

more self-service tools to give taxpayers better access to information; better leveraging of third parties could provide taxpayers with other avenues to receive service; expanded information reporting could reduce taxpayer burden and improve accuracy; implementing modernized systems should provide faster refunds and account updates; expanding pre-refund compliance checks could result in more efficient error corrections; and reducing tax complexity could ease taxpayer burden and make it easier to comply.

IRS Deputy Commissioner Beth Tucker Testifies Before Senate Finance Committee on PTIN Applicants

The number of individuals who have registered for and obtained a Preparer Tax Identification Number (PTIN) has reached 840,000, according to Beth Tucker, IRS deputy commissioner for operations support, who testified before the Senate Finance Committee on April 26.

Registration for PTINs commenced in September of 2010. The agency has been “learning some interesting facts” about the size and the composition of the tax preparer community, she said. “For example, over 60% of PTIN holders are not attorneys, CPAs, or enrolled agents and, prior to this effort, were not required to demonstrate competency or meet any set of consistent standards,” Tucker said.

In addition to the registration, testing, and continuing education elements of IRS’s Return Preparer Program, the agency must also focus on identifying “unscrupulous preparers” who badly tarnish the entire system, she said. Consequently, IRS is “developing a comprehensive strategy to focus on preparer enforcement and compliance,” Tucker said.

“We will also continue to conduct undercover shopping visits to return preparers suspected of engaging in fraud, and we will continue to work closely with the Department of Justice to pursue civil or criminal action against unscrupulous return preparers,” she said. Tucker also discussed the budgetary constraints being faced by IRS.

The agency would have been unable to meet its level of budget reduction in place for fiscal year 2012 without “substantially reducing” its workforce, she said. There is an agency-wide hiring freeze and, as a result of various measures, IRS has some 5,000 fewer employees for the current filing season than it had last year. “Of the 5,000, approximately 3,000 were associated with enforcement activities, with the balance of the reduction principally coming from taxpayer service functions,”

IRS Releases 2013 Inflation Adjustment Figures for Health Savings Accounts

Rev Proc 2012-26, 2012-20 IRB

In a Revenue Procedure, IRS has provided the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2013 for health savings accounts (HSAs).

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Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers as well as other persons (e.g., family members) also may contribute on behalf of an eligible individual. Employer contributions generally are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from income. In general, a person is an “eligible individual” if he is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a high deductible plan, unless the other coverage is permitted insurance (e.g., for worker’s compensation, a specified disease or illness, or providing a fixed payment for hospitalization). General purpose health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) constitute “other coverage” that will generally preclude HSA eligibility. However, exceptions apply for, among other things, limited purpose FSAs and HRAs (those providing only certain benefits, e.g., dental and vision) and FSAs and HRAs imposing high annual deductibles.

HSA distributions not used to pay for qualifying medical expenses generally are included in income and subject to a 10% penalty tax.

2013. For calendar year 2013, the limitation on deductions under Code Sec. 223(b)(2)(A) for an individual with self-only coverage under a HDHP is $3,250 (up from $3,100 for 2012). For calendar year 2013, the limitation on deductions under Code Sec. 223(b)(2)(B) for an individual with family coverage under a HDHP is $6,450 (up from $6,250 for 2012).

For calendar year 2013, a HDHP is defined under Code Sec. 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,250 for self-only coverage (up from $1,200 for 2012) or $2,500 for family coverage (up from $2,400 for 2012), and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,250 for self-only coverage (up from $6,050 for 2012) or $12,500 for family coverage (up from $11,900 for 2012).

IRS Addresses Permissible Return and Return Information Disclosures in Identity Theft Cases

Program Manager Technical Advice 2012-05

In Program Managers Technical Advice (PMTA), IRS has addressed several issues relating to the disclosure of a “bad return” in connection with a prosecution by a state Identity Theft Task Force (ITTF).

Subject to exceptions, the government is generally prohibited from disclosing tax returns under Code Sec. 6103(a). These exceptions include, among others:

Disclosure of an individual’s return information to that individual, providing that doing so wouldn’t impair federal tax administration (Code Sec. 6103(e)(1)(A)(i), Code Sec. 6103(e)(7));

Disclosure to the appropriate Federal agency of certain return information (not taxpayer return information) which may constitute evidence of a federal non-tax crime (Code Sec. 6103(i)(3)(A));

Upon appropriate written request or upon IRS’s own referral, disclosure to the Justice Department, including U.S. attorneys, of certain returns and return information for use in Federal grand jury proceedings in tax administration matters (Code Sec. 6103(h)(2), Code Sec. 6103(h)(3));

