final copyright 2015 lgutef irs issues 5taxworkbook.com/files/2015/09/irs-issues.pdf · the dirty...

© 2015 Land Grant University Tax Education Foundation, Inc. 139

IRS ISSUES

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Learning Objectives

After completing this chapter, participants will be able to perform the following job-related actions:

✔✔ Recognize the Dirty Dozen tax scams

✔✔ Consider the options for offshore compliance

✔✔ Understand the trust fund recovery penalty

✔✔ Complete the new streamlined Form 1023-EZ, Application for Exempt Status

✔✔ Navigate IRS.gov and the self-help online tools for tax professionals

✔✔ Access the new Directory of Federal Tax Return Preparers

✔✔ Understand the purpose of the Taxpayer Advocate Service

Issue 1: Dirty Dozen

Tax Scams � � � � � � � � � � � � � � � 140Issue 2: Offshore Compliance

Options � � � � � � � � � � � � � � � � 148Issue 3: Trust Fund Recovery

Penalty � � � � � � � � � � � � � � � � � 154Issue 4: New Form 1023-EZ � � � 159

Issue 5: Online Tools for Tax Professionals � � � � � � � � � 162

Issue 6: Directory of Federal Tax Return Preparers � � � � � � 167

Issue 7: Taxpayer Advocate Service � � � � � � � � � � � � � � � � � 170

Introduction

It is important for every tax professional to understand how to efficiently and effectively deal with IRS matters. This is especially true due to challenges currently encountered when trying to access the IRS by phone. This chap-ter highlights topics of interest for both the tax professional and the IRS, and provides alter-native solutions to current taxpayer issues.

FINAL COPYRIGHT 2015 LGUTEF

140 ISSUE 1: DIRTY DOZEN TAX SCAMS

ISSUE 1: DIRTY DOZEN TAX SCAMS The Dirty Dozen is a list of the 12 most common tax scams�

Annually, the IRS issues its “Dirty Dozen” list, reminding taxpayers to use caution and protect themselves against a wide variety of scams rang-ing from identity theft to return preparer fraud. Phone scams top the list this year as a persistent and prevalent problem for many taxpayers.

In 2015 the IRS took a new approach to raise consumer awareness: it issued news releases on the Dirty Dozen scams one at a time over 12 con-secutive business days. These scams can lead to significant penalties and interest for taxpayers, and even criminal prosecution, so it is important to take a close look at the Dirty Dozen tax scams for 2015.

1. Phone scams2. Phishing3. Identity theft4. Return preparer fraud5. Offshore tax avoidance6. Inflated refund claims7. Fake charities8. Hiding income with fake documents9. Abusive tax schemes

10. Falsifying income to claim credits11. Excessive claims for fuel tax credits12. Frivolous tax arguments

Phone Scams

Taxpayers continue to receive aggressive, threat-ening phone calls from scam artists impersonat-ing IRS agents. The IRS has seen a surge of these phone scams, and scam artists threaten their vic-tims with police arrest, deportation, license revo-cation, and other injurious actions.

These scam artists catch the taxpayer off guard and try to scare and shock the taxpayer into providing personal financial information over the phone. As of January 2015, the Treasury Inspec-tor General for Tax Administration (TIGTA) had received reports of more than 290,000 contacts since October 2013, and was aware of nearly 3,000 victims who collectively paid over $14 million as

a result of the scam [IR-News Rel. 2015-5 (Janu-ary 22, 2015) and IR-News Rel. 2015-62 (March 31, 2015)].

Scammers are able to alter caller ID num-bers to make it look like the IRS is calling. They use fake names and IRS badge numbers. If the taxpayer does not answer, the scammer often leaves “urgent” callback requests. They prey on the most vulnerable people, such as the elderly, newly arrived immigrants, and those whose first language is not English. However, they are now targeting the general public as well. The scam-mers have even impersonated agents from IRS Criminal Investigation.

Scammer’s Tactics

Some tactics used by scammers can tip off taxpay-ers that the call is not from the IRS� The IRS does not

■■ call to demand immediate payment;■■ call about taxes owed without first hav-

ing mailed a bill;■■ demand that taxes be paid without giving

the taxpayer an opportunity to question or appeal the amount owed;

■■ require a specific payment method to be used to pay the taxes, such as a prepaid debit card;

■■ ask for credit or debit card numbers over the phone; or

■■ threaten to bring in local police or other law enforcement groups to make an arrest for not paying�

Actions to Take If VictimizedIRS Criminal Investigation (CI) works closely with the Department of Justice (DOJ) to shut down scams and prosecute the criminals behind them. Taxpayers who get a phone call from someone claiming to be from the IRS and asking for money should do the following:

■■ If taxpayers know they owe tax, they should make arrangements with the IRS to pay the


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debt by either seeking assistance from their tax professional or by calling the IRS at 800.829.1040.

■■ If the taxpayer does not owe taxes, the tax-payer should report the incident to TIGTA at 800.366.4484, or report it online at www .treasury.gov/tigta/contact_report_scam

.shtml. ■■ If targeted by this scam, the taxpayer should also contact the Federal Trade Commission and use its FTC Complaint Assistant at FTC .gov. If the complaint involves someone impersonating the IRS, include the words “IRS Telephone Scam” in the notes.

The IRS does not use e-mail, text messages, or any social media to discuss a personal tax issue involving bills or refunds.

Additional information about tax scams is available on IRS social media sites, includ-ing YouTube at www.youtube.com/irsvideos and Tumblr at http://internalrevenueservice .tumblr.com. Use the search term “scam” to find related posts.

Phishing

Phishing is the term used for making an e-mail or website look like it is from a reputable source, such as the IRS, in order to obtain confidential or personal information. Taxpayers must be on guard against fake e-mails or websites that are try-ing to steal personal information. The IRS does not send e-mails about a bill or a refund. Taxpay-ers should not click on strange e-mails and web-sites, as they could be scams attempting to steal personal or financial information.

Report any unsolicited e-mail that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), by forwarding the e-mail to [email protected] [IR-News Rel. 2015-6 (January 23, 2015)].

Identity Theft

Fighting identity theft is an ongoing battle, as identity thieves create new ways to steal personal information and use it for their gain. The IRS continues to increase the number and efficiency

of the identity theft data models and filters that are used to identify potentially fraudulent returns. These prerefund filters stop the vast majority of fraudulent returns. Additionally, the IRS contin-ues to expand its partnerships with financial insti-tutions to identify and stop fraudulent refunds.

Identity theft cases are among the most com-plex cases handled by the IRS. In fiscal year (FY) 2014, the IRS initiated 1,063 identity theft related investigations. CI enforcement efforts resulted in the sentencing of 748 identity thieves in FY 2014 compared to 438 in FY 2013.

Department of Justice Press ReleasesThe following presses releases from the DOJ illustrate identity theft schemes.

Sentencing for Identity Theft Scheme In a July 14, 2015, DOJ press release, the DOJ announced that a Vietnamese national, Hieu Minh Ngo, 25, was sentenced to 13 years in prison for hacking into multiple US businesses’ computers, stealing personally identifiable infor-mation (PII) from approximately 200 million US citizens, and selling it to other cybercriminals.

“From his home in Vietnam, Ngo used Internet marketplaces to offer for sale millions of stolen identities of US citizens to more than a thousand cyber criminals scattered through-out the world,” said Assistant Attorney General Caldwell. “Criminals buy and sell stolen identity information because they see it as a low-risk, high-reward proposition. Identifying and prosecuting cybercriminals like Ngo is one of the ways we’re working to change that cost-benefit analysis.”

“This case demonstrates that identity theft is a worldwide threat that has the potential to touch every one of us,” said Acting US Attorney Feith. “I want to acknowledge the excellent work of the US Secret Service in identifying and captur-ing Mr. Ngo. This case proves that the US Attor-ney’s Office for the District of New Hampshire will work with law enforcement to investigate and prosecute identity thieves, even if they are half-way around the world.”

According to admissions made in connec-tion with his guilty plea, from 2007 to 2013, Ngo operated online marketplaces from his home in Vietnam, including “superget.info” and “findget.me.” The marketplaces sold packages of stolen



PII. These packages, known as “fullz,” typically included a person’s name, date of birth, social security number, bank account number, and bank routing number. Ngo also admitted to acquiring and trying to sell stolen payment card data, which typically included the victim’s pay-ment card number, expiration date, CVV num-ber, name, address, and phone number. Ngo admitted that he obtained some of the stolen PII by hacking into a New Jersey based business and stealing customer information.

In addition to selling the “fullz,” Ngo admit-ted to offering buyers the ability to search online databases for the stolen PII of specific individuals. Specifically, Ngo admitted that he offered access to PII for 200 million US citizens, and that more than 1,300 customers from around the world conducted more than three million “queries” through the third-party databases maintained on his websites.

Ngo made nearly $2 million from his scheme. The IRS confirmed that 13,673 US citi-zens, whose stolen PII was sold on Ngo’s web-sites, have been victimized through the filing of $65 million in fraudulent individual income tax returns [www.justice.gov/opa/pr/vietnamese -national-sentenced-13-years-prison -operating-massive-international-hacking

-and].

Indictment for Stolen Identity Refund SchemeOn June 26, 2015, a federal grand jury in Pitts-burgh returned a multi-count indictment against Yoandy Perez Llanes, a foreign national residing outside of the United States. He was charged on 21 counts of Stolen Identity Refund Fraud (SIRF), a scheme to defraud the IRS and the US Treasury. Llanes used the stolen identities of University of Pittsburgh Medical Center (UPMC) employees to file false federal income tax returns and obtain unlawful tax refunds. Llanes and unnamed con-spirators converted the unlawful tax refunds to Amazon.com gift cards, which were used to buy merchandise that was shipped internationally. All of these acts occurred generally between January and April 2014.

Early in 2014, thousands of employees of UPMC had their personal information compro-mised by hackers, who stole names, social secu-rity numbers, dates of birth, and other personal identifying information from a UPMC database.

This data was used to file 935 false 2013 federal tax returns. Quick action by the IRS, UPMC, and Amazon.com frustrated the efforts to file addi-tional false returns and obtain further fraudulent proceeds. While the perpetrators sought approxi-mately $2.2 million in fraudulent refunds, only $1.4 million was actually disbursed.

This criminal scheme was complex and crossed national borders. Llanes and the conspir-ators used anonymous and encrypted e-mail to disguise their identities, and proxy computers to file returns. Using the fraudulently obtained Ama-zon.com gift cards, Llanes purchased hundreds of thousands of dollars in electronic merchandise, which was shipped from Miami to “drop” loca-tions outside the United States. Llanes and others then retrieved the merchandise and advertised it for sale on online auction websites overseas.

Though Llanes and the conspirators attempted to conceal their location and their identities, investigators were able to uncover the sophisticated plot and identify Llanes.

