Wednesday, April 14, 2010

Congress Introduces Bill to Help Taxpayers Cope with IRS

The House Ways and Means Committee has introduced legislation to help taxpayers enter into payment agreements with the IRS, relax the record-keeping requirements on cell phones, and improve IRS services for low-income taxpayers.

“This week, many Americans are preparing and filing their income tax returns,” said Oversight Subcommittee chairman John Lewis, D-Ga., in a statement. “The Taxpayer Assistance Act of 2010 responds to taxpayer needs that have been raised in hearings before the committee. This legislation helps taxpayers who are struggling in this economy by making it easier to enter into payment arrangements with the IRS. It also helps low-income taxpayers by improving IRS services available to them and helps small businesses and nonprofit organizations by relaxing the record-keeping requirements for employer-provided cell phones. I am pleased that many of these provisions have broad, bipartisan support.”

As recommended by the Obama administration, the bill would eliminate the strict substantiation rules requiring individuals to keep detailed records regarding cell phones and similar equipment used for business purposes.

The bill would also allow the Treasury Secretary to exempt, for religious reasons, certain tax return preparers from the electronic filing mandate.

The bill would also accelerate the interest on refunds for returns filed electronically by requiring the IRS to pay interest on refunds related to individual income tax returns that are filed electronically if the refund is not paid within 30 days of the later of the return due date or the date the return is filed.

In addition, the Taxpayer Assistance Act of 2010 would require the Treasury Secretary to conduct a study on the effectiveness of collection alternatives, such as offers-in-compromise.It would also repeal the partial payment requirement on submissions of offers-in-compromise. The bill would help taxpayers enter into offer-in-compromise agreements to settle their federal tax liabilities, and increase the likelihood that some amount of tax is collected, by repealing this requirement.

As recommended by National Taxpayer Advocate Nina Olson, the bill would allow IRS employees to refer taxpayers to Low Income Taxpayer Clinics. The bill would also codify the Volunteer Income Tax Assistance program and allow the Treasury Secretary to allocate, in the absence of a specific appropriation, up to $20 million of grant funding annually for the program. The bill also would increase the allocated amount for LITCs from $6 million to $20 million annually.

The bill would require the IRS, to the extent practicable, to notify taxpayers of the availability of the Earned Income Tax Credit in prior taxable years. The bill also would require the IRS to review return information (such as Forms W-2, Wage and Tax Statements) and identify potentially eligible taxpayers to the extent possible.

The bill would require the IRS to notify taxpayers when it suspects that their identities, or their dependents’ identities, have been stolen. It would also allow the IRS to use "mass communication," including the Internet and its Web site, to notify taxpayers of undelivered refunds.

The bill would require the National Taxpayer Advocate to conduct a study on the feasibility of delivering federal tax refunds on debit cards or prepaid cards, or by other electronic means. Furthermore, as recommended by the National Taxpayer Advocate, the bill would require the Treasury Secretary to study, and make recommendations on, the administrative and legislative steps required to allow the IRS to receive information returns before it processes income tax returns. The bill would also require the Treasury Secretary to study how to reduce the number of taxpayers making in-person payments at IRS Taxpayer Assistance Centers.

To pay for all the various provisions, the bill contains revenue-raising aspects, including expanding the "bad check" penalty to electronic payments. As recommended by the Obama administration, the bill would clarify that the penalty applicable to bad checks or money orders extends to all commercially acceptable instruments of payments, i.e., electronic payments. This proposal is estimated to raise $47 million over 10 years.

Similar to another administration proposal, the bill would also increase information return penalties. The bill would hike the penalties for failing to file correct returns, failing to furnish correct payee statements, and failing to comply with other information reporting requirements. This proposal is estimated to raise $419 million over 10 years.

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Tuesday, April 13, 2010

IRS to Step Up Audits of Sole Proprietors

Washington, D.C. (April 12, 2010)

The Internal Revenue Service plans to check for unfiled tax returns and look for unreported income from sole proprietors of small businesses during correspondence audits.

Estimates by the IRS show that $68 billion of the $345 billion tax gap in 2001 was due to the underreporting of income by sole proprietors. The IRS conducted more than 5.1 million correspondence examinations between fiscal year 2004 and FY 2008 that recommended the IRS collect approximately $35 billion in additional taxes, according to a new report by the Treasury Inspector General for Tax Administration. For each tax return examined, a correspondence examination generated about $6,800 in recommended additional taxes.

TIGTA found 129 audits where sole proprietors may have avoided tax and interest assessments totaling more than $1.7 million because the IRS failed to address significant potential income misstatements during compliance audits. These audits were identified from a statistically valid sample of 298 closed correspondence audits of individual returns with sole proprietorships that were closed by tax examiners in the IRS Campus Compliance Services operations during fiscal year 2007. Unlike procedures for audits conducted in the field, procedures for correspondence audits of sole proprietors do not require examiners to complete minimum checks for unfiled returns (employment tax and information returns) and to probe for unreported income.

TIGTA recommended that the IRS require correspondence examiners to check for unfiled returns, such as employment tax and information returns, and to probe for unreported income. These checks are required of IRS examiners who conduct in-person audits, but not of correspondence examiners.

"Sole proprietors who underreport their income can create an unfair burden on honest taxpayers and diminish the public's respect for the tax system," said TIGTA Inspector General J. Russell George in a statement. "It is imperative that the IRS institutes policies to address this problem."

In response to TIGTA's draft report, the IRS agreed to develop inventory selection filters to identity and refer to field examiners those sole proprietors who did not file required employment tax or information returns; and those with indicators of unreported income.

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