How to Pay Zero Taxes 2016: Your Guide to Every Tax Break the IRS Allows

By Jeff A. Schnepper

Updated for 2016—a new revised edition of the classic guide that shows you how to pay less to the IRS

Easy to read, easy to use, and hard to beat, this comprehensive tax-saving guide has become the go-to resource for tax professionals and home filers alike. Unlike other brand-name guides, the book focuses on tax saving, not tax preparation—zeroing in on the one thing you really care about: paying less to the IRS.

Tax expert Jeff Schnepper explains everything you need to know in simple, accessible terms, organizing important subjects like deductions, exemptions, and tax shelters into six simple sections. The book includes the most up-to-date information—and hundreds of insider tips—that can lower your tax bills, and save you a bundle, year after year.

Jeff A. Schnepper, Esq. (Cherry Hill, NJ) is the author of multiple books on finance and taxation, including all previous editions of How to Pay Zero Taxes. He is a financial, tax, and legal advisor for Estate Planning of Delaware Valley and operates a tax, accounting, and legal practice in Cherry Hill, NJ. Mr. Schnepper is Microsoft’s MSN MONEY tax expert, economic editor for USA Today, and tax counsel for Haran, Watson & Company.

• Language: English
• Publisher: McGraw-Hill Education
• Release date: Nov 27, 2015
• ISBN: 9780071836654

Book preview

Also by Jeff A. Schnepper

How to Pay Zero Estate Taxes

Inside IRS

Professional Handbook of Business Valuation

New Bankruptcy Law

Can You Afford to Retire?

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THE WORK IS PROVIDED AS IS. McGRAW-HILL EDUCATION AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. McGraw-Hill Education and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither McGraw-Hill Education nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill Education has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill Education and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise.

This book is normally dedicated to my mogul,

Barbara, who taught me how to love, and to

my children, Brandy, Joshua, Allison, Mario,

and Jonelle, who gave me five more reasons why.

If I had the choice of doing it all over again,

I would begin by loving you again.

Also normally dedicated to the memory

of Frisco T. D. Schnepper, Tiger T. C. Schnepper,

Fred T. C. Schnepper, and to Bruno,

who now give me paws,

BUT

Forget it, guys … This one’s

for my Bianca Rose Conlin,

and her brothers Drew Ethan Conlin, Tyler Evan Conlin,

Spencer Henry Conlin, and Owen Bae Alexander Conlin

and their cousins Dylan Simon Schnepper and Aubrey

Anne Schnepper, who have redefined my universe!

Contents

ACKNOWLEDGMENTS

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CHAPTER 1

Tax Insanity

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CHAPTER 2

Is It Legal?

