Courtesy of the IRS

If you, your spouse or dependents had significant medical or dental costs in 2011, you may be able to deduct those expenses when you file your tax return. Here are eight things the IRS wants you to know about medical and dental expenses and other benefits.

1. You must itemize You deduct qualifying medical and dental expenses if you itemize on Form 1040, Schedule A.

2. Deduction is limited You can deduct total medical care expenses that exceed 7.5 percent of your adjusted gross income for the year. You figure this on Form 1040, Schedule A.

3. Expenses must have been paid in 2011 You can include the medical and dental expenses you paid during the year, regardless of when the services were provided. You’ll need to have good receipts or records to substantiate your expenses.

4. You can’t deduct reimbursed expenses Your total medical expenses for the year must be reduced by any reimbursement. Normally, it makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.

5. Whose expenses qualify You may include qualified medical expenses you pay for yourself, your spouse and your dependents. Some exceptions and special rules apply to divorced or separated parents, taxpayers with a multiple support agreement or those with a qualifying relative who is not your child.

6. Types of expenses that qualify You can deduct expenses primarily paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or treatment affecting any structure or function of the body. For drugs, you can only deduct prescription medication and insulin. You can also include premiums for medical, dental and some long-term care insurance in your expenses. Starting in 2011, you can also include lactation supplies.

7. Transportation costs may qualify You may deduct transportation costs primarily for and essential to medical care that qualify as medical expenses. You can deduct the actual fare for a taxi, bus, train, plane or ambulance as well as tolls and parking fees. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses, which is 19 cents per mile for 2011.

8. Tax-favored saving for medical expenses Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if used to pay qualified medical expenses including prescription medication and insulin.

For additional information, see Publication 502, Medical and Dental Expenses or Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Publication 502, Medical and Dental Expenses (PDF)


• Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans (PDF)

Medical and Dental Expenses English | ASL

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Medical and Dental Expenses

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The Internal Revenue Service has issued its annual “Dirty Dozen” tax scams list, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

Here are five of the Dirty Dozen tax scams for 2012:

Identity theft In response to growing identity theft concerns, the IRS has embarked on a comprehensive strategy focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued and is working to help victims of identity theft refund schemes.

Identity theft cases are among the most complex ones the IRS handles, but the agency is committed to working with taxpayers who have become victims of identity theft.

The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.

An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized. Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit. For more information, visit the special identity theft page on this website.

Phishing These scams are typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure potential victims into providing valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from email scams.

Return preparer fraud About 60 percent of taxpayers will use tax professionals this year to prepare and file their tax returns. Most return preparers provide honest service to their clients. But as in any other business, there are also some who prey on unsuspecting taxpayers.

Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against many others.

In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and must enter it on the returns he or she prepares.

Signals to watch for when you are dealing with an unscrupulous return preparer would include that they:

• Do not sign the return or will not include a Preparer Tax identification Number on it.


• Do not give you a copy of your tax return.


• Promise larger-than-normal tax refunds.


• Charge a percentage of the refund amount as preparation fee.


• Require you to split the refund to pay the preparation fee.


• Add forms to the return you have never filed before.


• Encourage you to place false information on your return, such as false income, expenses and/or credits.

Hiding income offshore Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

“Free money” from the IRS & tax scams involving Social Security Fliers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives. Scammers prey on low-income individuals and the elderly. They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.

There are a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but the scammer uses inflated amounts to complete the return for a larger refund they’ll run off with.

These are some of the Dirty Dozen Tax Scams for 2012. For a complete list, see IRS Releases the Dirty Dozen Tax Scams for 2012.
Links:

• IRS Releases the Dirty Dozen Tax Scams for 2012


• Special Identity Theft page


• Phishing Scams


• Tips for Choosing a Tax Return Preparer

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WASHINGTON — The IRS today released the guidance and forms that employers can use to claim the newly-expanded tax credit for hiring veterans. The IRS also announced that employers will have more time to file the required certification form for employees hired on or after November 22, 2011, and before May 22, 2012. The VOW to Hire Heroes Act of 2011, enacted Nov. 21, 2011, provides an expanded Work Opportunity Tax Credit (WOTC) to businesses that hire eligible unemployed veterans and for the first time also makes the credit available to certain tax-exempt organizations.

The credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations. The amount of the credit depends on a number of factors, including the length of the veteran’s unemployment before hire, hours a veteran works and the amount of first-year wages paid. Employers who hire veterans with service-related disabilities may be eligible for the maximum credit.

Normally, an eligible employer must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But according to today’s guidance, employers have until June 19, 2012, to complete and file this newly-revised form for veterans hired on or after Nov. 22, 2011, and before May 22, 2012. The 28-day rule will again apply to eligible veterans hired on or after May 22, 2012.

