The IRS And Big Data.

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With another tax filing and estimated tax payment deadline coming up, you may have spent the last few days thinking hard about your taxes, but the IRS has been doing so for years – positioning itself as a leader in using Big Data.

Each year, April 15th is a memorable date for those of us in the United States – this is the deadline to file our taxes or to file an extension to delay filing a tax return to October 15th.

It is clear that the IRS is the dominant government agency in the United States. After all if there are no taxes, there can be no government. Politicians know this and over the decades have ensured that the IRS has all the powers it needs to raise federal taxes from the citizens, residents, and even tourists who stay long enough in the United States.

U.S. citizens cannot even escape U.S taxation by leaving the country because the tax law requires U.S. citizens who currently earn more than $9,750 to file even if they don’t live in the country. Even if you renounce your citizenship, as 3,805 did in 2011, you still have to pay an exit tax of 15% on all your assets including investments, homes, and even your personal possessions.

Extensive data collection

To keep track of this, the IRS has one of the most extensive data collections in the world. Traditionally its power to enforce has come through the matching of data. For example, you received a W-2 Form from your employer showing how much you earned. That same form is submitted by your employer to the IRS. Now the IRS can match your return to that form to make sure you are reporting the income. The same thing goes for 1099 forms showing your earnings from miscellaneous income, gambling winnings, interest and dividend income, sales of assets, deductions, and so on.

But the IRS is not stopping here. The IRS has signed a $650 million ten-year contract with Unisys to further develop Big Transaction Processing Data whereby the IRS is using Unisys ClearPath Dorado Servers running at an estimated 1,200 MIPS to process tax returns.

For those of you who are not techies, “MIPS” is a measure of a computer’s central processing unit performance and its stands for “Million Instructions Per Second”. These servers will reside selected IRS Data Centers alongside several IBM z/196 mainframes, capable of running at an estimated 8,000 MIPS. Along with all this processing power are extensive data storage capabilities which will be managed in the IRS’ private cloud. It is estimated that IRS has 7.5 Petabytes of data. By the way just one Petabyte is equivalent to 1 quadrillion bytes.

Data from social media

But the IRS is not just stopping with Big Data Transactions, the IRS is now pursuing Big Data Social Media Analytics just like Google.

But unlike the normal corporate big data analytics, the IRS has one big advantage: It knows everyone’s social security numbers, as well as all the tax information from the firms we as taxpayers interact with, and as such the IRS can join the dots between Google, EBay, LinkedIn, Facebook, Yelp, Twitter, and perhaps your PayPal and credit card accounts along with your emails to overseas bankers.

The IRS has access to every social media posting going back to 2008 so deleting your posts does not make them go away.  The IRS has bragged that their computer can make DNA blueprint of each of our behaviors. Amazingly, the IRS’ supercomputer can read all 200 million e-Filed returns in just ten hours!

All this will allow the IRS to refine its algorithms to more effectively identity those taxpayers to be selected for audit or investigation.

So while none of us enjoys doing or paying our taxes we as taxpayers can be comforted by knowing that the government is at the forefront of the big data revolution. And despite the use of these new technology skills to make the government itself more efficient, there are still two certain things in life – death and taxes!

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California defend you from the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and minimize the chance of any criminal investigation or imposition of civil penalties.

How The IRS Selects Returns For Examination.

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I must say that the overwhelming majority of taxpayers file returns and make tax payments timely and accurately. As such taxpayers have a right to expect fair and efficient tax administration from the IRS, including verification that taxes are correctly reported and paid with enforcement actions against those who fail to comply voluntarily.

Four Ways That Returns Are Selected for Examination

1. Potential participants in abusive tax avoidance transactions — Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. Examples include information received from “John Doe” summonses issued to foreign and domestic banks, credit card companies, businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.

2. Computer Scoring — Some returns are selected for examination on the basis of computer scoring.  Computer programs give each return numeric “scores”. The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.

3. Information Matching — Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return.

4. Related Examinations — Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination.

How Does One Find Out If The IRS Does Select Your Tax Return For Examination?

This is where one must be careful because there are scammers out there who are calling people saying they are the IRS and threatening them with arrest and deportation unless they pay right away. If you are selected for an audit by the IRS, the initial contact will always be in the form of a letter sent by the assigned agent under official IRS letterhead.

Look for the following in the IRS Notice:

First, it will give you the contact information of the agent and what IRS office the agent reports to.

Second, it will tell you how the examination is to be conducted – this can be by mail, or through an in-person interview and review of the taxpayer’s records at the agent’s office or outside the agent’s office such as the taxpayer’s business.

Third, it will tell you which years are being audited and what records will be needed. Taxpayers may act on their own behalf or have a tax professional represent or accompany them. 

And that is where we come in. We highly recommend that you do not go into the IRS on your own. Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California defend you from the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and minimize the chance of any criminal investigation or imposition of civil penalties.

How The IRS Is Matching Big Data To Your Tax Return And Selecting You For Audit.

