IRS Slams Respected Attorney with $4.8 Million in Penalties

October 8th, 2009

Attorney Lewis B. Freeman, who is a well-known fraud investigator, forensic accountant and lawyer, has sued the IRS in an attempt to combat the $4.8 million civil penalty the IRS has slapped him with.

The IRS has accused Mr. Freeman of promoting abusive tax shelters in protest to unfair federal tax laws. The IRS has penalized him $1,000 for each of the 4,827 employees in the benefit plan which attempted to shelter income from taxation.

“This is like an episode from ‘The Twilight Zone,’” Freemen is quoted as saying in a recent online Forbes article.

In recent years the IRS has been accused of being too heavy-handed in its use of its power to massively penalize promoters of abusive tax shelters, especially in less severe situations or when the agency simply disagreed with an aggressive tax-saving strategy.

The Forbes article went on to say that Freeman is regularly quoted by journalists as an expert on fraud and white-collar crime. Freeman readily agreed that the mere existence of the litigation was embarrassing to him.

This is typical of the IRS, and the government in general. Once a government is given the authority and power to coerce or punish, it tends to use that power in a way that it was not originally intended, or in too harsh a manner.

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Top Five Facts About Dependents & Exemptions

September 21st, 2009

What you need to know about dependents and exemptions to prepare your income taxes. Proper organization and categorization of tax dependents can save you a lot of money on April 15.

1. Dependents may be required to file their own tax return. Even though you are a dependent on someone else’s tax return, you may still have to file your own tax return. Whether or not you must file a return depends on several factors, including: the amount of your unearned, earned or gross income, your marital status, any special taxes you owe and any advance Earned Income Credit payments you received.

2. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,500 on your 2008 tax return. Exemptions amounts are reduced for taxpayers whose adjusted gross income is above certain levels, which is determined by your filing status.

3. Dependents may not claim an exemption. If you claim someone as a dependent, such as your child, that dependent may not claim a personal exemption on their own tax return.

4. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return and were not the dependent of another taxpayer.

5. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children.

For more information on dependents and exemptions, including whether or not you or your dependent needs to file a tax return, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

Reference Links:

  • IRS Publication 501, Exemptions, Standard Deduction, and Filing Information
  • NWLC The Expanded Child and Dependent Care Tax Credit in the Family Tax Relief Act
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Tax Increases Are Just Around the Corner

September 14th, 2009

Fact: Tax revenues are falling due to the economic downturn.

Fact: The bailout/stimulus package will create the largest deficit in U.S. history.

Fact: The bailout/stimulus must be paid for.

In discussing the incoming Obama administration’s planned stimulus package, The Wall Street Journal had this to say:

“Whether or not you think new spending will stimulate the economy, the one undeniable truth is that this money has to come from somewhere, which means that it is borrowed or taxed from the private economy. This spending blowout is all but guaranteeing huge future tax increases, and anyone who thinks only the rich will pay is living an illusion. Taxpayers need some new champions in Washington — and fast.”

The Wall Street Journal’s Opinion Journal article titled “The Deficit Spending Blowout“, dated January 7, 2009.

Congress will needs its own stimulus package to pay off this huge deficit, so they will almost certainly have to raise taxes. The IRS is not going out of business anytime soon.

In addition, you can enjoy this Wall Street Journal video which discusses the likelihood of tax increases.

What is your opinion?

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Mark Your Calendars For Tax Payment Deadlines

March 30th, 2009

I was thinking that it would be helpful to provide a calendar of important upcoming dates for taxpayers so they can mark their own calendars and plan accordingly.

I’ve got this one on my web site, which counts down to the
April 15 tax filing deadline.

But I wanted to provide you with a fuller list of dates.

I googled “2009 tax dates” and found this link showing tax filing deadlines on irs.gov, which seemed promising. Until I clicked it. Not very helpful at all to determine when one must file income tax returns.

This is typical of the IRS: There is the obvious, basic questions that people want to know. And those obvious, basic questions should have obvious, basic answers that are quick and easy to find. With just one or two clicks from the site.

