IRS's New Early Interaction Initiative to Help Employers Maintain Payroll Taxes

In News Release IR-2015-136, the IRS has announced a new initiative (Early Interaction Initiative) designed to more quickly identify employers who are falling behind on their payroll taxes and then help them get caught up before incurring needless interest and penalty charges. It will seek to identify employers who appear to be falling behind on their tax payments even before an employment tax return is filed and then offer helpful information and guidance through letters, automated phone messages, other communications, and, in some instances, a visit from an IRS revenue officer. IR-2015-136.

Employment Tax Audit Procedures

The IRS issued a memorandum to examiners in the Small Business/Self-Employed (SB/SE) division providing updated guidance on their responsibilities for checking that returns were filed (filing checks) and the scope of all employment tax examinations. The memorandum amends Internal Revenue Manual (IRM) 4.23.3.7.4 (titled "Scope of Employment Tax Examination"), and the new guidance is to be applied by examiners immediately. The memorandum is available at: http://www.irs.gov/pub/foia/ig/spder/SBSE-04-0915-0058.pdf.

Business Travel Per Diem Rates

The IRS released the 2015–2016 per diem rates for substantiating employees' business expenses under IRC Sec. 274(d) for lodging, meals, and incidental expenses incurred while traveling away from home. The Meal and Incidental Expense (M&IE) rates for the transportation industry increases from $59 to $63 for travel in the continental U.S. and from $65 to $68 for travel outside the continental U.S. The per diem for travel to high-cost localities increases from $259 to $275 ($68 for M&IE), while the rate for travel to other localities increases from $172 to $185 ($57 for M&IE). The incidental-expenses-only rate remains at $5 per day. The updated rates and list of high-cost locations apply to per diem allowances paid to employees after 9/30/15. Notice 2015-63, 2015-40 IRB .

Whisteblower's Award Is Ordinary Income

The taxpayer and one of his former associates filed a qui tam action (i.e., whistleblower suit) against their former employer, a medical device company, alleging that the company was involved in a Medicaid fraud scheme. After reviewing the case, the government reached a settlement with the company, requiring it to pay over $75 million. The taxpayer and his former colleague received a portion of the recovery, with the taxpayer's share being nearly $7 million. On his tax return, the taxpayer reported the award as a capital gain. The IRS sent deficiency notices, explaining that the recoveries were ordinary income, not capital gain. The taxpayer challenged the deficiencies in Tax Court, which sided with the IRS. On appeal, the Seventh Circuit upheld the Tax Court's decision, concluding that a qui tam award isn't the result of a sale or exchange of a capital asset. Instead, it's a reward intended to compensate the whistleblower for his or her work in bringing the suit, which is effectively payment for services and, thus, ordinary income. Craig Patrick, 116 AFTR 2d 2015-XXX (CA 7).

No Principal Residence Gain Exclusion after Seller Reacquires Property

A taxpayer sold his principal residence and claimed a gain exclusion under IRC Sec. 121. Upon the buyer's default of the installment agreement, the taxpayer (seller) reacquired the property. The Tax Court examined the interplay between IRC Secs. 121 (principal gain exclusion) and 1038 (disregarded gain for reacquisition of property upon buyer's default on a debt secured by the property other than payments received prior to the reacquisition). Although the cash in excess of gain previously reported on the installment sale was taxable, the question was whether the gain could be excluded under IRC Sec. 121. The Tax Court determined that the gain could not be excluded. On appeal, the Eighth Circuit affirmed the Tax Court, holding that because the taxpayer didn't resell the property within one year, which is required under IRC Sec. 1038(e) , he wasn't entitled to the principal gain exclusion. Marvin E. DeBough, No. 14-3036, 2015 WL 5059103, (CA 8)

Not Reconciling Advance Premium Tax Credits Could Result in Lost Eligibility

Individuals, who received advance payments of Premium Tax Credits (PTCs) from the Marketplace, must file Form 1040 and attach a Form 8962 [Premium Tax Credit (PTC)] reconciling the advance PTC received to the actual PTC even if not otherwise required to file. In a recent "Update on Health Care and the 2014 Tax Season" report, federal officials indicate, in addition to taxpayers who have yet to file, more than 760,000 households filed their 2014 individual returns without the required Form 8962 reconciling the advance payments. The officials note that there is still time to act, but taxpayers who do not file a return and reconcile the PTCs received last year will not be eligible for PTCs when they renew coverage for 2016. A fact sheet is available at www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2015-Fact-sheets-items/2015-07-17.html

Mid-year Tax Update

The following is a summary of important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Supreme Court upholds subsidies for health care purchased on Federal Exchange. The Supreme Court by a 6-3 vote determined that premium tax credits (also known as health insurance subsidies) under the Affordable Care Act (ACA), are not limited to taxpayers who live in States that have established their own health insurance Exchange but are also available to taxpayers living in States that rely on a Federal Exchange. While acknowledging that the challengers' arguments were strong, the Supreme Court found that the language of the law was ambiguous in light of the context and structure of the premium tax credit provisions, as well as the role of the subsidies in the ACA as a whole. With these considerations in mind, the Supreme Court concluded that allowing the subsidies for insurance purchased on any Exchange was consistent with the purpose of the ACA.