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According to IRS estimates, in a calendar year employers, businesses, financial institutions, credit card companies and other third party payers will file 2.3 billion information statements. These information statements report income and financial transactions, and can help individuals and businesses prepare accurate tax returns. Using information-matching programs, the IRS compares third-party information statements with taxpayer data, and sends a notice to taxpayers when IRS systems detect inconsistencies.

Here are some of the programs IRS has in place to help select tax returns for audit:

Individual Automated Underreporter (AUR) program

This matching program is better known by its primary notice: CP2000, Notice of Proposed Adjustment for Underpayment/Overpayment. IRS systems automatically send this notice when items reported on Form 1040, U.S. Individual Income Tax Return, don’t match information reported to the IRS by employers and other payers. The first round of these notices arrives just after Thanksgiving, and the second round arrives toward the end of the next year’s filing season.

The CP2000 notice has been a mainstay of IRS information reporting for decades. In 2012, the IRS issued more than 4.5 million CP2000 notices, with an average of $1,572 in additional taxes owed.

Form 1099-K merchant card transaction matching program

In 2012, the IRS started receiving from credit card companies, Forms 1099-K, Payment Card and Third Party Network Transactions. With merchant card transactions now being reported to IRS, the IRS quickly began using this information to match against business returns. However, because businesses do not specifically report merchant card transactions as separate line items on business tax returns, the IRS can only infer potential underreporting. For example, if a business has a disproportionate amount of cash to credit/debit card sales, based on its line of business, the IRS may look closer. These kinds of mismatches have led the IRS to develop compliance initiatives, including “soft” notices requesting explanation and mail audits requesting documentation.

The IRS is developing a Form 1099-K matching initiative that will make the IRS more efficient in identifying problem tax returns. But for now many initial notices indicate that the IRS is focusing on underreporting cases in which merchant card payments appear to make up the majority or even exceed the total business receipts reported on the return. In these cases, the IRS perceives that the business is underreporting cash sales due to the disproportionate share of merchant card payments. Accrual-basis taxpayers and e-commerce businesses whose receipts do not neatly match merchant card transactions are likely early targets in this program and we have had our share of this cases where that is what happened.

Automated Substitute for Return program

When a taxpayer does not file and the IRS has information statements indicating a filing requirement, the IRS uses the data to file a return on behalf of the taxpayer if there is a projected balance owed. In 2012, the IRS used information statements to file 803,000 returns for taxpayers, totaling $6.7 billion in additional taxes owed. And the sad thing about this is in just about every case, the amount actually owed when a tax return is filed by the taxpayer is much lower than what the IRS says a non-filer taxpayer owes. We even had cases where the IRS ended up owing our clients money.

Where in the future is the IRS going with their use of Big Data?

The IRS has been getting a lot of help from Congress where Congress has expanded the IRS’ reach to access more information to enforce compliance and implement new legislation.

1. Foreign Account Tax Compliance Act (“FATCA”)

This legislation became law in 2010. Starting in 2014, the IRS will have the ability to match taxpayers’ returns against the information it receives on U.S. taxpayers with accounts at foreign financial institutions. The IRS will likely scrutinize taxpayers who have not filed the required Form 8938, Statement of Specified Foreign Financial Assets, or FinCEN Form 114, Report Of Foreign Bank Account (commonly known as “FBAR”). Our office has a lot of cases representing taxpayers with undisclosed foreign bank accounts – it is a hot issue with IRS.

2. Patient Protection and Affordable Care Act (“Obama Care”)

As this Act is implemented in the next several years, the IRS will start using information statements for individual and employer compliance with the Act’s mandates. Starting in 2012, employers reported the value of employer-provided health insurance on Forms W-2, Wage and Tax Statement, to inform taxpayers of the value of their health insurance coverage. In 2015, the IRS will also receive information from health insurance companies on employee coverage, including the name and identifying information of the employer. The IRS can use the information to identify and penalize individuals and employers for noncompliance with Obama Care mandates.

The Stakes Are High!

A recent U.S. Government Accountability Office study showed that the IRS spends $267 million on underreporter matching programs, compared with the $4.2 billion it spends on audits. But automated information-matching programs return almost six times more revenue than audits. You can see why with fewer IRS agents and reduced budgets, the IRS will increasingly rely on technology-driven matching programs to bring in more tax dollars.

So if you receive one of these audit notices it is important that you don’t ignore it. Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California defend you from the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and minimize the chance of any criminal investigation or imposition of civil penalties.

Beware Of The Dark Side – Protecting Yourself From The IRS

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A Gallup Poll released in April 2014 found that two-thirds of Americans believe that the Internal Revenue Service abuses its power. Yet few people realize exactly how much arbitrary power the IRS has through the Courts and the Laws of the United States.

Remember that the IRS like any government agency has a purpose to enforce the laws and like other government agencies the IRS will use all means available to achieve this purpose. For one thing the IRS will conduct undercover operations sometimes even masquerade as professionals to entice other citizens to violate tax laws.

