Thursday, November 13, 2014


We get a lot of questions from clients about inquiries from IRS.  Seems that when someone gets a letter or notice from our favorite federal agency most people instinctively hit the panic button. Thieves have discovered America’s paranoia over the IRS and have learned a new trick to capitalize on it, apparently with some success. The scam goes like this:

You will get a series of phone calls from someone claiming to be with the IRS. He tells you that you owe some amount, that it is long past due, and that he is here to help you resolve the matter. He will say that he is willing to work with you but if you do not work with him you will face serious consequences, including jail. He may even say that IRS agents are on their way to your home, or that this is your last chance to take care of the matter. If you do not answer the phone they leave messages with what appears to be a local call back number.

This is happening a lot here in So. Cal, but apparently it hasn’t caught on as much in other parts of the country yet. While I am getting calls from clients once a week over this, my colleagues in other cities have not even heard of it. Strange, because the callers usually have foreign accents and I assume they are calling in from outside the US, despite the local appearance of the source numbers.

Nobody is immune from this. My unlisted and blocked home phone number is on the national “Do not call” list, and I even got these calls at home. They left some very threatening messages!

To clarify, IRS will NEVER NEVER NEVER contact you by phone (or email) to initiate any kind of collection effort. If you owe them any money you will have received many letters explaining how much you owe before collection efforts get serious. In the rare event of a phone call from them it will only be after you have contacted them by phone and voluntarily given them your number. IRS never contacts taxpayers by email for collection purposes, period.

So, if you get one (or more) of these calls what do you do? You can take the number down and report it to the Phone Company, IRS, and police, but realistically, you are probably wasting your time as they get thousands of these complaints. Best suggestion is to ignore them and they will stop. Whatever you do, do not give them any information about you at all. They have your phone number, but that’s it. They have no access to anything else unless you give it to them, so don’t.

And if you are really feeling belligerent, you could have a bit of fun with it. Ask them what it’s like to live in Mumbai, or question their mother’s virtue.  Use your imagination!

Friday, May 30, 2014

Ahhh... springtime!

Well, it’s finally June, and now that Spring is in the air, our hearts and minds turn to thoughts of….Filing FBARS!

In case you forgot, an FBAR is the form you must file by June 30 if you have signature authority over a foreign bank account. It is part of the government’s effort to crack down on offshore bank accounts hiding income otherwise subject to tax.

Failure to do so can subject you to HUGE penalties, as a Mr Zwerner recently discovered. It seems Zwerner had failed to report an offshore account for many years, using it to hide income, also not reported. Because of the increased exposure to criminal prosecution and civil penalties, He had a change in heart, voluntarily disclosed the account, and paid his back taxes for all open years. He came clean BEFORE the government discovered him and hoped to avoid criminal prosecution in so doing.

He got his wish, and avoided criminal prosecution. But he didn’t count on the IRS auditing all his amended returns, and assessing penalties for each of 3 years in the amount of 50% of the highest balance in the account during each year. It went to trial and a jury ruled in favor of the IRS.

Zwerner owed penalties of $2.2 mil on an account whose highest balance was $1.7mil!

How could he have avoided this? Timely filing of his FBARs and claiming all his income on his tax returns is the simplest way to sleep well at night. And that works in all four seasons.

Tuesday, April 22, 2014

Taxing system

After just finishing my Nth (too many to count) tax season, its time to sit back and hear the predictable chorus of how unfair our taxing regime is and how it punishes successful people and the middle class while rewarding the wealthy. In fact, a recent study of International tax systems by German economists rated the U.S. 94th out of 100. At least we beat Venezuela!

While most reasonable people will agree that some form of tax system is essential to modern society, that’s about where the commonality ends. There are those who feel that a flat tax system, or a national sales tax, or higher rates for the wealthy, or lower rates for the wealthy, or some other variant, would all be better than our present system. A column in yesterday’ s OC Register discussed how the capital gains tax break  is purportedly counter-productive and unfairly favors the wealthy. There is no shortage of ideas as to how to fix our tax system, but I submit to you that the system may not be the problem. I believe it is the administrator (government) that is the problem.

The Lord ’s Prayer is 56 words long.  The Gettysburg Address is 226 words long. The Ten Commandments are 297 words.  But the Internal Revenue Code? FOUR MILLION WORDS LONG.

To paraphrase Ronald Reagan, Congress isn’t the solution, it is the problem.

Wednesday, March 26, 2014

Don’t be scammed.

Every tax filing season tax scams and frauds increase exponentially. I suspect that scammers pick up on overall IRS anxiety and use that to get victims to send them money more easily. This year the Treasury Inspector General has said that so far 2014 has seen the highest level of scammer activity ever, with some 20,000 contacts reported already.

Some advice: If you are contacted by telephone by someone claiming to be from IRS, it’s most likely a fraud. IRS usually initiates audits and collection efforts by mail. IRS will NEVER contact you by way of social media, texting or email. IRS will NEVER threaten you with deportation, jail, or cancellation of a driver’s license if you fail to pay your taxes, nor will IRS ever ask for a credit card, wire transfer, or debit card payment over the phone.

The new version of scams often appears legit and the phone number registers as an IRS number on your phone. If you are ever contacted by phone from someone claiming to be from IRS, hang up and call IRS at (800)829-1040 to determine if it’s official.