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CHAPTER 3

How Our Tax System Works

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CHAPTER 4

Exclusions—Tax-Free Money

A    Alternatives to Earned Income

1.  Hospitalization Premiums

2.  Group Life Insurance Premiums

3.  Group Legal Services Plans

4.  Accident and Health Plans

5.  Employee Death Benefits

6.  Merchandise Distributed to Employees on Holidays

7.  Expenses of Your Employer

8.  Meals and Lodgings

9.  Employee Discounts

10.  Workers’ Compensation

11.  Cafeteria Plans and Flexible Spending Accounts

12.  Dependent Care Assistance Program

13.  Employer Educational Assistance

14.  Employee Awards

15.  Clergy Housing Allowance

16.  Miscellaneous Fringe Benefits

B    Donative Items

17.  Gifts, Bequests, and Inheritances

18.  Scholarships and Fellowships

19.  Prizes and Awards

20.  Qualified Charitable Distributions (QCDs)

C    Investors

21.  Interest on State and Municipal Obligations

D    Benefits for the Elderly

22.  Public Assistance Payments

23.  Social Security and Other Retirement Benefits

24.  Annuities

25.  Sale of Your Home

E    Miscellaneous Individual Exclusions

26.  Carpool Receipts

27.  Damages

28.  Divorce and Separation Arrangements

29.  Life Insurance

30.  Qualified State Tuition (§529) Programs

31.  Your Home—The Mother of All Tax Shelters!

32.  Disabled Veteran Payments

33.  Exclusion of Income for Volunteer Firefighters and Emergency Medical Responders

34.  Unemployment Benefits

35.  Homeowner Security

36.  Reimbursed Costs to Parents of Children with Disabilities

37.  Wrongful Conviction and Incarceration

38.  Restitution Payments

39.  Frequent Flier Miles

40.  Hurricane Sandy

41.  Cancellation of Indebtedness

42.  Medicaid Payments for Foster Care of Related Individuals

F    Schedule of Excludable Items

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CHAPTER 5

Credits—Dollar-for-Dollar Tax Reductions

A    Estimated Tax and Withholding Exemptions

B    Credits

43.  The Earned Income Credit

44.  Excess Social Security Tax

45.  The Child and Dependent Care Credit

46.  Credit for the Elderly or Permanently and Totally Disabled

C    Special Credits

47.  Work Opportunity Credit (Formerly Targeted Jobs Tax Credit)

48.  Welfare to Work Credit

49.  Research Tax Credit

50.  Orphan Drug Tax Credit

51.  Adoption Assistance

52.  Hope Scholarship Credit

53.  American Opportunity Tax Credit

54.  Lifetime Learning Credit

55.  Child Tax Credit

56.  Disability Credits

57.  Health Insurance Credit

58.  Saver’s Credit

59.  Small Employer Credit

60.  Electric Vehicle Credit

61.  Credit for Residential Energy Efficient Property

62.  Energy Saving Home Improvement Credit

63.  Hybrid Vehicles Credit

64.  Telephone Tax Refund

65.  First-Time Home Buyer Credit

66.  Making Work Pay Tax Credit

67.  Plug-in Electric Drive Vehicle Credit

68.  Plug-in Electric Vehicle Credit

69.  Conversion Kits

70.  Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed against AMT

71.  Small Business Health Insurance Credit

72.  Foreign Tax Credit

73.  The Premium Tax Credit

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CHAPTER 6

Above the Line Deductions

A    Deductions for Adjusted Gross Income

74.  Trade and Business Deductions

75.  Employee Business Expenses of Actors and Other Performing Artists

76.  Employee Business Expenses

77.  Alimony

78.  Interest on Qualified Education Loans

79.  Retirement Plan Payments

80.  Self-Employment Tax

81.  Health Insurance Deduction for Self-Employeds

82.  Moving Expenses

83.  Clean Fuel Vehicles

84.  Deduction for Qualified Higher Education Expenses—Tuition and Fees

85.  Legal Fees

86.  Classroom Materials

87.  Medical Savings Accounts (Archer Medical Savings Accounts)

88.  Health Savings Accounts

89.  Sales Tax Deduction on Motor Vehicles

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CHAPTER 7

Below the Line Deductions

A    The Importance of Filing Status

B    Tax Planning with Itemized Deductions

90.  Medical Expenses

91.  Income Taxes

92.  Real Property Taxes

93.  Personal Property Taxes

94.  Interest

95.  Mortgage Insurance

96.  Charitable Contributions

97.  Casualty Losses

98.  Theft Losses

99.  Miscellaneous Trade and Business Deductions of Employees

100.  Job Loss Insurance

101.  Travel Expenses

102.  Transportation Expenses

103.  Meals and Entertainment Expenses

104.  Gifts

105.  Reimbursable Employee Business Expenses

106.  Educational Expenses

107.  Limit on Itemized Deductions

C    Schedules of Deductions

108.  Medical Deductions

109.  Deductible Taxes

110.  Charitable Deductions

111.  Casualty and Theft Loss Deductions

112.  Miscellaneous Deductions

113.  Employee Miscellaneous Deductions

114.  Investor Deductions

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CHAPTER 8

Traditional Tax Shelters

A    Deferral and Leverage

115.  Real Estate

116.  Fees in Public Real Estate Partnerships

117.  Oil and Gas

118.  Equipment Leasing

119.  Single-Premium Life Insurance

120.  Cattle Feeding Programs

121.  Cattle Breeding Programs

122.  Tax Straddles

123.  Art Reproduction

124.  Noncash Gift Shelters

125.  Municipal Bond Swaps

B    How to Analyze a Tax Shelter

126.  Getting Out of the Tax Shelter

127.  Master Limited Partnerships

128.  Abusive Shelters

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CHAPTER 9

Super Tax Shelters

A    Family Shifts

129.  Unearned Income of Minor Children

130.  Outright Gifts

131.  Clifford Trusts

132.  Interest-Free Loans

133.  The Schnepper Shelter: Gift Leasebacks

134.  The Schnepper Deep Shelter

135.  Family Partnerships

136.  Family Trusts

137.  The Schnepper Malagoli Super Shelter

138.  Employing Members of the Family

139.  Author’s Delight

B    Running Your Own Business

140.  Your Home

141.  Your Car

142.  Meals and Entertainment

143.  Travel and Vacation

144.  Gifts

145.  Advertising

146.  Deductible Clothes

147.  Creative Deductions—Busting the IRS

148.  Medical Premiums

149.  Borrowing from Your Company

150.  Miscellaneous Corporate Advantages

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CHAPTER 10

Investment Planning to Save Taxes

151.  Short Sales

152.  Broad-Based Index Options and Regulated Futures Contracts (RFCs)

153.  Wash Sales

154.  Premiums on Taxable and Tax-Exempt Bonds

155.  Original Issue Discount (OID)—Taxable Bonds

156.  Original Issue Discount (OID)—Tax-Exempt Bonds

157.  Market Discount

158.  Municipal Bond Swaps

159.  Employee Options—Nonqualified

160.  Incentive Stock Options

161.  Year-End Stock Sales

162.  Fund Strategies

163.  Dividends

164.  Tax-Exempt Income

165.  Old Prices

166.  Alternative Minimum Tax for Individuals

167.  U.S. Savings Bond Exclusion

168.  Madoff Losses

169.  Collars—Tax Free Lock in Your Gain

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CHAPTER 11

Last-Minute Tax Planning

170.  Defer Taxes

171.  Accelerate Expenses

172.  Accelerate Special Deductions

173.  Dependents and Personal Exemptions

174.  Phase-out of Exemptions

175.  Timing Strategies

176.  Retirement Plans

177.  Individual Retirement Plans (IRAs)

178.  H.R. 10 or Keogh Plans

179.  Marital Status

180.  The Goldinger Deferral

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CHAPTER 12

The Economic Growth and Tax Relief Reconciliation Act of 2001

181.  Marginal Rate Reductions

A    Individual Income Tax Rate Structure

B    Phase-out of Restrictions on Personal Exemptions

C    Phase-out of Itemized Deductions

182.  Tax Benefits Relating to Children

A    Increase and Expand the Child Tax Credit

B    Extension and Expansion of Adoption Tax Benefits

C    Child Care Credit

183.  Marriage Penalty Relief Provisions

A    Standard Deduction Marriage Penalty Relief

B    Expansion of the 15 Percent Rate Bracket for Married Couples Filing Joint Returns

C    Marriage Penalty Relief and Simplification Relating to the Earned Income Credit

184.  Education Incentives

A    Modifications to Education IRAs

B    Private Prepaid Tuition Programs; Exclusion from Gross Income of Education Distributions from Qualified Tuition Programs

C    Exclusion for Employer-Provided Educational Assistance

D    Modifications to Student Loan Interest Deduction

E    Eliminate Tax on Awards Under the National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program

F    Deduction for Qualified Higher Education Expenses

185.  Pension and Individual Retirement Arrangement Provisions

186.  AMT Relief

187.  Health Insurance for Self-Employed

188.  Income Tax Treatment of Certain Restitution Payments to Holocaust Victims

189.  Estate, Gift, and Generation-Skipping Transfer Tax Provisions

A    Phase-out and Repeal of Estate and Generation-Skipping Transfer Taxes; Increase in Gift Tax Unified Credit Effective Exemption

B    Expand Estate Tax Rule for Conservation Easements

C    Modify Generation-Skipping Transfer Tax Rules

D    Availability of Installment Payment Relief

190.  Sunset

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CHAPTER 13

The Job Creation and Worker Assistance Act of 2002

191.  Bonus Depreciation

192.  Net Operating Losses

193.  Classroom Materials

194.  Electric Vehicle Credit

195.  Work Opportunity Tax Credit

196.  Welfare to Work Tax Credit

197.  Archer Medical Savings Account

198.  Liberty Zone Benefits

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CHAPTER 14

The Tax Relief Reconciliation Act of 2003

A    Rate Reductions

B    The Marriage Penalty

C    The Alternative Minimum Tax

D    Child Tax Credit

E    Dividends/Capital Gains

F    Deduct Your SUV—Election to Expense

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CHAPTER 15

Income Averaging and Hurricane Tax Breaks

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CHAPTER 16

2006 Tax Reform

A    The Tax Increase Prevention and Reconciliation Act of 2005

B    The Pension Protection Act of 2006

C    Tax Relief and Health Care Act of 2006

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CHAPTER 17

Tax Reform, 2007–2008

A    The Mortgage Forgiveness Debt Relief Act of 2007

B    The New Debt Relief Act

C    The Economic Stimulus Act of 2008

D    The Heroes Earnings Assistance and Relief Act of 2008

E    The Housing and Economic Recovery Act of 2008

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CHAPTER 18

2009 Tax Changes

199.  Making Work Pay Tax Credit

200.  Reducing the COBRA Bite

201.  First-Time Home Buyer Credit Expanded

202.  American Opportunity Tax Credit

203.  Energy Credits

204.  Plug-in Electric Drive Vehicle Credit

205.  Plug-in Electric Vehicle Credit

206.  Conversion Kits

207.  Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed against AMT

208.  AMT Patch

209.  Earned Income Credit

210.  Child Tax Credit

211.  Section 529 Plans

212.  Unemployment Benefits

213.  Qualified Transportation Benefits

214.  Estimated Taxes

215.  Motor Vehicle Sales Tax

216.  Business Depreciation

217.  NOL Carrybacks

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CHAPTER 19

More Tax Changes

A    The Hiring Incentives to Restore Employment (HIRE) Act of 2010

B    The Patient Protection and Affordable Care Act

C    Small Business Jobs Act of 2010

D    The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

E    American Tax Relief Act of 2012

F    Tax Increase Prevention Act of 2014

G    The Able Act

H    More Changes

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CHAPTER 20

How to Avoid/Survive an IRS Audit

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APPENDIX A

Cost Recovery/Depreciation

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APPENDIX B

Business Use of Listed Property

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APPENDIX C

Auto Leases

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INDEX

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Acknowledgments

I wish to thank Nancie Crook, Barbara Thomassian, Pat Berenson, Ronnie Smith, and Anne McVay, without whom this book could not have been written, and the U.S. Congress and the IRS, without whom this book wouldn’t have been needed.