The most common and for many people most cartographic use of power by the IRS is levying bank accounts, paychecks and other sources of income. Unlike a typical creditor, the IRS is able to do this without having to hire an attorney and for the most part does not even require a person to initiate this action. Instead it is the IRS computers that scour taxpayers’ accounts and when seeing that there is an outstanding balance sending out those dreaded Notices of Levy. What is even more tragic is that many times the amount that the IRS is seeking to collect is more than what the taxpayer should actually owe.

Take, for example, the case of Melvin Powers. In 1983 the IRS decided to investigate Mr. Powers’ 1978 and 1979 tax returns. Mr. Powers was a Houston builder and owner of five office buildings; he had only an eighth-grade education. The IRS had made no effort to examine Mr. Powers’ tax returns during the three years of the statute of limitations. Six weeks before the statute was to expire, an IRS agent asked Mr. Powers to sign a waiver of his statute of limitations, allowing the IRS to investigate him for another three years. Mr. Powers willingly agreed. In 1986, the IRS disallowed almost all of Mr. Powers’ business deductions for 1978 and 1979 and demanded $7,145,266.71 in back taxes, interest and penalties.

Shortly after the IRS’s assessment, a bankruptcy court trustee seized all of Mr. Powers’ operations, caused Mr. Powers to vacate his office premises, and took possession of his books and records for all years. Then, in early 1991, the IRS reversed itself and conceded that Mr. Powers actually had legitimate losses for the years under scrutiny and thus owed no taxes for those years. After IRS officials canceled the $7 million tax bill, Mr. Powers successfully sued the IRS to cover his legal costs for the case but it was already way too late as the IRS had devastated his life.

Another amazing position that the IRS maintains is that the IRS is entitled to impose penalties or seize property for overdue taxes even after the agency admits sending tax deficiency notices to the wrong address.

Take for example the case of Clayton and Darlene Powell. In late 1987 the Powell’s moved from Adelphi, MD, to Mitchellville, MD, and filed a tax return with their new address in early 1988. A few weeks after the IRS received the Powell’s’ new address, the agency sent a notice of deficiency for their 1984 tax return to their old address. The local post office — though it had the forwarding address — returned the notice to the IRS. Though the three-year statute of limitations had expired on the Powell’s 1984 return, on Dec. 28, 1988, the IRS sent a tax bill to their new address giving the couple 10 days to pay $6,864 in back taxes, interest and penalties or have their property seized. The Powell’s paid and then sued the IRS to get a refund.

The Federal Appeals Court ruled that “the Powell’s are entirely innocent” and ordered the IRS to issue a refund. The IRS then appealed the decision to the Supreme Court, contending that as long as the IRS mailed a tax deficiency notice to a taxpayer’s “last known address”, the taxpayer must be presumed to have received the notice — even when it is indisputable that he did not receive it.

The Justice Department, in its brief on this case, noted that the IRS “issues more than 2 million notices of deficiency each year and approximately 240,000 of those notices were returned undelivered during the past year.” The Justice Department whined that requiring the IRS to actually notify citizens of tax assessments before final seizure notices would impose “unmanageable detective burdens” on the IRS. The government went on to say that “This case threatens to create a ‘window of time’ during which the Internal Revenue Service may be helpless to protect its rights in pursuing delinquent taxpayers”.

The Supreme Court denied the government’s request to re-examine the Powell case. Yet even though the IRS lost in Federal Appeals Court on this issue and paid back the Powell’s, the agency has formally chosen to disregard that court’s verdict — to follow a policy of “nonacquiescence,” in legal terms. The IRS believes the court made a mistake and thus that the agency has no obligation to respect its decision.

So what is one to do when it is the IRS’ perspective that the citizen has an unlimited obligation to comply with its demands — even when the IRS fails to inform the citizen of its demands? You need to hire an experienced and local tax attorney who is accountable to you and will act in your best interest to defend you from the IRS and get an acceptable resolution. Having experienced tax counsel will level the playing field and take the IRS out of the driver’s seat.

Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

What Is The Difference Between Tax Fraud And A Simple Mistake?

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In most tax audits the IRS is only interested in collecting the taxes owed, plus interest along with a few penalties. Perhaps the IRS might impose a negligence penalty or a late filing penalty. However, if during the tax audit the IRS suspects that you have committed tax fraud they can impose a civil tax fraud penalty. The civil tax fraud penalty is equal to 75% of the tax owed, plus interest on the penalty. Worse yet the IRS tax auditor might ask the tax fraud referral specialist to look at your case to see if it should be sent to the IRS Criminal Investigation Division (CID) for criminal tax prosecution.

 

Tax crimes include filing a false tax return, tax evasion, filing false documents, failure to collect employment taxes, failure to pay taxes, and failing to file a tax return. The penalties for criminal tax fraud are very serious. They range up to 5 years in jail, plus fines of up to $500,000, plus the costs of prosecution for each separate tax crime. Once the criminal tax case is completed CID will refer the case back to the IRS Examination Division where the taxes will be assessed, and the IRS can be expected to add on the civil tax fraud penalty, on top of any criminal tax fraud fines.

