IRS Hot Topics of the Day Dan Breece

IRS Hot Topics of the Day Dan Breece Lori Cacioppo April 14, 2010

Topics Ø Reminders for Last Minute Tax Filers Ø Get Recovery Tax Breaks Ø Return Preparer Initiative Ø Collection Issues

Reminders for Last Minute Tax Filers Ø Deadlines Ø Recovery Tax Breaks Ø File Electronically Ø Direct Deposit for Refunds Ø Pay Electronically Ø Extension of Time to File Ø Installment Agreements

Don’t Miss the Deadline

Recovery Tax Breaks Ø The Homebuyer Credit Ø Making Work Pay Credit Ø American Opportunity Credit Ø Home Energy Credit Ø New Car Tax and Fee Deduction

Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA) Ø First time homebuyers have qualified for refundable tax credits as part of the economic stimulus package Ø With that program set to expire at the end of November, Congress voted to extend and expand the program Ø President Obama signed WHBAA into law, November 6, 2009

First Time Homebuyer Credit for 2008 Purchases Ø Maximum credit $7, 500 Ø Repayment over 15 years - starting on tax year 2010 return Ø Purchases must have been completed between 4/9/2008 and 12/31/2008

First Time Homebuyer Credit for 2009 and 2010 Purchases Ø First Time Homebuyers l Maximum credit $8, 000 ($4, 000 for married filing separately), l Purchase must be completed between 01/01/2009 and 4/30/2010 Ø Long Time Homeowners l Maximum credit $6, 500 ($3, 250 for married filing separately) l Purchase must be completed between 11/7/2009 and 4/30/2010 Ø Credit allowed to homebuyers who sign a binding contract by 4/30/2010 and close by 6/30/2010 Ø No Repayment, unless home ceases to be main home within 3 years of purchase date Ø Taxpayers can elect to claim credit on their prior year return. 2009 purchases can be claimed on a 2008 return, either original or amended. 2010 purchases can be claimed on a 2009 return, either original or amended.

Eligibility Requirements Ø Must be primary residence Ø Must close on the purchase prior to claiming credit Ø Must be a first-time homebuyer to claim the $7, 500 credit for 2008 purchases or $8, 000 credit for 2009/2010 purchases • Must not have not owned a home in the three years prior to the purchase Ø Must be long-time resident of same principal residence to claim $6, 500 credit for purchases after 11/6/2009 • Must have owned and used the same principal residence for five consecutive years out of eight-year period ending on date of new purchase Ø Must file Form 5405 with relevant return

Repayments of Credit Ø For 2008 purchases, normally repaid in 15 equal annual installments beginning in 2010 Ø For 2009/2010 purchases no repayment required unless a repayment trigger within 3 years

Making Work Pay Credit Ø Maximum credit is 6. 2% of earned income Ø Refundable Ø Phased out over modified AGI range of $75, 000 - $95, 000 ($150, 000 -$190, 000 if MFJ) Ø Available for tax years 2009 and 2010 Ø Figured on Schedule M or on 1040 EZ worksheet Ø Reduced by economic recovery payment and government retiree credit

Hope Education Credit Ø Hope credit modified for 2009 and 2010 Ø Maximum credit $2, 500 l l 100% of the first $2, 000 of expenses 25% of the next $2, 000) Ø Available first four years of post-secondary education Ø Qualified expenses include course materials, tuition, and fees Ø 40% credit is refundable

Nonbusiness Energy Property Credit Ø Increased to 30% Ø Limited to $1, 500 for the total of all 2009 and 2010 purchases Ø Qualifying property definition revised including update to energy efficiency requirements

Qualified Motor Vehicle Taxes Ø New deduction for qualified motor vehicle taxes on purchase of certain new cars, trucks, motorcycles or motor homes Ø Elect to add to standard deduction or take itemized deduction (if not electing sales tax deduction) Ø Limited to tax on first $49, 500 Ø Applies to purchases made after February 16, 2009, and before January 1, 2010

Other Reminders File Electronically Ø Choose Direct Deposit for Refunds Ø Buy Savings Bonds Ø Check for Errors Ø Pay Electronically Ø Extension of Time to File Ø Installment Agreement Ø

IRS Recommends Increased Oversight of Federal Tax Return Preparers (Presenter name) (Presenter title)