Supreme Court declares nationwide right to same-sex marriage. The Supreme Court, in a 5-4 decision, struck down four state-wide bans on same-sex marriage, holding that the Fourteenth Amendment requires all States to license a marriage between two people of the same sex. And, since same-sex couples may now exercise the fundamental right to marry in all States, the Court ruled that there is no lawful basis for a State to refuse to recognize a lawful same-sex marriage performed in another State. Tax ramifications of this decision include simplified tax filing for some taxpayers, and new filing choices for those who were in a State-sanctioned domestic partnership or civil union before the Supreme Court's decision.

New trade laws include wide variety of tax provisions. On June 29, President Obama signed into law two major trade bills: (1) the Trade Preference Extension (TPE) Act of 2015; and (2) and the Trade Priorities and Accountability (TPA) Act of 2015. These new laws contain a variety of tax provisions including the following:

• The refundable health coverage tax credit (HCTC) makes health insurance more affordable for certain trade-affected workers, Pension Benefit Guaranty Corporation (PBGC) payees, and their families by paying part of their health insurance premiums. The HCTC had expired at the end of 2013. The TPE Act provides that the HCTC applies before Jan. 1, 2020. Thus, the credit is generally retroactively extended six years through 2019. The TPE Act also makes certain changes to the HCTC, including how the health coverage tax credit interacts with the Affordable Care Act's premium tax credit.
• Qualifying taxpayers can claim a $1,000 child tax credit, which is phased out if modified adjusted gross income exceeds certain levels. The child tax credit is refundable, within certain limits. Effective for tax years beginning after Dec. 31, 2014, the TPE Act provides that any taxpayer who takes advantage of the foreign earned income exclusion for a tax year can't claim the refundable portion of the child tax credit for that year.
• Pre-age-59-1/2 withdrawals from retirement plans generally are subject to a 10% penalty tax unless one of several exceptions applies. Under one of these exceptions, distributions from a government pension-type plan aren't subject to the penalty tax if made upon separation from service after age 50 to state or local police, firefighters or emergency medical services personnel. Effective for distributions made after Dec. 31, 2015, the TPA Act broadens the category of eligible governmental workers who can qualify for the penalty tax exception to include specified federal law enforcement officers, customs and border protection officers, federal firefighters, and air traffic controllers who reach age 50 and separate from service. Additionally, the TPA Act expands the types of plans from which distributions eligible for the exception can be made.
• The tax rules impose a penalty on taxpayers that fail to file correct information returns (such as IRS Form 1099) with the IRS. There's a separate, but parallel, penalty on taxpayers that fail to provide the payee with a correct copy of the information return that was required to be filed with the IRS. The penalties are based on the duration of the delinquency and whether the delinquency was intentional, and are subject to maximums that depend on the size of the taxpayer. Effective for returns and statements required to be filed after Dec. 31, 2015, the TPE Act increases these penalties. For example, where an unintentional delinquency is corrected no more than 30 days after the return due date, the TPE Act increases the per-return penalty from $30 to $50 and the maximum penalty for any calendar year, for certain “small” taxpayers, from $75,000 to $175,000.

Regulations explain new tax-advantaged ABLE accounts.For tax years beginning after Dec. 31, 2014, states may establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts, which can be created by disabled individuals to support themselves or by families to support their disabled dependents. Contributions to the accounts are made on an after-tax basis (i.e., contributions aren't deductible), but assets in the account grow tax free. Withdrawals are tax-free if the money is used for qualified disability-related expenses. A nonqualified distribution is subject to income tax and a 10% penalty on the part of the distribution attributable to earnings. Each disabled person is limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account can be made up to the inflation-adjusted gift tax exclusion amount ($14,000 for 2015).

Comprehensive IRS regulations provide details on how ABLE accounts work, including the following:

• . . . A qualified ABLE program may accept cash contributions in the form of cash or a check, money order, credit card payment, or other similar method of payment.
• . . . If the eligible individual cannot establish the account, the eligible individual's agent under a power of attorney or, if none, his or her parent or legal guardian may establish the ABLE account for that eligible individual.
• . . . An eligible individual must present the disability certification, accompanied by the diagnosis, to the qualified ABLE program, and that certification will be treated as filed with the IRS once the qualified ABLE program has received the disability certification. 
• . . . Qualified disability expenses are not limited to expenses for items for which there is a medical necessity or which provide no benefits to others in addition to the benefit to the eligible individual. For example, expenses for common items such as smart phones could be considered qualified disability expenses if they are an effective and safe communication or navigation aid for a child with autism.

Next year's inflation adjustments for health savings accounts (HSAs). Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers, as well as other persons (e.g., family members), also may contribute on behalf of an eligible individual. A person is an “eligible individual” if he is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a HDHP, unless the other coverage is permitted insurance (e.g., for worker's compensation, a specified disease or illness, or providing a fixed payment for hospitalization).