 

Generally tax fraud or tax evasion involves an intentional wrongdoing. Mere carelessness is not tax fraud. “Badges Of Fraud” commonly used by taxpayers to deceive or defraud the IRS include the following:

Badges of Fraud – Income

  • Omissions of specific items where similar items are included.
  • Omissions of entire sources of income.
  • Unexplained failure to report substantial amounts of income determined to
    have been received.
  • Substantial unexplained increases in net worth, especially over a period
    of years.
  • Substantial excess of personal expenditures over available resources.
  • Bank deposits from unexplained sources substantially exceeding reported
    income.
  • Concealment of bank accounts, brokerage accounts, and other property.
  • Inadequate explanation for dealing in large sums of currency or the
    unexplained expenditure of currency.
  • Consistent concealment of unexplained currency, especially in a business
    not calling for large amounts of cash.
  • Failure to deposit receipts to business account, contrary to normal
    practices.
  • Failure to file a return, especially for a period of several years
    although substantial amounts of taxable income were received.
  • Covering up sources of receipts by false description of source of
    disclosed income and/or nontaxable receipts.
  • Substantial overstatement of deductions.
  • Substantial amounts of personal expenditure deducted as business expenses.
  • Claiming fictitious deductions.
  • Dependency exemption claimed for non-existent, deceased, or
    self-supporting persons.
  • Loans of trust funds disguised as purchases or deductions.
  • Keeping two sets of books or no books.
  • False entries or alterations made on the books and records; backdated or
    postdated documents; false invoices, applications, or statements, other false
    documents, or applications.
  • Failure to keep adequate records, concealment of records, or refusal to
    make certain records available.
  • Variances between treatments of questionable items on the return as
    compared with books.
  • Intentional under or over footing of columns in journal or ledger.
  • Amounts on return not in agreement with amounts in books.
  • Amounts posted to ledger accounts not in agreement with source books or
    records.
  • Journalizing of questionable items out of correct amount.
  • False receipts to donors by exempt organizations.
  • Distribution of profits to fictitious partners.
  • Inclusion of income or deductions in the return of a related taxpayer,
    when difference in tax rates is a factor.
  • False statement, especially if made under oath, about a material fact
    involved in the examination.
  • Attempts to hinder the examination. For example, failure to answer
    pertinent questions, repeated cancellations of appointments, or refusal to
    provide records.
  • The taxpayer’s knowledge of taxes and business practice where numerous
    questionable items appear on the returns.
  • Testimony of employees concerning irregular business practices by the
    taxpayer.
  • Destruction of books and records, especially if just after examination was
    started.
  • Transfer of assets for purposes of concealment or diversion of funds
    and/or assets by officials or trustees.
  • Patterns of consistent failure over several years to report income fully.
  • Proof the return was incorrect to such an extent and in respect to items
    of such character and magnitude as to compel the conclusion the falsity was
    known and deliberate.
  • Payment of improper expenses by or for officials or trustees.
  • Willful and intentional failure to execute plan amendments.
  • Backdating of applications and related documents.
  • Making false statements on EP/EO determination letter applications.
  • Use of false social security numbers.
  • Submission of false Form W-4.
  • Submitting a false affidavit.
  • Attempts to bribe the examiner.
  • Inadequacy of consideration.
  • Insolvency of transferor.
  • Assets placed in other names.
  • Transfer of all or nearly all of debtors’ property.
  • Close relationship between parties to the transfer.
  • Transfer made in anticipation of a tax assessment or while the
    investigation of a deficiency is pending.
  • Reservation of any interest in the property transferred.
  • Transaction not in the usual course of business.
  • Retention of possession.
  • Transactions surrounded by secrecy.
  • False entries in books of transferor or transferee.
  • Unusual disposition of the consideration received for the property.
  • Use of secret bank accounts for income.
  • Deposits into bank accounts under nominee names.
  • Conduct of business transactions in false names.

 Badges of Fraud – Expenses or Deductions

  • Substantial overstatement of deductions.
  • Substantial amounts of personal expenditure deducted as business expenses.
  • Claiming fictitious deductions.
  • Dependency exemption claimed for non-existent, deceased, or
    self-supporting persons.
  • Loans of trust funds disguised as purchases or deductions.

 Badges of Fraud – Books and Records

  • Keeping two sets of books or no books.
  • False entries or alterations made on the books and records; backdated or
    postdated documents; false invoices, applications, or statements, other false
    documents, or applications.
  • Failure to keep adequate records, concealment of records, or refusal to
    make certain records available.
  • Variances between treatments of questionable items on the return as
    compared with books.
  • Intentional under or over footing of columns in journal or ledger.
  • Amounts on return not in agreement with amounts in books.
  • Amounts posted to ledger accounts not in agreement with source books or
    records.
  • Journalizing of questionable items out of correct amount.
  • False receipts to donors by exempt organizations.

Badges of Fraud – Allocations of Income

  • Distribution of profits to fictitious partners.
  • Inclusion of income or deductions in the return of a related taxpayer,
    when difference in tax rates is a factor.