Background Ø IRS Return Preparer Review Ø IRS Strategic Plan Objectives Ø Oversight agency interest Ø Consumer protection group concerns Ø Taxpayer Advocate concerns Ø Almost 9 out of 10 use a paid preparer/software

Definition of Preparer for These Recommendations Any person who prepares for compensation any return of tax or any claim for refund of tax under the Internal Revenue Code

Summary of Significant Recommendations Registration, user fee, and Preparer Tax Identification Number (PTIN) usage requirements for all signing paid preparers 2. Competency testing for signing paid preparers who are not attorneys, certified public accountants, or enrolled agents 3. Continuing education requirements of 15 hours per year for signing paid preparers who are not attorneys, certified public accountants, enrolled agents, enrolled actuaries, or enrolled retirement plan agents 4. Tax compliance verification of all paid preparers 1.

1. Registration, User Fee, PTIN § Recommendations: l Implement mandatory registration and user fee for all signing paid federal tax return preparers l l Issue a PTIN to all registered preparers Require renewal registration and user fee every three years

2. Competency Testing § Recommendations: l Require all unenrolled signing paid return preparers to pass a competency test within three years from the initial implementation date. No grandfathering for experience l l Attorneys, CPAs, and enrolled agents would be exempt from testing Develop two levels of competency tests 1) Wage and non-business 1040 returns and 2) Wage and small business 1040 returns (would expand to include other business returns in later years) (more)

2. Competency Testing § Recommendations (continued): l Allow individuals to take the tests an unlimited number of times during the initial three-year implementation phase l l Individuals who pass the test will be permitted to sign returns as paid tax return preparers After completion of the initial registration phase and testing has begun, new unenrolled preparers would be required to pass the competency test prior to receiving a PTIN

3. Continuing Education § Recommendations: l Require all unenrolled signing paid preparers to complete 15 Continuing Professional Education (CPE) hours per year, including 3 hours of federal tax law updates, 2 hours of ethics, and 10 hours of federal tax law l During three-year renewal registration, require self-certification of 45 hours of CPE completion (IRS will perform random verification)

4. Tax Compliance § Recommendations: l During the three-year phase-in period, tax compliance checks would be performed on all preparers after registration l After the three-year phase-in period, the IRS would begin conducting tax compliance checks prior to issuance or renewal of a PTIN. Similar to the testing requirement, tax compliance would become a condition of registration for new applicants. (more)

4. Tax Compliance § Recommendations (continued): l Existing preparers with potential tax compliance violations would be referred to the IRS Office of Professional Responsibility for investigation

Additional Recommendations § Apply Circular 230 ethical standards to all signing and nonsigning paid preparers § Develop a comprehensive return preparer enforcement strategy § Develop a public awareness campaign to educate taxpayers, preparers, and employees on the new requirements and standards § Create a public database (more)

Additional Recommendations § Establish an IRS task force that will seek the input of the software industry to address identified risks on software dependence and the possibility of establishing industry standards § Convene a working group to review the refund settlement product industry and explore opportunities to improve efficiency of refund delivery

Efforts This Filing Season § Helping taxpayers choose a reputable preparer § Sending 10, 000 letters to preparers with large volumes of returns with error-prone issues § Visiting thousands of preparers who receive the letters to discuss preparer obligations and responsibilities § Posing as taxpayers for the purpose of determining non-compliance § Working closely with the Department of Justice to pursue civil or criminal action as appropriate

Also Coming Soon… Preparer E-File Mandate § Legislation was signed in late 2009 mandating preparers that file more than 10 individual or trust returns to e-file beginning 1/1/2011 § IRS has not yet issued rules or regulations § Analysis is underway on whether the mandate will be phased in and whethere will be exceptions, waivers, or taxpayer opt-outs

In Preparation § If you file more than 10 individual or trust returns, are you enrolled and accepted to e-file? Do you have an Electronic Filing Identification Number (EFIN)? § § If yes, all you need to do is file your customers’ returns electronically If no, the first step is to enroll to participate in IRS e-file, also known as becoming an Electronic Return Originator (ERO). You may do this anytime. Visit IRS. gov and click on the e-file logo.