Disclosure of returns and return information to persons designated by the taxpayer. (Code Sec. 6103(c))

A “bad return” filed by an identity thief isn’t considered a valid return because it is not filed by the true taxpayer or with his consent. Additionally, it lacks a valid signature and doesn’t reflect an honest and reasonable attempt to comply with Federal tax laws. The bad return and information reported on it does, however, constitute “return information” under Code Sec. 6103(b)(2)(A). In prior PMTA, IRS concluded that upon its receipt and through the point in time when the fraudulent filing is confirmed, the return information on the bad return was the information of the victim only, and it became the return information of the identity thief as well once IRS suspected and began to investigate the possibility of fraud. IRS now considers the return information, upon the filing and receipt by IRS of the bad return, to belong to both the victim and alleged thief.

Although Code Sec. 6103 doesn’t expressly address the situation in which one individual files a fraudulent return using the name and/or taxpayer identification number of another individual, the PMTA states that it is nonetheless possible to delineate the separate interests involved and to assign “ownership” to the various items of information associated with an identity theft based on existing principles.

The U.S. Attorney’s Office for the Southern District of Florida has created an Identity Theft Task Force (ITTF). The ITTF is comprised of federal agencies including the IRS, the U.S. Postal Service, Secret Service, and Immigration & Naturalization Service, as well as state and local law enforcement. The typical identity theft case is one in which fraudulent Form 1040 individual tax returns are prepared and filed using stolen identities of third parties. The person perpetrating the fraud loads prepaid access cards with the stolen refunds or cashes the fraudulent refund checks and then spends the fraudulently obtained proceeds.

ITTF intends to open a Title 18 grand jury investigation, in which the various federal agencies along with state and local law enforcement agents will participate. To prosecute an identity thief, it will often be necessary to introduce the “bad return” as evidence of the identity theft.

The PMTA reached the following conclusions regarding IRS’s disclosure of bad returns:

Provided that the disclosure doesn’t impair federal tax

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administration, an identity theft victim may obtain from IRS a copy of the bad return and other information associated with its filing under Code Sec. 6103(e)(1)(A)(i). However, the Code doesn’t provide any authority for disclosure of the thief’s return information (including his or her identity) to the victim.

Disclosure of the bad return to appropriate federal law enforcement agencies is authorized under Code Sec. 6103(i)(3)(A). That provision’s prohibition on the disclosure of taxpayer return information doesn’t apply because the bad return wasn’t filed by or on behalf of the victim. However, in making these disclosures, IRS cautioned that the delegated official disclose the bad return only after he has assured that the return is, in fact, fictitious.

State and local law enforcement agents who are appointed, but not detailed, to the Justice Department as part of title 26 and non-title 26 grand jury investigations may access return information under Code Sec. 6103(h)(2), Code Sec. 6103(i)(1), Code Sec. 6103(i)(2), and Code Sec. 6103(i)(3)(A), respectively. (“Appointed” agents who are assisting in a federal investigation and supervised by a federal employee are considered federal employees for Code Sec. 6103 purposes.) However, the PMTA cautioned against categorically relying on IRS’s “investigative disclosure” authority to justify sharing return and return information with state and local law enforcement personnel assigned to a federal grand jury investigation.

Under Code Sec. 6103(c), the identity theft victim can consent to the disclosure of the bad return information to state and local law enforcement personnel in connection with their law enforcement investigations related to identity theft. The victim can consent via Form 8821 or another type of general purpose consent document. (The PMTA notes that a consent tailored for this specific purpose is in the works.)

Thoughts from the Ragin Cajun

It is time to CELEBRATE! Congratulations to the ncpeFellowship for 2 years of great growth as a Fellowship of tax professionals who consider EDUCATION the first step in

providing excellent tax service to America’s taxpayers through “due diligence” in return preparation.

The dedicated people in the business of tax certainly have recognized that this is no longer Grandma’s Old Tax Business and have been the first to step up in this changing industry to alter the procedures in their tax practices to meet the changing needs of due diligence to ensure they are compliant with IRS practice and procure requirements of Circular 230, Federal Code of Regulations.

Without question, this has been difficult for many of us. Changing the office practices and procedures of many, many years is not easy. That is why I worked diligently with Beanna to establish the Tax Practice Office and Procedures Manual you will find on the Resources site of www.ncpeFellowship.com. Beanna even put the document in “word” so that you can customize it to your firm.