The IRS Criminal Investigation (CI), the US Secret Service, and the US Postal Inspection Service conducted the investigation leading to the indictment in this case [www.justice.gov /opa/pr/indictment-upmc-stolen-identity-

scheme].

Identity Protection PINIn an effort to help victims of identity theft, the IRS has issued approximately 1.5 million Iden-tity Protection PINs (IP PINs). The IP PIN is a unique, six digit number that is assigned annu-ally to victims of identity theft for use when filing their federal tax return. The IP PIN allows these individuals to avoid delays in filing returns and receiving refunds [IR-News Rel. 2015-7 (January 26, 2015)].

Actions to Take If VictimizedA taxpayer may be the victim of tax-related iden-tity theft if the taxpayer receives a notice or letter from the IRS that states any of the following:

1. More than one tax return was filed for you.2. You owe additional tax, have a refund offset,

or have had collection actions taken against you for a year you did not file a tax return.

3. IRS records indicate you received wages from an employer unknown to you.


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If you know or suspect you are a victim of tax-related identity theft, take these additional steps:

1. Respond immediately to any IRS notice. Call the number provided on the notice.

2. Complete IRS Form 14039, Identity Theft Affidavit. Use a fillable form at IRS.gov, print, then mail or fax the form according to the instructions.

3. Continue to pay your taxes and file your tax return, even if you must do so by paper.

4. If a taxpayer previously contacted the IRS regarding tax-related identity theft, and the issue was not resolved, the taxpayer should contact the Identity Protection Specialized Unit at 800.908.4490.

Return Preparer Fraud

Return preparers are a vital part of the US tax sys-tem. About 60% of taxpayers use tax professionals to prepare their returns. While the vast majority of these preparers provide honest high-quality service, there are some dishonest preparers who perpetrate refund fraud, identity theft, and other scams that hurt taxpayers. Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS CI works closely with the DOJ to stop scams and prosecute the crimi-nals behind them [IR-News Rel. 2015-8 (January 27, 2015)].

Fraudulent Tax Refund SchemeOn May 13, 2015, a federal grand jury indictment in the District of Oregon was unsealed.

The indictment alleges that, beginning at least as early as tax year 2012, the named defendants, along with others, engaged in a scheme to obtain millions of dollars in fraudulent tax refunds from the IRS and the Oregon Department of Revenue. The allegations of the indictment detail how the conspirators used stolen PII, falsified wage and withholding information, fraudulently gener-ated electronic filing PINs, created disposable e-mail addresses to conceal the co-conspirators’ identities, and received fraudulent tax refunds through prepaid debit cards and third-party bank accounts.

In total, the defendants are alleged to have unlawfully obtained identity information from

over 125,000 taxpayers, and filed over 980 false federal tax returns seeking more than $6.6 mil-lion in fraudulent refunds. Although the IRS rejected $4.6 million of the claimed refunds, the indictment alleges that the defendants success-fully obtained $2 million in illegal refunds.

This case results from a joint investiga-tion by IRS CI, the US Department of Health and Human Services Office of Inspector Gen-eral, and the FBI, with support provided by US Immigration and Customs Enforcement, the US Postal Inspection Service, the US State Depart-ment, and the Oregon Department of Rev-enue Fraud Unit. This case is being prosecuted in the District of Oregon [www.justice.gov /opa/pr/five-individuals-charged-nationwide

-identity-theft-scheme].

Fraudulent Tax Preparer InjunctionsThe DOJ’s Tax Division and the IRS use civil and criminal enforcement tools to shut down fraudu-lent tax return preparers and tax fraud promot-ers. Under the civil injunction program, the DOJ sues preparers and promoters, and seeks a court ordered injunction to bar the person or business from engaging in specified misconduct, or from preparing tax returns for others.

An alphabetical listing of injunctions is available here: www.justice.gov/tax /program-shut-down-schemes-and-scams#O. If one of the enjoined persons or businesses may be vio-lating an injunction, contact the Tax Division at [email protected].

Reporting Preparer MisconductTo report preparer misconduct to the IRS, com-plete Form 14157, Complaint: Tax Return Pre-parer. This form may be used by a taxpayer or another tax preparer. There is a section at the bot-tom of the form for a tax preparer to complete. A fillable form is available online. Fax the form to 855.889.7957 or mail it to:

Internal Revenue ServiceAttn: Return Preparer Office401 W. Peachtree Street NWMail Stop 421-DAtlanta, GA 30308If a taxpayer has been financially impacted

by an unscrupulous preparer, also include Form 14157-A, Tax Return Preparer Fraud or



Under the program, banks are required to do the following:

1. Make a complete disclosure of their cross-border activities

2. Provide detailed information for each account in which US taxpayers have a direct or indi-rect interest

3. Cooperate in treaty requests for account information

4. Provide detailed information about other banks that transferred funds into secret accounts, or that accepted funds when secret accounts were closed

5. Agree to close accounts of accounthold-ers who fail to comply with US reporting obligations

6. Pay appropriate penalties

Swiss banks meeting all of the above require-ments are eligible for a nonprosecution agree-ment. In a recent 3-month sample period from April 15, 2015, to July 15, 2015, DOJ press releases reported 19 Swiss banks that reached resolutions under the DOJ Swiss Bank Program.

Inflated Refund Claims

Taxpayers should be cautious of anyone prom-ising inflated refunds. Taxpayers should also be wary of anyone who asks them to sign a blank return, promises a big refund before looking at the taxpayer’s records, or charges fees based on a percentage of the refund. Scam artists use flyers, advertisements, phony store fronts, and word of mouth in community groups and churches. They prey on people who do not have a filing require-ment, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.

Scammers convince people to make claims for fictitious rebates, benefits, or tax credits. Or worse, they file a false return in a person’s name, and the refund is paid to the scammer’s account.

Scam artists also promise inflated refunds based on fictitious social security benefits, and false claims for credits such as education cred-its, the earned income credit, or the American opportunity tax credit.

A taxpayer is legally responsible for what is on his or her return, even if it was prepared by

Misconduct Affidavit, and mail both completed forms to:

Internal Revenue ServiceAM – Preparer Complaints Mail Stop 583333 Getwell RoadMemphis, TN 38118

Offshore Tax Avoidance

Over the years, numerous individuals have evaded US taxes by hiding income in offshore banks, brokerage accounts, or nominee enti-ties, and then using debit cards, credit cards, or wire transfers to access the funds. Others have employed foreign trusts, employee leasing schemes, private annuities, or insurance plans for the same purpose.

The recent string of successful enforcement actions against offshore tax evaders and the finan-cial organizations that help them have resulted in billions of dollars in criminal fines and restitu-tion. Taxpayers who do not comply with offshore reporting requirements risk large penalties, fines, and even criminal prosecution. Thus, taxpayers should disclose their foreign financial accounts and resolve their US tax obligations. The IRS offers the Offshore Voluntary Disclosure Pro-gram (OVDP), discussed in Issue 2 of this chap-ter, to help taxpayers disclose and report their income from offshore accounts [IR-News Rel. 2015-9 (January 28, 2015)].

Swiss Bank ProgramThe DOJ is also working with Swiss banks to com-bat offshore tax avoidance. Since 2013, Switzer-land has encouraged its banks to cooperate with a program that requires information sharing and imposes significant financial penalties on banks that aid secret account holders.

The Swiss Bank Program allows Swiss banks to resolve potential criminal liabilities in the United States. Participating Swiss banks were required to advise the DOJ, by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared US related accounts. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program.


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ensure their contributions are going to eligible charities. IRS.gov has a search feature, Exempt Organizations Select Check, that allows people to find legitimate tax exempt charities. The IRS warns taxpayers to be wary of charities with names that are similar to familiar or nationally known organizations.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned tax-payers. Scam artists use a variety of tactics. Some scammers operating fake charities may contact people by telephone or e-mail to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or social security numbers that can be used to steal the victims’ identities or financial resources. Fraudulent websites may solicit funds for disaster victims.

The IRS encourages taxpayers who wish to help disaster victims to donate to recognized charities [IR-News Rel. 2015-16 (January 30, 2015)].

Hiding Income with Fake Documents

Filing a false information return, such as a Form 1099 or Form W-2, is an illegal way to lower the amount of taxes an individual owes. The perpe-trators use self-prepared, “corrected,” or other-wise fake forms that improperly report taxable income as zero.

Taxpayers should resist participating in any variations of this scheme. The IRS is aware of this scam, and perpetrators have received significant penalties, imprisonment, or both. Filing a false return may result in a $5,000 penalty.

Some people also attempt fraud using false Form 1099 refund claims. In some cases, indi-viduals have made refund claims based on the fictitious theory that the federal government maintains secret accounts for US citizens, and that taxpayers can gain access to the accounts by issuing Forms 1099-OID to the IRS.

In this scam, the culprit falsely reports on the form that taxes were withheld, and then files a return to claim a refund of the withheld taxes.

someone else. Taxpayers can be penalized for fil-ing false claims or receiving fraudulent refunds. If the taxpayer provides false income amounts, the taxpayer could lose his or her federal benefits, such as social security benefits, certain veterans’ benefits, or low-income housing benefits [IR-News Rel. 2015-12 (January 29, 2015)].

On July 20, 2015, the DOJ announced that a complaint was filed seeking to permanently bar a former Staten Island, New York, man, and the tax preparation business he operates, from pre-paring federal tax returns for others.

The civil complaint against Ranti Azeez-Taiwo and his business, Lot Associates, Inc., alleges that he prepared federal income tax returns that understated the correct tax liabilities. The understatements are allegedly the result of fabricated or inflated itemized deductions, par-ticularly charitable deductions, unreimbursed employee business expense deductions, and sole proprietorship business expenses. According to the complaint, an undercover IRS agent provided Azeez-Taiwo with information that should have resulted in a tax return showing more than $500 in tax due, but Azeez-Taiwo prepared a return claiming a refund of more than $500.

On March 6, 2014, Azeez-Taiwo was sen-tenced to serve 18 months in prison for multiple counts of willfully aiding and assisting in the preparation of false federal income tax returns for tax years 2006 through 2010. The current suit is to permanently bar him and his business from tax return preparation.

The IRS estimates that Azeez-Taiwo pre-pared more than 7,000 tax returns since 2006. The IRS has audited or examined over 250 returns prepared by Azeez-Taiwo, and the total tax deficiency for those returns alone exceeds $773,000. According to the complaint, Azeez-Taiwo’s conduct could have caused more than $773,000 in harm to the US Treasury [www.justice.gov/opa/pr/justice-department -asks-federal-court-shut-down-fraudulent

-new-york-tax-return-business].

Fake Charities

Taxpayers should be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Contributors should take a few extra minutes to



Again, the IRS is aware of this scam, the courts have consistently rejected these attempts to evade taxes, and perpetrators have received significant penalties and even imprisonment [IR-News Rel. 2015-18 (February 2, 2015)].