In an effort to streamline the certification requirements, IRS today clarified and expanded upon 2002 guidance to facilitate employers’ use of electronic signatures when gathering the Form 8850 for transmission to state workforce agencies. The guidance confirms that employers can transmit the Form 8850 electronically, and also allows employers to transmit the Form 8850 via fax, subject to the ability of the state workforce agencies to accept submissions in those formats. The IRS expects the Department of Labor to issue further guidance to the state workforce agencies providing further clarification.

Notice 2012-13, posted today on IRS.gov, and the instructions for Form 8850 provide further details.

Businesses claim the credit on their income tax return. The credit is first figured on Form 5884 and then becomes a part of the general business credit claimed on Form 3800.

This credit is also available to certain tax-exempt organizations by filing Form 5884-C. The guidance released today also provides instructions and a new set of forms for tax-exempt organizations to claim the credit. For more information, including how to claim the credit, go to IRS.gov.

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em>Courtesy of the IRS. For more information, see the Special Identity Theft Enforcement Efforts – 2012 page.
See related article about IP PIN at MarketWatch.com this weekend.

WASHINGTON – The Internal Revenue Service and the Justice Department today announced the results of a massive national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft.

Working with the Justice Department’s Tax Division and local U.S. Attorneys’ offices, the nationwide effort targeted 105 people in 23 states. The coast-to-coast effort took place over the last week and included indictments, arrests and the execution of search warrants involving the potential theft of thousands of identities and taxpayer refunds. In all, 939 criminal charges are included in the 69 indictments and informations related to identity theft.

In addition, IRS auditors and investigators conducted extensive compliance visits to money service businesses in nine locations across the country in the past week. The approximately 150 visits occurred to help ensure these check-cashing facilities aren’t facilitating refund fraud and identity theft.

“This unprecedented effort against identity theft sends a strong, unmistakable message to anyone considering participating in a refund fraud scheme this tax season,” said IRS Commissioner Doug Shulman. “We are aggressively pursuing cases across the nation with the Justice Department, and people will be going to jail. This is part of a much wider effort underway at the IRS to help protect taxpayers.”

“The Justice Department is working closely with the IRS to investigate, prosecute, and punish tax refund crimes committed through the theft of identities,” said Principal Deputy Assistant Attorney General John A. DiCicco of the Tax Division. “Now, more than ever, we must remain vigilant against the unauthorized use of identification information to defraud the U.S. government.”

The national effort is part of a comprehensive identity theft strategy the IRS has embarked on that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.

The law-enforcement sweep started last week across the country, reflecting investigative efforts stretching back months and even years.

The nationwide effort by the Justice Department and the IRS led to actions taking place in 23 locations across the country with 105 individuals. The actions included 80 complaints/indictments and informations, 58 arrests, 19 search warrants, 10 guilty pleas and four sentencings. A map of the locations and additional details on the actions are available on IRS.gov, the IRS Civil and Criminal Actions page and the Department of Justice Tax Division page.

Beyond the criminal actions, the IRS enforcement personnel conducted a special sweep last week and on Monday to visit 150 money services businesses to help make sure these businesses are not knowingly or unknowingly facilitating identity theft or refund fraud. The visits occurred in nine high-risk places identified by the IRS covering areas in and surrounding Atlanta, Birmingham, Ala., Chicago, Los Angeles, Miami, New York, Phoenix, Tampa and Washington, D.C.

In addition, the IRS has more than 250 check-cashing operations under audit across the country and will be looking for indicators of identity theft as part of the exam effort.

The information from these audits and compliance visits will be used to assist continuing IRS investigations into refund fraud and identity theft.

The IRS also is taking a number of additional steps this tax season to prevent identity theft and detect refund fraud before it occurs. These efforts includes designing new identity theft screening filters that will improve the IRS’s ability to spot false returns before they are processed and before a refund is issued, as well as expanded efforts to place identity theft indicators on taxpayer accounts to track and manage identity theft incidents.

To help taxpayers, the IRS earlier this month created a new, special section on IRS.gov dedicated to identity theft matters, including YouTube videos, tips for taxpayers and a special guide to assistance. The information includes how to contact the IRS Identity Protection Specialized Unit and tips to protect against “phishing” schemes that can lead to identity theft.

Identity theft occurs when someone uses another’s personal information without their permission to commit fraud or other crimes using the victim’s name, Social Security number or other identifying information. When it comes to federal taxes, taxpayers may not be aware they have become victims of identity theft until they receive a letter from the IRS stating more than one tax return was filed with their information or that IRS records show wages from an employer the taxpayer has not worked for in the past.