IRS wants to see how you, as a tax professional, conduct your practice and how you monitor your employees to ensure their compliance as well. Don’t wait until you are visited by IRS compliance officers. The Fellowship made it easy for you, but remember, once you have procedures in writing they bind you to conducting your practice under the procedures. It is not enough to have the procedure; you must demonstrate the procedure with actions.

Members of the Fellowship should look forward to more tools to help you run your practice in 2012 and future years.

Congratulations on 2 years and counting – To the Fellowship!

Jerry

Tax Pros in Trouble

Owner of NJ Payroll Firm Sentenced for Tax Evasion

Federal prosecutors in New Jersey say the owner of now-defunct payroll company has been sentenced to 27 months in prison for trying to evade almost $477,000 in tax payments.

Jerry Carter Jr. of Hillsborough also must serve three years of supervised release under the sentence imposed. He had pleaded guilty last December to a complaint charging him with attempted tax evasion.

Carter also agreed to pay $833,586 in back taxes and penalties.

The 33-year-old, who operated Hoboken-based First Priority Pay, admitted that he purposely failed to provide the IRS with true, correct, and complete information regarding his income for 2007-2009. During that time, he under-reported his income by more than $1.8 million, which resulted in a tax loss to the

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government of approximately $476,832.

Elizabeth Tax Preparer Found Guilty in Scheme Seeking $22 Million in Refunds

An Elizabeth tax-return preparer was found guilty in federal court of preparing more than fifty bogus tax returns for at least 20 clients, who claimed illegal refunds worth about $22 million, the U.S. Attorney’s Office in Denver said.

Curtis Morris, 43, and Richard Kellogg Armstrong, 77, of Prescott, Ariz., face decades in prison and millions of dollars in fines when they are sentenced on Aug. 10.

Armstrong, one of Morris’ clients who received more than $1.6 million from bogus tax returns, also served as a promoter and recruiter for the scheme, prosecutors said.

“Those who defy the tax laws by preparing or filing false and frivolous tax returns risk criminal prosecution resulting in conviction, substantial penalties and time in prison, as well as being required to pay their taxes, interest and penalties,” said Kathryn Keneally, assistant attorney general for the tax division .

Las Vegas Tax Preparer Pleads Guilty to Bilking IRS, U.S. Attorney Announces

A Las Vegas tax preparer pleaded guilty in federal court to preparing false and fraudulent returns for clients, the U.S. Attorney’s Office announced.

Rafael Aguirre, 45, was accused of causing a tax loss of more than $200,000 to the Internal Revenue Service. He plead guilty to one count of obstructing the administration of IRS laws, Daniel Bogden, U.S. attorney for Nevada, said in a statement.Aguirre’s sentencing is scheduled for Aug. 9, and he faces up to three years in prison and a $250,000 fine.

According to the plea memorandum, Aguirre and employees under his supervision at Aguirre Tax Services knowingly prepared fraudulent returns that overstated various deductions, allowing clients to receive tax refunds they were not entitled to Aguirre and his employees prepared about 65 fraudulent returns dating back as early as 2006, Bogden said.

Eighth Circuit Agrees that CPA Was Underpaid

The Eighth Circuit Court of Appeals held that a portion of the dividends paid by an S corporation to its CPA sole shareholder/employee was compensation. In upholding the decision by the District Court of Southern Iowa, the Eighth Circuit agreed that the salary to the sole shareholder/employee used to compute Federal Insurance Contributions Act (FICA) taxes was unrealistically low.

A corporate employer may deduct salary payments for income tax purposes, but it and the payee must pay FICA taxes on those amounts. However, unlike partners and LLC

members, S corporation shareholders do not pay FICA taxes on their distributive share of the business’s income. Courts have recharacterized corporate compensation payments as a dividend for income tax purposes when the amount was determined to be unreasonably high, and they have recharacterized corporate dividend payments as compensation for FICA tax purposes when the amount was determined to be unreasonably low

David Watson, a CPA, formed David E. Watson PC (DEWPC), an Iowa professional corporation electing to be taxed as an S corporation, in which he was the sole owner, shareholder, director, and employee. Under an employment agreement with DEWPC, Watson provided exclusive accounting expertise to an accounting firm in which he had formerly been a partner. In 2002 and 2003, DEWPC paid Watson a salary of $24,000 each year and distributed dividends to him of $203,651 in 2002 and $175,470 in 2003. In 2007, the IRS assessed FICA taxes, interest, and penalties against DEWPC, recharacterizing a portion of the dividends it had paid to Watson in 2002 and 2003 as compensation.