Abusive Tax Schemes

The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them.

The Abusive Tax Schemes program inves-tigates the use of multiple flow-through entities to evade taxes. These schemes are characterized by the use of limited liability companies, limited liability partnerships, international business com-panies, foreign financial accounts, offshore credit or debit cards, and other similar instruments. The schemes are usually complex, involving multi-layer transactions to conceal the true nature and ownership of the taxable income and assets. Pro-moters of abusive tax schemes often use financial instruments to facilitate tax evasion.

If an arrangement is “too good to be true,” promises to “eliminate” or “substantially reduce” a tax liability, or uses unnecessary steps or a form that does not match its substance, then that arrangement may be an abusive scheme [IR-News Rel. 2015-19 (February 3, 2015)].

Misuse of TrustsTrusts are commonly used in abusive tax struc-tures. Unscrupulous promoters urge taxpayers to transfer large amounts of assets into trusts. These assets include cash and investments, and success-ful businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These trans-actions promise reduced taxable income, inflated deductions for personal expenses, reduced (even to zero) self-employment taxes, and reduced estate or gift taxes.

These transactions commonly arise when taxpayers transfer wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.

The IRS continues to see an increase in the improper use of private annuity trusts and foreign

trusts to shift income, deduct personal expenses, and avoid estate transfer taxes. Taxpayers should seek the advice of a trusted professional before entering a trust arrangement [IR-News Rel. 2015-19, supra].

Captive InsuranceAnother abuse involving a legitimate tax struc-ture involves certain small or “micro” captive insurance companies. The tax law allows busi-nesses to create captive insurance companies to protect the business against certain risks. The insured claims income tax deductions for premi-ums paid to the captive insurance company for the insurance policies. The owners of the insured business or their family members own the captive insurance company.

The captive insurance company can elect to be taxed only on the investment income from the pool of premiums, excluding taxable income of up to $1.2 million per year in net written premiums.

In the abusive structure, unscrupulous pro-moters persuade closely held entities to create captive insurance companies onshore or off-shore. The promoters draft organizational docu-ments and prepare initial filings to state insurance authorities and the IRS. The promoters assist with creating and “selling” to the entities often times poorly drafted “insurance” binders and policies to cover ordinary business risks, or esoteric and implausible risks. They charge exorbitant “pre-miums,” while maintaining economical commer-cial coverage with traditional insurers.

Total amounts of annual premiums often equal the amount of deductions business enti-ties need to reduce income for the year; or, for a wealthy entity, total premiums are $1.2 million annually to take full advantage of the exclusion. Underwriting and actuarial substantiation for the insurance premiums are either missing or insuf-ficient. The promoters manage the entities’ cap-tive insurance companies for hefty fees, and assist taxpayers who are unsophisticated in insurance to continue the charade [IR-News Rel. 2015-19, supra].

Reporting Suspected Tax Avoidance SchemesTo report a suspected abusive tax avoidance scheme and/or tax return preparers who pro-mote such schemes, use Form 14242, Report


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claim a tax credit by filing Form 4136, Credit for Federal Tax Paid on Fuels.

Improper claims for the fuel tax credit gener-ally come in one of two forms:

1. Individuals or businesses make erroneous claims on their otherwise legitimate tax return.

2. An identity thief claims the credit in a broader fraudulent scheme.

The IRS has taken a number of steps to improve compliance involving fuel tax credits. IRS compliance filters prevent a significant num-ber of questionable fuel tax credit claims from being processed. New identity theft screening filters have also improved the IRS’s ability to identify questionable fuel tax credit claims dur-ing return processing and have prevented the issuance of $33 million in questionable credit claims in 2013 [IR-News Rel. 2015-21 (February 5, 2015)].

Frivolous Tax Arguments

The 2015 version of “The Truth about Frivolous Tax Arguments,” a 69-page document, describes and responds to some of the common frivolous tax arguments made by those who oppose com-pliance with federal tax laws. Examples include contentions that taxpayers can refuse to pay taxes on religious or moral grounds by invoking the First Amendment. The cases cited in the docu-ment demonstrate how frivolous arguments are rejected by the IRS and the courts.

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The penalty for filing a frivolous tax return is $5,000 [IR-News Rel. 2015-23 (February 6, 2015)].

Suspected Abusive Tax Promotions or Preparers, and its instructions.

Falsifying Income to Claim Credits

Falsifying income to claim credits involves inflat-ing or including income that was never earned, either as wages or as self-employment income, usually in order to maximize refundable credits.

Just like falsely claiming an expense or deduction not paid, claiming income not earned in order to secure a larger refundable credit, such as the earned income credit, could have serious repercussions. Taxpayers must repay the errone-ous refunds, including interest and penalties. In some cases, they can even face criminal prosecu-tion [IR-News 2015-20 (February 4, 2015)].

Excessive Claims for Fuel Tax Credits

The fuel tax credit is generally limited to off-highway business use, including use in farming. Consequently, the credit is not available to most taxpayers. The IRS routinely finds unscrupulous preparers who have enticed sizable groups of tax-payers to erroneously claim the credit to inflate their refunds.

The federal government taxes gasoline, die-sel fuel, kerosene, alternative fuels, and certain other types of fuel used to power vehicles and equipment on roads and highways. Taxes paid for fuel to power certain vehicles and equipment for off-road use may qualify for the tax credit. This includes farm equipment, certain boats, trains, and airplanes. Individuals and businesses that purchase fuel for one of those purposes can


148 ISSUE 2: OFFSHORE COMPLIANCE OPTIONS

An attorney, CPA, or enrolled agent who has documented authority to sign and submit FBARs on behalf of legally obligated clients can file the reports through a single BSA e-file account [http://bsaefiling.fincen.treas.gov/Enroll .html]. However, if the filer does not have such authority, the reports must be signed and submit-ted through a BSA e-file account unique to each client. The filer can use professional tax software if it complies with BSA requirements.

Offshore Voluntary Disclosure Program

Individuals who willfully failed to report foreign accounts may find relief through the Offshore Voluntary Disclosure Program (OVDP). The OVDP is specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due with respect to those assets. OVDP can pro-vide such taxpayers with protection from crimi-nal liability and terms for resolving their civil tax and penalty obligations.

The IRS began an open-ended OVDP in January 2012 because of strong interest in the 2009 and 2011 programs. The 2012 OVDP has a higher penalty rate than the previous programs, but offers clear benefits to encourage taxpayers to disclose foreign accounts now, rather than risk detection by the IRS and possible criminal prosecution.

The 2014 OVDP, effective July 1, 2014, is a continuation of the program’s modified terms, which were introduced in 2012. There is no dead-line for taxpayers to apply. However, the terms of this program could change at any time.

Penalties for NoncomplianceFailure to report foreign accounts may result in severe civil and/or criminal penalties.

ISSUE 2: OFFSHORE COMPLIANCE OPTIONS The Foreign Account Tax Compliance Act and the ongoing efforts of the IRS and the Department of Justice strive for proper reporting of foreign investments�

The IRS is offering taxpayers with undisclosed income from offshore accounts another opportu-nity to fulfill their filing obligations. Because the circumstances of taxpayers with non-US invest-ments vary widely, the IRS offers four options to taxpayers with undisclosed foreign financial assets.

1. Delinquent Foreign Bank and Finan-cial Accounts Report (FBAR) submission procedures

2. Offshore Voluntary Disclosure Program (OVDP)

3. Streamlined filing compliance procedures (SFCP)

4. Delinquent international information return submission procedures

FBAR Filing Requirements

The FBAR must be filed by a US person who has a financial interest in, or a signature authority over, a foreign financial account if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

The FBAR filing deadline is June 30 for cal-endar-year taxpayers. No extensions are allowed, but the report may be amended, if necessary.

Example 5.1 Foreign Account

Carlotta Canton is a US citizen living in Canada with her Canadian husband. In 2015 they had $11,000 in a joint account in a Canadian bank. They have no US Form 1040 filing requirement. Carlotta must file the FBAR by June 30, 2016, because she is a US person who has an interest in a foreign account that exceeds $10,000.

Individuals file the FBAR on FinCEN Report 114. The report can be e-filed on the website of the Bank Secrecy Act (BSA) Financial Crimes Enforcement Network [http://bsaefiling .fincen.treas.gov/NoRegFBARFiler.html].


Offshore Voluntary Disclosure Program 149

5

Civil PenaltiesCivil penalties may include failure-to-file, fail-ure-to-pay, and accuracy-related penalties. The amount of the penalty varies, depending on the tax form required.

Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance of the foreign account, per violation [31 U.S.C. § 5321(a)(5)]. Nonwillful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

There is a $10,000 penalty for failing to file Form 8938, Statement of Specified Foreign Financial Assets, reporting the taxpayer’s inter-est in certain foreign financial assets, including financial accounts, certain foreign securities, and

interests in foreign entities. An additional $10,000 is added for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

New FinCen Form

FinCEN Form 114 replaced Form TD-F 90�22�1�

A chart comparing the filing requirements of Form 8938, Statement of Specified Foreign Financial Assets, and FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), is set forth in Figure 5.1.

FIGURE 5.1 Comparison of Requirements

Form 8938, Statement of Specified

Foreign Financial AssetsFinCEN Form 114, Report of Foreign Bank

and Financial Accounts (FBAR)

Who must file? Specified individuals, which include US citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets and meet the reporting threshold

US persons, which include US citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold

Does the United States include US territories?

No Yes, resident aliens of US territories and US territory entities are subject to FBAR reporting

Reporting threshold (total value of assets)

$50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad)

$10,000 at any time during the calendar year

When do you have an interest in an account or asset?

If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return

Financial interest: you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title

Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account

See instructions for further details

What is reported? Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign nonaccount investment assets

Maximum value of financial accounts maintained by a financial institution physically located in a foreign country



FIGURE 5.1 Comparison of Requirements (Continued)




How are maximum account or asset values determined and reported?