I also want to thank Sayes B. Block, for his encouragement and professional guidance; Sandi Walker, April Napolitano, and Anne Rigney, for their typing and editorial assistance; my editors at McGraw-Hill, Mary Glenn, Jane Palmieri, Patricia Amoroso, Tania Loghmani, Zach Gajewski, Patricia Wallenburg, and Cheryl Ringer; and Sri Haran, CPA, Robert Doyle, Steve Leimberg, Jeff Kelvin, Joel Petchon, John McFadden, Kenn Tacchino, Bill Rotella, George Hasenberg, Frank Kesselman, John Oxley, Stephen D. Leightman, Noeleen McLoughlin, Julian Egnaczyk, Ed Caldwell, CPA, Al Blum, Brian Hans, Harry K. Sorenson, CPA, Patrick O’Rourke, CPA, S. Scott Davison, Zulma Lombardo, Morris Abraham, Richard and Janice Schank, Mark S. Fineberg, CPA, Anthony Lyras, and Ron Campbell for their professional assistance; and Simba T.C. Schnepper Conlin, Bruno T.D. Conlin, and Fred T.C. Schnepper, who give me reason to paws. Special thanks to Stephanie Davison-Thompson and Brian Lance for research and editorial assistance, to Bill Fox for his investment insights, and to contributor and pain in the ass John Paul Malagoli, CLU, AEP, and ChFC, for his efforts and annoyances to make this book to be most current.

CHAPTER 1

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Tax Insanity

Our income tax system is overly complex. It distorts investment decisions and encourages people to put money into schemes to reduce their tax bills instead of into enterprises to create jobs and help our economy grow.

BILL BRADLEY, New Jersey senator (1984)

The words of such an act as the Income Tax … merely dance before my eyes in a meaningless procession: cross-reference, exception upon exception—couched in abstract terms that offer no handle to seize hold of—leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out the net, against all possible evasion; yet at times I cannot help recalling a saying of William James about certain passages of Hegel: that they were, no doubt, written with a passion of rationality; but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness.…

JUDGE LEARNED HAND, Thomas Walter

Swan, 57 Yale L.J. 167, 169 [1947].

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Q: What’s the difference between Obama’s cabinet and a penitentiary?

A: One is filled with tax evaders, blackmailers, and threats to society. The other is for housing prisoners.

—DAVID LETTERMAN

I don’t believe in a law to prevent a man from getting rich; it would do more harm than good.

ABRAHAM LINCOLN

Politicians tax the middle class for the same reason some people rob banks. That’s where the money is.

FORBES MAGAZINE

May 11, 1992

If our current tax strucure were a TV show, it would either be ‘Foul-ups, Bleeps and Blunders,’ or ‘Gimme a Break.’ If it were a movie, it would be ‘Revenge of the Nerds’ or maybe ‘Take the Money and Run.’ And if the IRS ever wants a theme song, mabye they’ll get Sting to do ‘Every breath you take, every move you make, I’ll be watching you.’

PRESIDENT REAGAN, in remarks to students at

Northside High School, Atlanta, Georgia, June 6, 1985

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2015 – Extenders Again and a Tough Year for the IRS

Insanity has been defined as doing the same thing over and over again and expecting different results. Yet year after year, we elect the same representatives back to Congress expecting them to legislate and govern and all they do is play politics (That’s from the Greek poli meaning many and tics meaning bloodsuckers).

Once again, the extenders have expired and, as of this writing, they have not yet been renewed. The extenders are a series of fifty some-odd tax provisions that pretty much on an annual basis Congress waits until the last minute to renew—and then renews only for a short period of time. They include a group of deductions such as the $250 above the line allowance for teachers’ expenses, the deduction for state sales taxes, the mortgage insurance premium deduction, the tuition and fee deduction, the forgiven mortgage debt exclusion, the nonbusiness energy credits, etc. Last year’s extender legislation had a shelf life less than a carton of eggs. Signed into law on December 18, 2014, the provisions expired less than two weeks later. See page 625 for details on the 2014 extensions.

See www.professional.com/Schnepper for updates for 2015.

I Actually Felt Bad for the IRS in 2015

Clearly Congress is unhappy with the IRS. Clearly Congress has no idea what it is doing. There is no dispute that the IRS officials have acted inappropriately and potentially criminally in multiple occasions in the past. But, instead of coming down hard on the individuals responsible, Congress has punished the institution by severely slashing its budget at the same time the Affordable Care Act substantially increases its responsibilities. Less money to do more work. The results would be obvious to a fifth grader but maybe I’m giving our representatives too much credit.

Here are some of the indignities suffered by the IRS in 2015 as reported by the General Accounting Office (GAO) and the Treasury Inspector General for Tax Administration (TIGTA):

•  Remember the 24,000 missing Lois Lerner e-mails tied to alleged IRS political targeting? More than 1,000 previously unreported e-mails have been recovered but as much as 23,000 more are still missing since backup data in 422 disaster recovery tapes were erased months after a preservation order and a subpoena to retain them were issued. It’s a destruction of evidence according to House Oversight and Government Reform Committee Chairman Jason Chaffetz of Utah.

•  The IRS bragged about preventing $24.2 billion in fraudulent identity theft refunds last year. But then it was revealed that the IRS did pay out $5.8 billion in fraudulent claims. That’s more than twice my daughter’s clothes budget for a year!

•  The GAO noted that weaknesses remain in information security control that could affect the confidentiality, integrity, and availability of financial and sensitive taxpayer data, as a result of which—

•  Hackers broke through the security program used to protect taxpayer data on the IRS’ Get Transcript Online System and stole past tax return information, including Social Security numbers, from more than 334,000 tax returns.

•  If you are a victim of identity theft, go to www.IdentityTheft.gov for checklists as to what to do and file Form 8821-A. However, according to the TIGTA, the IRS has not always responded with accurate, timely information to requests from law enforcement officials to help identity theft victims.

•  The IRS awarded $18.8 million in contracts to 17 corporations that owed back taxes in fiscal 2012 and 2013 despite a law specifically prohibiting such contracts with firms with unpaid tax debts.

•  Identity theft fraudulent returns using TurboTax software caused its owner, Intuit, Inc., to suspend the filing of state tax returns. Massachusetts and Vermont actually suspended issuing tax refunds in an abundance of caution.