Badges of Fraud – Conduct of Taxpayer

  • False statement, especially if made under oath, about a material fact
    involved in the examination.
  • Attempts to hinder the examination. For example, failure to answer
    pertinent questions, repeated cancellations of appointments, or refusal to
    provide records.
  • The taxpayer’s knowledge of taxes and business practice where numerous
    questionable items appear on the returns.
  • Testimony of employees concerning irregular business practices by the
    taxpayer.
  • Destruction of books and records, especially if just after examination was
    started.
  • Transfer of assets for purposes of concealment or diversion of funds
    and/or assets by officials or trustees.
  • Patterns of consistent failure over several years to report income fully.
  • Proof the return was incorrect to such an extent and in respect to items
    of such character and magnitude as to compel the conclusion the falsity was
    known and deliberate.
  • Payment of improper expenses by or for officials or trustees.
  • Willful and intentional failure to execute plan amendments.
  • Backdating of applications and related documents.
  • Making false statements on EP/EO determination letter applications.
  • Use of false social security numbers.
  • Submission of false Form W-4.
  • Submitting a false affidavit.
  • Attempts to bribe the examiner.

Badges of Fraud – Methods of Concealment

  • Inadequacy of consideration.
  • Insolvency of transferor.
  • Assets placed in other names.
  • Transfer of all or nearly all of debtors’ property.
  • Close relationship between parties to the transfer.
  • Transfer made in anticipation of a tax assessment or while the
    investigation of a deficiency is pending.
  • Reservation of any interest in the property transferred.
  • Transaction not in the usual course of business.
  • Retention of possession.
  • Transactions surrounded by secrecy.
  • False entries in books of transferor or transferee.
  • Unusual disposition of the consideration received for the property.
  • Use of secret bank accounts for income.
  • Deposits into bank accounts under nominee names.
  • Conduct of business transactions in false names.

Whether and when to answer questions from the IRS, or whether to stand on your 5th Amendment rights, are questions that only a tax fraud lawyer can help you answer. Your financial well being, as well as your personal freedom may depend on the right answers. If you or your accountant even suspects that you might be subject to a criminal or civil tax fraud penalty, the experienced tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and San Diego and elsewhere in California can determine how to respond to these inquiries and formulate an effective strategy.

Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.

Tales From An X-IRS Agent

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It is usually impossible to get the inside scoop of how the IRS is looking at taxpayers but sometimes a retired IRS agent will provide me with some valuable insight.

Before I go into this, let’s cover some of the basics about the structure of the IRS. Generally, there are four classes of employees at the IRS. 

The Office Examiner is the person who audits personal income tax returns which can include the small Schedule Cs-the sole proprietor.  This person usually does not have a degree in accounting.  These audits are performed at the IRS office. 

The Revenue Agent will have a degree in accounting and is the person who audits large Schedule C’s and corporate income tax returns.  These audits are performed at the business. 

The Revenue Officer is the person who collects past due tax accounts.  These are the people who will give you a bad time, and they can have the worst attitudes.  When they wanted to make the IRS kinder and gentler, these are the people they wanted to tame down.  However, there are cases that involve some real big crooks, and the actions that the Revenue Officer takes are justifiable. 

Then, there are the Special Agents who work in the Criminal Investigation Division (CID) handle the fraud and criminal cases.  These are the people who pack the heaters (guns, shotguns, and rifles).  These are the kind, sympathetic, and understanding people that you will meet in the event that you are ever found to be significantly cheating on your taxes.  You see, by going after you, making a public case out of you (newspapers, radio and TV), and by putting you in jail, they can assist in the government’s goal of voluntary compliance with the tax laws.

How A Routine Audit On Excise Taxes Turned Into A Nightmare For The Taxpayer-Business Owner.

The Revenue Agent was assigned a case where a company that was manufacturing truck parts was turned in by one of its competitors.  The competitor suspected that the company was not paying the excise tax that is due on truck parts since this company was winning most of the government bids to supply the military.  The excise tax on the parts, tires and fuel is used to maintain the Federal roads.

The Revenue Agent pulled copies of the returns from the IRS and sure enough, no tax was being reported or paid. While at the company’s place of business, the Revenue Agent noticed that one of the owners had a picture of an airplane on his wall.  Since there is also an annual excise tax on small airplanes, the Revenue Agent decided to test this business owner.  So the Revenue Agent got him into a conversation about how much he loved his airplane and then the Revenue Agent asked him for copies of the excise tax returns for the plane.  The business owner acted dumb, like he didn’t know anything about it.  So the Revenue Agent gave him blank forms to fill out for the last three years. 

After receiving the completed forms, the Revenue Agent checked what tax returns were filed by the business owners and what was reported on those tax returns. Well what the Revenue Agent found was that one of the business owners had never filed personal income tax returns for the last five years.  The Revenue Agent was then able to show that the business owner committed tax fraud through his intentional disregard for the law.

This case was then transferred to the CID where it did go to a criminal trial. Besides having to deal with a criminal tax proceeding, the non-compliant business owner who didn’t file his five years of tax returns suffered more misfortune as his wife divorced him and he lost total custody of his kids.  He and his business partner still owed $250,000 in taxes plus significant penalties and interest, to the IRS.