Fair market value in US dollars in accord with the Form 8938 instructions for each account and asset reported

Convert to US dollars using the end of the taxable year exchange rate and report in US dollars

Use periodic account statements to determine the maximum value in the currency of the account

Convert to US dollars using the end of the calendar-year exchange rate and report in US dollars

When due? By due date, including extension, if any, for income tax return

Received by June 30 (no extensions of time granted)

Where to file? File with income tax return pursuant to instructions for filing the return

File electronically through FinCEN’s BSA E-Filing System

The FBAR is not filed with a federal tax return

Penalties Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of nonfiling after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000

Criminal penalties may also apply

If nonwillful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply

Types of Foreign Assets and Whether They Are Reportable

Financial (deposit and custodial) accounts held at foreign financial institutions

Yes Yes

Financial account held at a foreign branch of a US financial institution

No Yes

Financial account held at a US branch of a foreign financial institution

No No

Foreign financial account for which you have signature authority

No, unless you otherwise have an interest in the account as described above

Yes, subject to exceptions

Foreign stock or securities held in a financial account at a foreign financial institution

The account itself is subject to reporting, but the contents of the account do not have to be separately reported

The account itself is subject to reporting, but the contents of the account do not have to be separately reported

Foreign stock or securities not held in a financial account

Yes No

Foreign partnership interests

Yes No

Indirect interests in foreign financial assets through an entity

No Yes, if sufficient ownership or beneficial interest (i�e�, a greater-than-50% interest) in the entity

See instructions for further detail

Foreign mutual funds Yes Yes


Offshore Voluntary Disclosure Program 151

5

FIGURE 5.1 Comparison of Requirements (Continued)




Types of Foreign Assets and Whether They Are Reportable

Domestic mutual fund investing in foreign stocks and securities

No No

Foreign accounts and foreign nonaccount investment assets held by foreign or domestic grantor trust for which you are the grantor

Yes, as to both foreign accounts and foreign nonaccount investment assets

Yes, as to foreign accounts

Foreign-issued life insurance or annuity contract with a cash value

Yes Yes

Foreign hedge funds and foreign private equity funds

Yes No

Foreign real estate held directly

No No

Foreign real estate held through a foreign entity

No, but the foreign entity itself is a specified foreign financial asset, and its maximum value includes the value of the real estate

No

Foreign currency held directly

No No

Precious metals held directly

No No

Personal property held directly, such as art, antiques, jewelry, cars and other collectibles

No No

Social security–type program benefits provided by a foreign government

No No

Criminal PenaltiesPossible criminal charges include tax eva-sion [I.R.C. § 7201], filing a false return [I.R.C. § 7206(1)], and failure to file an income tax return [I.R.C. § 7203]. Willfully failing to file an FBAR and willfully filing a false FBAR are both viola-tions that are subject to criminal penalties under I.R.C. § 5322. The following criminal penalties can be imposed for these violations:

■■ Conviction for tax evasion—up to 5 years in prison and a fine of up to $250,000

■■ Filing a false return—up to 3 years in prison and a fine of up to $250,000

■■ Failing to file a tax return—up to 1 year in prison and a fine of up to $100,000

■■ Failing to file an FBAR—up to 10 years in prison and criminal penalties of up to $500,000



taxpayer is not eligible for the streamlined procedures.

4. The taxpayer must have paid previous pen-alty assessments. If a delinquent or amended return was previously filed, but not declared to be under this program, any previous pen-alty assessment must be paid and cannot be abated.

5. The taxpayer must have a valid taxpayer identification number (TIN). For US citizens, resident aliens, and certain other individuals, the proper TIN is a valid social security num-ber (SSN). Claims will not be processed under the streamlined procedures if the claimant is not eligible for an SSN or ITIN. However, taxpayers who are ineligible for an SSN may submit their application with a completed ITIN application (Form W-7), Appplication for IRS Individual Taxpayer Identification Number.

General TreatmentTax returns submitted under the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures are processed like any other tax return submitted to the IRS. Con-sequently, receipt of the returns is not acknowl-edged by the IRS, and the streamlined filing process does not result in the signing of a closing agreement with the IRS.

Returns submitted under the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures are not automati-cally subject to IRS audit, but may be selected for audit under the existing audit selection pro-cesses applicable to any US tax return. Returns may also be subject to verification procedures. The accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources. Therefore, returns submitted under the stream-lined procedures may be subject to IRS examina-tion, additional civil penalties, and even criminal liability.

Continued Compliance ExpectedAfter a taxpayer has completed the stream-lined filing compliance procedures, he or she is expected to comply with US tax law for all future years, and file all returns according to regular fil-ing procedures.

FAQs on OVDP

For a more detailed explanation of the OVDP, see the lengthy FAQs on the IRS website at www .irs.gov/Individuals/International-Taxpayers /Offshore-Voluntary-Disclosure-Program -Frequently-Asked-Questions-and-Answers -2012-Revised or search for OVDP on www.irs.gov�

Streamlined Filing Compliance Procedures

The streamlined filing compliance procedures (SFCP) are available to US individual taxpayers (or estates of individual taxpayers) who certify that their failure to report foreign financial assets and pay all tax due with respect to those assets did not result from their willful conduct.

Willful Conduct Not Eligible

Taxpayers who are concerned that their failure to report income, pay tax, and submit required infor-mation returns was due to willful conduct, and who therefore seek assurance that they will not be subject to criminal liability or substantial mon-etary penalties, should consider participating in the OVDP instead of the streamlined procedure�

EligibilityTo participate in the streamlined compliance pro-gram, the following requirements must be met:

1. The taxpayer must be an individual. US individuals may reside in the United States (Streamlined Domestic Offshore Procedures) or outside the United States (Streamlined Foreign Offshore Procedures).

2. The taxpayer must certify that the failure to report all income, pay all tax, and submit all required forms was due to nonwillful conduct.

3. The IRS must not have initiated an exam. If the IRS has initiated a civil or criminal exam of the taxpayer’s returns for any tax year, the


Delinquent International Information Return Submission Procedures 153

5

4. Select a reason for filing late (on the cover page of the electronic form), or enter a cus-tomized explanation using the “Other” option

5. If unable to file electronically, contact Fin-CEN’s Regulatory Help line at 800.949.2732 or 703.905.3975 (if calling from outside the United States) regarding alternatives to elec-tronic filing

Penalty WaiverThe IRS will not impose a penalty for a failure to file a delinquent FBAR, provided the following conditions are met:

1. Income from the foreign financial accounts reported on the delinquent FBAR is prop-erly reported, and taxes are paid on the US income tax return.

2. The IRS has not previously contacted the taxpayer regarding an income tax examina-tion or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

Delinquent International Information Return Submission Procedures

Taxpayers who have not filed a required interna-tional information return, and who do not need to use the OVDP or the SFCP, should file the delinquent or amended return to report and pay additional tax and should attach a statement of facts establishing reasonable cause for the failure to file.

QualificationsFilers must meet all of the following requirements:

1. Have not filed one or more required interna-tional information returns

2. Have reasonable cause for not timely filing the information returns

3. Are not under a civil examination or a criminal investigation by the IRS

4. Have not already been contacted by the IRS about the delinquent information returns

Coordination Once a taxpayer makes a submission under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures, the taxpayer may not participate in the Off-shore Voluntary Disclosure Program (OVDP). Similarly, a taxpayer who submits an OVDP voluntary disclosure letter pursuant to OVDP FAQ 24, on or after July 1, 2014, is not eligible to participate in the streamlined procedures [www .irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program- Frequently-Asked-Questions-and-Answers

-2012-Revised].A taxpayer who submits, or who has sub-

mitted, a voluntary disclosure letter under the OVDP (or any predecessor offshore voluntary disclosure program) prior to July 1, 2014, but who does not yet have a fully executed OVDP closing agreement, may request application of the penalty terms available under the streamlined procedures.

Delinquent FBAR Submission Procedures

Taxpayers who meet the following four criteria should file a delinquent or amended tax return to report and pay any additional tax:

1. The taxpayer has not filed a required FBAR.2. The taxpayer is not under examination by the

IRS.3. The IRS has not contacted the taxpayer

regarding a delinquent FBAR.4. The taxpayer does not need to use the

OVDP or the SFCP.

Steps to Resolve DelinquencyTaxpayers must follow these steps to resolve delinquent FBARs:

1. Review the instructions to the FBAR form 2. Include a statement explaining why the

FBAR is filed late 3. File all FBARs electronically at

http://bsaefiling.fincen.treas.gov

/NoRegFBARFiler.html



Responsible Persons

The TFRP may be asserted against only those individuals who were both willful and respon-sible in failing to collect or pay the tax [Wiggins v. United States, 188 F.Supp 374 (E.D. Tenn. 1960)]. The individual must have had financial control at the time the liability was not paid.

Third-Party Responsibility

Even if the taxpayer had delegated withholding and payment responsibility to a third party, such as a payroll service, the taxpayer is ultimately responsible for the collection and payment of taxes�

ISSUE 3: TRUST FUND RECOVERY PENALTY The trust fund recovery penalty enables the IRS to collect taxes from business owners and others who withheld taxes from employees or customers but did not pay those taxes to the US Treasury�

The income, social security, Medicare, and rail-road retirement taxes withheld from employees’ wages, and the federal excise taxes that are col-lected from customers when taxpayers provide certain products or services, are called trust fund taxes. The business that receives the funds is required to hold them in trust for the government.

If the business uses those funds for another purpose, I.R.C. § 6672(a) authorizes the IRS to assess a penalty equal to 100% of the collected tax on any responsible person “who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof.”

The IRS can assert the trust fund recovery penalty (TFRP) against responsible persons, whether or not a business has ceased operations, if the IRS cannot collect the tax from the business. The IRS can collect the taxes only once: from the business, from one or more of its responsible per-sons, or from the business and one or more of its responsible persons.

Return of Foreign Trusts With U.S. Owner. Information returns filed with amended returns are not automatically subject to audit, but may be selected for audit through the audit selection processes applicable to other tax or information returns.

All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms.

FBAR Educational Resources

The following educational products discuss why, when, and where to file the FBAR:

■■ FBAR Reference Guide (PDF) [www.irs.gov/pub/irs-utl/IRS_FBAR_Reference_Guide.pdf]

■■ Reporting of Foreign Financial Accounts on the Electronic FBAR (webinar) [www.irsvideos.gov/ElectronicFBAR/]

Reasonable Cause StatementTo avoid penalties, the taxpayer must establish reasonable cause for not filing. The reasonable cause statement should describe in detail the reason for not filing the required return. As part of the reasonable cause statement, the taxpayer must also certify that he or she was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.

Filing InstructionsAll delinquent international information returns should be attached to an amended return, and filed according to the applicable instructions for the amended return, with the exception of Forms 3520, Annual Return To Report Transac-tions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information


Statute of Limitations 155

5

ResponsibleResponsibility is a matter of status, duty, and authority [I.R.M. § 5.7.3.3.1]. A responsible per-son has the power to direct the act of collecting trust fund taxes, accountability for and authority to pay trust fund taxes, and the authority to deter-mine which creditors will or will not be paid. Business owners and employees can be respon-sible persons, as can directors, board members, surety lenders, and payroll service providers.

Responsibility is based on whether an individ-ual can exercise independent judgment. Employ-ees and agents who perform only ministerial acts without exercising independent judgment are not deemed responsible. Thus an employee who pays bills as directed by a superior, rather than determining which creditors will be paid, is not a responsible person.

A responsible person must have actual power to control and direct company funds, and not mere titular authority. Whether a person is responsible depends on the facts and circumstances of each case [Bloom v. United States, 69 A.F.T.R. 2d (RIA) 92-967 (D. Haw. 1992); and United States v. Lan-dau, 155 F.3d 93 (2d Cir. 1998)].