•  Between fiscal years 2010 and 2015, the IRS budget has been reduced by more than $1.2 billion. This has resulted in a 21 percent reduction of Automated Collection Service (ACS) contact representatives and 28 percent of Field Collection revenue officers. The IRS is answering 25 percent fewer taxpayer telephone calls since 2011 and taxpayers who actually got through waited an average of eight minutes longer to speak with a representative. In fiscal 2014, 35.6 percent of phone calls to the IRS went unanswered and 50 percent of correspondence with the agency was not handled in a timely manner. During the 2015 tax filing season, the IRS’ over-loaded phone system hung up on more than 8 million calls from taxpayers. According to a Ways & Means report, the time IRS employees spent on union activities would have allowed for an additional two million plus in taxpayer assisted phone calls. In fiscal 2014, revenue officers closed 34 percent fewer cases and collected $222 million (7 percent) less in revenue than in 2011. Fiscal year computer downtime reached 66,448 hours, the equivalent of losing 32 full-time employees for the year. The IRS currently employs about 90,000 people, of which only about 2,000 are under the age of 30, and about 650, less than 0.01 percent, were born after 1990—not a recipe for sustainment. More than half of the IRS work force is over age 50, and about 40 percent will be eligible to retire in 2019. Because of budget cuts, the IRS will continue its hiring freeze and expects to lose through normal attrition approximately 3,000 additional full-time employees in fiscal year 2015. That would bring the total reduction in full-time staffing since fiscal year 2011 to over 18,000, while the amount spent on employee training for those left has been cut by 83 percent.

•  While funding and employees have crumbled, over the past decade the number of individual tax returns have jumped 11 percent, business returns are up 18 percent, and phone calls to the IRS have soared 70 percent.

•  According to the Treasury Department, every $1 cut from the IRS enforcement budget results in a loss of $6 in additional revenue.

•  Adjusted for inflation, the IRS will have as much money as it did in 1998, when it processed 30 million fewer returns. According to IRS Commissioner John Koskinen, such budget cuts will result in the loss of $2 billion in revenue through enforcement cut backs.

•  In 2015, budget prevented the IRS from distributing paper forms in libraries and most post offices. In fact, the IRS actually ran out of preprinted tax forms and reportedly didn’t even have the extra blank paper to print out more forms.

•  Computer upgrades will also suffer. According to the IRS Commissioner, We still have applications that were running when John F. Kennedy was president.

•  Nevertheless, the IRS managed to find $8.3 million to spend on market research, office furniture, fitness equipment, and nearly $4,000 for toy give-away items.

•  Between October 2003 and September 2013, the IRS found that more than 1,500 employees were willfully not complying with our tax law. Over this period, 620 employees resigned, retired, or were terminated. However, others were rewarded with cash bonuses, promotions, and paid time off.

•  In fiscal 2014, the IRS gave out $2.8 million in bonuses to employees who had conduct issues or owed back taxes.

•  In fiscal 2012, the IRS handed out $5.6 billion in bogus education tax credits.

•  Between fiscal years 2003 and 2013, the IRS paid out as much as $148 billion in improper Earned Income Tax Credits.

•  Between 2011 and 2013, the IRS may have allowed $167.7 million in questionable fuel tax credits.

•  IRS ethics attorney Takisha Brown was disbarred for intentionally misappropriating funds and making false statements. So much for IRS ethics.

•  In 2015, approximately 800,000 taxpayers received from the government incorrect tax information on their Form 1095-A relating to health insurance subsidies and couldn’t correctly file their tax returns.

•  GAO investigators filed 12 fraudulent applications for health insurance tax credits under the Affordable Care Act (ACA). Eleven of the twelve were approved!

•  The IRS failed to maintain effective internal control over financial reporting because of continuing material weakness in internal control over unpaid tax assessments.

•  According to a TIGTA audit of the agency, the IRS has failed to take adequate measures to safeguard tax information disclosed to other agencies.

•  The IRS was also found to have failed to do background checks on some private contractors who handled confidential taxpayer information, exposing more than a million taxpayers to an increased risk of fraud and identity theft.

•  The Centers for Medicare and Medicaid Services said in February 2015 that it had sent incorrect Forms 1095-A, Health Insurance Marketplace Statement, needed to reconcile subsidies with actual incomes on your 2014 tax return, to more than 800,000 people.

•  The Internal Revenue Service’s total tax debt inventory has increased 23 percent since 2009 to $380 billion, according to a 2015 GAO report, while the agency’s collection staff has declined 23 percent after years of budget cuts.

•  The study also found the IRS lacks adequate internal controls over its largely automated tax collection processes. The automated Inventory Delivery System, or IDS, categorizes and routes cases based on many factors, such as type of tax and amount owed.

MEMORIES OF 2014

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I guess IRS now stands for I’m Really Sorry. In an age where every keystroke lives forever, it appears that what the agency called a catastrophic failure followed by the routine recycling of backup tapes, wiped out 2 years’ worth of e-mails belonging to former IRS official Lois Lerner, currently under Congressional and Justice Department investigation. Try using that the computer ate my records defense at your next audit.

The IRS had other things to be sorry about:

•  It was revealed that the IRS mailed out fraudulent refunds worth $3.6 billion in 2013. That was at least better than the $5.2 billion it paid out in 2012. I still have difficulty understanding how it could miss the half million dollars the agency mailed to a single address in Bulgaria used on 700 different income tax returns. Really, Bulgaria?

•  It was also revealed that the IRS may have disclosed as many as 100,000 Social Security numbers (along with names and addresses) on its Website. Oops. … On the other hand, more than 3,000 IRS employees are working on identity theft cases and the agency has assigned 35,000 more employees to work with taxpayers to look for warning signs and help victims.

•  Forget calling the IRS for help. In fiscal 2013, only 61 percent of calls to IRS customer service representatives were answered with a 17.6-minute waiting time. The waiting time as of March 2014 was 16.8 minutes, better, but almost double the 8.8-minute hold in fiscal 2009. However, about 70 percent of calls were eventually answered in 2014. Thanks for waiting.

•  Don’t write either. More than 50 percent of written correspondence from taxpayers in fiscal 2013 was not answered within time frames set by the agency.

•  Love getting letters from the IRS? Approximately 4,000 retirement plan sponsors received erroneous penalty notices. At least the Service sent out letters of apology. No sponsor legal or accounting fees were reimbursed.

•  A National Small Business Association survey reported that more than half the businesses spend more than 40 hours per year dealing with federal taxes. Forty percent reported spending more than 80 hours, or 2 full weeks. More than a quarter of the respondents spend more than $10,000 per year on tax compliance.

•  According to the American Action forum, compliance with Internal Revenue Service requirements takes 7.7 billion hours and costs $170.4 billion in labor each year.

•  According to IRS estimates, more than 4,000 changes were made to the Internal Revenue Code just between 2000 and 2010.

Government agencies with IRS oversight were less than pleased as well. The Treasury Inspector General for Tax Administration (TIGTA) had the following issues:

•  Taxpayer privacy? In one study, the TIGTA found that in more than half the cases taxpayers’ authorized representatives were bypassed, unauthorized disclosures to third parties, or numerous processing errors were made.