Abuse Of The Travel & Entertainment Deduction.

Some companies like to spend large amounts on travel and entertainment and, in some industries, it is necessary.  The Revenue Agent was assigned a case where, for the size of the company, the Travel & Entertainment (T&E) expense seemed a little high.  As the Revenue Agent got into the audit, he realized that there was only one salesman-the owner-and his T&E expenses per year amounted to $250,000.

As the Revenue Agent started going through the receipts for the expenses, he noticed some interesting things. The Revenue Agent noticed receipts for mink coats, wash machines, and TV’s.  The Revenue Agent asked the outside CPA about these items and he said that they were for corporate gifts to clients.  Now the Internal Revenue Code limits gifts to $25.00 per person, per year but these were a little higher than that.  The Revenue Agent asked the accountant what the purpose of these gifts were and he said that this was the only way that the company could get the buyers’ in the retail chains to purchase the company’s products.  What the Revenue Agent was able to show was that these items were corporate bribes and payoffs to purchasing agents.  The retail chain purchasing agents were on the take.  The items were for their wives and their own homes.

Needless to say, the Revenue Agent disallowed 50% of the company’s T&E expenses due to a lack of documentation and excessive gifts for the three most recent years.

The Wedding And The Boat.

Sometimes a Revenue Agent goes out to a company and on the surface of the tax return and financial statements everything looks just normal.  But, on occasion, the unusual just jumps out at you.

In one audit the Revenue Agent following standard audit procedures came across an entry in the books for about $80,000 that looked a little unusual, so the agent checked it off and asked for the documentation.

When the Revenue Agent returned to complete the audit, the CPA sat down with the agent to go over the list of items that the agent had requested.  When the agent came down to the $80,000 item, the CPA explained to the agent that it was for the owner’s daughter’s wedding and that since the owner HAD TO invite his customers to the wedding that some or all of it was a business expense.  Now some people will try to justify anything; however, the average Joe out there can’t take a tax deduction for inviting fellow employees to his daughter’s wedding. Needless to say, the taxpayer didn’t get the deduction.

Again, sometimes when things look normal, they aren’t.  In another audit the Revenue Agent stumbled on an entry hidden in Cost Of Goods Sold (CGS).  The CGS is where material, labor and related product costs are supposed to be recorded.  So what is the total cost of a 45 foot yacht doing there?

The explanation given to the Revenue Agent was: “Oh, no!  We didn’t mean for that to happen.  Alice the bookkeeper entered that to the wrong account, and it slipped by us.”  So the agent said “I suppose that she should have buried it in another account”.  While there is a provision in the law for the use of a boat as a travel and entertainment expense, expensing a whole boat in one year just doesn’t work. Again, needless to say, the taxpayer didn’t get the deduction.

It Just Doesn’t Add Up.

The Revenue Agent was assigned to audit a small retail store.  Upon going through the books and records, the agent could not get the deposits on the books to balance to the tax return and neither could the accountant.

The agent asked the accountant to prepare a cost of living analysis for the owner and the business.  Congress has given the IRS the authority to prove the income of the taxpayer.  This is a simple task.  All deposits to your bank accounts are income unless you can prove otherwise.  However, if all of the income does not get deposited, then the second method of proving income is a cost of living analysis.  In that case, your income is equal to your cost of living unless you can prove otherwise.

Well, the cost of living analysis showed $100,000 more per year of income than what had been reported on the tax return.  Now the accountant and business owner were nervous!  The Revenue Agent then sent the case for a fraud review and the IRS authorized the taxpayer to be charged with a Civil Fraud Penalty amounting to 75% of the increase in income tax.

What Should You Do?

If you receive notice that your tax returns are to be audited or there is a knock on your door by IRS Special Agents, do not try and take this matter on your own. Instead, enlist the services of a qualified tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Diego, San Francisco and elsewhere in California to resolve these inquiries.

Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.

Three Common Myths About The Dreaded IRS Tax Audit

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Filing taxes is punishment enough without the vague threat of an IRS audit looming over our heads. For understandable reasons, the IRS insists on keeping the ins and outs of its auditing process on the murky side. After all how will the IRS catch the bad guys if you give them the rule book first? 

But because of the sense of mystery around the process, it’s an area of regulation often misunderstood by taxpayers. 

Here are a few common myths about the dreaded tax audit: 

Myth #1: Only the wealthy get audited.

While it’s true that big businesses and the uber-rich are often targets of IRS tax probes, that doesn’t necessarily mean low- and middle-income workers are free and clear. The IRS is increasingly relying on data mining and robo-audit systems to detect errors in tax returns, which has actually made it easier to go after small-fish taxpayers. 

In 2013, the IRS audited more than 6.5 million taxpayers with an adjusted gross income of less than $1 million. And it audited fewer than 40,000 of those reporting $1 million or more. 