WillfulWillful means intentional, deliberate, voluntary, reckless, or knowing, as opposed to accidental. No evil intent or bad motive is required [I.R.M. § 5.7.3.3.2]. To show willfulness, the government generally must demonstrate that a responsible person was aware, or should have been aware, of the outstanding taxes, and either intentionally disregarded the law, or was plainly indifferent to its requirements.

A responsible person’s failure to investigate or correct mismanagement, after being notified that withholding taxes were not paid, satisfies the willful element. Using available funds to pay other creditors when the business is unable to pay employment taxes is an indication of willfulness [Domanus v. United States, 961 F.2d 1323 (7th Cir. 1992)].

A reckless disregard of whether the taxes have been paid is also willful. Recklessness for this purpose is established if a responsible person should have known that withheld taxes were not remitted, and was in a position to easily deter-mine whether they were remitted [Phillips v. United States, 73 F.3d 939 (9th Cir. 1996)].

Actions Preceding TFRP

In most cases, IRS revenue officers (ROs) contact the delinquent business before the IRS assesses the TFRP. Before the return is even due, com-puter-generated federal tax deposit (FTD) alerts identify taxpayers who have failed to make deposits. FTD alerts are issued on taxpayers who are classified as semiweekly depositors and who have not made FTDs during the current quar-ter, or who have made deposits in substantially reduced amounts. An RO who receives an FTD alert must schedule a field visit or telephone call within 15 calendar days. The RO must review FTD requirements with the taxpayer and pro-vide information about the deposit requirements. If the taxpayer cannot satisfy past-due deposits while meeting current deposits, the RO should encourage the taxpayer to make current deposits first, while working to resolve past-due deposits. If the delinquency continues, the IRS may open a TFRP case.

The TFRP equals the unpaid balance of the trust fund tax. When a business has paid part, but not all, of a liability that includes both trust fund taxes and other taxes, the IRS applies the partial payment first to the non–trust fund portion of the liability (for employment taxes, this is the employer’s share of social security and Medicare taxes), unless the taxpayer designates otherwise.

If the business’s payments exceed the non–trust fund portion of the tax liability, the IRS applies the additional amount to the trust fund portion of the liability (for employment taxes, the withheld income taxes and the employees’ share of social security and Medicare taxes).

The IRS applies taxpayer remittances to assessed fees, collection costs, penalties, and interest only after the tax is paid in full [Rev. Proc. 2002-26, 2002-1 C.B. 746]. A TFRP taxpayer is liable for interest on the TFRP assessment.

Statute of Limitations

Unless the statute of limitations for assessment is extended, the IRS must assess a TFRP for with-held income, social security, and Medicare taxes within 3 years after the later of the date the return was filed or 3 years from April 15 of the year after the calendar year that the taxes were withheld.


156 ISSUE 3: TRUST FUND RECOVERY PENALTY

right to question the scope of the questions and to clarify the questions for their clients. When asked a question by an RO, clients can simply state that they are deferring the question to their authorized representative.

A Form 4180 interview should not be an adversarial proceeding. The IRS can issue a summons to compel the taxpayer to appear and supply business documents at a Form 4180 inter-view, but it cannot compel or force the taxpayer to make statements.

Form 4180Section I of Form 4180, “Person Interviewed,” asks the individual to describe his or her job and association with the business.

Section II, “Responsibilities,” asks whether the individual performed any of the following duties or functions:

1. Determined financial policy2. Directed or authorized payments of bills/

creditors3. Prepared, reviewed, signed, or autho-

rized transmittal of payroll tax returns4. Had knowledge that withheld taxes were not

paid5. Authorized payroll6. Authorized or made FTDs7. Authorized assignment of any EFTPS or elec-

tronic banking PINs or passwords8. Had signature authority or PIN assignment

on business bank accounts

It also asks the interviewee to name and pro-vide contact numbers for any other individual who could perform any of the above functions.

Section III of Form 4180 is the signatures, and Section IV, “Business Information,” identi-fies corporate officers and directors, and banking information.

Section V, “Knowledge/Willfulness,” includes the following questions:

1. Whether the business paid financial obliga-tions while payroll taxes were delinquent, and if so, what bills it paid and who autho-rized the payment

2. Whether the business paid employees, and whether anyone provided funds for the net payroll

A TFRP for excise taxes or railroad retirement tax must be assessed by the later of 3 years from the original due date of the return (without exten-sions) or the date the return was filed. A few events, such as bankruptcy filings, extend the statute of limitations.

If an ongoing business enters into an install-ment agreement to pay the past-due taxes, the IRS may wait to assert a TFRP, but it will gather information to support a future assessment if the business defaults on the agreement. The IRS may ask responsible persons to sign a statute of limita-tions extension using Form 2750, Waiver Extend-ing Statutory Period for Assessment of Trust Fund Recovery Penalty.

Each Form 2750 extends the statute of limita-tions only for the person who signs the waiver, so the IRS must secure a waiver from all poten-tially responsible persons to properly extend the assessment period.

A TFRP is not dischargeable in bankruptcy, but it can be incorporated into a repayment plan. A bankruptcy court can contravene I.R.C. § 6672 and order the IRS to apply tax payments by a chapter 11 debtor to trust fund taxes, if the bank-ruptcy court concludes that paying the trust fund taxes first is necessary for the bankruptcy reorga-nization plan to succeed [United States v. Energy Resources Co., 495 U.S. 545 (1990), aff’g 871 F.2d 223 (1st Cir. 1989)].

Investigatory Interviews

The IRS RO who conducts a TFRP field inves-tigation interview uses Form 4180, Report of Interview With Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes. The questions on the form are not all-inclu-sive; the RO may ask supplemental questions. After completing the interview, the RO gives the potentially responsible person an opportunity to review and sign Form 4180. At this time the RO also signs the form and provides a copy of the signed form and a copy of IRS Notice 784, Could You Be Personally Liable for Certain Unpaid Federal Taxes? to the potentially responsible per-son or authorized representative.

Practitioners representing clients have the right to be present during Form 4180 interviews, but they cannot appear in place of their clients. Practitioners attending the interview have the


Proposal Letter 157

5

Proposal Letter

IRS Letter 1153 proposes to assess the TFRP against an individual. The IRS can give the letter directly to the individual or mail it to the respon-sible person at his or her last known address. Form 2751, Proposed Assessment of Trust Fund Recovery Penalty, which is enclosed with Letter 1153, states the outstanding liability and the pro-posed penalty for each tax period.

A taxpayer who agrees with the penalty should sign Form 2751 and return it to the office that sent the letter. A taxpayer who disagrees must file a written appeal within 60 days of the date of the letter (75 days if the mailing address is outside the United States).

Figures 5.2 and 5.3 show pertinent portions of page 1 of Letter 1153 and page 1 of Form 2751.

3. How and when the interviewee became aware of the unpaid taxes, and what actions he or she took to make sure that the business paid the taxes

4. Whether interested parties ever discussed nonpayment of taxes

5. Who handled IRS contactsSection VI of the form asks questions

about dealings with third-party payers such as a payroll service provider, and Section VII asks questions about collecting and reporting excise taxes.

FIGURE 5.2 Letter 1153, Proposal to Assess Trust Fund Recovery Penalty

Dear

Our efforts to collect the federal employment or excise taxes due from the business named above have not resulted in full payment of the liability. We therefore propose to assess a penalty against you as a person required to collect, account for, and pay over withheld taxes for the above business.

Under the provisions of the Internal Revenue Code section 6672, individuals who were required to collect, account for, and pay over these taxes for the business can be personally liable for a penalty if the business doesn’t pay the taxes. These taxes, described in the enclosed Form 2751, consist of employment taxes you withheld (or should have withheld) from the employees’ wages (and didn’t pay) or excise taxes you collected (or should have collected) from patrons (and didn’t pay), and are commonly referred to as “trust fund taxes.”

The penalty we propose to assess against you is a personal liability called the Trust Fund Recovery Penalty. It is equal to the unpaid trust fund taxes which the business still owes the government. If you agree with this penalty for each tax period shown, please sign Part 1 of the enclosed Form 2751 and return it to us in the enclosed envelope.

If you don’t agree, have additional information to support your case, and wish to try to resolve the matter informally, contact the person named at the top of this letter within ten days from the date of this letter.

You also have the right to appeal or protest this action. To preserve appeal rights you need to mail us your written appeal within 60 days from the date of this letter (75 days if this letter is addressed to you outside the United States). The instructions below explain how to make the request.

1 Letter 1153 (DO) (Rev. 3-2002)Catalog Number. 40545C


158 ISSUE 3: TRUST FUND RECOVERY PENALTY

No Appeals Hearing after Protest Period

A taxpayer has 60 days (75 days if the letter is mailed to an address outside the United States) from the date of the letter to respond to the pro-posed assessment� If the taxpayer does not file a timely protest, the IRS assesses the penalty� The taxpayer may then file a Form 843, Claim for Refund and Request for Abatement, to request a reversal of the assessment� To claim a refund of a TFRP, the taxpayer must, for each applicable tax period, pay the portion of the penalty attribut-able to either one employee (if the TFRP is based on employment taxes) or one transaction (if the claim relates to a TFRP for excise taxes)�

A TFRP appeal is sent to the address on Letter 1153, and if the parties cannot resolve the matter, it is then forwarded to the IRS Appeals Office.

Appealing a TFRPPage 2 of Letter 1153 advises recipients that they may contact the RO within 10 days of the date of the letter if they do not agree with the pro-posed assessment, have additional information to support their case, and wish to try to resolve the matter informally. But the letter also provides formal appeal rights, and an attempt at informal resolution does not extend the period for a formal protest.

FIGURE 5.3 Form 2751, Proposed Assessment of Trust Fund Recovery Penalty

Form 2751 (Rev. 7-2002)

Department of the Treasury -- Internal Revenue Service

Proposed Assessment of Trust Fund Recovery Penalty (Sec. 6672, Internal Revenue Code, or corresponding provisions of prior internal revenue laws)

Report of Business Taxpayer’s Unpaid Tax Liability

Name and address of business

Tax Return

Form Number

Tax Period

Ended

Date Return

Filed

Date Tax Assessed

Identifying

Number

Amount

Outstanding

Penalty

Agreement to Assessment and Collection of Trust Fund Recovery Penalty

Name, address, and social security number of person responsible I consent to the assessment and collection of the penalty shown for each period, which is equal either to the amount of federal employment taxes withheld from employees' wages or to the amount of federal excise taxes collected from patrons or members, and which was not paid over to the Government by the business named above. I waive the 60-day restriction on notice and demand set forth in Internal Revenue Code Section 6672(b). Signature of person responsible

Date

Part 1 - Please sign and return this copy to Internal Revenue Service Catalog No. 21955U Form 2751 (Rev. 7-2002)


Qualifying Organizations 159

5

If the total amount of the proposed TFRP assessment for each tax period (inclusive of pen-alties and interest) is $25,000 or less, the taxpayer can appeal the assessments in an informal letter that states that the taxpayer wants an appeals con-ference. The letter should explain why the tax-payer is not responsible for the unpaid taxes and/or why the taxpayer disagrees with the amount of the proposed assessments. It should also include a clear explanation of the taxpayer’s duties and responsibilities during the tax periods involved. The taxpayer should enclose a copy of the Letter 1153.