•  Amend your returns carefully. The TIGTA estimated that the IRS may have issued more than $439 million in potentially erroneous refunds claimed on 187,421 amended returns during fiscal 2012. The TIGTA estimated $2.1 billion in bad refunds over the next 5 years.

•  Did you have your 2013 return prepared by the staff of the Internal Revenue Service’s Volunteer Program? You were subject to a 49 percent inaccuracy rate based upon one audit. It’s at least 2 percent better than the 47 percent inaccuracy rate for 2012 volunteer-prepared returns.

•  Another audit exposed sensitive taxpayer information had been disclosed and taxpayer rights violated in 16.4 percent of Freedom of Information/Privacy Act requests.

•  The TIGTA found continuing difficulties in IRS handling of collection due process cases.

•  Scanning of documents continues to plague the IRS. One audit found 24 percent of the documents scanned incomplete, illegible, or inaccurate.

•  From 2003 to 2012, the IRS paid at least $110 billion and as much as $132.6 billion in improper earned income credits. That’s at least $11 billion a year, or more than the $9.5 billion Congress will spend on the Department of Commerce in the 2013–2014 fiscal year.

•  The TIGTA estimated another $11.4 billion potential loss over 5 years from fraudulent use of stolen Employer Identification Numbers (EINs).

•  Almost 700 employees of companies contracting with the IRS owe $5.4 million in federal tax debt.

•  The IRS may have forgone up to $1.5 billion in unassessed penalties for erroneous tax refund or credit claims from June 3, 2012, to May 2, 2013.

•  The IRS now has responsibilities under the Affordable Care Act (ACA). Unfortunately, the IRS’s existing fraud detection system may not be capable of identifying ACA refund fraud or schemes prior to the issuance of tax return refunds.

•  The IRS has failed to make adequate progress in allowing taxpayers to access their tax account information online as required by law.

•  The IRS has failed to pursue up to $53 million in potentially improper claims for the Qualified Retirement Contributions credit.

•  Nearly half the tax returns on which individuals claimed tax deductions for alimony payments did not match up with the former spouse’s tax return showing an alimony gap of over $2.3 million in 2010 alone.

•  Between October 1, 2010, and December 31, 2012, more than 2,800 IRS employees with recent substantiated conduct issues resulting in disciplinary action received more than $2.8 million in monetary rewards and more than 27,000 hours in time off awards. Among these, more than 1,100 IRS employees with substantiated federal tax compliance problems received more than $1 million in cash rewards and more than 10,000 hours in time off awards.

The Government Accountability Office (GAO) had its own concerns:

•  An audit of the IRS’s fiscal year 2013 financial statements revealed eight new internal control deficiencies.

•  The IRS budget has been cut to below 2009 levels. While the IRS has taken short-term steps to address budget cuts, it doesn’t have a strategy to operate in an uncertain budget environment over the long term or to stem declining performance.

•  The IRS has been erroneously double charging some taxpayers for user fees in installment agreement arrangements, causing them to pay the same fee twice.

•  The IRS is plagued by significant and material inaccuracies when it comes to financial reporting on unpaid tax assessments resulting in almost $11 billion in adjustments to its 2013 gross revenues balance. I had a client who was audited for being off $11 in dividend revenue, and they wanted a penalty. Don’t look for fairness in the Internal Revenue Code.

•  Sensitive taxpayer data remains at risk due to system weakness at the IRS. Such data is vulnerable to inappropriate and undetected use, modification and disclosure that could affect the confidentiality, integrity, and availability of financial and sensitive taxpayer data.

All was not bad. There was some positive news:

•  Senate Minority Leader Mitch McConnell (R-Ky.) introduced a bill to allow parents who have baby cribs and other child care implements in their home offices to still claim the home office deduction despite failing the exclusive use test. As of this writing, the bill has not become law.

•  The IRS now recognizes all same sex marriages nationwide. That allows for joint filing of returns and qualification for spousal benefits. Domestic partnerships and civil unions still do not qualify to be considered as married for federal tax purposes.

•  In 2013, 78 percent of taxpayers were satisfied with their personal interactions with the IRS, up 2 percent from 2012.

•  According to the Tax Policy Center, 43.3 percent of Americans had a zero or negative income tax liability for 2013, up from 41.8 percent the prior year.

EXTENDERS—AGAIN!

The 2014 filling season was pushed back to January 31 because of delays caused by the government shutdown the previous October. We had another problem in 2015 because Congress played politics with the extenders again. These are a group of deductions such as the $250 above the line allowance for teachers’ expenses, the deduction for state sales taxes, the mortgage insurance premium deduction, the tuition and fees deduction, the forgiven mortgage debt exclusion, the nonbusiness energy property credits, etc., which expired after December 31, 2013, but which are traditionally extended for another 2-year period after the November elections. That means the IRS computers and all private tax preparation programs have to be redone, thereby creating additional costs and delays in filing. The provisions were extended on December 18, 2014.

See page 625 for details.

IN RETROSPECT, 2013 WASN’T THAT BAD

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April is the cruelest month

T. S. ELIOT

It starts with laughter on April Fool’s Day—but by April 15, nobody is smiling.

The IRS had some issues in 2013:

•  The Internal Revenue Service reportedly posted the Social Security numbers of tens of thousands of people on the Internet before taking it down when a whistleblower pointed out the mistake.

•  The Treasury Inspector General for Tax Administration (TIGTA) found that IRS supervisors urged employees to ignore potential fraud when reviewing applications for Individual Taxpayer Identification Numbers (ITINs). The study showed 15,028 ITINs assigned to individuals with the same address in Dallas and $46.3 million in refunds sent to the same address in Atlanta. Another $7.3 million in refunds for allegedly 2,706 taxpayers went to the same single bank account.

•  The TIGTA also found that the IRS revenue agents failed to follow procedures designed to protect taxpayer rights during the tax collection process, did not follow guidelines on contacting taxpayers with representatives, and were not efficiently or effectively processing information referrals, including identity theft claims. Identity theft has increased by more than 650 percent from fiscal 2008 to fiscal 2012. At the end of fiscal 2012, the IRS had nearly 650,000 identity theft cases in its inventory.

•  Approximately 1.45 million taxpayers who qualified for relief from tax penalties totaling close to $181 million were never told they could get penalty abatement and never got it.

•  The IRS could not provide documentation for $394,430 paid for labor hours. Point that out in your next audit!

•  The IRS failed to save $527 million in erroneous tax credits for the Earned Income Credit and Additional Child Tax Credit due to inadequate IRS controls.

•  For the second year in a row, the IRS failed to comply with the provisions of the Improper Payments Elimination and Recovery Act.

•  Accounting errors by the IRS in calculating unpaid tax assessments created a risk of a material misstatement of the IRS’s financial statements.

•  The American Civil Liberties Union released documents showing that the IRS criminal division had been reading taxpayers’ e-mails without a warrant, in violation of the Fourth Amendment.