During the district court bench trial, DEWPC unsuccessfully argued that its intent to pay Watson a salary of $24,000 should control the characterization of the payments. The court held that the character of the payments should rather depend on whether they were remuneration for services performed, as determined by the economic realities of the situation. According to the court, intent was one factor to be considered; however, other factors must be considered as well, including the employee’s qualifications, the nature of his duties, and comparable compensation for similar duties by similar entities. The court accepted the $91,044 annual salary calculated by an IRS expert witness as reasonable, since Watson was an extremely qualified accountant, had about 20 years of experience, and worked 35–45 hours per week for a well-established firm as one of its primary revenue producers. The court concluded that DEWPC’s assertion it intended to pay Watson a salary of $24,000 per year was “less than credible.” DEWPC appealed the decision to the Eighth Circuit.

In its appeal, DEWPC argued that the district court decision had in essence established a minimum salary although no such statutory or regulatory requirement exists. The Eighth Circuit could find no error in the lower court’s use of the reasonable compensation standard for FICA tax purposes or in any other part of its analysis, including its reliance on the finding of the expert witness.

Preparers Accused of Tax Fraud

A Lubbock tax preparer pleaded not guilty to conspiracy and tax fraud charges after allegedly inflating some taxpayers’ income - and tax refunds - by creating fake dependents, employment and income.

San Juanita “Janie” Pena, who worked at Z & Z Bookkeeping and Tax Service, is accused of conspiring with her mother, Patricia Servin Zavala, to create more than $411,000 in undeserved income tax refunds by manipulating customers’

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income between 2008 and mid-2010.

A federal grand jury indicted Pena and Zavala April 11 on one count of conspiracy to commit tax fraud and 94 counts of tax fraud for incorrect returns they prepared between January 2008 and April 2010, using the Internal Revenue Service’s e-file process.

Both were arrested April 13.

Zavala, who was both office manager and a tax preparer, pleaded not guilty in Koenig’s court last week.

Both women have trial dates of June 4.

If convicted, Pena faces a maximum sentence of 287 years in prison, a maximum fine of $500,000 and three years of supervised release.

The scheme of which they are accused is detailed in the 21-page grand jury indictment:

■ Zavala and Pena, among others, would create false W-2and 1099 forms that claimed certain taxpayers worked forthree companies — Z & Z, Zavala Environmental Services orAll Quote Insurance — and received income either as wage-earners or as independent contractors.■ The tax preparers would encourage the taxpayers to takerefund anticipation loans. Z&Z could issue checks for thoseloans the next day.■ Zavala and Pena would quote a lower refund amount to thetaxpayer than the amount claimed when filed with the IRS.■ In some cases, taxpayers were given the refund anticipationloan check, told to cash it and bring a portion of the moneyback.■ In other cases, the checks would be generated andtaxpayers’ signatures forged. Those checks would be takento a pawn shop where the owner had authorized employeesto cash the checks without the taxpayer being present.■ Zavala and Pena cashed the checks, kept a portion of themoney and gave the rest to the taxpayers.

The indictment alleges the scheme led to 10 fraudulent tax returns filed in 2008, resulting in $22,446 in fraudulent refunds.

The following year, the conspirators filed 40 fraudulent returns and excess refunds totaling $167,810.

In 2010, the last year of the alleged scheme, the business processed 44 refunds with fake information and generated fraudulent refunds totaling $221,139.

Ironically, the owner of now-defunct All Quote Insurance pleaded guilty last month to one count of tax fraud.

Richard G. Salinas pleaded April 19 before U.S. District Judge Sam R. Cummings to filing a fraudulent tax return in 2009 for the 2008 tax year.

According to a plea agreement, Salinas used false wage

expenses to reduce his business’s reported net profit by $46,000.

According to the plea agreement, the fraud lowered his reported tax liability from $12,259 to $784.

Salinas faces up to three years in prison, a maximum fine of $250,000 and up to one year of supervised release.

Cummings has yet to set a sentencing date for Salinas.

Royal Palm Beach Man to Pay $570,000 for Filing False Tax Returns

A Royal Palm Beach man who once operated a tax return business pleaded guilty to filing a false return and preparing and filing a false return for a client, authorities said in a statement.

Gregory J. Salgado Jr., 39, agreed to pay $570,000 in restitution to the United States.

He was charged with filing income tax returns for himself and his clients in which he fraudulently claimed the First-Time Homebuyer Credit and other tax credits and deductions, a U.S. Attorney’s Office for the Southern District of Florida spokeswoman said in the statement.

In 2009, while operating a tax return preparation business, Salgado filed returns for clients while falsifying information to support a fake claim that they were entitled to claim credits and deductions.