If more than one tax period is involved, and any tax period assessment exceeds $25,000, the taxpayer must file a formal written protest for all of the tax periods. A formal protest must include the same information as an informal protest, but it should also cite the law or authority, if any, on which the taxpayer is relying. The taxpayer must sign the protest under the penalties of perjury by making the following statement: “Under the pen-alties of perjury, I declare that I examined the facts stated in this protest, including any accompany-ing documents, and, to the best of my knowledge and belief, they are true, correct, and complete.”

Representative’s Declaration

If the taxpayer’s representative prepares and signs the protest, the representative should substitute a declaration stating that the representative is submitting the protest and accompanying docu-ments, and knows personally that the facts stated in the protest and accompanying documents are true and correct�

Right of Contribution

The IRS can collect the total amount of the TFRP only once, whether from a single responsible indi-vidual or from a group of responsible individuals. The IRS is not required to apportion the liability, and it will collect the funds from the most readily available source.

I.R.C. § 6672(d) gives the person who pays the TFRP a right of proportionate contribution from other responsible persons. If the person who paid the TFRP files a lawsuit against the other respon-sible individuals, the IRS is not a party to the suit.

ISSUE 4: NEW FORM 1023-EZ Small charities can file Form 1023-EZ, which is a streamlined application for I�R�C� § 501(c)(3) tax-exempt status�

The new Form 1023-EZ, Streamlined Applica-tion for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, released in July 2014, is three pages. The standard Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, is 26 pages. Most small organizations, including as many as 70% of all applicants, qualify to use the new streamlined form. Prior to releas-ing the new form, the IRS had more than 60,000 I.R.C. § 501(c)(3) applications in its backlog, and many of them had been pending for 9 months.

Qualifying Organizations

To qualify for exemption under I.R.C. § 501(c)(3), the organization must be organized and operated exclusively for one or more of the

following purposes: charitable, religious, educa-tional, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals.

Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible to use Form 1023-EZ.

The Instructions for Form 1023-EZ identify 26 situations or types of organizations that are not eligible to file Form 1023-EZ, such as an organi-zation that does not have a US mailing address, a successor to a for-profit entity, and a terrorist organization.

If an organization is not eligible to file Form 1023-EZ, the organization may file Form 1023 or Form 1024, Application for Recognition of Exemption Under Section 501(a), to apply for tax-exempt status.


160 ISSUE 4: NEW FORM 1023-EZ

If Form 1023-EZ is not filed within 27 months of formation, the effective date of exempt status is the date Form 1023-EZ is submitted.

If Form 1023-EZ is not filed within 27 months of formation, and the organization believes it qualifies for an effective date that is earlier than the submission date, the filer can request an ear-lier effective date. After receiving its determina-tion, the filer must send correspondence to the address in the Instructions for Form 1023-EZ stat-ing the filer’s name and EIN, the requested effec-tive date, and an explanation of why an earlier date is warranted. Alternatively, the applicant can file Form 1023. Figure 5.4 shows a completed Form 1023-EZ for Sample Food Pantry.

Annual Report Required

Unless the taxpayer chooses to file Form 990 or Form 990-EZ, small tax-exempt organizations whose annual gross receipts are usually $50,000 or less must file Form 990-N every year� Form 990-N, also known as the e-Postcard, is filed elec-tronically at https://epostcard.form990.org/� The organization will automatically lose its tax-exempt status if it fails to file the e-Postcard (or Form 990 or 990-EZ) for 3 consecutive years�

Filing Form 1023-EZ

The Form 1023-EZ can be filed only elec-tronically. The IRS will not accept a printed application.

Before completing the online application, the applicant should read the Instructions for Form 1023-EZ and complete the eligibility worksheet in the instructions.

Form 1023-EZ is filed at Pay.gov. To begin, enter “1023-EZ” in the search box. A user name and password are required to register and elec-tronically file this form.

Complete the three-page Form 1023-EZ. If the form appears compressed on Pay.gov when using Internet Explorer, turn on the “Compat-ibility View.” Instructions for each version of Internet Explorer can be found on the Microsoft website.

The applicant must pay a $400 user fee when submitting Form 1023-EZ.

When to File: Effective Date

Generally, Form 1023-EZ must be filed within 27 months after the end of the month in which the organization was legally formed. If the applica-tion is approved, the legal date of formation is the effective date of exempt status.

FIGURE 5.4 Form 1023-EZ for Sample Food Pantry


When to File: Effective Date 161

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FIGURE 5.4 Form 1023-EZ for Sample Food Pantry (Continued)


162 ISSUE 4: NEW FORM 1023-EZ

practitioners. Figure 5.5 is a screenshot of the landing page for www.irs.gov/for-Tax-Pros.

ISSUE 5: ONLINE TOOLS FOR TAX PROFESSIONALS Many self-help tools for tax professionals are available at www.IRS.gov�

The IRS website has extensive information and self-help tools for tax professionals. Over 100 links are accessible from the IRS Tax Pros web-site, including information on audit procedures, collection online tools, practitioner priority ser-vice, and frequently used telephone numbers for

FIGURE 5.4 Form 1023-EZ for Sample Food Pantry (Continued)


Tools for Client Assistance 163

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Tools for Client Assistance

The IRS Tax Pros website has numerous links to assist tax professionals with filing returns, arranging or verifying a payment, and other tax preparation responsibilities. The following information is all accessible from www.irs.gov/Tax-Professionals/Basic-Tools-for-Tax-Professionals.

Information You Need to File Returns for Your Clients

1. Where to File2. Forms and Publications3. Information Returns Processing

FIGURE 5.5 Screenshot of www.irs.gov/for-Tax-Pros

4. Disaster Relief Resource Center for Tax Professionals

5. New PTIN Requirements for Tax Return Preparers

6. e-services: Online Tool for Tax Professionals7. Publication 13458. EIN9. Earned Income Credit (EIC)

10. EIC Electronic Toolkit for tax Preparers11. EIC Assistant12. EIC Pubs, Forms, and Brochures13. EIC Due Diligence Requirements14. Maximize Effectiveness of Check-The-Box

Authorization15. Filing an Extension


164 ISSUE 5: ONLINE TOOLS FOR TAX PROFESSIONALS

Campus Responsibilities and Operations1. Campus Video: A Dialogue with Practitioners2. CAF Unit Addresses, Fax Numbers, and

State Mapping3. Centralized Lien Processing Unit Publication

14684. Understanding Your CP2000 Notice5. Understanding a Federal Tax Lien6. FOIA Request for CAF Representative/

Client listing7. How EINs Are Assigned8. Internal Revenue Manual, Part 21, Customer

Account Services9. Practitioner Priority Service

Reference Materials1. Issue Management Resolution System

(IMRS)2. Internal Revenue Manual3. Advance Notices for Tax Professionals4. IRS Tips for Bankruptcy Trustees5. Tax Code, Regulations, and Official Guidance6. Subscription Services7. IRS Freedom of Information8. Index of Applicable Federal Rates9. Audit Technique Guides

Representing Clients Before the IRS After Returns Have Been Filed1. Understanding Notices2. IRS Notices and Bills, Penalties and Interest

Charges (Topic 653)3. Understanding The Collection Process (Pub-

lication 594)4. Instructions for Form 843, Claim for

Refund and Request for Abatement5. Publication 556, Examination of Returns,

Appeal Rights, and Claims for Refund6. Practitioner priority service7. Face-to-Face Tax Help8. Taxpayer Advocate Service

16. W-2: Additional, Incorrect, Lost, Nonreceipt, Omitted

17. Where’s My Refund?

Confirming Payments or Credits on a Tax Account1. Transcript Delivery through E-Services2. EFTPS3. Practitioner Priority Service

Tax Payment Alternatives1. Collection Procedures for Taxpayers Filing

and/or Paying Late (This link leads to an additional 32 links, including the Collection Financial Standards for housing and utilities, food, clothing and other, transportation, and health care.)

2. Make a Payment3. EFTPS4. Payment Plans, Installment Agreements5. Online Payment Agreement Application6. Online Payment Agreement (Video)7. Offer in Compromise8. Offer in Compromise Pre-Qualifier tool9. Form 656, Offer in Compromise (Video)

10. Owe Taxes? Understanding IRS Collection Efforts (Video)

Your Responsibilities As A Tax Professional1. Treasury Dept. Circular 2302. Standards of Practice for Tax Professionals3. Office of Professional Responsibility4. Return Preparer Office Enrolled Agent

Program5. How To Report Suspected Tax Fraud Activity6. Preparer Penalties7. Section 7216 Information Center8. Section 6694, Preparer Penalty Provi-

sions Under the Small Business and Work Opportunity Act of 2007

9. Section 7216, Guidance Necessary To Facilitate Electronic Tax Administration


Tools for Client Assistance 165

5

Criminal Investigation Division and Enforcement InitiativesThese initiatives are found at www.irs.gov/uac /Criminal-Enforcement-1.

1. If you suspect or know of an individual or company that is not complying with the tax laws, you may report this fraudulent activity.

2. If you suspect that your taxpayer has pro-vided you with false information, read Publi-cation 3857 for information on what you can do.

Treasury Inspector General for Tax Administration (TIGTA) The TIGTA link at www.treasury.gov/tigta reports fraud, waste, and abuse within the IRS and related entities.

Frequently Used Telephone Numbers for Practitioners

1. IRS Hotlines and Toll-Free numbers [See Figure 5.5.]

2. IRS Return Preparer Office3. Disaster Hotline: 866.562.52274. Practitioner Priority Service: 866.860.42595. Business Specialty Tax Line: 800.829.49336. Forms and Publications: 800.829.36767. Refund Hotline: 800.829.19548. E-Help Desk: 866.255.06549. T a x - E x e m p t O r g a n i z a t i o n s :

877.829.550010. Health Coverage Tax Credit Contact Center:

866.628.428211. Report Tax Schemes: 866.775.747412. EFTPS Customer Service: 800.555.447713. Taxpayer Advocate: 877.777.477814. Automated Substitute for Return (ASFR) Call

Site: 866.681.427115. Identity Protection Specialized Unit:

800.908.4490

Figure 5.6 provides a chart of IRS hotlines and toll-free numbers.

