THE TAX ATTIC with Jerry Coon

Jerry Coon

IRS needs bigger budget?

I might have made a slight mistake last week in putting in writing that I thought we were becoming weather-wise close to Indiana. Evidently, the weather gods were just waiting for me to write that article, because it has been winter since that time.

However, some people are happy with the cold and the snow. The ice fishermen are happy. The downhill and cross-country skiers are happy. All of the people involved in the Rockford Ice Festival are happy. The tubers are happy. The golfers of Michigan, however, are disappointed.

Let me clarify. The Michigan golfers who are stuck here in Michigan are disappointed. The Michigan golfers who are happy are those spending the winter months in states closer to the equator. However, those golfers still here have to accept the reality they have to wait until April to get back out on the course. I’m a golfer. As such, as with all golfers, shots go awry, so I’m used to being disappointed and I think I accept that reality rather well. I’m also a Detroit Tiger, Lions, Pistons and Red Wings fan. That also means I’m used to being routinely disappointed and most of the time accepting of a rather ugly reality.

Of course, just like in golf, there is always next year and, since I’m an optimistic person, it’s going to be a great year coming up for me as a golfer as well as the Tigers, Lions and Red Wings. However, even an optimistic person can’t see the Pistons having a good year.

In a previous article, I also discussed the difficult situation of the Internal Revenue Service. I believe it’s called “Damned if you do and damned if you don’t.” Come down too hard on people and they are chastised by most everyone. Go too easy on people and no one chastises them, but compliance with the tax laws suffers.

Currently, the IRS has a budget of 11.8 billion dollars. That may sound like a lot, but according to a recent study by the national taxpayer advocate’s office, it’s not enough.

The amount of taxpayer fraud and identity theft cases grew by 20% last year alone, and there were over one million returns that could have used additional screening that did not occur because of funding or personnel shortages.

The IRS has made some changes in forms to deal with identity theft cases and to help clean up the screening process.

For taxpayers who have suffered through an identity theft crisis, the IRS is issuing a six-digit Identity Protection PIN that the taxpayer must put on the Form 1040 when filing. This will help the IRS to determine if the return being filed is really from the taxpayer or if his/her identity is being hijacked.

You might be thinking that it should be impossible to file a false return using someone else’s identity. Think again. A Florida-based identity theft ring that was recently uncovered specialized in filing false tax returns for people who recently deceased. They created false returns using the deceased taxpayer’s personal information and, subsequently, received millions of dollars of false refunds. Apparently, they were only caught because of dogged forensic work by the personal representatives of some of the deceased taxpayers and the IRS itself.

Think about this. There are millions of taxpayers who are not required to file a tax return. In reality, each of these taxpayers is a potential target of having someone file a false tax return without their consent, claiming a substantial refund. Since the real taxpayer isn’t filing a return, the IRS has nothing to judge the fake one against. The refund will probably be issued.

This is a potential nationwide fiscal nightmare waiting to happen. I’m not happy about suggesting this, but perhaps the IRS does need some added funding, especially if they can demonstrate they have a plan and the personnel to keep this nightmare from happening.

The issue of taxpayers hiding money in foreign accounts has also been troublesome. To help find out exactly which taxpayers have money in foreign accounts, all taxpayers must answer a two-part question.

In the first part, the taxpayer must answer “yes” or “no” to whether the taxpayer has a financial interest in a foreign account. The second part asks whether or not the taxpayer is required to file Form TD F 90-22.1. This form is required for taxpayers who have $10,000 or more in a foreign account.

Mitt Romney will be answering “yes” to both of these questions. For the most part, when people are asked a direct question on a tax return, they tend to give an honest answer. These are direct questions and require direct answers. Most people are going to give honest answers and the IRS won’t have to do any additional screening.

To also help in the screening process with the end goal of finding unreported income, the Schedule C, Sole Proprietor form, the Schedule F, Farm Income form, and Schedule E, Rental Income form, now require taxpayers to answer two new questions:

A. Did the taxpayer make any payments in 2011 that would require the filing of Forms 1099? Yes or No.

B. If A is yes, did the taxpayer file all required Forms 1099? Yes or No.

Now those are direct questions that also require direct answers. The IRS just became more pro-active in attempting to find taxpayers who are working as subcontractors for other taxpayers.

Schedule C, F and E taxpayers are required to file 1099s for subcontractors who are paid $600 or more during the year. This ups the ante on compliance because it is forcing the taxpayer filing the Schedule C, F or E to declare under the penalties of perjury that they have filed the required forms or are not required to file the forms at all.

As you can see, compliance is becoming more important. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.

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