According to court documents, between Jan. 14 and May 13, 2009, Salgado submitted more than 75 tax returns that included fictitious claims for the first-time homebuyer tax credit.

These claims resulted in a tax loss to the United States of more than $570,000, but less than $1 million.

Salgado faces up to three years in prison. He is scheduled to be sentenced on July 27.

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USDJ: Federal Court Shuts Down Texas Tax Return Preparer

A Federal court in Dallas has permanently barred Joseph Rivas of DeSoto, Texas, from preparing federal tax returns for others, the Justice Department announced. The civil injunction order, to which Rivas consented without admitting the allegations against him, was signed by Judge Sidney Fitzwater of the United States District Court for the Northern District of Texas.

The government complaint in the case alleged that Rivas claimed fake mortgage-interest deductions, illegally deducted Social Security taxes as state and local taxes, and fabricated employee business expenses, among other fraudulent items, on his customers’ tax returns. According to the complaint, the harm to the United States from Rivas’s misconduct could be $7.8 million or more.

The court also ordered Rivas to provide the government with a list of all persons for whom he has prepared federal tax returns since January 1, 2010.

The IRS lists return preparer fraud as one of the “Dirty Dozen” tax scams for 2012. In the past decade, the Justice Department’s Tax Division has obtained injunctions against hundreds of tax-return preparers and tax-fraud promoters. Information about these cases is available on the Justice Department website. Related Material: Rivas Injunction

Shiloh Tax Preparer Sentenced to 46 Months in Prison

An operator of a Shiloh tax preparation firm who submitted false tax returns for clients in exchange for kickbacks was sentenced to 46 months in prison and banned from preparing taxes.

Carey E. Herron, 39, of St. Peters, ran Prime Time Tax Services with Delaun M. Leflore, 38, of Belleville.

The men pleaded guilty in January to a charge of conspiracy to defraud the IRS and admitted falsifying information on IRS Schedule C forms, which report profit or loss from a business, to inflate tax refunds from 2009 through April 2011.

In exchange, company employees got kickbacks, generally $500, prosecutors said.

Prosecutors said that the IRS paid roughly $1.6 million in refunds to Prime Time clients who declared Schedule C income, but not all were fraudulent.

Herron was already sentenced. Leflore was also scheduled to be sentenced, but his hearing was postponed.

Conecuh Woman Gets Probation for Selling Social Security Numbers to Corrupt Tax Preparer

A federal judge sentenced a Conecuh County woman to probation for her role in what the Internal Revenue Service has called that biggest fraud case of its kind in Alabama history.

Linda Thomas, of Repton, admitted in November that she helped a Monroeville tax preparer obtain hundreds of Social Security numbers that ended up on fraudulent income tax returns.

Though advisory sentencing guidelines called for at least a year in prison for conspiracy to defraud the IRS, Federal Defender Carlos Williams and Assistant U.S. Attorney Greg Bordenkircher both agreed that Thomas should not face stiffer penalties than a pair of other defendants who participated in the scheme.

“I find that there really doesn’t seem to be any sense in giving you any sort of custody sentence,” said U.S. District Judge Ginny Granade, who imposed a 5-year probation sentence. According to the plea agreement, the owner of Preyear’s Tax and Check Cashing Services and other similar businesses, approached Thomas in January 2000 about using her Social Security numbers.

The plea document stated that business owner, Alice Mobley, initially paid Thomas and her mother $500 to use their Social Security numbers on tax returns. Mobley, who had locations in Monroe County and elsewhere, pleaded guilty in July and received a sentence of 6 years and 3 months in prison in March.

In January 2004, according to Thomas’ plea agreement, Mobley asked the defendant if she could get other Social Security numbers. Over the next six years, Thomas provided Mobley about 50 Social Security numbers a year. Mobley paid $500 for adult numbers and $600 for children’s numbers.

Thomas admitted that she would deliver money from Mobley to the people selling their personal information. Those people would pay Thomas about $10 to $20 per person, according to the plea agreement.

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When federal agents raided Mobley’s home and offices, they found that she had 942 copies of Social Security cards, drivers licenses, Medicaid cards and other “personal identifiers,” according to court records. Those included handwritten sheets with names, dates of birth and Social Security numbers.

Mobley had information on 620 people and complete identification on 536 people, according to court records.

Mobley used the Social Security numbers to add fictitious dependents to the tax returns of hundreds of clients in order to claim larger refunds. Some of those people were aware of the undeserved refunds and willingly paid Mobley about $900 each, according to court records.