IRS Collection Tools and Clients’ Rights

Tools

1. Understanding a Federal Tax Lien2. Levies3. Notices of Potential Third Party Contact

a. Notice 1219-Ab. Notice 1219-B

Rights

1. Your Appeal Rights (Topic 151)2. Publication 5, Your Appeal Rights and How To

Prepare a Protest If You Don’t Agree3. Form 12153, Request for a Collection Due

Process Hearing4. Collection Appeal Rights5. Form 9423, Collection Appeal Request6. Fast Track Mediation7. Offer in Compromise8. Taxpayer Advocate Service9. Form 911, Request for Taxpayer Advo-

cate Service Assistance (and Application for Taxpayer Assistance Order)

Rules on Representation and Disclosure

1. Publication 947, Practice Before the IRS and Power of Attorney

2. Form 2848, Power of Attorney and Declara-tion of Representative

3. Form 88214. Third Party Authorizations5. Third Party Authorization Product line6. Centralized Authorization File (CAF)

Information

Requesting Transcripts and Other IRS Information on Clients1. Online Tools for Tax Professionals2. Practitioner Priority Service3. Copies of Tax Returns

a. Form 4506, Request for Copy of Tax Return

b. Form 4506T, Request for Transcript of Tax Return


166 ISSUE 5: ONLINE TOOLS FOR TAX PROFESSIONALS

FIGURE 5.6 IRS Hotlines and Toll-Free Numbers


5

Issue 6: Directory of Federal Tax Return Preparers 167

The preface to the directory advises the user of the following:

1. Anyone with a PTIN can prepare a tax return for a client. However, tax return prepar-ers have differing levels of skills, education, and expertise. The searchable directory is intended to help you with your choice by pro-viding a listing of preparers in your area who currently hold professional credentials recog-nized by the IRS, or who hold an Annual Fil-ing Season Program Record of Completion.

ISSUE 6: DIRECTORY OF FEDERAL TAX RETURN PREPARERS A new searchable database is available to help taxpayers search for tax professionals by location, or find professionals with certain credentials or other qualifications�

The new Directory of Federal Tax Return Pre-parers, available at http://irs.treasury.gov/rpo/rpo.jsf, allows taxpayers to search for a paid tax return preparer based on location, creden-tials, and certain other qualifications. While more than 666,000 tax return preparers have active preparer tax identification numbers (PTINs) for 2015, the directory includes only the PTIN hold-ers who are attorneys, CPAs, enrolled agents, enrolled retirement plan agents, enrolled actuar-ies, or those who participate in the Annual Filing Season Program.

The E-Help Desk— E-Product Assistance

The e-Help Desk assists tax professionals, such as enrolled agents, reporting agents, electronic return originators, certified public accountants, software developers, and transmitters, with non-account related questions, and issues concerning e-products� The e-Help Desk provides support for IRS e-file individual and business, EFTPS, SAM, and e-services issues� It is open Monday through Friday 6:30 a�m� to 6:00 p�m� Central Time�

Keeping Current

It is important for tax professionals to keep cur-rent with the latest tax laws and the latest tax return processing information. The IRS Tax Pros website also has links for the following:

1. Annual Filing Season Program2. Tax Professional News & Resources3. Continuing Education Resources4. IRS Nationwide Tax Forums5. Subscribe to E-News for Tax Professionals6. Latest Return Preparer Statistics7. Return Preparer Letters and Visits

Preparer Guidelines

Tax return preparers must adhere to the respon-sibilities of being a tax return preparer. The IRS Tax Pros website provides links to the following resources:

1. Oversight & Professional Responsibility2. Disclosure Rules (Section 7216)3. Tax Preparer Credentials and Qualifications4. IRS Tax Code

Other Tax Pro Links

The following links are located on the outer mar-gins of the IRS Tax Pros website:

1. Access to E-Services 2. E-Filing Resources3. ACA for Tax Pros4. PTIN System Renewal or Sign-up5. Contacts for Tax Pros

a. Practitioner Priority Service®b. How to Contact the Return Preparer

Office6. Taxpayer Bill of Rights


168 ISSUE 6: DIRECTORY OF FEDERAL TAX RETURN PREPARERS

1. Country: United States or a foreign country2. Zip/Postal Code: US zip code or postal code

for all other countries3. Distance: 5, 10, 25, 50, 100, or 200 miles 4. Last Name: Enter at least the first three letters

of the last name 5. Credential/Other: Check all that apply or

leave blank if no preference

Figure 5.7 is a screenshot of what taxpayers see when using the directory.

2. “Understanding Tax Return Preparer Cre-dentials and Qualifications” can help you learn more about the different types of tax professionals.

3. “Choosing a Tax Professional” provides more guidance for making this important choice.

4. This directory is updated regularly. It may take up to 4 weeks after the IRS receives an update for a tax return preparer’s information to be added or revised in the directory.

Searching the Directory

The user has a number of variables to choose from when searching for a preparer.

FIGURE 5.7 Directory Search Page


Preparer Directory FAQs 169

5

Example 5.2 Searching for Tax Preparer

Cathy Cautions wants to find a tax professional within 10 miles of her home in Iola, Wisconsin, with a 54945 zip code. She does not have a cer-tain credential in mind, so she does not check any box. Figure 5.8 shows the search results:

1. Enrolled agent2. Certified public accountant3. Attorney4. Enrolled retirement plan agent5. Enrolled actuary6. Annual Filing Season Program participant

The directory does not list noncredentialed return preparers who are not Annual Filing Sea-son Program participants.

If you believe you meet these criteria, log into your online PTIN account at www.irs.gov/ptin and confirm your information.

■■ Have you self-reported your professional credential if you have one? If not, you can add it under “Manage My PTIN Account.”

■■ Have you completed the process to obtain your Annual Filing Season Program Record of Completion, if you qualify? After you qualify for the Annual Filing Season Pro-gram (AFSP), you must log into your PTIN account and elect to participate. On the Main Menu, look for “Obtain My AFSP Record of Completion,” and follow the screen prompts.

The directory is updated weekly, but it may take up to 4 weeks for new or revised information to appear. If you still can’t determine why you are not listed, contact the PTIN Helpline.

FIGURE 5.8 Tax Return Preparers within 10 Miles of 54945

While the directory lists those preparers with credentials or participation, it does not contain the address or any contact information for the preparers listed.

Preparer Directory FAQs

Question 1.I am a tax return preparer and my information is wrong in the directory. What should I do?

Answer 1.The information is taken directly from each indi-vidual’s PTIN account. To fix the information, log into your online PTIN account at www.irs.gov/ptin. On the Main Menu, under “Manage My PTIN Account,” choose “Update My PTIN Account Information.”

If you do not have an online PTIN account, contact the PTIN Helpline at 877.613.PTIN (7846) anytime Monday through Friday from 8:00 a.m. to 5:00 p.m. CST.

Question 2. I am a tax return preparer and I am not listed in the directory. Why not?

Answer 2.The directory contains only certain federal tax return preparers. It contains those with an active PTIN who are also one of the following:


170 ISSUE 6: DIRECTORY OF FEDERAL TAX RETURN PREPARERS

Answer 5.Not all paid tax return preparers are listed. There are many other preparers who have a current- year PTIN from the IRS, but who do not have a professional credential, and are not participating in the voluntary IRS Annual Filing Season Program. Also, some paid tax return preparers have opted to not be included in the directory.

Talk to your preparer and ask about his or her qualifications, education, and training. Choose a preparer carefully. More tips are available at www .irs.gov/chooseataxpro.

Question 6.I am a taxpayer. What are the differences in the types of return preparers? What should I consider when hiring a tax return preparer?

Answer 6.The IRS has many tips available at www.irs.gov /chooseataxpro.

Question 3.I am a tax return preparer and my information is included in the directory. I do not want it to appear. What should I do?

Answer 3.Log into your online PTIN account at www.irs .gov/ptin. On the Main Menu, under “Manage My PTIN Account,” choose “Opt Out of Pre-parer Directory.”

If you do not have an online PTIN account, contact the PTIN Helpline.

Question 4.I am a taxpayer. Can you provide more informa-tion about someone in the directory?

Answer 4.No, the information shown is all that is publi-cally available. Try the phonebook or an Internet search if you need more information to locate the preparer.

Question 5.I am a taxpayer. I searched for a specific pre-parer, but she is not listed in the directory. Why not? What should I do?

ISSUE 7: TAXPAYER ADVOCATE SERVICE The Taxpayer Advocate Service plays a vital role in protecting taxpayers’ rights and helping to resolve tax issues�

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. TAS ensures that taxpayers are treated fairly and know and understand their rights. Tax profes-sionals can report systemic problems to TAS, and TAS investigates the cause and recommends corrective action. In addition, the National Tax-payer Advocate issues two reports to Congress each year: its Objectives Report and its Annual Report. The Objectives Report contains goals and activities planned for the coming year, and the Annual Report summarizes the most serious problems that taxpayers encounter, and recom-mends solutions.

Nina Olson is the National Taxpayer Advo-cate and is also the manager of TAS, which has 75 offices in 50 states, with 1,900 staff members. TAS has helped close 250,000 taxpayer files per year.

TAS Eligibility

TAS helps individuals, businesses, and exempt organizations. If a situation qualifies for TAS assistance, TAS assigns one advocate who works with the IRS to get the problem resolved.

To be eligible for TAS help, the case must fall into one of these general categories:

1. The taxpayer is experiencing financial diffi-culty, emergency, or hardship, and the IRS must move much faster than it usually does (or even can) under its regular procedures. In those cases, time is of the essence. If the IRS doesn’t act quickly (for example, to remove a levy or release a lien), the taxpayer will expe-rience even more financial harm.

2. Many different IRS units and steps are involved, and the case needs a “coordinator”


5

TAS Eligibility 171

or “traffic cop” to make sure everyone does his or her part.

3. The problem is not being resolved through regular IRS channels.

4. Unique facts or issues (including legal issues) are present, and the IRS is applying a “one size fits all” approach, is not listening to the taxpayer, or does not recognize that it needs new guidance for those circumstances.

Example 5.3 Unscrupulous Payroll Service Provider

As reported by the Taxpayer Advocate in April, TAS helped a small business defrauded by an unscrupulous Payroll Service Provider (PSP). The taxpayer provided money to the PSP to calculate and deposit its employment taxes with the IRS. The PSP embezzled the money instead of sending it to the IRS, but the taxpayer was still liable for the debt to the IRS. TAS worked to obtain release of a levy the IRS had placed on the business for its unpaid tax debt. TAS determined that hundreds

of businesses were affected by this one PSP. TAS helped these businesses to avoid liens and penal-ties, and helped them resolve their debts through offers in compromise. TAS turned the issue into a national project, successfully advocating for tax-payers throughout the country.