If a taxpayer receives a notice from the IRS indicating identity theft, they should follow the instructions in that notice. A taxpayer who believes they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. The taxpayer should contact the IRS Identity Protection Specialized Unit at 800-908-4490. The taxpayer will be asked to complete the IRS Identity Theft Affidavit, Form 14039, and follow the instructions on the back of the form based on their situation.

Taxpayers looking for additional information can consult the Taxpayer Guide to Identity Theft or the IRS Identity Theft Protection page on the IRS website.

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human resource, and employee benefits solutions for small and medium-sized businesses, today released its top 12 in ’12 list, containing the top 12 potential regulatory changes that America’s small businesses need to know about in 2012. Paychex works closely with the IRS and other government agencies on issues of importance and is constantly monitoring regulatory and compliance-related matters that impact its 564,000 clients.

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Your kids can be helpful at tax time. That doesn’t mean they’ll sort your tax receipts or refill your coffee, but those charming children may help you qualify for some valuable tax benefits. Here are 10 things the IRS wants parents to consider when filing their taxes this year.

1. Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.


2. Child Tax Credit You may be able to take this credit for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. For more information see IRS Publication 972, Child Tax Credit.


3. Child and Dependent Care Credit You may be able to claim this credit if you pay someone to care for your child or children under age 13 so that you can work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.


4. Earned Income Tax Credit The EITC is a tax benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. IRS Publication 596, Earned Income Credit, has more details.


5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. If you claim the adoption credit, you must file a paper tax return with required adoption-related documents. For details, see the instructions for IRS Form 8839, Qualified Adoption Expenses.


6. Children with earned income If your child has income earned from working, they may be required to file a tax return. For more information, see IRS Publication 501.


7. Children with investment income Under certain circumstances a child’s investment income may be taxed at their parent’s tax rate. For more information, see IRS Publication 929, Tax Rules for Children and Dependents.


8. Higher education credits Education tax credits can help offset the costs of higher education. The American Opportunity and the Lifetime Learning Credits are education credits that can reduce your federal income tax dollar-for-dollar. See IRS Publication 970, Tax Benefits for Education, for details.


9. Student loan interest You may be able to deduct interest paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970.


10. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage for any child of yours who was under age 27 at the end of the year, even if the child was not your dependent. For more information, see the IRS website.

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Courtesy of the IRS

[TaxMama note: Read this in conjunction with today’s MarketWatch article – How to file your taxes for free

WASHINGTON — Over 12,000 free tax preparation sites will be open nationwide this year as the Internal Revenue Service continues to expand its partnerships with nonprofit and community organizations providing vital tax preparation services for low- to moderate-income and elderly taxpayers.

The IRS Volunteer Income Tax Assistance (VITA) Program offers free tax help generally to people who earn $50,000 and less. The Tax Counseling for the Elderly (TCE) Program offers free tax help to taxpayers who are 60 and older.

Today, partners and local officials will be hosting news conferences or issuing news releases nationwide to highlight the Earned Income Tax Credit (EITC) and their free tax preparation programs. The EITC is one of the federal government’s largest benefit programs for working families and individuals. But taxpayers must file a tax return, even if they do not have a filing requirement, and specifically claim the credit to get the benefit.

Taxpayers need to present the following items to have their returns prepared:

Photo identification
Valid Social Security cards for the taxpayer, spouse and dependents
Birth dates for primary, secondary and dependents on the tax return
Wage and earning statement(s) Form W-2, W-2G, 1099-R, from all employers
Interest and dividend statements from banks (Forms 1099)
A copy of last year’s federal and state returns, if available
Bank routing numbers and account numbers for direct deposit
Other relevant information about income and expenses
Total paid for day care
Day care provider’s identifying number
To file taxes electronically on a Married Filing Jointly tax return, both spouses must be present to sign the required forms.

Trained community volunteers can help eligible taxpayers with credits, such as the EITC, Child Tax Credit or Credit for the Elderly. Also, many sites have multilingual volunteers who can assist people with limited English skills. To locate the nearest VITA site, taxpayers should call 800-906-9887.

As part of the IRS-sponsored TCE Program, AARP offers the Tax-Aide counseling program at more than 7,000 sites nationwide during the filing season. Trained and certified AARP Tax-Aide volunteer counselors help people of low-to-middle income with special attention to people age 60 and older. To locate the nearest AARP Tax-Aide site, call 888-227-7669 or visit AARP’s Internet site.