But why should the IRS do anything the easy way? Why spend $1 of taxpayer’s money to create a simple set of tax rules accessible from an easy to find site when you can spend $100 of taxpayer’s money to do the same thing???

And so, when we look for “2009 dates” or “2009 deadlines” or “2009 tax dates” (etc.) we get a whole bunch of useless information.

Note to IRS: Post the filing dates on your home page… or at least a link to open a tax calendar. It’s not difficult to do. (Heck, a high school student with a list of dates could probably do it in an evening with Google Calendar).

Now, I realize that April 15 is THE DAY. It’s the day that is burned on most people’s psyche as the darkest day of the year. But there are other important filing dates and tax deadlines throughout the year that need to be adhered to.

If you want to mark your calendars with relevant tax-related dates, this calendar from MSNMoney is a lot better.

Here’s another tip that the IRS will ignore: They should allow syncing options with Blackberries and personal online calendars so that we can click a button on the IRS site and download the filing dates to our calendars… perhaps even with helpful reminders built in to remind us in the weeks leading up to a tax deadline. The technology is there, the federal government needs to implement it.

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IRS: Carrying a Big (Padded) Stick for Tax Collecting

March 26th, 2009

The IRS, and Congress, are a little heavy-handed. And by “a little” I mean “a lot”! Congress issues many, many complex laws and expects people to follow them to the letter. And each law is usually in some way connected to making YOU owe more tax. Thus, Congress’ collection agency, the IRS, normally carries a big stick, ready to whack taxpayers with it in the form of new legislation and more taxes owing.

But recently, the IRS seems to have realized that they can only bleed someone for so long. If they keep taking their pound of flesh, they are eventually left with taxpayers who have nothing else to give. And this is the case even more so now than ever before because of the economic turmoil facing the world.

So, the IRS has “graciously” conceded to “additional steps to help people who owe back taxes”… in particular, for those who are facing “unusual hardships”. . Here are some of those additional steps:

The IRS increased the authority of its employees to suspend collection when there’s a hardship situation. This includes:

  • Job loss
  • Social security or welfare recipients
  • Significant medial bills

Taxpayers who have difficulty making payments (because of a number of reasons including job loss) may skip a payment or pay reduced payments.

Also, the Offer in Compromise has been augmented to allow for drops in home values (which once may have created difficulty in getting the IRS to agree to an OIC). And those who have an OIC agreement but are at risk of default now have options to avoid default.

Lastly, the IRS is speeding up its delivery of levy releases by reducing the requirements that taxpayers must meet when requesting a levy release.

In some ways, it’s nice to see the IRS finally recognizing that it needs to help people who want to pay their taxes but cannot. After all, it costs taxpayers a lot of money to punish taxpayers who aren’t paying their taxes… and law-abiding taxpayers who simply are not able to pay should not face dire consequences, particularly in this economy.

But let’s be realistic: While it’s nice to see the IRS doing something about it, the only reason they’re doing it is because they know that the pound of flesh is running out. They know that they can’t get more money out of taxpayers in the traditional way, and with the economy making it more and more difficult, they have developed “creative financing” to make it happen.

Tentative kudos to the IRS.

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Be Aware of Suspicious E-Mails Claiming to Be From The IRS

March 25th, 2009

By now, email has been around long enough for us to know better when we receive the email that tells us that Bill Gates is going to send us money for every email address we forward to. (That’s SO 1999).

And I don’t know about you, but I’ve seen a drop in the number of emails I get that are written in all caps and start with something like “GREETINGS TO YOU BLESSED ONE” and then goes on to tell me that some highly placed Nigerian politician is trying to get millions of dollars out of the country.

And, of course, there are others that pretend to be something they’re not. I remember seeing one from the “Bankfomaerica” (as if the people at the Bank of American had forgotten to spell their own company name and yet decided to send emails from that domain anyway).

Not surprisingly, we’re not immune to emails claiming to be from the IRS.