TAS Website

The landing page for TAS is designed for the gen-eral public, but there is also a link to information for tax professionals. Figure 5.9 shows a screen-shot of the landing page, found at www.irs.gov/Advocate.

The TAS tax toolkit is accessed by clicking on the TAS logo on the far right of the TAS landing page, just above the “Trending in TAS” heading. The Tax Pros landing page is accessed by clicking on “For Tax Pros” on the far right of the menu at the top of the TAS tax toolkit landing page. Figure 5.10 is a screenshot of the Tax Pros TAS landing page.

FIGURE 5.9 TAS Information for Taxpayers


172 ISSUE 7: TAXPAYER ADVOCATE SERVICE

FIGURE 5.10 TAS Information for Tax Professionals


5

Systemic Advocacy Management System 173

Tax Advocate Service Estimators

TAS has developed several tools to assist individ-uals and employers to estimate their Affordable Care Act (ACA)–related credits and payments.

1. The Premium Tax Credit Change Estimator helps an individual estimate how the pre-mium tax credit will change if the income or family size changes during the year [www.taxpayeradvocate.irs.gov/estimator/

premiumtaxcreditchange/]. 2. The Individual Shared Responsibility Pay-

ment Estimator helps estimate the amount that must be paid for someone who did not have minimum essential coverage during the year [www.taxpayeradvocate.irs.gov/estimator/isrp/].

3. The Small Business Health Care Tax Credit Estimator helps determine eligibility for the Small Business Health Care Tax Credit, and estimates the amount of credit. This tool pro-vides an estimate for tax year 2014 and subse-quent years [www.taxpayeradvocate.irs.gov/estimator/smallbusiness2014/].

Premium Tax Credit Change EstimatorThe estimator requires the following information:

■■ An estimate of monthly income■■ Family size (includes taxpayer, spouse, and dependents)

■■ The age of each family member enrolled in Marketplace coverage, and whether the member is eligible for coverage outside of the Marketplace (for example, cover-age through an employer, Medicare, or Medicaid)

■■ Expected filing status■■ The state, county, and zip code of residence■■ The cost of the benchmark plan used to cal-culate the advance credit payments, if living in a state that is not participating in the fed-eral Marketplace (found at Healthcare.gov)

■■ The monthly premium for the health insur-ance plan in which the individual is cur-rently enrolled

■■ The monthly advance premium credit pay-ments for current coverage (if any)

The estimator provides only an estimate of the changes to the premium tax credit. It does not calculate the actual credit.

This tool does not report the changes to the Marketplace where the healthcare coverage was purchased. The insured must report all changes directly to the Marketplace, because changes can affect coverage and the tax credit. Even if all changes are reported, there still can be a refund or balance due.

Systemic Advocacy Management System

The Systemic Advocacy Management System (SAMS) office is part of the TAS. SAMS advo-cates changes that benefit groups of taxpayers. SAMS investigates systemic issues that

■■ always affect multiple taxpayers;■■ do not apply to just one taxpayer;■■ involve IRS systems, policies, and procedures;

■■ involve protecting taxpayer rights, reducing burden, ensuring fair treatment, or providing essential taxpayer services.

To report a problem to SAMS, select “Know of a problem that affects multiple taxpay-ers? Send it to TAS” in the upper right corner of the TAS landing page. This will take you to the SAMS main page [www.irs.gov/Advocate /Systemic-Advocacy-Management-System-SAMS]. Alternatively, complete a fillable Form 14411 [www.irs.gov/pub/irs-pdf/f14411.pdf ] and fax it to 202.317.4204.

SAMS maintains independence from other IRS functions, looks at issues impartially, and pursues recommendations from that perspective.

The SAMS office also helps coordinate and produce the National Taxpayer Advocate’s Annual Report to Congress, which reports TAS activities for each fiscal year.



Annual Report to Congress

The National Taxpayer Advocate (NTA) submits two reports to Congress each year; an Annual Report in January, and an Objectives Report in June. These reports are delivered to the Senate Committee on Finance and the House Commit-tee on Ways and Means, with no prior review or comment from the IRS commissioner, IRS Over-sight Board, secretary of the Treasury, Office of Management and Budget, or any other Treasury officer or employee.

Most Serious Problems Encountered by TaxpayersThe 2014 TAS Annual Report analyzes more than 20 of the most serious problems encoun-tered by taxpayers, and it includes legislative and administrative recommendations for solving those problems.

The Right to Quality Service

1. TAXPAYER SERVICE: Taxpayer service has reached unacceptably low levels and is getting worse, creating compliance barriers and significant inconvenience for millions of taxpayers.

2. TAXPAYER SERVICE: Due to the delayed completion of the Service Priorities Initiative, the IRS currently lacks a clear rationale for taxpayer service budget allocation decisions.

3. IRS LOCAL PRESENCE: The lack of a cross-functional geographic footprint impedes the IRS’s ability to improve voluntary compli-ance and effectively address noncompliance.

4. APPEALS: The IRS lacks a permanent appeals presence in 12 states and Puerto Rico, making it difficult for some taxpayers to obtain timely and equitable in-person hear-ings with an appeals officer or settlement offi-cer in each state.

5. VITA/TCE FUNDING: Volunteer Tax Assistance Programs are too restrictive, and the design grant structure is not adequately based on specific needs of served taxpayer populations.

The Right to a Fair and Just Tax System: Complexity

6. HEALTH CARE IMPLEMENTATION: Implementation of the Affordable Care Act may unnecessarily burden taxpayers.

7. OFFSHORE VOLUNTARY DISCLO-SURE (OVD): The OVD programs initially undermined the law, and still violate taxpayer rights.

8. PENALTY STUDIES: The IRS does not ensure that penalties promote voluntary com-pliance, as recommended by Congress and others.

9. COMPLEXITY: The IRS does not report on tax complexity, as required by law.

10. COMPLEXITY: The IRS has no process to ensure front-line technical experts discuss legislation with the tax writing committees, as requested by Congress.

11. WORKLOAD SELECTION: The IRS does not sufficiently incorporate the findings of applied and behavioral research into audit selection processes as part of an overall com-pliance strategy.

The Right to Be Informed: Access to the IRS

12. ACCESS TO THE IRS: Taxpayers are unable to navigate the IRS and reach the right person to resolve their tax issues.

13. CORRESPONDENCE EXAMINATION: The IRS has overlooked the congressional mandate to assign a specific employee to correspondence examination cases, thereby harming taxpayers.

14. AUDIT NOTICES: The IRS’s failure to include employee contact information on audit notices impedes case resolution and erodes employee accountability.

15. VIRTUAL SERVICE DELIVERY: Despite a congressional directive, the IRS has not maximized the appropriate use of videocon-ferencing and similar technologies to enhance taxpayer services.


Objectives Report to Congress 175

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The Right to Be Informed: Adequate Explanations

16. MATH ERROR NOTICES: The IRS does not clearly explain math error adjustments, making it difficult for taxpayers to understand and exercise their rights.

17. NOTICES: Refund disallowance notices do not provide adequate explanations.

18. COLLECTION DUE PROCESS: The IRS needs specific procedures for performing the collection due process balancing test to enhance taxpayer protections.

19. FEDERAL PAYMENT LEVY PROGRAM: Despite some planned improvements, tax-payers experiencing economic hardship con-tinue to be harmed by the federal payment levy program.

20. OFFERS IN COMPROMISE: Despite con-gressional actions, the IRS has failed to real-ize the potential of offers in compromise.

21. OFFERS IN COMPROMISE: The IRS does not comply with the law regarding victims of payroll service provider failure.

22. MANAGERIAL APPROVAL FOR LIENS: The IRS’s administrative approval process for notices of federal tax lien circumvents key taxpayer protections in RRA 98.

23. STATUTORY NOTICES OF DEFI-CIENCY: Statutory notices of deficiency do not include local Taxpayer Advocate office contact information on the face of the notices.

In addition to identifying taxpayer problems, the report includes dozens of recommendations for administrative change, and almost two dozen recommendations for legislative change.

Objectives Report to Congress

The midyear Objectives Report to Congress identifies the priority issues the TAS will address in the upcoming fiscal year, including the IRS’s long-term strategic planning, tax-related identity theft, and administration of the Patient Protection and Affordable Care Act. The report also pres-ents highlights of the recently concluded filing season.

According to NTA Nina Olson,

The 2015 filing season was akin to A Tale of Two Cities. For the majority of taxpay-ers who filed their returns and did not require IRS assistance, the filing season was generally successful. For the segment of taxpayers who required help from the IRS, the filing season was by far the worst in memory.

In the preface to the Objectives Report to Congress, NTA Olson states,

FY 2015 has been very challenging for the IRS and incredibly difficult for taxpayers and their representatives, particularly in the area of taxpayer service. There is no doubt that the deficiencies in taxpayer service are substantially attributable to a lack of resources. Over the long term, temporary periods of limited funding can have the salutary effect of causing an organization to rethink its mission and allocate its resources more effectively. The IRS is, in fact, evaluating ways to accomplish its mission more cheaply. But from a taxpayer perspective, I am con-cerned its long-term approach is headed in the wrong direction.

Focus for 2016The NTA’s recommended areas of focus for 2016 include the following:

1. The IRS should provide victims of identity theft with a true single point of contact to help them resolve their account problems and obtain their refunds.

2. The IRS agrees it should issue refunds to vic-tims of return preparer fraud, but it has been slow to develop necessary procedures.

3. The IRS’s administration of the Afford-able Care Act has gone well overall, but some glitches have arisen.

4. The IRS’s implementation of FATCA (For-eign Account Tax Compliance Act) has in some cases imposed unnecessary burdens and failed to protect the rights of affected taxpayers.



11. The IRS must have a comprehensive review process for guidance and other documents to protect taxpayer rights, improve customer service, and operate more efficiently.

Resources—Full ReportThe full report contains two volumes. Volume 1 is a 129-page Objectives Report to Congress, and is available at www.taxpayeradvocate.irs.gov/reports/fy-2016-objectives-report-to-

congress/full-report. Volume 2 is a 92-page report, “IRS Responses and National Taxpayer Advocate’s Comments Regarding Most Serious Problems Identified in the 2014 Annual Report to Congress,” and is available at www.taxpayerad-vocate.irs.gov/Media/Default/Documents/2016-JRC/Volume_2.pdf.

5. IRS procedures for levies on retirement plan assets create financial harm and undermine taxpayer rights.

6. As the IRS migrates to more self-service tools and online services, low income and other vulnerable taxpayer populations may face greater compliance challenges.

7. Additional requirements for appeals access and compressed case timelines impair the fundamental rights of taxpayers.

8. The IRS approves many applications for tax-exempt status almost automatically, often based on insufficient information.

9. International local taxpayer advocates would provide valuable assistance to taxpayers and protect their rights.

10. TAS continues to work with the IRS to imple-ment the taxpayer bill of rights into IRS operations.