Collection Issues Ø Notices Ø Federal Tax Liens Ø Installment Agreements Ø Offer in Compromise Ø Appealing Collection Issues

Issuance of Notices

Who Works What Ø After the last notice is issued: l Status 26: Worked by a Revenue Officer l Status 24: Queue – may be worked by Campus, ACS, TAC or Field Collection l Status 22: Referred to the Automated Collection System (ACS) • May also be worked at Taxpayer Assistance Centers (TAC) – walk-in sites

Federal Tax Lien Ø Legal claim against property as security for tax debt Ø Arises after assessment, notice and demand, and neglect or refusal to pay Ø NFTL is filed to establish priority against competing creditors Ø Appeal rights after filing

Levy/Seizure Authority Ø Final Notice issued at least 30 days prior to levy Ø Seizure: Property that is held by the taxpayer l Ø Car, Boat, House, etc. Levy: Property that belongs to the taxpayer that is held by someone else l Wages, bank accounts, retirement accounts, etc. Ø Levy on assets easily converted to cash first Ø Appeal Rights prior to levy within 30 days of notice l Collection Due Process hearing with Appeals Division

Installment Agreements TP can not full pay immediately Ø TP can make payments Ø TP can Full Pay prior to expiration of the Collection Statute Ø TP can make payments up to the expiration of the Collection Statute Ø Penalty and Interest continue to accrue Ø l l l Payroll Deductions Direct Debits Monthly Remittances

Streamlined Installment Agreements Ø Income Tax l Business or Individual Ø Out-of-Business Payroll Taxes Ø Balance due less than $25 K Ø Can full pay in five years Ø All Federal tax returns must be filed Ø Financial statement may be required Ø Generally, Federal Tax Lien is considered

Traditional Installment Agreements Collection Information Statement is required l l l Collection Financial Standards are used to help determine a taxpayer's ability to pay a delinquent tax liability Allowances for food, clothing and other items, known as the National Standards. Taxpayers are allowed the total National Standards amount for their family size and income level, without questioning amounts actually spent Maximum allowances for housing and utilities (based on family size) and transportation, known as the Local Standards, both vary by County. Unlike the National Standards, the taxpayer is allowed the amount actually spent or the standard, whichever is less

What is an Offer in Compromise? Ø An agreement between the taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed

Objectives of the OIC Program Resolution in best interest of both the taxpayer and the government Ø Provide taxpayer a fresh start toward future compliance Ø Obtain what can be reasonably collected as early as possible and at least cost Ø Revenue that may not be collectable through other means Ø

Basis of OICs Ø Doubt as to Collectibility - doubt that the tax liability could be fully paid during the life of the statute Ø Effective Tax Administration - exceptional circumstance exists: public policy/equity/economic hardship Ø Doubt as to Liability - doubt exists that the assessed tax is correct

OIC Payment Terms Lump Sum Cash Offer Ø Short Term Periodic Payment Offer Ø Deferred Periodic Payment Offer Ø

Lump Sum Cash Offer Ø Payable in five or fewer installments upon written notice of acceptance Ø Offer must be accompanied by 20% of the amount being offered and the $150 application fee or a completed Form 656 -A Ø 20% payment is not refundable, regardless of the outcome of the OIC

Determining the Lump Sum Offer Amount Ø 5 or fewer installments in 5 months or less: - Realizable value of assets + amount that could be collected over 48 months (or time remaining on statute, whichever is less) Ø 5 or fewer installments in more than 5 months but within 24 months : - Realizable value of assets + amount that could be collected over 60 months of payments (or time remaining on statute, whichever is less)

Determining the Lump Sum Offer Amount (continued) Ø 5 or fewer installments in more than 24 months: - Realizable value of assets + amount that could be collected over the time remaining on the statute

Short Term Periodic Payment Offer Ø The offer amount must be paid within 24 months of the date the IRS received the offer Ø The first installment and the $150 application fee or a completed Form 656 -A are due upon filing

Determining the Short Term Periodic Payment Offer Amount Ø The offer amount must equal or exceed: The realizable value of assets + what could be collected over 60 months of payments, or the time remaining on the statute, whichever is less

Deferred Periodic Payment Offer Ø Payable in installments in 25 or more months but within the life of the remaining statutory period for collection Ø Offer must be accompanied with the first proposed installment payment and the $150 application fee, or a completed Form 656 -A

Determining the Deferred Periodic Payment Offer Amount Ø The offer amount must equal or exceed: The realizable value of assets + the amount that could be collected through monthly payments during the remaining life of the collection statute.