The IRS provided the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2016 for health savings accounts (HSAs). For calendar year 2015, the limitation on deductions is $3,350 (no change from 2015) for an individual with self-only coverage. It's $6,750 (up from $6,650 for 2015) for an individual with family coverage under a HDHP. Each of these amounts is increased by $1,000 if the eligible individual is age 55 or older. For calendar year 2016, an HDHP is a health plan with an annual deductible that is not less than $1,300 (no change from 2015) for self-only coverage or $2,600 (no change from 2015) for family coverage, and with respect to which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 (up from $6,450 for 2015) for self-only coverage or $13,100 for family coverage (up from $12,900 for 2015).

Certain taxpayers can file delinquent FBARs without penalty. “U.S. persons” (U.S. citizens or residents as well as many entities) who have financial interests in or signature authority over certain financial accounts maintained with financial institutions located outside of the U.S. must file a Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate maximum values of the foreign financial accounts exceed $10,000 at any time during the calendar year. The FBAR is a calendar year report and must be filed on or before June 30 of the year following the calendar year being reported. Those required to file an FBAR but who fail to properly file one may be subject to a civil penalty. The IRS's Offshore Voluntary Disclosure Program (OVDP) offers people with unreported taxable income from offshore financial accounts or other foreign assets an opportunity to fulfill their tax and information reporting obligations, including the FBAR. In addition, streamlined filing compliance procedures are available to certain persons.

The IRS said that U.S. persons should file delinquent FBARs if they don't need to use either the OVDP or the streamlined filing procedures, have not filed required FBARs, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent FBARs. The IRS will not impose a penalty for the failure to file the delinquent FBARs if the taxpayer: (a) properly reported on its U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs; and (b) has not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

Monday, April 18 will be 2016 tax deadline for most individual taxpayers. When April 15 falls on a Saturday, Sunday, or legal holiday (which includes a legal holiday observed in the District of Columbia), a return is considered timely filed if filed on the next succeeding day that is not a Saturday, Sunday, or legal holiday. April 15, 2016, will fall out on a Friday, but the Emancipation Day holiday will be observed in the District of Columbia on that day. As a result, the IRS announced that most taxpayers will have until the next business day, Monday, April 18, 2016, to file their Form 1040s. However, because of a special rule for Patriot's Day observance on Monday, April 18, 2016, taxpayers in Maine and Massachusetts will have until Tuesday, April 19, 2016, to file their tax returns.

Minimize the Bite of the 3.8% Net-Investment-Income Tax By BILL BISCHOFF/WSJ

Here is a link to a great article from Wall Street Journal:  http://www.wsj.com/articles/BL-TOTALB-3131

IRA Contributions for 2014

The IRS reminded taxpayers with qualifying income they have until 4/15/15 to make 2014 traditional and Roth IRA contributions totaling up to $5,500 ($6,500 for taxpayers who turn age 50 by 12/31/14). Deductions for contributions to traditional IRAs are phased-out for taxpayers with income greater than certain threshold amounts. For those who reach age 70 1/2 by the end of 2014, contributions are no longer allowed to a traditional IRA and mandatory distributions must begin. Contributions to Roth IRAs are not deductible and the allowable contribution is phased out for taxpayers whose incomes are above certain levels. Taxpayers who reach age 70 1/2 by the end of 2014 are not required to take distributions from a Roth IRA, nor are they barred from making Roth IRA contributions. IRS Newswire IR-2015-50 

Where's My Refund?

 The IRS has reminded taxpayers that they can quickly check the status of their tax return and refund through "Where's My Refund?" on IRS.gov or on the smartphone application IRS2Go. Initial information will normally be available within 24 hours after the IRS receives the taxpayer's efiled return or four weeks after the taxpayer mails a paper return to the IRS. The system updates only once every 24 hours, usually overnight, so there's no need to check more often. Taxpayers should have their Social Security number, filing status, and exact refund amount when accessing "Where's My Refund?". News Release IR-2015-45 .

CMS Announces Special Enrollment Period for Tax Season Eligibleconsumers have from March 15 through April 30 to enroll in coverage

The Centers for Medicare & Medicaid Services (CMS) announced today a special enrollment period (SEP) for individuals and families who did not have health coverage in 2014 and are subject to the fee or “shared responsibility payment” when they file their 2014 taxes in states which use the Federally-facilitated Marketplaces (FFM). This special enrollment period will allow those individuals and families who were unaware or didn’t understand the implications of this new requirement to enroll in 2015 health insurance coverage through the FFM.

For those who were unaware or didn’t understand the implications of the fee for not enrolling in coverage, CMS will provide consumers with an opportunity to purchase health insurance coverage from March 15 to April 30. If consumers do not purchase coverage for 2015 during this special enrollment period, they may have to pay a fee when they file their 2015 income taxes.

Click here for the full press release.