•  And then there were the IRS parties. During one conference, more than $50,000 was spent on receptions, including 28 bottles of wine for 41 guests. Then there was the almost $4,000 spent on giveaway items, including footballs, $418 in Kazoos, bathtub toy boats, and other novelty decorations. IRS credit cards were used to purchase romance novels, steaks, diet pills, and unspecified items from merchants affiliated with online pornography … your tax money at work!

•  The IRS spent about $50 million on 225 conferences during the 3 years between fiscal 2010 and 2012. The Small Business and Self-Employed division spent $4.1 million alone on a single conference in Anaheim, California. You should have been there. Speaker fees for presentations such as how seemingly random combinations of ideas can drive radical innovation totaled $135,350. One speaker was paid $17,000 to create six paintings. Three were donated to charity, two were given to conference attendees, and the sixth was lost. Then there were the videos that cost $50,107 to produce. They included a dance video showing IRS employees learning the cupid shuffle and a Star Trek parody, for which the set alone cost $2,400 and 11 hours of staff work (estimated to cost an additional $3,100). But, they did get a 1-minute finished video. We won’t even talk about the IRS video parody of Gilligan’s Island used to train 1,900 taxpayer assistance employees in 400 locations nationwide. As Maynard G. Krebbs would say, WORK? In addition to these large expenditures, the IRS spent $15,669 of your money on brief bags with free gifts and trinkets, $6,060 on lanyards and badge holders, $1,524 on engraved travel mugs and clocks, and $90 on sleeves for puzzle pieces.

•  And then there were the political issues. The supposedly politically independent IRS was found to have targeted conservative groups seeking tax exemption for extra scrutiny. The TIGTA found the inappropriate conduct inexcusable and Attorney General Eric Holder announced that criminal penalties may be sought in a Justice Department criminal investigation. Add that to the 24 IRS employees who were indicted for fraudulently obtaining more than $250,000 in government benefits and you have what some would call a rogue agency out of control.

There was some good news:

•  The IRS was in compliance with restrictions on the use of enforcement statistics to evaluate employees.

•  For fiscal 2012, the IRS collected $2.5 trillion but only spent about 48 cents for every $100 in revenue collected, which is the lowest cost since 2008.

•  Among households with incomes of less than $50,000, 55 million or 59 percent didn’t pay any federal income tax. Nonpayers made up 41 percent of all households.

•  IRS firings for misconduct fell to the lowest level since 2002.

•  Between fiscal 2009 and fiscal 2011, the total amount of outstanding taxes collected under the IRS Collection Program was 20 percent higher than before, with even fewer revenue officers on staff. Conversely, the IRS had grown slower in closing Offer-in-Compromise cases during the same period.

2012 WAS WHEN…

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SHAMEFUL!

I don’t want to get on a rant here but our Congress has all the character of an egg yolk frying on the asphalt road behind my grandfather’s barn on a hot summer day. Since when did having a three-digit IQ disqualify someone from running for office? Are our choices limited only to the left-hand leg of the bell curve? As we crawl out of a recession, I’m reminded of my 92-year-old mother-in-law’s comment, "Recession? I lived through the depression of the 1930s and this is a depression." Does anybody think a sane business person would take the risk and invest and expand when the tax rules keep changing (maybe) and the cost of employee healthcare is subject to a new law that nobody understands and few agree upon.

When I wrote this, we were approaching what some called a fiscal cliff and others refered to as tax Armageddon. If Congress did nothing, we faced the biggest tax increase in the history of the Internal Revenue Code. Between the expiration of the Bush tax cuts (which were extended in 2010 for 2 years through 2012) and the expiration of the extenders, deductions would be lost, rates would increase, credits would disappear, and the marriage penalty would return in full force. The maximum tax on dividends would jump from 15 percent to as much as 43.4 percent! According to the Tax Policy Center, four out of five U.S. households would face an average of $3,701 more in taxes. Add mandated spending cuts to this tax hike and on January 1, 2013, we were scheduled to suffer an $8 trillion hit!

Here’s the part that really gets me angry. Everybody agreed on what should be done. But nobody in Congress had the backbone to do anything until after the November elections. So once again politics trumped economics and sanity. Once again hundreds of millions of dollars were wasted on reprogramming IRS computers and tax preparation programs at the last minute. More of your tax money was spent redoing IRS forms. It’s hard to play the game if the rules keep changing. It’s even harder if the rules change in December when the year is already up.

According to the Joint Committee on Taxation in March 2012, the prior cost of kicking the can down the road for tax cuts, extenders, estate tax, etc., through fiscal year 2012 was 967.7 billion in wasted dollars. Add to that decreased stability and the inability to properly budget into the future, and you had a framework for economic impotence.

Don’t blame the IRS. Then Commissioner Doug Shulman warned, If Congress can’t act by the end of the year, and even starts to think about retroactive legislation of things like the AMT, which have already expired, you could have a real disaster in the filing season, where there is total confusion, where some people are filing under one law and others under another.

Congress finally passed the American Tax Relief Act of 2012 to address these issues. See Chapter 19 for details.

What else happened? Well, the IRS did have some issues:

•  The IRS delayed tax refunds early this filing season for 7.8 million tax returns because of fraud detection problems with its computer system.

•  It was revealed that the IRS paid $3.2 billion in erroneous American Opportunity Tax Credits during the first 5 months of 2010 to 2.1 million taxpayers.

•  The Service either failed to notify or incorrectly notified 61,427 taxpayers about their need to start repaying the First-Time Home Buyer Credit.

•  The Tax Inspector General for Tax Administration (TIGTA) reported that the IRS failed to securely operate its computer network.… The TIGTA also found that the IRS needed to gain tighter control over its wireless technology and improve security to protect data from computer attacker exploits. Weaknesses in the Internal Revenue Service’s financial and tax processing systems continue to jeopardize the confidentiality, integrity, and availability of sensitive taxpayer information. No surprise that the number of fraudulent returns jumped to 2.2 million in 2011, up from just 457,369 in 2009.

•  Somebody got the math wrong. The IRS sent out 8.6 million math error notices, but almost 138,000 taxpayers disputed the computer-generated adjustments.

•  Tax returns that were incorrectly prepared by IRS volunteers, if filed, would have caused taxpayers to pay almost $10,000 more than they owed and would have kept them from receiving legitimate refunds of $4,000 according to a TIGTA study. Of the 36 returns audited, only 14 were prepared correctly.

•  Another TIGTA study found more than $697 million in wrongly claimed investment theft deductions causing a revenue hit to the Treasury of over $41 million.

•  The percentage of customer service phone calls that actually reached IRS representatives in fiscal year 2012 fell to 61 percent, down from 70.1 percent in 2011. That’s what happens when Congress cuts the IRS budget by 2.5 percent, and the IRS responds by eliminating 3.1 percent of its full-time employees.

•  TIGTA also found the IRS’s new e-file system error prone and still unable to ensure the accurate processing of individual tax returns.

There was some good news:

•  For 2011, the IRS scored a 73 percent on the American Customer Satisfaction Index survey, way up from only 32 percent in 1998.