One of the biggest reasons behind that discrepancy is that it just takes fewer resources to audit low- and middle-income earners than to audit high-income earners. For example, the IRS has effectively moved to pursue people who fraudulently claim the Earned Income Tax Credit (EITC), a juicy tax break worth an average $5,891 for a family of five earning less than $50,270 a year.  In 2012 alone, EITC fraud cost the government between $11.6 billion and $13.6 billion. 

Myth #2:  An audit means you’ll have an IRS agent knocking down your door. 

Of the 6.5 million audits conducted last year, only 362,500, or 5.5%, resulted in an actual field visit. If your return is flagged, you’ll most likely get a letter in the mail notifying you that your tax return has been selected for examination or seeking additional information. From there, you can either answer by return mail or call them directly.

Now when IRS agents do come knocking on your door, they usually are Special Agents from the Criminal Investigation Division. Here there is no civil tax audit. These are the agents with guns and badges who seek out taxpayers that the IRS believes should be charged with tax crimes and prosecuted. Don’t be fooled by their civility. Refrain from communicating with them until you first seek tax counsel.

Myth #3: I’ve got my tax refund so I don’t have to worry about an audit. 

Even if your tax return was accepted and you cashed your refund check, you’re still fair game for auditors. The IRS actually has up to three years to go after questionable tax returns and in some cases this can be extended to six years or indefinitely.

The IRS uses a special matching system that tracks each taxpayer’s W-2s, 1099s and 1040 forms. If it turns out that you’ve under-reported your income, the system will eventually catch up to you. 

The IRS will also “score” your tax return adding points for the tax credits and deductions you claim including the Home Office Deduction, Real Estate Activity Losses, Unreimbursed Employee Business Expenses, Charitable Contributions and Business Expenses for the Self-Employed. The more you claim, the higher your score and the chance you are selected for audit.

And that’s not even the worst part. Any interest and penalties owed on your unpaid taxes will start accruing the day your taxes were due — not two years later when the IRS letter finally shows up in your mailbox. Two years of compounding interest and penalty charges will only add salt to the wound. 

What Should You Do?

If you receive notice that your tax returns are to be audited or there is a knock on your door by IRS Special Agents, do not try and take this matter on your own. Instead, enlist the services of a qualified tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Diego, San Francisco and elsewhere in California to resolve these inquiries.

Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.

What You Need To Know About IRS Bills, Penalties And Interest Charges

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Many people want to know what they are up against for failing to file and or pay by the tax deadline of April 15th so here are some things for you to consider.

1.         Federal income tax returns are systematically checked for mathematical accuracy. If there is any money owed, you will be sent a bill. So don’t worry so much about math errors on the federal tax return as it will be caught. Generally speaking if you catch a math error after the tax return was submitted it can make sense in many instances to wait for the IRS to contact you with the changes before going through the brain damage of filing an amended federal income tax return. The tangible cost incurred for waiting will be the assessed penalties and interest for the difference between the original underpayment and the actual balance owed.

Keep in mind too that a math error on a federal tax return will also impact your state income tax return and various states react differently to errors. So you will want to reach out to your state department of revenue with any necessary adjustments as soon as they are discovered.

2.         Interest is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate, determined quarterly is the federal short-term rate plus 3% compounded daily. This in and of itself is not so onerous however when penalties are added in a $10,000 balance due can jump up to $15,000 in approximately 5 months.

3.         If you file a return but don’t pay all amounts shown as due on time, you will be subject to pay a late payment penalty. This penalty is on the amount of tax due at the rate of one-half of one percent for each month, or part of a month, up to a maximum of 25%, on the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. If you file by the return due date, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect.

4.         If you owe tax and don’t file on time, you will be subject to a total failure to file penalty. The total failure to file penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to five months. If your return is over 60 days late, the minimum penalty for late filing is the lesser of $135 or 100% of the tax owed.

5.         You must file your return and pay your tax by the due date to avoid interest and penalty charges. Be mindful that the effective rate of accruals with the IRS can be as high as 8% per annum. Often times the funds necessary to pay your tax can be borrowed at a lower effective rate than the combined IRS interest and penalty rate.

6.         Properly identify each payment you are making. To ensure your payment on a bill for tax is credited properly, be sure to return the tear-off stub on your bill. Make your check or money order payable to the United States Treasury. Do not make your check payable to Internal Revenue Service as it will likely be returned by the government to you. Enter the primary social security number or employer identification number, the tax year and form number, and your telephone number on your check or money order. Do not send cash.

What Should You Do?

If you believe there is an error on your notice or bill, do not assume that the IRS will discover this on their own. The IRS will not and will continue their efforts to aggressively collect the money they say is due. Instead, enlist the services of a qualified tax attorney to resolve these errors. There are circumstances where penalties can be abated if you have reasonable cause and the failure was not due to willful neglect. Working with a tax attorney lawyer at the Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Diego, San Francisco and elsewhere in California is the best way to assure that your account is corrected, and penalties are abated and that you get a payment plan or settlement that works for your situation and prevents IRS collection action to be taken against you.

