WASHINGTON – Because the Internal Revenue Service (IRS) does not always recognize and properly investigate possible tax fraud, it may be missing opportunities to further promote voluntary compliance and enhance revenue, according to a new audit report released publicly today by the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA reviewed a statistical sample of 100 office audits, closed between October 2009 and September 2010 that involved high-income and sole proprietor taxpayers agreeing they owed additional taxes of at least $10,000. Of the 100 office audits reviewed, TIGTA identified 26 audits with fraud indicators that were not recognized and investigated in accordance with some key IRS procedures and guidelines. The IRS agreed with TIGTA’s findings and conclusions that fraud was not adequately considered and investigated in all 26 of these audits. Consequently, TIGTA estimates that additional assessments totaling approximately $5.8 million in civil fraud penalties may have been avoided by taxpayers.

“The failure to accurately identify and appropriately investigate indicators of fraud is a serious concern,” said J. Russell George, Treasury Inspector General for Tax Administration. “Civil fraud penalties should be considered when appropriate because they discourage taxpayers from willfully underreporting substantial tax liabilities” he added.

The IRS relies on its examiners and their first-line managers to ensure that the civil fraud penalty is adequately considered. Yet IRS records show that the civil fraud penalty is rarely recommended for office audits. Specifically, during fiscal years 2008 through 2011, examiners recommended, on average, that 96 taxpayers be assessed a civil fraud penalty out of the approximately 127,100 office audits closed each year.

While there are layers of management controls in place to guide examiners through the consideration of fraud, TIGTA’s results indicate that additional steps are needed at the examiner and first-line manager levels to ensure that potential fraud is adequately recognized and properly investigated.

IRS management partially agreed with TIGTA’s two recommendations. Although the IRS plans to take corrective actions for both recommendations, TIGTA believes the IRS’s planned corrective action for one of the recommendations is not adequate and it is unlikely to be effective.

WASHINGTON – Because the Internal Revenue Service (IRS) does not always recognize and properly investigate possible tax fraud, it may be missing opportunities to further promote voluntary compliance and enhance revenue, according to a new audit report released publicly today by the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA reviewed a statistical sample of 100 office audits, closed between October 2009 and September 2010 that involved high-income and sole proprietor taxpayers agreeing they owed additional taxes of at least $10,000. Of the 100 office audits reviewed, TIGTA identified 26 audits with fraud indicators that were not recognized and investigated in accordance with some key IRS procedures and guidelines. The IRS agreed with TIGTA’s findings and conclusions that fraud was not adequately considered and investigated in all 26 of these audits. Consequently, TIGTA estimates that additional assessments totaling approximately $5.8 million in civil fraud penalties may have been avoided by taxpayers.

“The failure to accurately identify and appropriately investigate indicators of fraud is a serious concern,” said J. Russell George, Treasury Inspector General for Tax Administration. “Civil fraud penalties should be considered when appropriate because they discourage taxpayers from willfully underreporting substantial tax liabilities” he added.

The IRS relies on its examiners and their first-line managers to ensure that the civil fraud penalty is adequately considered. Yet IRS records show that the civil fraud penalty is rarely recommended for office audits. Specifically, during fiscal years 2008 through 2011, examiners recommended, on average, that 96 taxpayers be assessed a civil fraud penalty out of the approximately 127,100 office audits closed each year.

While there are layers of management controls in place to guide examiners through the consideration of fraud, TIGTA’s results indicate that additional steps are needed at the examiner and first-line manager levels to ensure that potential fraud is adequately recognized and properly investigated.

IRS management partially agreed with TIGTA’s two recommendations. Although the IRS plans to take corrective actions for both recommendations, TIGTA believes the IRS’s planned corrective action for one of the recommendations is not adequate and it is unlikely to be effective.

Link: http://www.bizjournals.com/baltimore/print-edition/2013/04/05/prudent-business-owners-should-not.html?page=all

Glen E. Frost and Kaitlyn Loughner, Contributors

This tax season, thousands of business owners are gearing up to prepare their tax returns and are collectively wondering, “What do I do with this Form 1099-K?”

Businesses that accept credit card payments are now subject to a new IRS requirement – Section 6050W of the Internal Revenue Code. Section 6050W requires payment settlement entities (PSEs), such as merchant acquiring entities and third-party settlement organizations, to file an information return for each calendar year reporting all credit card and third-party transactions with respect to each participating payee.

Merchant acquiring entities include banks or other organizations that have the contractual obligation to make payment in settlement of credit card transactions, such as First Data and TSYS. Third-party settlement organizations, such as PayPal, are the central organizations with the contractual obligation to make payment to payees of third-party network transactions.

Third-party network payments need to be reported on a 1099-K only if there are $20,000 or more in total transaction amounts and more than 200 transactions.

In 2011, taxpayers were told by the IRS to disregard the 1099-K. However, the reporting requirements will go into effect starting with the 2012 tax year. On Feb. 9, the IRS in a letter to the National Federation of International Banks wrote that the information reported on Form 1099-K need not be reported on tax returns and that the purpose of the 1099-K is purely informational.

Despite this, differences between gross receipts on tax returns and the amount reported by PSEs on the 1099-K could raise red flags and possibly trigger an audit.

For this reason, it would likely benefit business owners to keep better records so that it is easier to verify the accuracy of the amount reported on the 1099-K. Differences may arise if a taxpayer allows cash-back transactions at the point of sale.

Another source of discrepancy could arise for business owners that hold money in trust accounts, such as attorneys. In these situations, the amount reported on the 1099-K will not accurately depict income.