•  The IRS was ranked third out of 15 large agencies in the Best Places to Work in the Federal Government survey for 2011, up from eighth place as recently as 2008.

•  Why is it so much fun to work at the IRS? It may have something to do with a forfeiture relating to a Nevada brothel. I guess the job with the Secret Service was already taken.

•  According to the TIGTA, IRS inability to detect identity theft could result in the issuance of $21 billion in fradulent refunds over the next 5 years.

The best tax tip of the year? A Cleveland waitress received an erroneous tax refund of $434,712. She had requested a refund of only $754.

WE SURVIVED 2011

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Senator Olympia Snowe (R-Maine) hit the nail on the head in 2011 when she said, It’s all political theater. It’s not about legislating anymore. It’s all for the next election that’s coming very shortly. That pretty much described 2011. But we did have an interesting year:

•  A Joint Tax Committee Report revealed that 51 percent of households not only owed no federal income tax for 2009, but that 30 percent of all households got back a check for their full income tax bill and more resulting from refundable credits.

•  In January the IRS launched IRS2Go, a free application for the iPhone and Android market, an app that lets users check their refunds and access help lines over the phone.

•  Having trouble keeping up with changes to the tax law? In April 2011, IRS Commissioner Shulman reported that there have been about 3,500 tax law changes since 2000.

•  More than half of small businesses spend at least $5,000 and 40 hours per year just to file their taxes according to a National Small Business Association survey.

Our government tax enforcers are still having problems:

•  The IRS improperly transferred hundreds of millions of dollars in taxpayer payments to its Excess Collections File.

•  A March Government Accounting Office (GAO) report revealed that taxpayer data are at risk of being disclosed, modified, or destroyed because of material weaknesses in IRS internal control systems. About 74 percent of previously reported information security weaknesses still remained unresolved or unmitigated.

•  A June 2011 report by the Treasury Inspector General for Tax Administration (TIGTA) found that IRS databases are increasingly being targeted by attackers and that the IRS needs to increase its security diligence.

•  An August 2011 TIGTA report showed that only 19 percent of written inquiries from taxpayers received timely and accurate responses. In another study, the percent dropped as low as 8 percent.

•  The TIGTA reported that the IRS has been doing a better job of detecting and preventing fraudulent returns. But, I guess that doesn’t apply to prisoners and those with kids. The number of fraudulent tax returns filed by state and federal prisoners in the United States doubled from 18,103 in 2004 to 44,944 in 2009. That allowed $295.1 million in illegal tax refunds. The IRS reported that between 23 and 28 percent of earned income tax credits (EITCs) each year are issued erroneously. For 2009, that was $13 billion in improper payments.

•  The IRS didn’t do much better with cars or other credits. As much as 20 percent of the $163.9 million in credits claimed for electric and alternative motor vehicles was claimed in error according to a February TIGTA report. The IRS also allowed 125,762 individuals to erroneously receive $111.4 million in stimulus-related tax credits. If this is doing better, how bad was it before?

•  The TIGTA did find that the IRS needs to improve the security of a Web portal used by preparers to electronically file returns. I guess the IRS failed to show its security concerns when it awarded a tax processing contract to a company that admitted to having information on 1.5 million payment card-holders and 1.1 million Social Security numbers stolen by computer hackers.

•  The TIGTA found that the IRS also divulged personal taxpayer records and information over the phone without properly authenticating taxpayer identity.

•  Because of multiple use of taxpayer identification numbers, the IRS accepted $380 million in erroneous tax exemptions and tax credits in 2007.

•  In July 2011, the TIGTA reported that the IRS may have violated over 32,000 taxpayers’ tax lien rights with improper notifications.

•  The IRS found over 245,000 identity theft incidents last year. Since 2004, there have been 470,000 incidents of identity theft affecting more than 390,000 taxpayers.

•  TIGTA auditors found that taxpayers had to wait an average of one hour to receive assistance as per an August 2011 report.

•  The good news—the IRS provides a special toll-free phone line for hearing and speech impaired taxpayers. The bad news—the IRS ignores most of the calls! Out of the 350,000 calls made to the special line, only 339 were responded to by the IRS.

•  Really? The Center for Plain Language gave the IRS its Grand ClearMark Award for clear language in its simplified notices, as required under the Plain Writing Act signed in October 2010.

2010 WAS WHEN …

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2010 was a great year for tax preparers. Congress solved any and all economic and social problems with multiple changes in the tax code while shamefully delaying any action on the estate tax and tax extenders by playing politics rather than providing clear and long-term rules for playing the tax game. But, we had fun:

•  It’s become harder and harder to reach executive level in government service if you actually pay your taxes. New York Congressional representative Charlie Rangel was forced to resign as Chairman of the House Ways and Means Committee, which writes all our tax rules, because he couldn’t follow them. I guess anybody could forget to report $75,000 in rental income.

•  Lael Brainard was nominated and approved to be undersecretary for international affairs despite late real estate tax payments, questionable home office deductions, late unemployment insurance payments for household employees, and questions as to their legal work status.

•  You didn’t have to be a senior executive to be bad. IRS employee Lattice Murray pleaded guilty to stealing cash and mail addressed to the IRS facility where she worked.

•  IRS revenue officer Albert Bront threatened to kill tax agents who investigated his fraudulent returns and was hit with a 16-count indictment.

•  IRS employee Colette Browne was charged with filing 32 fraudulent returns and embezzling over $100,000.

•  While it helps, being on the government teat wasn’t a prerequisite for cheating on your taxes. In April 2010, the Department of Justice and the IRS announced fraud charges against 26 New York City tax preparers.

And then there were the successes of the Internal Revenue Service itself:

•  A report by the Treasury Inspector General for Tax Administration (TIGTA) found that errors in the Modernized e-Filing system limited its utility and caused it to erroneously reject tax returns. The $78 million MeF Release 6.1 was deployed in February 2010 and subsequently rejected 23 percent of the electronic returns filed.

•  The TIGTA in July 2010 found security weaknesses in IRS contractors which placed confidential information at risk of unauthorized access and disclosure.

•  The IRS also failed to expeditiously process paper checks resulting in the loss of thousands of dollars in interest for the agency.

•  The TIGTA also found $20 million in erroneous credits issued by the IRS under the Making Work Pay program.

•  Then there was another $20 million in erroneous refunds issued to nearly 14,000 taxpayers as a result of dishonored and bounced checks for payments.

•  Then our tax masters failed to make timely and appropriate lien determinations on more than $1.4 billion in delinquent taxes.

•  IRS oversight could have been more focused. At least 130 companies that received federal funds under the Troubled Asset Relief Program (TARP) owed taxes totaling $530.8 million at the time they received government funding.

•  The IRS didn’t do much better with home buyer credits. A TIGTA study reported $636 million in bogus claims, including 500 people under age 18 and one home buyer only four years old. One hundred IRS employees filed dubious claims, and 256 filers took the credit for homes at just five addresses. That’s your tax dollars at work with a computer system that won’t work!

•  Putting perpetrators in jail didn’t appear to work. 1,295 prison inmates, including more than 200 serving life sentences, received $9.1 million in fraudulent home buyer tax credits. One home was used by 67 inmates to claim credits.