Granade last month sentenced 2 of Mobley’s employees, Fretizell Locke-Wiggins and Latana Locke, to 3 years of probation.

Three Charged in Stealing Identities and Money from Inmates

Three people have been charged with stealing personal information from prison inmates then using it to claim more than $70,000 worth of illegal tax refunds from the Pennsylvania Treasury. State Attorney General Linda Kelly called the scam an intricate scheme.

According to arrest documents, popular tax preparation software was used to create the fraudulent tax returns. One of the defendants runs Indigent Inmate, an Atlanta-based group for inmates in financial need and a possible source for inmate personal information.

The defendants were identified as 36-year-old Dion Lee McBride of Pittsburgh and 36-year-old Qadir Abdul Shabazz and 30-year-old Leslie Julian Shabazz, both of East Point, Georgia. They face charges including conspiracy, money laundering and identity theft.

Extradition hearings have been scheduled to facilitate extradition for the two from Georgia to Pennsylvania for prosecution.

The defendants allegedly used the names and social security numbers of approximately 185 prison inmates from Pennsylvania and six other states.

The majority of the tax refunds were electronically deposited into bank or debit card accounts, such as this one, opened by the defendants, using the same stolen personal information and fake addresses which were used to create the tax returns. Video show the defendants using ATM machines in the Pittsburgh area to make numerous withdraws from the accounts shortly after refunds were deposited.

The Attorney General says the defendants took elaborate steps to hide their scheme. She calls the investigation “active an ongoing.”

Federal Authorities have Charged a New Jersey Man with Using the Identification of a Deceased Tax Preparer to Fill Out Fraudulent Tax Returns

New Jersey’s U.S. Attorney announced that 46-year-old Todd P. Halpern of Livingston faces tax fraud and identity theftcharges.

Prosecutors say Halpern prepared and electronically filed 657 fraudulent federal income tax returns from 2009 through 2010. He allegedly used the identification number of a dead tax return preparer from A & V Financial of Guttenberg, a business that Halpern purchased in 2008.

Halpern’s also accused of using stolen taxpayer identities to receive tax refunds directly into his personal bank account.

Prosecutors say Halpern’s prior criminal record prevented him from obtaining his own tax preparer ID.

Kickback Scheme Lands Metro-east Tax Preparer in Federal Prison

A federal judge sentenced a Metro-east tax preparer to almost four years in prison for his part in a tax fraud kickback scheme.

Carey E. Herron, of 39, of St. Peters, Mo., received 46 months in prison and was banned from being a tax preparer by Judge William D. Stiehl in connection with a conviction for conspiracy to defraud the IRS by submitting false tax returns for tax refunds, according to the United States Attorney’s office.

From 2009 to April 2011, Herron and Delaun M. LeFlore, of Belleville, engaged in the scheme while operating Prime Time Tax Services in Shiloh and East St. Louis. They helped clients receive inflated federal tax refunds by providing false Schedule C self-employment information, court documents state. In return, clients paid an extra fee, usually $500, to a Prime Time employee who would escort clients to a check cashing business after they received their refund.

Tax Advocacy & Tax ProfessionalsIRS Veteran On Innocent Spouse Cases

“If, taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either); the Secretary may relieve such individual of such liability.”

And so, in the case of Tomi Baumann , the Secretary, in an exercise of discretion, relieved Tomi of a portion of the liability resulting from a joint return she filed with Stanley for 1998. The legal standard for reviewing such determinations is “whether the Secretary abused his discretion”.

Tomi didn’t think there was an abuse of discretion and accepted

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the Secretary’s determination.

Stanley may not have personally disputed the Secretary’s determination, but he appears to have had a tax lawyer that didn’t mind pressing the case to trial; for reasons not disclosed. And so it went to trial and, quite predictably, the Secretary’s deal with Tomi was upheld and Frederick J. O’Laughlin, Stanley’s tax lawyer, chocked up another loss for his resume.

Stanley had his vices and personal problems and did not live long after the trial, dying in his sleep at age 47 when his heart gave out in 2007. His obituary noted, in part:

“Stanley loved to play the ponies at Remington Park.”

That’s really where the innocent spouse story begins.

Prior to 1998, the tax year before the Tax Court, Stanley had hit it big betting on the ponies. He and Tomi enjoyed the windfall and paid the taxes on the winnings.

Somewhere along the line, Stanley came up with the idea that the provision that limits gambling losses to gambling winnings was not to be applied on a year to year basis and was not limited to applying gambling losses against gambling gains. So, in years subsequent to the big win, the joint returns of Stanley and Tomi used Stanley’s “love for the ponies” to offset Stanley’s other business income.