Monday, March 17, 2014

High Risk Occupation?

Our Tax Season is in full swing now, and the entire staff is working themselves to death trying to keep up with the influx of projects. Regardless, nobody actually expects to die at work in a CPA firm. Other than clogging a few arteries with the ever present cookies and snacks that seem to show up, you wouldn’t think that being a tax preparer is high risk.

Well, apparently that’s not always the case.  In Missouri a 53 year old man was arrested for choking an H&R Block worker after he became enraged over his tax situation. The assailant knocked the Block worker to the ground and is now charged with assault. The Block worker sustained minor injuries.

In Detroit, a local tax preparer was beaten and four people were shot in her office when a client was told she could not get her tax refund in cash. A friend who was with the client apparently was upset about the cash and took it upon himself to expedite things.

But it hasn’t all been one sided. A few weeks ago a Chicago tax preparer had to pull a gun on a client when the client threatened to beat him up over a fee increase. Apparently the tax pro had some concerns as he was licensed to carry the gun and was not arrested. The client however, was.

Here’s a suggestion: when you meet with your tax preparer, the first thing you should ask is if they are packing heat.  Depending on the answer you may want to be more polite than usual.  

Saturday, February 1, 2014

The Geithner Defense

Former US Secretary of the Treasury Timothy Geithner took a lot of heat during his confirmation hearings when it was revealed that he had not paid all of his income taxes in a timely manner. He was found to be short by almost $35,000, and blamed it on the Turbo Tax software that he used not prompting him for questions.  Thus was born two things: his nickname “TurboTax Timmy” and “the Geithner Defense”.

The Geithner defense has been used as an excuse in a number of cases, and although it was enough to get Secretary Geithner out of paying penalties (but not the tax), for some reason it has been less than successful when employed by the average Joe Taxpayer. There were a number of cases that taxpayers tried the same line that Turbo Tax Timmy used,  “The software made me do it” and whose arguments were disregarded by both the IRS and the court.

 Until Olsen.

Kurt Olsen was a patent attorney in the Department of Energy. He prepared his tax returns using the same software as our hero.  He entered some data incorrectly, the software did not alert him to it, and he understated his tax by over $9,000. Upon examination the IRS assessed the tax and a penalty. Mr. Olsen agreed to the tax but objected to the penalty, blaming his transgression on the software. The court accepted his reason and let him off the hook for $1800 in penalties!  

 As a result, we now have a formal penalty defense strategy known as the Geithner defense. The bad news is that apparently it only applies to Federal employees. Perhaps the rest of us are supposed to be smarter.

Wednesday, January 22, 2014

Will you be audited?

Now that our tax season is ramping up, I thought it would be good to address the question that we get a lot: Will I get audited? Here’s the low down on IRS audits:

Statistically overall audit rates have actually declined in the last couple years. Not only have IRS personnel been spread thin to deal with implementation of Obamacare and preventing ID theft, among other things, but overall headcount at the Service is down from previous levels due to budget cuts.

However, if you fall in to certain categories, your odds of losing the audit lottery are high. If your income is in the seven figure range you can count on a 10% chance of being examined. If your income is less than that but greater than $200k, your odds are about 3% of being selected. If your income is less than $200k your overall odds of an audit are slightly less than 1%.

Certain items on your tax returns will increase the odds of imperial entanglements. Things like claiming real estate professional status, running a cash intensive business, showing a large loss for a sole proprietorship, and taking deductions disproportionate with your level of income all are red flags inviting scrutiny.

And woe be to the owner of a foreign bank account that failed to disclose it to Treasury! Many former safe banking havens are caving in to US demands to share information. When that happens, it results in an investigation, and the penalties for failing to disclose such investments are very steep.

Bottom line: with reduced resources the IRS is still able to focus on high probability targets. If you fall into these categories the time to prepare for the examination is now, not when you get the “Dear Taxpayer “ letter.

Tuesday, January 21, 2014

They are Watching !

I was recently surprised to learn that the IRS’ website,  www.IRS.GOV, has a new feature. You can type in some personal data and download transcripts of your own tax return.  Wondering how well the government website designers had fulfilled this objective (call me a skeptic), I decided to give it a try.

My first attempt went well until I got to the part about establishing an account or proceeding as a guest. Apparently “guest” was the wrong answer. I was booted off the website.

My second attempt got as far as the security questions. I expected them to ask about stuff on the tax returns I submitted. The question I was asked was: in 2005 you may have obtained a loan to purchase a vehicle. Which lender was that with? I was given 4 choices, none of which looked familiar. I chose “none of the above”. Then I was asked how much my monthly payment was. I can’t remember what I had for lunch yesterday let alone what a car payment was nine years ago. And where does this ever show up on a tax return anyway? The system didn’t like my response and I was bounced out again.

My third attempt got as far as the security questions again. This time I was asked what year my house was built and what did it originally sell for? HUH? I’m not the original owner, so how should I know?  More disturbing, how do they know? My response got me bounced again and locked out for 24 hours. I would have been locked out longer if I could have keyed in what I was thinking...

When private companies access your credit report, they must seek your permission first. Apparently the Federal  government is not so constrained. The take away here is that if your tax return is being examined, you should assume that the examining agent has instant access to data that even you don’t have. If you think you are going to conceal something, think again.