•  Taxpayer security is still an issue. The Government Accounting Office (GAO) found control and processing weaknesses that continue to jeopardize the confidentiality, integrity, and availability of financial and sensitive taxpayer information.

But, there was some good news:

•  Laura Schultz, a house cleaner in the Denver area, received an erroneous $122,783 tax refund. Being honest, she voided the check and returned it to the IRS. Being a government agency, the IRS then billed her for $80 in taxes owed.

•  IRS Commissioner Douglas Shulman revealed that nine out of ten taxpayers use either a tax preparer or third party software to complete their tax returns. Well, that’s good news if you’re a tax preparer or sell software.

•  The IRS has established a global high wealth industry division to make sure high wealth taxpayers pay their share. These wealth squads will go after taxes on income from high net worth individuals regardless of its source or country of origin.

•  I think the Tax Court got this one right: William C. Naylor, Jr., set up a foundation to store his sperm and, in conjunction with a sperm bank, distribute it to recipients of his choice. The Tax Court found that the foundation did not promote health for the community and denied the foundation status as a tax-exempt organization.

2009 WAS FINE

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I’m beginning to understand now. The tax code is the Holy Grail—the answer to all our social and economic problems. If we have a problem, it can be solved through the tax code. Need to sell more cars? Simple! Make the sales tax on their purchase deductible, even for those taking the standard deduction, and create a clunkers credit. But, then again, the government does own General Motors, doesn’t it?

Still, I stand by my argument. Your house went down in value? Stimulate the real estate market by making real estate taxes on a principal residence deductible, again, even for those taking the standard deduction.

Oil prices getting too high again? Stimulate green energy alternatives with credits that reduce your taxes on a dollar-for-dollar basis.

On June 11, 2009, Rep. Carolyn Maloney (D-NY) introduced a bill that would give an employer a 50 percent tax credit on up to $10,000 for qualified breast-feeding promotion and support expeditures. Talk about milking the system.

You can’t say 2009 was a quiet year taxwise.

The Internal Revenue Service released a Taxpayer Attitude Survey on February 2, 2009, which found that 89 percent of Americans think it unacceptable for people to cheat on their taxes. The other 11 percent appear to be headed for the president’s cabinet. President Obama’s pick to lead the Department of Health and Human Services, former Senate Majority Leader Tom Daschle, apologized for owing $140,000 in back taxes and interest. In 1998, he was quoted as saying, Make no mistake, tax cheaters cheat us all and the IRS should enforce our laws to the letter. The president’s selection for the first Chief Performance Officer for the federal government, Nancy Killefer, failed to pay tax on her household help. Both had the good graces to withdraw from consideration. And then there was Ron Kirk, nominated to be the U.S. trade representative. He forgot to report $37,000 in speaking fees assigned to a charity, but he managed to remember taking a deduction for $7,500 of the donation. And then there was $7,400 in pro basketball tickets without a business purpose.

Cheating on his taxes didn’t deter Timothy Geithner from becoming Treasury Secretary. His taxes were found to be underpaid in 2001, 2002, 2004 and 2005. (Nobody looked at 2003?) But then again, who better to put in charge of the IRS than someone who requests a ruling on the law and then ignores it? But, he did pay up, when caught.

Talking about the law, surprise, it changed again! The year started with the American Recovery and Reinvestment Act of 2009 passed on February 17. That was just the beginning. The details of these and other changes, and how to respond to their opportunities, are found in Chapter 18.

GOT STIMULATED IN 2008

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Rebate, rebate, rebate!

That’s all we heard in 2008. Once again Congress, in its infinite wisdom, decided that you could be trusted to spend your own money and spent many millions of your dollars to send some back to you—to stimulate the economy. The IRS estimated that the reallocation of hundreds of IRS collection staff members to answering taxpayer telephone calls about the stimulus payments alone would result in up to $565 million in foregone enforcement revenue. According to the Treasury Inspector General for Tax Administration, calculations of the economic stimulus payments by the IRS may have been wrong in nearly 400,000 cases. More than 100,000 self-employed taxpayers received larger checks than they were entitled to and 25,000 clergy members didn’t get the rebates owed to them. The details of this give-back are covered in Chapter 17 as part of the Economic Stimulus Act of 2008.

Chapter 17 also discusses the tax aspects of three more tax law changes—both 2008’s Housing Stimulus Bill and the Hero’s Earnings Assistance and Relief Act, as well as the Mortgage Debt Relief Act of 2007, which was passed and signed into law on December 20, 2007. We also had the Emergency Economic Stabilization Act in October 2008 in response to our economic and financial meltdown.

Because of the last minute changes in the law, more than 3 million and as many as 13.5 million taxpayers in 2008 were unable to even file their returns until February 11 because the forms were wrong—again! Let’s not even think about the cost to update and correct all the tax preparation programs and educate the public. As noted by National Taxpayer Advocate Nina Olson, When taxpayers do not claim tax benefits because they do not know about them, Congress’s intent in providing the tax benefits is undermined and taxpayers understandably question the fairness of the tax system. She was referring to the last minute 2006 changes that resulted in 1.4 million fewer claims for deductions that were extended but weren’t even on the forms that finally went out to confused taxpayers.

The IRS computer system remains a mess. The IRS still lacks adequate procedures to identify identify theft victims or adequate systems to even determine the number of tax-related identity thefts that occur. From 2002 to 2006, identity theft related to refund fraud rose by 396 percent, while employment related identity theft increased by 129 percent. Call 800-908-4490 if you have an identity theft issue.

2007 SUCKED BLOOD

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I guess the IRS is a great training ground. First they want your money; now they want your blood! Former IRS Commissioner Mark W. Everson left that position in April 2007 to head the American Red Cross. In July, his successor, Kevin M. Brown, declared that he too was leaving the IRS to serve as chief operating officer for the American Red Cross. Unfortunately, Mr. Everson was caught in a tryst with one of his employees and the Red Cross wrote him off.

In December 2006, Congress passed an extenders package that gave renewed life to the research and development credits, deductions for college tuition, above-the-line deductions for teacher expenses, and the sales tax deduction. Unfortunately, the 2006 tax forms had already been printed without these changes. The IRS incurred additional costs of $410,000 for printing and $1.3 million for postage for the new sales tax tables alone.

In 2007, the IRS eliminated the telefile program, a free telephone filing service. It had been used by about 2 million taxpayers in 2005. Half of those reverted to filing paper tax returns, slowing the refund process and increasing IRS processing costs. Those who paid tax preparers or purchased software spent nearly $24 million to file their taxes in 2006.

The Treasury Inspector General for Tax Administration revealed that of the 106 million refunds totaling $228 billion issued by the IRS to individual taxpayers in 2004, taxpayers voluntarily returned approximately 51,000 refunds totaling $302 million. The report estimated that about half of those erros were due to IRS mistakes!

It’s a good thing the former IRS commissioner was a computer expert. In five weeks to April 13, 2007, the IRS sent upward of $300,000 worth of one time $30 federal telephone tax refunds to a single JPMorgan Chase Bank