In these cases, scammers will use the IRS name and logo to get people to reveal personal information, including their Social Security number, their bank account or credit cards numbers, and other information.

First, you should know that the IRS states explicitly that they do not send unsolicited emails to you about your tax information. In other words, you can probably expect a phone call and/or a knock at the door long before you expect an email. This makes sense, especially since the telephone and face-to-face are far more secure forms of communication, and reputable. (After all, they want to make sure they’re talking to the right person, too). Second, even when the IRS contacts you, they won’t ask for passwords or PIN numbers to bank accounts.

The IRS makes it easy to know whether an email you’ve received claiming to be from the IRS is legitimately…the IRS does NOT send unsolicited e-mail about tax account matters to individual, business, tax-exempt or other taxpayers.  Here’s a quote from one of their press releases discussing this:

“The IRS does not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS never asks people for the PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.”

Read more about Suspicious e-Mails and Identity Theft on irs.gov

If you do get an email claiming to be from the IRS, you can know for sure that its not from them.    Be sure that you don’t reply to it. Delete it or forward it to the IRS. Don’t download anything from the email, don’t click on links in the email… don’t even click on links that say they’re going to the IRS website. The US government will never request any sensitive personal information via e-mail.

If you have received an e-mail claiming to come from the IRS you may forward it to a mailbox the IRS has established to receive such e-mails, phishing@irs.gov, using instructions contained in an article titled “How to Protect Yourself from Suspicious E-Mails or Phishing Schemes.” Following the instructions will help the IRS track the suspicious e-mail to its origins and shut down the scam. You can find the article by visiting IRS.gov and entering the words “suspicious e-mails” into the search box in the upper right corner of the front page. If it really is the Internal Revenue Service, you can be sure that they’ll get in touch with you in other ways.

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This Taxpayer Advocate is Right On Target

March 23rd, 2009

Today’s taxpayer faces two huge (and growing) problems. First, they face an increasingly complex income tax system. Second, they face an economy that is making it more and more difficult to make ends meet.

Nina E. Olson is the National Taxpayer Advocate, which is a kind of independent watch dog group within the IRS.  Each year she is required by Congress to produce and annual report about the problems with the IRS. Each year she produces am annual report, and each year the IRS acknowledges it and then promptly ignores it.

In her recent report, Olson outlines several problems with the tax code right now, specifically around the tax code’s complexity and the economic difficulty that Americans are facing. Here are a few highlights (and my take on them):

  • “Taxpayers and businesses spend 7.6 billion hours a year complying with tax filing requirements”. That is huge. To put that in perspective, every man, woman, and child in the world is given a total of 8760 hours in a year. With an average lifespan of 75 years, every person will enjoy just over 650,000 hours of life. So, if 12,000 people spent every hour of their entire lives doing income tax, they would be able to do the work required of one year’s worth of taxes!
  • “Taxpayers spend $193 billion a year complying with income tax requirements, an amount that equals 14 percent of the total amount of income taxes collected”.
  • 80% of individual tax payers have to pay to get help with their taxes (either for someone to complete them or for software).
  • There are changes to the tax code every single day. In 2008, Olson points out, there were over 500 changes.

These are just a few of the many problems Olson has highlighted in her report. You can read the IRS report here.

Olson’s report is very informative. It tells us that the tax system is so unwieldy and complex that no one can efficiently navigate it and this creates more problems than it solves.

Just imagine if Americans were suddenly given 7.6 billion hours of their lives back. I’m sure that stress and crumbling family life would be positively impacted. Just imagine if Americans were suddenly given $193 billion back. We wouldn’t feel the need for a BandAid stimulus package. Just imagine if taxpayers could sit down in an evening with clearly written papers and could quickly fill out their income tax forms. I believe we would minimize late filings and tax mistakes.

For further reading, visit the National Taxpayer Advocate site, here: taspresskit.irs.gov.

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A Telling Mistake

March 20th, 2009

If I was pulled over for driving 75 mph in a 55 mph zone, and I received a ticket, most people would say that I deserved the ticket. I would agree.