Processability Criteria The Taxpayer Must: 1. Not be a debtor in open bankruptcy 2. Submit $150 application fee or Form 656 -A 3. Submit 20% payment if filing a Lump Sum Cash offer, or the first installment payment if filing a Short Term or Deferred Periodic Payment offer, or submit Form 656 -A

OIC Processing Ø Offer must be filed with COIC site: Memphis or Holtsville. Ø COIC site is determined by the taxpayer’s state of residence Exception: DATL offers must be filed with Holtsville Ø COIC makes all processability determinations

Field Ø The Field OIC groups work the following types of cases: * * * * Corporations Partnerships Estates and Trusts Trust Fund Recovery Penalty (TFRP) – Doubt as to Liability (DATL) only Any business with employees Closely held corporations LLP and LLC Sole proprietors with gross receipts over $500, 000

Field (continued) Ø Field OIC groups are located in three Collection Areas: – – – California Gulf States South Atlantic

Doubt as to Liability Processing Ø Most Doubt as to Liability offers are processed and worked by a centralized Doubt as to Liability Unit in the Brookhaven Campus

Low Income Guidelines • Used to determine eligibility for exception to the application fee • Used to determine eligibility for exception to initial and all subsequent payments due during course of offer investigation • Only applies to individuals • Annual income level is based on the IRS OIC Low Income Guidelines.

Payment Designations Ø Taxpayers may designate the application of the 20% initial payment with the offer and periodic payments submitted while the offer is being investigated Ø Designation must be in writing at the time of payment and specify taxable year, period, and type of tax Ø $150 application fee cannot be designated

Payment Designations (continued) Ø Payments in excess of the required amount will be applied to tax unless designated as a deposit Ø Payments are considered “payments on tax” and are not refundable Ø Deposits are refundable if the offer is later returned, rejected, or withdrawn

Form 656 - Most Common Errors Tax periods missing or incorrect OIC amount missing or not consistent with the terms Taxpayer identification numbers missing or incorrect OIC includes joint liabilities without signatures or both parties Ø OIC submitted by a husband wife with joint liability taxes but also includes the single liabilities of one of the taxpayers. Ø Ø

Most Common Reasons for a “Processable Return” Ø Failure to provide financial information Ø Failure to stay in compliance with estimated tax payments Ø Waiver of fee not substantiated Ø Returns not filed

Tax Liens, Impact on Statutes, & Appeal Rights Ø Tax liens may be filed during the offer investigation Ø Tax liens not released until offer payment terms are satisfied Ø Statute of limitations for collection is suspended for pending offers Ø IRC § 7122 – provides for appeal of rejection of an offer

FY 2008 Program Results Ø Receipts: 43, 989 Dispositions: Total Non processable returns: Ø Acceptances: Ø Rejections: Ø Returns: 4, 706 10, 677 11, 608 13, 329 % of Total 10% 23% 25% 29%

Case Cycle Time Ø COIC * 92% of offers processed by COIC are currently closed within 6 months or less Ø Field * 74% of offers worked in our Field groups are currently closed in 9 months or less

Finally…. Ø Before Filing * Explore all collection options * Review processability checklist in Form 656 * Ensure taxpayer is current with all filing and paying requirements * Include all required fees and payments * Carefully complete financial statements and Form 656

Appealing Collection Actions Ø Traditional Appeals l Denied OICs, Trust Fund Recovery Penalties, Other Penalties Ø Collection Appeals Program l Pub. 1660 Collection Appeal Rights Ø Collection Due Process l Pub. 1660 Collection Appeal Rights

The Collection Appeals Program Ø Taxpayers can appeal under CAP when they are told by an IRS employee that a l lien, • Can also appeal denied requests to withdraw, discharge, or subordinate l l levy, or seizure action • Must 1 st appeal within 10 days to the field Collection manager after Notice of Seizure is provided will be or has been taken, or that an installment agreement is denied or terminated Ø Generally, quicker and available for a broader range of collection actions l Determinations should be made within 5 days of receipt by Appeals

The Collection Appeals Program Ø Under CAP: l Lien, Levy and Seizure • Collection is generally suspended unless in jeopardy l Installment Agreement • Collection is suspended for first 30 days after denial or termination (unless in jeopardy) • Collection is generally suspended while under appeal if timely filed