Replacement Forms SSA-1099 and SSA-1042S Available Online

A recent enhancement to the Social Security Administration's (SSA's) website allows individuals to obtain replacement Form SSA-1099 or Form SSA-1042S this tax season through an account created at www.ssa.gov/myaccount/ . In addition, an online  mySocial Security  account may be used to track earnings, estimate future benefits, change an address, start or change direct deposit, or for those currently receiving benefits, request a letter with proof of benefits. Medicare enrollees may obtain a benefit verification letter, check benefit and payment information, verify earnings records, change an address and phone number, start or update benefit payment direct deposit. A mySocial Security  account may be only created and used for an individual's personal information. An account cannot be created or used on behalf of another person, even with written permission.

Applicable Federal Rates for February

The Section 7520 rate for February 2015 is 2.0%, while the Applicable Federal Rates (AFRs) are as follows (Rev. Rul. 2015-3, 2015-6 IRB):

	Annual	Semiannual	Quarterly	Monthly
Short-term (≤ 3 years)	0.48%	0.48%	0.48%	0.48%
Mid-term (> 3 years but ≤ 9 years)	1.70%	1.69%	1.69%	1.68%
Long-term (> 9 years)	2.41%	2.40%	2.39%	2.39%

Identity Theft Victims May Opt into IRS Program

In an effort to help victims of identity theft, the IRS has issued approximately 1.5 million six-digit Identity Protection PINs (IP PINs) for taxpayers to use in filing their federal tax return. The IP PIN is a unique number that is assigned annually to victims of identity theft with resolved cases. The IP PIN is intended to help these individuals avoid delays in filing returns and receiving refunds. The IRS is continuing the program, which was piloted last year in Florida, Georgia, and the District of Columbia. In addition, the IRS is offering the program to approximately 1.7 million taxpayers for whom the IRS suspects identity theft on their accounts. For more information on combating identity theft, see www.irs.gov (search for identity theft ). News Release IR-2015-07.

President's Budget Proposal for 2016 (Green Book)

On 2/2/15, President Obama released his federal budget proposals for fiscal year 2016. On that same day, the Treasury Dept. released the "General Explanations of the Administration's Fiscal Year 2016 Revenue Proposals," commonly known as the "Green Book." The nearly $4 trillion budget proposal is intended to strengthen the middle class and help working families by providing them with more generous tax breaks, such as a new tax credit to two-earner families, an increased child and dependent care tax credit, an expanded earned income tax credit, and an improved tax credit to improve college affordability. Additionally, the proposal includes provisions intended to scale back certain tax breaks for the wealthy, close certain corporate tax loopholes while broadening the tax base, lower the corporate tax rate, target companies that shift income and assets overseas to avoid taxes, and provide the IRS with the authority to regulate all paid tax return preparers. The Green Book can be viewed at www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2016.pdf

Child Support Payments Have Priority over Alimony

According to the terms of his divorce, an ex-husband was required to provide child support payments of $8,307 and alimony payments of $8,205 ($16,512 total) for the year in question. However, he only paid a $9,688 for both child support and alimony that year, claiming the entire amount as alimony. According to IRC Sec. 71(c)(3), if the payment is less than the full amount of required child support and alimony, the partial payment is treated first as nondeductible child support, and any excess is alimony. Thus, the Tax Court disallowed all but $1,381 of the ex-husband's alimony deduction, which was the excess amount over his required child support payment. Joseph L. Becker, TC Summ. Op. 2015-2 (Tax Ct.).

National Taxpayer Advocate Delivers Annual Report to Congress; Focuses on Taxpayer Service and Taxpayer Bill of Rights

WASHINGTON — National Taxpayer Advocate Nina E. Olson today released her 2014 annual report to Congress, which expresses concern that taxpayers this year are likely to receive the worst levels of taxpayer service since at least 2001 when the IRS implemented its current performance measures.  The report recommends that Congress enact a principles-based Taxpayer Bill of Rights, adopt additional safeguards to make those rights meaningful, and provide sufficient funding to make the “Right to Quality Service” a reality.

In the preface to the report, Olson emphasizes four points:

• “First, the budget environment of the last five years has brought about a devastating erosion of taxpayer service, harming taxpayers individually and collectively;
• “Second, the lack of effective administrative and congressional oversight, in conjunction with the failure to pass taxpayer rights legislation, has eroded taxpayer protections enacted 16 or more years ago;
• “Third, the combined effect of these trends is reshaping U.S. tax administration in ways that are not positive for future tax compliance or for public trust in the fairness of the tax system; and
• “Fourth, this downward slide can be addressed if Congress makes an investment in the IRS and holds it accountable for how it applies that investment.”

The report says the combination of the IRS’s increasing workload, the erosion of public trust occasioned by the IRS’s use of “tea party” and similar terms in screening applicants for tax-exempt status, and the sharp reduction in funding have created a “perfect storm” of trouble for tax administration and therefore for taxpayers.  “Taxpayers who need help are not getting it, and tax compliance is likely to suffer over the longer term if these problems are not quickly and decisively addressed,” Olson wrote.