A deficiency notice was issued as to the 1998 tax year, Frederick J. O’Laughlin was called in, and the jurisdiction of the Tax Court was invoked in seeking a redetermination.

The original trial was set for February of 2002 but was continued. That continuation, it would be later determined, resulted from a certain domestic disturbance involving Stanley and Tomi, after which Stanley was involuntarily committed to Griffin Memorial Hospital for observation. Other reported incidents involved Stanley’s alleged physical assaults on Tomi and threats against her and the children, including one arson charge to which Stanley pleaded guilty.

A divorce followed and Frederick J. O’Laughlin was removed as counsel as to Tomi due to the conflict of interest.

The Government filed a motion for summary judgment and was granted summary judgment as to the deficiency. It’s not clear how the Court ultimately disposed of the accuracy related penalty.

Tomi filed for innocent spouse relief. She did NOT mention the abuse issues in her application for innocent spouse relief.

The District Director considered Tomi’s request and, taking into account the information available, denied relief because Tomi was aware of the issue giving rise to the deficiency (e.g., the gambling) and ignorance of the tax ramifications of such was not considered a basis upon which to grant relief. Other factors that might have otherwise supported relief were insufficient to overcome the knowledge issue. Based on the

information available to the District Director at that time, the decision to deny relief cannot be said to have been in error.

Trial before the Tax Court was rescheduled to January of 2004.

As is the custom, since the Appeals Office had not previously considered the case, the District Counsel office handling the litigation referred the case to the Appeals Office. An Appeals Officer met with Tomi in December of 2003. During that meeting, the abuse issues were discovered and later independently verified. When added to the mix of other issues, the Appeals Officer determined that a compromise settlement would be appropriate in order to reflect the merits of the innocent spouse claim and the hazards of litigation.

In effect, Tomi’s liability would be limited to the amount of her separate 2002 tax year refund of $2,020.00 which the Secretary was holding pending the outcome of the innocent spouse dispute.

Tomi agreed.

Frederick J. O’Laughlin, Stanley’s tax lawyer, would not concede the issue and the case proceeded to trial. Stanley did not testify in order to dispute of the settlement of the innocent spouse issue that Tomi had reached with the Secretary. Had Stanley testified and been cross-examined, the Secretary or the Tax Court just might have modified the settlement with Tomi to allow full relief instead of partial relief.

Frederick J. O’Laughlin was unimpressive in his attempts to argue the Secretary abused his discretion, particularly when one considers that he had no witness to testify. Mr. O’Laughlin could not convince the Tax Court with his legal shenanigans that the Secretary had abused his discretion in the settlement reached with Tomi.

As with any substantive changes in the law, it sometimes takes years for the details to work out as to the administration of the law. That was the case with the revisions to innocent spouse law made in the 1990s. As indicated in a Forbes’ column earlier this year on the subject, by Stephen J. Dunn, that process is continuing (e.g., the IRS is softening up on what it proposes to be the rules).

Mr. Dunn concludes with:

I have clients who have litigated in U.S. Tax Court under the old rules and lost who will apply for innocent spouse relief under the new rules.

Tomi Baumann didn’t have to wait.

She managed, in time and circumstance, to work with an IRS Appeals Officer who was, perhaps, a visionary regarding tax administration and was able to craft an appropriate settlement without the quibbling and legal hair-splitting reflected in the continuing evolution of the issue.

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Congress and the President mandated equitable treatment within the ambiguous discretionary limits implied by the statute.

Tomi Baumann was a beneficiary of that mandate!

Supreme Court Rules Couple Must Pay Taxes on Sale of Bankrupt Farm

The Supreme Court has handed down a decision in favor of the Internal Revenue Service collecting capital gains taxes from a couple who sold their family farm during bankruptcy.

Sonia Sotomayor

In a 5-4 decision, the high court found that Lynwood and Brenda Hall owed capital gains taxes of $26,000 on the $960,000 sale of their 320-acre farm in Willcox, Arizona, which they were forced to sell during Chapter 12 bankruptcy proceedings.

The Halls proposed a plan under which they would pay off their outstanding liabilities with proceeds from the sale. The IRS objected, however, asserting they owed capital gains taxes from the sale. The Halls then proposed treating the tax as an unsecured claim to be paid to the extent that the funds were available, with the unpaid balance being discharged.

The Bankruptcy Court sustained an IRS objection, the District Court reversed that ruling, and the Ninth Circuit then reversed the District Court. The Ninth Circuit Court of Appeals in San Francisco held that because a Chapter 12 estate is not a separate taxable entity under the Tax Code, it does not “incur” post-petition federal income taxes. The Ninth Circuit concluded that because the tax was not “incurred by the estate,” it was not a priority claim eligible for the exception.