Description: Working with an IRS lawyer to resolve errors in your IRS notice or bill and set up a payment plan can help you avoid a tax levy and other IRS collection actions.

IRS Warning: Beware Email Phishing Scheme Falsely Claiming to be from the Taxpayer Advocate Service

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From time to time the IRS issues consumer warnings on the fraudulent use of the IRS name or logo by scammers trying to gain access to consumers’ financial information in order to steal their identity and assets. When identity theft takes place over the Internet,it is called phishing.

Suspicious e-Mail/Phishing

Phishing (as in “fishing for information” and “hooking” victims) is a scam where Internet fraudsters send e-mail messages to trick unsuspecting victims into revealing personal and financial information that can be used to steal the victims’ identity. Current scams include phony e-mails which claim to come from the IRS Taxpayer Advocate’s Office which lure the victims into the scam by telling them that their case has been forwarded to the Taxpayer Advocate’s Office.

How The Scam Works

Victims will receive an email that appears to be from the IRS Taxpayer Advocate Service and includes a bogus case number.The fake emails may include the following message: “Your reported 2013 income is flagged for review due to a document processing error. Your case has been forwarded to the Taxpayer Advocate Service for resolution assistance. To avoid delays processing your 2013 filing contact the Taxpayer Advocate Service for resolution assistance.”

Recipients are directed to click on links that supposedly provide information about the “advocate” assigned to their case or that let them “review reported income.” The links lead to web pages that solicit personal information.

The Taxpayer Advocate Service (“TAS”) is a legitimate IRS organization that helps taxpayers resolve federal tax issues that have not been resolved through the normal IRS channels. The TAS never initiates contact with taxpayers by email, texting or any social media. A taxpayer must contact the TAS directly in order to secure assistance and receive communications from the TAS.

To Report Fraud

Taxpayers who get these messages should not respond to the email or click on the links. Instead, they should forward the scam emails to the IRS at phishing@irs.gov. You may also report the fraudulent misuse of the IRS name, logo, forms or other IRS property by calling the IRS toll-free fraud hotline at 1-800-366-4484.

What You Should Do If You Really Do Have Tax Issues?

The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles and California know exactly what to say and handle the IRS. Our experience and expertise not only levels the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems.

Description: The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people avoid collection action by the IRS and State tax agencies. Working with one of our tax attorneys in Los Angeles or elsewhere in California is the best bet for reducing or eliminating the amount you owe.

IRS Warning: Beware Of Sophisticated Fraudulent Tax Collection Notice Scam Targeting Taxpayers

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From time to time the IRS issues consumer warnings on the fraudulent use of the IRS name or logo by scamsters trying to gain access to consumers’ financial information in order to steal their identity and assets. When identity theft takes place over the Internet, it is called phishing.

Suspicious e-Mail/Phishing

Phishing (as in “fishing for information” and “hooking” victims) is a scam where Internet fraudsters send e-mail messages to trick unsuspecting victims into revealing personal and financial information that can be used to steal the victims’ identity.  Current scams include phony e-mails which claim to come from the IRS and which lure the victims into the scam by telling them that they are due a tax refund.

2013/2014 Tax Season Fraudulent Tax Collection Notice Scam

The most recent scam that the public has told our office involves a sophisticated fraudulent tax collection notice scam targeting taxpayers for which the IRS has filed a Federal Tax Lien.

Here is how it works: The scamsters will search public records for the filing of a Federal Tax Lien by IRS and with the information gathered from that filing will generate a form letter and mail it to the targeted taxpayer.  The letter is designed to mimic an IRS notice but it is really coming from a third party having nothing to do with the IRS.  If the recipient of the notice contacts the number listed, the person answering your call will purport to be working for the IRS.  The intended victim is told he or she owes money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, he or she is then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the person who answered your call becomes hostile and insulting.

The IRS is aware of this scam too and has confirmed that this scam has hit taxpayers in nearly every state in the country.  The IRS does not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer.

If you receive a notice regarding your taxes which do not bear the official seal of the Internal Revenue Service and an official verifiable address of an IRS office or Service Center, that is a sign that it really isn’t the IRS sending you a notice.

Other characteristics of this scam include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling you back.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

The IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts.

Employment Verification Contacts

If you receive a telephone call or a fax from someone claiming to be with the IRS and you are not comfortable providing the information, you should get that person’s name, badge number and office location and then contact the IRS customer service line at 1-800-829-4933 to verify the validity of the call or fax. Upon getting verification from this IRS customer service line, you may then contact the IRS employee who requested the information and provide the required information.

To Report Fraud

You may also report the fraudulent misuse of the IRS name, logo, forms or other IRS property by calling the IRS toll-free fraud hotline at 1-800-366-4484.

What You Should Do If You Really Do Have Tax Issues?

The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles and California know exactly what to say and handle the IRS.  Our experience and expertise not only levels the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems. 

Description: The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people avoid collection action by the IRS and State tax agencies. Working with one of our tax attorneys in Los Angeles or elsewhere in California is the best bet for reducing or eliminating the amount you owe.