The report also urges Congress to enact comprehensive tax reform, pointing out that simplification would ease burdens on taxpayers and the IRS alike.

TAXPAYER SERVICE LEVELS EXPECTED TO FALL TO NEW LOWS

The report describes the decline in taxpayer service in detail and attributes the decline to a combination of more work and reduced resources for the IRS.

Scope of Taxpayer Service Needs.  Nearly 200 million Americans interact with the IRS each year, more than three times as many as any other federal agency.  (Individuals file nearly 150 million returns, including about 50 million joint returns.)  Because of the complexity of the tax code, large numbers of taxpayers turn to the IRS for assistance.  The IRS typically receives more than 100 million telephone calls, 10 million letters, and 5 million visits at its walk-in sites from taxpayers each year.

Decline in Taxpayer Service Levels.  IRS taxpayer service reached its high-water mark in fiscal year (FY) 2004.  In that period, the IRS answered 87% of calls from taxpayers seeking to speak with an assistor, and hold times averaged 2.5 minutes.  The IRS also responded to a wide range of tax-law questions, both on its toll-free lines and in its roughly 400 walk-in sites, prepared nearly 500,000 tax returns for taxpayers who requested help (particularly low income, elderly, and disabled taxpayers), and maintained a robust outreach and education program that touched an estimated 72 million taxpayers.

By comparison, the IRS’s diminished service expectations for FY 2015 are as follows:

• The IRS is unlikely to answer even half the telephone calls it receives, and levels of service may average as low as 43%.
• Taxpayers who manage to get through are expected to wait on hold for 30 minutes on average and considerably longer at peak times.
• The IRS will answer far fewer tax-law questions than in past years.  During the upcoming filing season, it will not answer any tax-law questions except “basic” ones.  After the filing season, it will not answer any tax-law questions at all, leaving the roughly 15 million taxpayers who file later in the year unable to get answers to their questions by calling or visiting IRS offices.
• Tax return preparation assistance has been eliminated.

More Work, Reduced Resources.  On the workload side, the IRS is receiving 11% more returns from individuals, 18% more returns from business entities, and 70% more telephone calls (through FY 2013) than a decade ago.  During the upcoming filing season, implementation of the Patient Protection and Affordable Care Act and the Foreign Account Tax Compliance Act are both expected to add considerable new work.

On the resources side, the IRS’s budget has been reduced by about 17% in inflation-adjusted terms just since FY 2010.  As a consequence, the IRS has already reduced its workforce by nearly 12,000 employees and projects further reductions will be needed during FY 2015.  In addition, the IRS has reduced the amount it spends on employee training since FY 2010 by 83%.  These cutbacks leave the IRS with a shrinking workforce whose employees are less equipped to do their jobs.

“Like any agency, the IRS can operate more effectively and efficiently in certain areas,” Olson wrote.  “However, we do not see any substitute for sufficient personnel if high-quality taxpayer service is to be provided.  The only way the IRS can assist the tens of millions of taxpayers seeking to speak with an IRS employee is to have enough employees to answer their calls.  The only way the IRS can timely process millions of taxpayer letters is to have enough employees to read the letters and act on them.  And the only way the IRS can meet the needs of the millions of taxpayers who visit its walk-in sites is to have enough employees to staff them.”

Olson urged Congress and the IRS to work together to ensure that taxpayer needs are met.  “We do not think it is acceptable for the government to tell millions of taxpayers who seek help each year, in essence, ‘We’re sorry.  You’re on your own,’” the report says.

TAXPAYER BILL OF RIGHTS, SPECIFIC TAXPAYER PROTECTIONS, AND JOINT CONGRESSIONAL OVERSIGHT HEARINGS RECOMMENDED

Since 2007, the National Taxpayer Advocate has been recommending that Congress enact a Taxpayer Bill of Rights, a list of 10 rights based on principles and modeled on the U.S. Constitution’s Bill of Rights.  In 2013, the House passed legislation to implement this recommendation, but the Senate did not act.  In 2014, the IRS adopted the Taxpayer Bill of Rights administratively, a step Olson praised.  However, Olson continues to recommend that Congress enact the provisions by statute to assure taxpayers that the rights will become “a permanent part of our tax system.”

“Taxpayer rights are central to voluntary compliance,” the report says.  “If taxpayers believe they are being treated, or can be treated, in an arbitrary and capricious manner, they will mistrust the system and be less likely to comply of their own volition.  By contrast, taxpayers will be more likely to comply if they have confidence in the fairness and integrity of the system.”

Noting that the principle-based rights are “only as effective as the specific statutory rights that give [them] effect,” the report recommends that Congress enact specific taxpayer rights that the Advocate has proposed in this and prior-year reports and that relate to each of the 10 conceptual rights.  Almost every issue discussed in the Advocate’s report identifies one or more of the rights in the Taxpayer Bill of Rights that the IRS can do a better job of protecting.