Taxpayers who use the accrual basis of accounting, or report on a fiscal year, should also be aware that the 1099-K reports gross transactions on a cash basis of accounting and is reported on for a calendar year.

An additional concern will arise if the taxpayer does not file a return. In the case of a Schedule C filer, if the IRS prepares a Substitute for Return (SFR) for a taxpayer in one of the above scenarios, it is likely that the entire amount reported on the 1099-K will be picked up as income on the SFR.

Business owners also need to be watchful for double counting of income. The IRS has stated that payments that could be reported on both a 1099-MISC and 1099-K should now be reported only on a 1099-K. However, with the 1099-K being relatively new, it is probable that inconsistencies will arise.

Finally, Section 6050W requires the merchant processing service to deduct and withhold a 28 percent tax from the total amount of transactions processed. This applies if the taxpayer fails to furnish his information, or incorrectly reports information, to the merchant processing service.

It is important that the information reported on a 1099-K exactly match the legal name and federal tax identification number on file with the IRS. The IRS has extended the effective date for backup withholding to Section 6050W payments made after Dec. 31, 2012.

It is important that business owners are aware of this requirement so they can implement new accounting procedures in order to avoid issues in the future.

Although the IRS maintains that the 1099-K will be used only for informational purpose, prudent business owners should reconcile information reported on their 1099s with their own records in order to detect and preemptively resolve any discrepancies or problems.

Glen E. Frost is the owner of Annapolis-based Frost & Associates, a tax controversy law firm. Kaitlyn Loughner is a law clerk for Frost & Associates.

Link: http://www.cnbc.com/id/100617291

The IRS is focusing much of its resources on wealthy taxpayers.  Our firm is seeing an increased number of audits focused on high earning  individuals and businesses.  Among the most likely audit risks are Schedule C businesses and individuals claiming large amounts of itmized deductions.  Individuals or companies that are selected for audit should seek the consultation of a Maryland Tax Attorney.

Link: http://www.detroitnews.com/article/20130316/METRO01/303160352#ixzz2OIbj1ATi

Detroit - The man charged with fixing Detroit's faltering finances has been hit with four liens in four years from the state of Maryland for unpaid taxes, records show.

State records show Kevyn D. Orr, who was appointed emergency manager on Thursday, has two outstanding liens on his $1 million home in Chevy Chase, Md., for $16,000 in unemployment taxes in 2010 and 2011. Two other liens of more than $16,000 in unemployment and income taxes were satisfied in 2010 and 2011, records show.

Orr said he didn't know anything about the liens when shown records of them Friday morning by The Detroit News.

"I don't know what they are," Orr said, as his new boss, Gov. Rick Snyder, sat next to him in The News' offices. "That's surprising to me, to be honest."

Late afternoon, a spokeswoman for Snyder - who appointed Orr to the $275,000 per year post Thursday - said Orr spent the day researching the issue and would pay "in full ASAP." The Washington, D.C., bankruptcy attorney blamed the problems on an outside accountant hired to file his tax returns, said Sara Wurfel, a Snyder spokeswoman.

"There was apparently an oversight related to a childcare provider unemployment insurance payment," Wurfel wrote in an email. "Immediately upon learning of the potential issue just today, he took action at once to look into and resolve with the state of Maryland."

She said Snyder's office wasn't aware of the liens until The News asked about them.

"It did not come up in any of the vetting," Wurfel said.

Critics of the emergency manager said the liens are troubling, since Orr is tasked with improving tax collections. The Detroit News reported last month that only 53 percent of homeowners paid property taxes last year, leaving $246.5 million uncollected for Detroit and other governments. City records estimate that, in 2011, Detroit collected $32 million less in income taxes than it was owed.

"It's quite interesting that he feels he could manage the city of Detroit and he's having trouble managing his own affairs," said the Rev. Charles E. Williams II, president of the National Action Network of Michigan that is fighting the appointment.

"This proves the point that people aren't perfect and democracy isn't perfect. But our community is sticking with democracy and will continue to fight this."

Another opponent of the emergency manager, state Rep. Fred Durhal, D-Detroit, said tax problems aren't a big deal if Orr pays up.

"As long as he takes care of it, it's not an issue. I just hope he doesn't forget to collect our taxes," said Durhal, a candidate for mayor.

Maryland is aggressive about placing liens on property during tax disputes, said Glen Frost, a Columbia, Md., tax attorney.

The liens place claims on property that have to be satisfied before the property can be sold, he said, adding that in rare instances governments can foreclose on egregious cases.

Records show Maryland has hit Orr with a lien per year from 2009-12.

A lien for $7,022 in unemployment taxes for the 2008 tax year was entered on July 17, 2009, and satisfied on Aug. 20, 2010. Another for $9,409 in income taxes for the 2008 tax year against Orr and his wife, Dr. Donna Neale, was entered on Aug. 11, 2010, and satisfied on Oct. 3, 2011.

Two other liens over unemployment taxes - $6,985 for the 2010 tax year and $9,201 for the 2010-11 tax years - are outstanding, said Frost, who reviewed the records.

Frost and another Maryland tax attorney, Jeffrey Katz, disagreed on whether it's common for subjects of liens to not know about them. Frost said Maryland typically sends separate warning and notification letters about liens. Katz said many who are hit with them don't know liens were placed until they try to renew driver's licenses and learn about them.

Katz and Frost agreed that Maryland is zealous about tax collection and its use of liens.

Katz said the state once sent him two certified letters demanding payment for $9.47 in unemployment taxes for a temporary staffer who worked two days moving boxes.