But what if I was going 75 mph in a zone where the posted speed limit was posted as “the square root of 3025”? The very thought of requiring a calculator in order to drive the limit is laughable.

And wouldn’t it be ironic if I was going 75 mph in a zone where the speed limit was posted as “the square root of 3025” but I was the one who had helped to create that sign? Some might say that I should know better. Others might say that my mistake was a natural consequence of an overly complicated system.

Thankfully, our speed limit signs are clearer than that. But our tax laws are not. They are far more complicated. And the above situation is going on right now with a highly placed politician.

Tim Geithner is the Treasury Secretary under Barak Obama (and most of you know that that Treasury is in charge of a number of things including the IRS).

And guess what Mr. Geithner did: He failed to correctly file his income tax during the years of 2001 and 2004, resulting in more than $40,000 worth of errors. Now, just to be clear, he DID file his income tax. This is not a story about tax evasion. However, he committed two errors, which are fairly common:

  • He hired a housekeeper and while she was employed by him, her working papers expired.
  • And, while working with the IMF, he was considered an independent contractor and failed to file self-employment income tax returns.

To Mr. Geithner’s credit, both issues were resolved:

  • The housekeeper married an American citizen and remains in the US.
  • And, Geithner paid the taxes he owed.

You can read more about the situation here.

But the reason I titled this blog “A telling mistake” and told the speeding story at the beginning was to illustrate the following: Tim Geithner is an educated man who works very close to the pulse of finances – first with the IMF and now with the Treasury (and IRS). And if he makes an error that is common, how much easier is it for the hardworking men and women of the US who are NOT as close to financial decision-making?

We need an income tax system that is simpler.

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Late Filing Syndrome No Excuse to Not Pay Taxes

March 18th, 2009

It seems like everywhere you look there is a new “syndrome”. There’s road rage – which some of us encounter in our daily commutes. There’s retail rage (or shopping rage), which some of us encounter when we have to wait in line at the grocery store. It feels like people are generating new and creative syndromes with every problem.

In the New York Times article, “Late Filing Syndrome”, the article describes the sad plight of a down-and-out person who has not able to pay their tax bill.

Oh, did I say “sad plight of a down-and-out” person? I meant: educated, six-figure-earning political aide Charles J. O’Byrne. O’Byrne claims that he suffers from a very specific form of depression called – are you ready for this? – “late filing syndrome”. Yeah, you read that correctly.

It seems that, just around tax time every year, he falls into a depression that is so difficult to manage, he is simply unable to file his tax returns. Ironically, this sickness only ever appears at tax time and, in O’Byrne’s case, it appeared 4 years in a row – from 2001 to 2005.

Although it’s not a syndrome he fabricated himself, the American Psychiatric Association doesn’t see it as a psychiatric condition…  I guess the Psychiatric Association is just like the rest of  us Americans who can see through the bull.

I am all for legally paying less tax. However, I am against using illegal tax evasion methods, and, I don’t believe in fake excuses. O’Byrne has a responsibility to pay (and he has the opportunity to reduce his taxes by simply calling me). Instead, he has the gall to claim this particular problem.

It’s galling because his income is paid for by our tax dollars. What if everyone in the US suddenly was hit with a bout of late filing syndrome? He’d be out of a job.

It’s also galling because it shows that he thinks the rest of us are fools. C’mon… did he really think that we’d take pity on him because he procrastinated on his income taxes too long?

It’s like the old “my dog ate my homework” trick. Or the “I didn’t get your letter.” excuse. Everyone (especially the IRS) can see through those lies!

There’s another syndrome – a far more serious one – that occurs with regularity. It’s equally rare. During a full moon, those bitten by a wolfman will themselves become wolfmen (or wolfwomen). My diagnosis? Equally laughable; equally silly.

A CNN article rightly attacks the “syndrome” for what it is: a made-up excuse by a tax lawyer in an effort to get his client out of trouble.

I’ve got my own syndrome. Let’s call it: “shake-my-head-at-foolish-people” syndrome.

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