In the “Most Serious Problems” section, the report focuses on specific rights provided to taxpayers by the IRS Restructuring and Reform Act of 1998 (RRA 98) and describes how the IRS, for a variety of reasons, is not respecting some of the protections Congress established in that Act.  The report also notes that Congress passed taxpayer rights legislation in 1988, 1996, and 1998 but has not passed any significant taxpayer rights legislation in the last 16 years.

“The National Taxpayer Advocate believes the time is right for taxpayer rights legislation,” the report says.  “The passage of time has shown where new protections are needed.  Without providing these specific taxpayer protections, the [Taxpayer Bill of Rights] becomes merely a statement of principles, without any teeth to ensure that these fundamental rights are protected on a daily basis, and that taxpayers have remedies and the IRS is held accountable for any violations of these rights.”

The report says that funding and oversight are essential to protect taxpayer rights.  Noting that the “Right to Quality Service” and other rights can only be honored if the IRS has enough resources, the report says “[t]he IRS will be severely hampered in its ability to implement new policies, procedures, and systems for protecting taxpayer rights if it does not receive adequate funding.”

With regard to congressional oversight, the report says RRA 98 required Congress to hold joint hearings to review, among other things, the IRS’s progress in meeting its objectives and improving taxpayer service and compliance.  Each hearing was conducted by majority and minority members of the House Committees on Ways and Means, Appropriations, and Oversight and Government Reform and the Senate Committees on Finance, Appropriations, and Homeland Security and Governmental Affairs.  The report recommends these hearings be revived to identify and address problem areas, with emphasis on how the IRS is meeting the needs of particular groups of taxpayers, including individuals, small businesses, and exempt organizations, and how it is protecting taxpayer rights for all.

The report suggests that regular congressional oversight hearings on the “nuts and bolts” of tax administration would go a long way toward educating Members of Congress about the important work of the IRS including its successes and challenges, foster a shared sense of purpose in tackling the challenges, and allow Members to see more closely how funding levels and performance levels interrelate.

“The IRS will never be a beloved federal agency, because it is the face of the government’s power to tax and collect,” Olson wrote.  “But it should be a respected agency.  When there are accusations of bias or heavy-handed actions by the tax agency, these reinforce the already deep concerns the U.S. taxpayer bears toward taxes, such as concerns going back to the nation’s founding.”

“But casting the entire agency and all its employees as an out-of-control agency in response to the actions of a few, no matter how deplorable those actions may be, is harmful to taxpayers and tax compliance.  We need to recognize that the IRS and its employees play a vital role in the economic welfare of this country.  And we need to find a way to support the agency even as we hold it accountable for what is often a thankless task.”

OTHER KEY ISSUES ADDRESSED

Federal law requires the Annual Report to Congress to identify at least 20 of the “most serious problems” encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.  Overall, this year’s report identifies 23 problems, makes dozens of recommendations for administrative change, makes 19 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts.

Among the “most serious problems" addressed are the following:

Lack of Clear Rationale for Taxpayer Service Resource Allocation Decisions. The National Taxpayer Advocate is concerned that the IRS does not have a rigorous methodology for making the difficult resource-allocation decisions required by today’s tight budget environment.  A recent report by the Treasury Inspector General for Tax Administration also reached this conclusion.  In response to these concerns, the IRS’s Wage & Investment Division (W&I) is collaborating with the Taxpayer Advocate Service (TAS) on the development of a ranking methodology for the major taxpayer service activities.  Its purpose is to balance cost savings the IRS can achieve by automating service delivery options against the needs of taxpayers for personal service.  Considerable progress has been made, but it is not clear whether the IRS will devote the short-term resources required to determine how it can better allocate its limited resources over the long term.  The report recommends that W&I continue to work with TAS to develop the be
st ranking methodology possible.

Lack of a Functional IRS Presence in Many Areas.  The report assesses the impact of the IRS’s shift from a geographic-based structure to a centralized structure organized by taxpayer segments, as directed by RRA 98.  While centralization has benefits, the report says local functional presence is also important.  The report says the attributes and needs of populations that are geographically clustered in certain regions are often neglected under the current structure.  To illustrate the IRS’s shrinking geographic footprint, the report provides staffing data that shows sharp declines in key IRS functional personnel in the state of Wyoming (as an example of a low-volume region) and in the New York City borough of Manhattan (as an example of a high-volume region), while staffing at a centralized IRS campus has increased considerably since FY 2001.  The report also points out that the IRS now has no outreach staff dedicated to small business and self-employed taxpayers in 13 states and no Appeals or Settlement Officers present in 12 states, which makes the ability to obtain local assistance or Appeals hearings challenging for taxpayers.

Potential Patient Protection and Affordable Care Act (ACA) Burdens.  The report credits the IRS with making “tremendous progress” in implementing provisions of the ACA within its jurisdiction.  However, the report points out that the IRS is “downstream” of many of the reporting processes required by the law, because it receives new information returns from exchanges through the hub maintained by the Department of Health and Human Services.  Therefore, problems may arise over which the IRS has no control.  The report describes continuing challenges the IRS faces in implementing the law, including the processing of returns reconciling Advanced Premium Tax Credits, and makes recommendations in several areas.