The CAP Process The taxpayer must first discuss the case with the group manager Ø If resolution is not reached, the taxpayer may request an appeals hearing Ø l l Use Form 9423 Collection Appeals Request for field (non-Campus) cases Must be submitted to the Collection manager within 2 days of managerial conference

The CAP Process Ø The decision made in the CAP hearing is FINAL Ø No subsequent CDP after lien or levy notice is later issued (if not previously done) Ø There is no judicial review

Collection Due Process CDP available if you receive one of the following notices: Ø Notice of Federal Tax Lien Filing (L 1372) l l Ø IRS must notify TP within 5 days of filing TP must file hearing request within 30 days (date will be specified on notice) Final Notice of Intent to Levy (L 1058 or 11) l l Collection action suspended for 30 days from notice date TP must file hearing request within 30 days Notice of Jeopardy Levy Ø Notice of Levy on Your State Tax Refund Ø

Right to Hearing Form 12153 Request for a Collection Due Process Hearing TP may raise issues relating to unpaid tax: Ø Appropriateness of collection actions Ø Collection alternatives l l Ø Spousal defenses l Ø Innocent or Injured Spouse Amount of tax l l Ø Offer-in-Compromise Installment Agreement No 90 -day letter received No other opportunity to dispute tax liability TP may not raise any of the above issues considered at a prior administrative or judicial hearing

Right to Hearing Collection action is generally suspended during the 30 days after the levy notice and during the appeal process if appeal was filed timely (unless in jeopardy) Ø Late Request (after 30 days) Ø l Equivalent Hearing • Same consideration • No right to judicial review • Collection actions not statutorily suspended Ø Location of CDP or Equivalent Hearing l Local Appeals Office • Frivolous arguments not considered in office l Telephone

Frivolous Arguments Ø Taxpayer must raise valid issues Ø Appeals will NOT consider the following arguments l Constitutional, Religious, Moral, Conscientious, Political, etc. l Tape Recording NOT permitted for CDP or Equivalent hearing espousing above arguments Ø Appeals will STILL solicit alternative collection methods or valid challenges to underlying audit issues

What Happens After the Hearing? l l l Account adjustment if necessary Waiver requested for agreed CDP cases “Decision Letter” sent in Equivalent Hearing cases

What Happens After the Hearing? In CDP cases where taxpayer will not sign the waiver, Appeals will issue a “Determination Letter” that addresses: Whether the IRS has verified that it followed legal and procedural requirements The issues raised by the taxpayer Whether the collection action balances the government’s need to collect with the taxpayer’s concerns about intrusiveness Taxpayer’s right to petition the Court Ø Ø l Tax Court or District Court within 30 days after Appeals determination

When are Cases Returned for Collection? Ø Request Withdrawn Ø Equivalent Hearing – when decision rendered Ø Agreed CDP – when waiver accepted Ø Unagreed CDP – when no Court petition is filed or when judicial review finalized

Retained Jurisdiction Ø Taxpayer can return to Appeals if: l l Ø Appeals’ determination is not carried out Taxpayer has a change in circumstances Before returning to Appeals under this provision, taxpayer must exhaust all other administrative remedies

Comparing CAP and CDP Ø Important distinction between CDP and CAP: l Under CDP a lien or levy action MUST have occurred first l Taxpayers may request CAP before or after lien or levy action

CDP Expands Taxpayer Rights to Resolve Disputes The taxpayer has judicial rights following CDP 1. determination, but not following CAP decision Appeals officers have broader authority in resolving a CDP 2. case than in resolving a CAP l 3. Can propose other solutions A taxpayer may have the right to challenge an underlying liability during a CDP Hearing, but not during a CAP

Tips for Collection Cases Ø Try to resolve the case as early in the process as possible Ø Taxpayer must be in full compliance during resolution period

Tips for Collection-related Cases Ø Taxpayer should bring the following records to the conference: l l l Current, verifiable financial statements Recent bank and wage statements Verification of loan balances Reliable valuations of assets Documentation supporting a qualified challenge to the underlying tax liability, if appropriate

Resources Form 9465: Installment Agreement Request Ø Publication 594: What You Should Know About the Collection Process Ø Publication 4165: An Introduction to Collection Due Process Hearings Ø Publication 1660: Collection Appeals Rights Ø Publication 1854: How to Prepare A Collection Information Statement Ø Publication 971: Innocent Spouse Relief Ø Publication 4183: Injured Spouse Claims Ø

Collection Issues Questions?