The military also partners with the IRS to provide free tax assistance to military personnel and their families. The Armed Forces Tax Council (AFTC) consists of the tax program coordinators for the Army, Air Force, Navy, Marine Corps and Coast Guard. The AFTC oversees the operation of the military tax programs worldwide, and serves as the main conduit for outreach by the IRS to military personnel and their families. Volunteers are trained and equipped to address military specific tax issues, such as combat zone tax benefits and the effect of the EITC guidelines.

In addition to free tax return preparation assistance, most sites use free electronic filing. An e-filed tax return means a fast refund. The IRS can generally issue refunds to taxpayers who combine e-file and direct deposit in as few as 10 days.

Taxpayers who file electronically also can opt to file now and pay later. If taxpayers owe, they can make a payment April 17, 2012, by authorizing an electronic funds withdrawal (direct debit) from a checking or savings account, paying by credit, by check or money order (made out to the United States Treasury) using Form 1040-V, Payment Voucher.

For taxpayers who want to prepare and e-file their own tax returns, there is IRS Free File. Everyone can use Free File, the free way to prepare and e-file federal taxes either through brand-name software or online fillable forms. Individuals or families with 2011 adjusted gross incomes of $57,000 or less can use Free File software. Free File Fillable Forms, the electronic version of IRS paper forms, has no income restrictions. For either service, taxpayers must go through www.irs.gov/freefile to access the programs.

Taxpayers also can seek free assistance at the 400 IRS Taxpayer Assistance Centers nationwide. Locations nationwide are listed on www.IRS.gov.

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WASHINGTON — National Taxpayer Advocate Nina E. Olson today released her annual report to Congress, identifying the combination of the IRS’s expanding workload and declining resources as the most serious problem facing taxpayers. The result, the report says, is inadequate taxpayer service, erosion of taxpayer rights, and reduced tax compliance. The Advocate expressed her continuing concern that the IRS’s expanding use of automated processes to adjust tax liabilities is causing harm to taxpayers and recommended that Congress enact a comprehensive Taxpayer Bill of Rights.

THE IRS IS NOT ADEQUATELY FUNDED TO SERVE TAXPAYERS AND COLLECT TAXES

The overriding challenge facing the IRS is that its workload has grown significantly in recent years, while its funding is being cut,” Olson said in releasing the report. “This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers – and at the same time reduces the IRS’s ability to deliver on its core mission of raising revenue.”

Workload Overload. The sharp increase in the IRS’s workload is due to several factors, including the increasing complexity of the tax code and the code’s frequent changes, the need to provide service to an increasingly diverse taxpayer population, the IRS’s increasing responsibility for administering economic and social policies, a surge in refund fraud and tax-related identity theft, and the implementation of new third-party information reporting requirements.

There were approximately 4,430 changes to the tax code from 2001 through 2010, an average of more than one a day, including an estimated 579 changes in 2010 alone. The IRS must explain each new provision to taxpayers, write computer code so it can process returns affected by the provision, and train its auditors to identify improper claims.

In addition, the report says, an expansion of refundable credits in recent years – including the First-Time Homebuyer Credit, the Making Work Pay credit, the American Opportunity tax credit, the health care premium tax credit, the adoption tax credit, and the Additional Child Tax Credit – has helped spawn an increase in illegal activity that seeks to profit off the tax system by filing bogus refund claims and often by stealing and using another taxpayer’s identity. While refundable credits provide valuable benefits to the target populations, they can be tempting targets for fraud because taxpayers eligible for them may claim refunds that exceed the amount of taxes they have paid. In 2011, the IRS’s Electronic Fraud Detection System (EFDS) flagged 1,054,704 returns on suspicion of fraud, an increase of 72 percent over 2010. Meanwhile, the IRS’s centralized Identity Protection Specialized Unit (IPSU) received more than 226,000 identity theft-related cases, an increase of 20 percent over 2010.

“Each year,” Olson wrote, “the IRS’s task in identifying these claims has become more challenging, with the inevitable result that some fraudulent claims are never identified and many legitimate claims are mistakenly held up, imposing a significant burden on honest taxpayers.”

“Shortcuts” Shortcut Taxpayer Rights: “Non-Audits,” IRS Math Errors, Lack of Notice, and Delays. To keep up with its rising workload, the IRS is increasingly relying on automated data-matching procedures to identify potentially inaccurate claims and adjust tax liabilities. However, automated processes are inherently imperfect, so the taxpayer’s return position often turns out to be correct. Moreover, taxpayers subject to audits are entitled to established taxpayer rights protections. But an increasing number of IRS adjustments are not classified as audits, so these protections often do not apply. Throughout the report, Olson describes IRS practices that “harm taxpayers by acting on assumptions of noncompliance arrived at by automated processes that do not solicit, encourage, or allow taxpayer response.”