Offshore Voluntary Disclosure (OVD) Program Inequities.  The report describes the evolution of the OVD program and the disproportionate penalties it says were often imposed, particularly with respect to unrepresented taxpayers.  The IRS changed the streamlined program in 2014 in ways that allow many taxpayers to pay lower penalties.  However, the new rules do not allow taxpayers who already had entered into closing agreements with the IRS at higher penalty rates to amend those agreements.  Therefore, taxpayers who are the most deserving of leniency because they were the first to acknowledge they had failed to comply with foreign account reporting requirements ultimately are paying substantially greater penalties than taxpayers who waited until later to acknowledge their noncompliance.  Among other things, the report recommends that the IRS revisit this decision.

Absence of Studies to Determine Whether Existing Penalties Promote Voluntary Compliance.  The number of provisions in the Internal Revenue Code that either authorize or require the IRS to impose penalties has ballooned from 14 in 1955 to over 170 today.  More than 20 years ago, Congress recommended that the IRS “develop better information concerning the administration and effects of penalties” to ensure they promote voluntary compliance.  The IRS Office of Service-wide Penalties (OSP) is, according to the report, “an office of six analysts buried three levels below the Small Business/Self-Employed Division Commissioner [that] cites insufficient resources, insufficient staffing, employees with the wrong skillsets, and a lack of access to penalty-related data as barriers to conducting penalty research.”  In light of the large number of penalty provisions in the tax code, the large number of taxpayers against whom penalties are imposed, and the significant amount of some penalties, the report recommends that the IRS ensure the OSP has sufficient resources and support to conduct and publish appropriate studies.

New TAS Research Studies. Volume 2 of the report contains three new research studies, including an important study on the needs of low income taxpayers.  The Advocate’s office commissioned a survey of more than 1,100 low income individuals to better understand their circumstances and service needs, particularly in relation to Low Income Taxpayer Clinics but also more generally.  The survey findings show that technology use varied across incomes, education levels, and age groups.  The survey found that some groups of taxpayers are less likely to utilize technology than others, which suggests that reductions in telephone and walk-in services will affect those taxpayers disproportionately.

The findings also suggest that low income taxpayers are more vulnerable and more likely than the population at large to be taken advantage of by unskilled or unscrupulous tax return preparers.  More than 15% of those relying on a preparer said they either did not receive a copy of their return or the preparer did not sign the return.  Put differently, for nearly one in six low income taxpayers who used preparers, the preparers did not follow the basic statutory requirements established for commercial tax return preparation.

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Please visit http://www.taxpayeradvocate.irs.gov/2014AnnualReport for more information about this report, including an Executive Summary and downloadable graphics about features from the report.

Related Items: 

• Executive Summary: 2014 Annual Report to Congress
• Complete Report: 2014 Annual Report to Congress 

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IRS Opens International Data Exchange Service (IDES)

The IDES, a web-based application that transmits encrypted data, is open for enrollment. Participating foreign financial institutions and host country tax authorities will use IDES to securely transmit information reported on financial accounts held by U.S. persons in foreign jurisdictions. According to the IRS, more than 145,000 financial instructions have registered through the IRS FATCA Registration System. The U.S. has more than 110 intergovernmental agreements, either signed or agreed in substance. IRS Commisioner Koskinen notes that the IDES is a critical component of FATCA implementation, "enhancing the IRS's ability to detect hidden accounts and help ensure fairness in the tax system."

2014 ACA Changes - What you should expect

Beginning this tax season, you may notice some changes on your tax return related to the Affordable Care Act, commonly referred to as just ACA or Obamacare.
We've created the following guide to help inform you of potential changes, and to ensure that you understand how the ACA might impact your tax situation this year. In this guide, you'll find specific information around (a) how the ACA might affect your taxes, (b) which new forms you'll need to look for, and (c) what documentation we'll need from you in order to complete your tax return.
To begin, find the description that best represents your current situation.

I enrolled in a health plan through my employer, private insurance, Medicare or Medicaid.

You're all set! All you will need to do is indicate that you have minimum essential coverage, a general term that includes individual market policies, job-based coverage, Medicare, Medicaid, CHIP, TRICARE and certain other coverage. For a full list of qualifying plan types, visit www.healthcare.gov/fees-exemptions/plans-that-count-as-coverage/.

NEW TAX FORMS TO EXPECT

• Form 1095-C: Your employer may provide a separate Form 1095-C to you and to the IRS, which provides information about your plan and who was covered.
• Form 1095-B: Private insurers and self-funded plans may provide each policyholder and the IRS with information summarizing the coverage provided on Form 1095-B.
• Note: This year is a transition period for Forms 1095-B and 1095-C, so these forms are not a requirement for tax year 2014.

WHAT I NEED FROM YOU

• All of the usual documentation you provide
• Form 1095-C or 1095-B, if you received it from your employer or private insurer.