Chapter 12 of the Bankruptcy Code allows farmer debtors with regular annual income to adjust their debts subject to a reorganization plan. The plan must provide for full payment of priority claims. However, certain governmental claims arising from the disposition of farm assets are stripped of priority status and downgraded to general, unsecured claims that are dischargeable after less than a full payment.

The Supreme Court agreed with the appeals court and ruled in favor of the IRS. In the ruling, written by Justice Sonia Sotomayor, the high court noted that the federal income tax liability resulting from the Halls’ post-petition farm sale is not

“incurred by the estate” under the Bankruptcy Code and “thus is neither collectible nor dischargeable in the Chapter 12 plan.”

“The phrase ‘incurred by the estate’ bears a plain and natural reading,” wrote Sotomayor. “A tax ‘incurred by the estate’ is a tax for which the estate itself is liable. Only certain estates are liable for federal income taxes.”

“None of the contrary arguments by petitioners and the dissent overcomes the statute’s plain language, context, and structure,” she added. “There is no textual basis for giving ‘incurred by the estate’ a temporal meaning, such that it refers to all taxes ‘incurred post-petition.’”

She noted that the Halls contend that the purpose of the statute is to provide debtors with robust relief from tax debts. “There may be compelling policy reasons for treating post-petition income tax liabilities as dischargeable,” she wrote. “But if Congress intended petitioners’ result, it did not so provide in the statute.”

Wayne’s World

The Education Season

It seems that just yesterday I finished the last Form 1040, electronically filed it and received confirmation of receipt by the Internal Revenue Service. And yes, I quickly gave a sigh of relief having thought many times during the filing season, “Will this ever end?”

Beanna has communicated with me regularly about questions coming into the Fellowship about various tax issues. I remember one distinct question and Beanna said, “Where does this stuff come from?” I think we all had a season much like that.

There is no substitute for education! It is where our requirement for due diligence begins. To be in the business of tax today, we must be the best educated in the business, know the business and be on the cutting edge of technology.

Ncpe is ready to go on the Aging America Seminar in the early part of the summer and shortly after that will be coming to

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Tax Quotes & Funnies

We have long had death and taxes as the two standards of inevitability. But there are those who believe that death is the preferable of the two. “At least,” as one man said, “there’s one advantage about death; it doesn’t get worse every time Congress meets.”

Erwin N. Griswold

Income tax returns are the most imaginative fiction being written today.

Herman Wouk

Capital punishment: The income tax. Jeff Hayes

If the Lord loveth a cheerful giver, how he must hate the taxpayer!

John Andrew Holmes

Of course the truth is that the congresspersons are too busy raising campaign money to read the laws they pass. The laws are written by staff tax nerds who can put pretty much any wording they want in there. I bet that if you actually read the entire vastness of the U.S. Tax Code, you’d find at least one sex scene (“’Yes, yes, YES!’ moaned Vanessa as Lance, his taut body moist with moisture, again and again depreciated her adjusted gross rate of annualized fiscal debenture”).

Dave Barry

a presentation venue near you to present on Corporations, Partnerships and LLCs.

For you or your staff that need to take the Registered Tax Return Preparer examination before December 31, 2013, ncpe recommends ExamMatrix as a self-study tool. You can easily find contact information on the Sponsors link at www.ncpefellowship.com. Tell them ncpe sent you to them and they will give you the best price for the highly-successful course.

Beanna, who took the exam just to experience it – always knew she was not quite right in the head, says it is not a slam dunk and it had its challenges. She does recommend taking it now rather than wait as you are most familiar with the tax law on the test just coming out of tax season

Like Jerry, I want to congratulate the Fellowship on its 2-year anniversary. You have exceeded our expectations and we are excited about continued growth and service to the tax professional community. Wear your ncpe Fellowship pins to class and bring in new members in order that we continue to improve our service to you.

Wayne

Sponsor of the Month

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Now is the time to evaluate the performance of your tax software. Did your software provide you the support to service your clients? Did your software provider back up the product with quality and timely technical assistance? Has your soft ware priced itself out of the market and you along with it? TaxWorks will send you a disc of the 2011 Filing program to test its success at preparing your extended returns.

Make the decision today to have tax soft ware that meets your needs and call Mike Hinckley at TaxWorks. Tell them Jerry, Wayne, John and Beanna sent you.

Next Edition of Taxing Times: July 1st, 2012