By Stephen J. Dunn
Douglas Schulman’s term as Commissioner of Internal Revenue expired November 9. Major challenges at the agency await his yet-unnamed successor. Here are some of the challenges, from a practitioner’s perspective.
An online transcript delivery system that works. My practice exists to help taxpayers, and IRS transcripts are at the core of my practice. Account transcripts report whether the taxpayer has filed a tax return, the amount of tax assessed against the taxpayer, the amount and nature of penalties assessed against the taxpayer, and the amount and date of payments made by the taxpayer.
Wage and income transcripts show income reported to the IRS for the taxpayer. Wages earned by the taxpayer are reported to the IRS on Form W-2. Other income realized by the taxpayer is reported to the IRS on various Forms 1099. For example, interest paid to the taxpayer is reported on Form 1099-INT, dividends on Form 1099-DIV, cancellation of indebtedness income on Form 1099-C, and amounts paid to the taxpayer in a trader or business of the payor on Form 1099-MISC. Taxpayers often come to me needing to file delinquent income tax returns for many years. Wage and income transcripts are an important starting point in preparing the delinquent returns.
Tax return transcripts show the details of filed income tax returns. For example, a tax return transcript discloses the identities of dependents claimed on a filed tax return.
To get transcripts from the IRS, I prepare a Form 2848, Power of Attorney and Declaration of Representative, have the client sign it, and then scan it and save it on my computer. Then I call the IRS Practitioner Priority Line. The IRS has an automated answering system, which places the call on hold. It generally takes about 45 minutes for a human assister to come on the line. I identify myself and the taxpayer, and then e-fax my Form 2848 for the taxpayer to the IRS representative at the other end. This takes about 10 more minutes. If the assister accepts my Form 2848, and there is no guarantee of that, I can make my transcript request to the assister. I can order up to ten transcripts per phone call. The IRS generally faxes the transcripts to me within 24 hours. Sometimes the IRS omits some of the ordered transcripts, and I have to call again for them.
The IRS has an online transcript delivery system, but it doesn’t work. I completed the tortuous registration process, only to be asked, when attempting to use the system, the taxpayer’s prior year adjusted gross income. Most of my clients did not file tax returns in the prior year; if they had, they probably would not need to see me. Thus, I have to go through the telephone ordeal outlined above to get transcripts. This needlessly consumes my time and that of IRS personnel. This is not right. In my 27-year career, I have represented hundreds of taxpayers before the IRS, all without incident. I should be able to get transcripts online for my clients.
Protect taxpayers from “tax resolution” scam artists. When a taxpayer owes at least $10,000 to the IRS and fails to pay it after demand, the IRS will issue a Notice of Federal Tax Lien (“NFTL”) against the taxpayer, and record it in the local Register of Deeds’ office. The purpose is to put the world on notice of the IRS’ claim in the taxpayer’s property, to protect the IRS’ priority in the taxpayer’s property, and prevent the taxpayer from selling or mortgaging the property. The IRS may refrain from recording an NFTL where the taxpayer’s balance owing to the IRS does not exceed $25,000, and the taxpayer enters into an installment agreement with the IRS to pay it off with interest in not more than 60 months.
But recorded NFTLs are commonly abused for another purpose. “Bird dogs” scour Register of Deeds’ offices for recorded NFTLs, and then sell the taxpayers’ names and addresses to “tax resolution” scam artists. The scam artists then bombard the taxpayer with fraudulent come-ons to solve their tax issues. The operators take large ($5,000-$10,000) retainers from taxpayers, and generally do nothing in return. Taxpayers thus get no relief, and are cheated out of their money, money which could have been paid to the IRS against their tax liability. Abuse of recorded NFTLs thus also cheats the IRS, and taxpayers generally. Many people have come to me having been burned by tax resolution scam operators. I have blogged on these operations several times, including October 13, 2012, November 29, 2010, and September 7, 2010.
The IRS can and should protect taxpayers from abuse of recorded NFTLs. I advocate a different system. My system would use a form which a prospective creditor or employer (“applicant”) submits to the IRS inquiring about tax liens against a person (“subject”). The form would be signed by the subject authorizing disclosure of the subject’s tax lien information to the applicant. The form would also be signed by the applicant promising not to use information disclosed pursuant to the form for any purpose other than making credit or employment decisions concerning the subject. Criminal penalties would lie for abuse of information gotten pursuant to the form.
Currently, a competing lien in the taxpayer’s property has priority over a Federal tax lien in that property notice of which was not recorded in the Register of Deeds’ office before, or within 45 days after, notice of the competing lien was recorded in the Register of Deeds’ office. My system would require a change in the Federal tax lien priority statute to provide that a Federal tax lien attaching to a taxpayer’s property before a competing lien attaches to that property enjoys priority over the competing lien unless, before advancing the loan of the competing lien, the lender filed with the IRS a duly completed form inquiring about Federal tax liens against the taxpayer, and the IRS failed to respond within 48 hours disclosing the existence of the Federal tax lien.
My proposal would require the IRS to engage in email with taxpayers’ representatives, something it does not presently do. It is time the IRS updated its practices to 2012.
Protect the public fisc. A scheme has circulated around the country in recent years by which out of tens millions of dollars have been bilked out of the U.S. Treasury. The scheme purports to involve original issue discount (“OID”), the process of amortizing to income the excess over the face amount of a debt over the amount received for its issuance. But the scheme really has nothing to do with OID. Rather, it involves the filing of fraudulent Forms 1099-OID with the IRS purportedly by banks falsely reporting huge amounts of tax withheld from taxpayers and remitted to the IRS. Fraudulent claims for refund are then filed with the IRS for the taxpayer claiming refund of the fraudulently-reported tax remittances. The refund claims are large, in some cases reaching into the hundreds of thousands of dollars. The claims are idiotic, having no basis in fact or law.
The amazing thing is that the IRS has paid the refund claims, at least the first such claim filed for a taxpayer. By the time the IRS realizes the fraudulent nature of the claim, many months after paying it, most or all of the refund paid to the taxpayer has been spent or sent overseas, and will never be recovered. The IRS will assign special agents of its Criminal Investigation Division to investigate the claim, and the Justice Department will assign Assistant U.S. Attorneys to prosecute it, all at great expense to the government.
The scheme is marketed and sold by promoters around the United States. Promoters sell the scheme directly to taxpayers, preparing and filing fraudulent Forms 1099-OID and fraudulent refund claims for them. Promoters also sell the scheme to local operators, who in turn market it to taxpayers. Judging from the cases, the amount scammed from the U.S. Treasury by this scheme is easily in the tens of millions of dollars, and may exceed $100 million. E.g., US v. Armstrong , 397 Fed. Appx. 466 (10th Cir. 2010) ($1.6 million fraudulent refund claim paid); US v. Poynter, 107 AFTR 2d 2011-1483 (W.D. Mo. 2011) ($2.568 million in fraudulent refund claims paid); US v. McIntyre, 105 AFTR2d 2010-2693 (C.D. Cal. 2010) ($1.4 million in fraudulent claims paid).
How could the IRS have paid such bogus refund claims? Payment of such claims from the public fisc is patently unfair to honest taxpayers, and undermines confidence in the government’s tax system.
Summary. Daunting challenges await the new Commissioner of Internal Revenue, but by no means insurmountable ones.