I purchased a health plan through a Health Insurance Marketplace.

To get started, just let us know that you purchased your plan through a Health Insurance Marketplace, also known as a health exchange.
Did you receive a government subsidy in the form of a tax credit to purchase health insurance through the online Health Insurance Marketplace?
Unlike most tax credits, this tax credit or subsidy could be applied to insurance premiums throughout 2014 when your coverage began. Whether or not you choose to receive this subsidy during the year, we are required to reconcile your credit on your tax return at year end.
If you overestimated your 2014 household income when you applied for the tax subsidy, you will receive the remainder of the subsidy in the form of a refundable credit, which will increase the refund amount or decrease the amount owed on your tax return. But if you earn more than you projected, you will have to pay a portion or all of the subsidy back, which will decrease the refund amount or increase the amount owed on your tax return.
In addition to a change in income, make sure to report all life changes (i.e. getting married or having a child) through your Marketplace to ensure your subsidy is correct.

NEW TAX FORMS TO EXPECT

• Form 1095-A: If you purchased insurance through the Health Insurance Marketplace you will receive a new form, Form 1095-A, which will show details of your insurance coverage including the effective date, amount of premium and the advance premium tax credit.
• Form 8962: If you are eligible to receive a premium tax credit in 2014, information about your advance premium tax credit will be reported and the actual premium tax credit will be determined on Form 8962.

WHAT I NEED FROM YOU

• All of the usual documentation you provide
• Form 1095-A, if you purchased health insurance through the Health Insurance Marketplace

I don't have health insurance.

Under the ACA, individuals who did not have health insurance for more than three months in 2014 must pay a tax penalty. However, according to Congressional Budget Office, an estimated 20 million Americans may qualify to waive that penalty this year. To find out if you qualify for an exemption, review the material below.
How do I know if I qualify for an exemption?
The Affordable Care Act recognizes there are legitimate reasons people may be exempt from paying a tax penalty for not having health insurance.
Some of the common exemption reasons include:

• Can't afford health insurance; the lowest-priced coverage available would cost more than 8 percent of their household income
• Had difficulty signing up for health insurance through a state or federal marketplace
• Had medical expenses you couldn't pay in the last 24 months that resulted in substantial debt
• Had an individual insurance plan cancelled, and believe other marketplace plans are unaffordable
• Received a shut off notice from a utility company

For the full list of exemptions, please check www.healthcare.gov/fees-exemptions/exemptions-from-the-fee/
If you've been uninsured for fewer than three consecutive months of the year, you don't need to apply for an exemption. This will be handled when we file your 2014 taxes. Also, if you are not required to file a tax return because your income is too low, you don't need to apply for an exemption.
If you believe you qualify for one of the exemptions, please notify us as soon as possible, so we will be able to let you know whether you can claim it on your tax return or apply through the Health Insurance Marketplace along with the required documentation in certain cases. Different exemptions require different forms, so be sure to apply with the correct document. You can find and print all of the forms at healthcare.gov/exemptions.
For those exemptions that should be filed through the Health Insurance Marketplace, the approval process can take a couple of weeks, so don't wait until we file your taxes to apply for an exemption. Instead, submit your application as soon as possible. That way, it will be documented and processed in time, and we can file your tax return as soon as the IRS begins accepting returns in January.

WHAT I NEED FROM YOU

• All of the usual documentation you provide
• If you are getting an exemption through the Health Insurance Marketplace (also called an exchange) and not claiming the exemption directly on the tax return, you will also need to provide the exemption certificate number.

What if I'm not exempt?
If you don't have health insurance and don't qualify for an exemption, you will have to pay a penalty when you file for your 2014 tax return. If that's the case, don't worry: We will help you calculate the exact amount of your tax penalty and work to identify any qualifying deductions that may help offset this fee.
The tax penalty, also referred to as the “individual shared responsibility payment”, is based on your family size and income. The penalty will be prorated based on the number of months you are uninsured and will increase each year.
For tax year 2014, the annual one-time tax penalty will be $95 per adult, or one percent of your total income, whichever is greater. For uninsured children in your family, the penalty is $47.50 per child, with a family maximum of $285 for the year. The tax penalty is assessed on your 2014 tax return.
Each year following 2014, the penalty increases — in 2015 the penalty is $325 per person, $162.50 per child — or two percent of your income. By 2016, the penalty rises to $695 per adult, $347.50 per child — or 2.5 percent of your household income.
We know that the tax filing process can sometimes be overwhelming and that the Affordable Care Act could potentially further complicate the process. Please know that we are here to help you navigate these changes.

Tax Season to Begin in January, Says IRS:  Although there were more than 50 changes in the recent passage of the extenders legislation (the Tax Increase Prevention Act of 2014), the IRS announced that it still plans to open the 2015 filing season as scheduled in January. According to its recent News Release, the IRS will begin accepting tax returns filed electronically on 1/20/15. Paper tax returns will begin processing at the same time. The IRS also reminds taxpayers that filing electronically is the most accurate way to file tax returns and get a refund.