Non-Audits and Automated Examinations. In 2010 alone, the IRS made about 15 million contacts with individual taxpayers to adjust their tax liabilities, but it treated only about ten percent (1.6 million) as audits. Thus, in the majority of cases, the IRS’s actions did not give rise to traditional audit protections, including the right to avoid repetitive and unnecessary examinations and the right to seek review of the IRS’s determination in the U.S. Tax Court before tax is assessed. Even where the IRS designated reviews of individual taxpayer returns as “audits,” it conducted about 78 percent of them by correspondence in a highly automated campus setting where no single IRS employee was responsible for the audit, making it more difficult for the taxpayer to communicate with the IRS about his or her case.

Some “Math Errors” May Be Corrected Using IRS Data. In 2010, the IRS issued notices correcting 10.6 million “math errors,” up from four million in 2005. These notices are tax assessments that presumably result from mathematical or clerical errors. Unless a taxpayer disputes the IRS assessment within a limited timeframe, it may not be appealed to the Tax Court. The report notes that math error authority is increasingly used where there is disagreement over a facts-and-circumstances issue. The report says that math error notices are often vague and do not state the perceived error with specificity, making it difficult, if not impossible, for affected taxpayers to determine what has changed on their returns and whether to accept or contest the adjustments. Taxpayers whose returns are correct sometimes do not respond because they do not know what is being asked of them. IRS math error notices also are sometimes inaccurate. When the IRS used math error authority in 2010 to disallow exemptions for dependent children on about 300,000 returns, it ultimately had to reverse about 55 percent of the adjustments. Of the 184,000 corrected math errors, a Taxpayer Advocate Service (TAS) sample showed the IRS had internal data to immediately resolve 56 percent of these reversals, and thus could have avoided denying eligible taxpayers their dependency exemptions and related tax credits and refunds.

The IRS Determines Some Taxpayers Have Committed Fraud Without Notifying Them and Giving Them an Opportunity to Respond. Under a program designed to detect returns relating to a scheme known as “Operation Mass Mail,” the IRS declined to process about 900,000 returns in 2011. In most situations where the IRS identifies questionable claims, it sends notices to the affected taxpayers to give them an opportunity to contest the IRS’s position. In these cases, however, the IRS simply “auto-voided” the returns, providing the individuals who had submitted them with no notice of the IRS action. Yet in tens of thousands of these cases, the IRS later marked the accounts with a code that indicates it had erred and the return had been submitted by a legitimate taxpayer. The report expresses concern that this “auto-void” procedure violates fundamental notions of due process, as individuals whom the government suspects of fraud – a serious charge – normally are given notice and an opportunity to respond before the government takes adverse action.

Substantial Delays to Receive Large Refunds. Among taxpayers who sought assistance from TAS after their refunds were withheld on a suspicion of fraud, 75 percent received relief. These taxpayers had to wait an average of nearly six months overall to receive their refunds. The average refund amount was $5,600, a significant sum for most households. Thus, these delays can create significant financial hardships.

“In light of the IRS’s indiscriminate use of automation to avoid personal contact with taxpayers and the sheer volume of work to be accomplished,” Olson wrote, “the IRS is increasingly in danger of judging taxpayers as noncompliant when in fact they are not.”

Taxpayer Service Concerns: Delays and Non-Responses to Taxpayer Inquiries. Two key indicators of taxpayer service are the IRS’s ability to answer taxpayer telephone calls and the IRS’s ability to respond to taxpayer correspondence.

From FY 2004 to FY 2011, the percentage of calls that the IRS answered from taxpayers seeking to speak with a telephone assistor dropped from 87 percent to 70 percent.

Over the same period, the IRS’s ability to timely process taxpayer correspondence also declined. Comparing the final week of FY 2004 with the final week of FY 2011, the backlog of correspondence in the tax adjustments inventory jumped by 158 percent (from 357,151 to 920,768), and the percentage of correspondence in this inventory classified as “over-age” (i.e., 45 days or older, with issues that have not been resolved) increased by 309 percent (from 11.5 percent to 47.0 percent of correspondence).

“The decline in these key measures is deeply disturbing,” the report says. “Telephone calls and correspondence are the two main ways taxpayers communicate with the IRS. Few government agencies or businesses would be satisfied if their customer service departments were unable to answer three out of every ten calls, nor would they be content when nearly half of all correspondence takes more than 6½ weeks to answer.”

Increased Diversity of the Taxpayer Population Presents Challenges. When the federal individual income tax was enacted in 1913, it applied to high-income taxpayers. The individual taxpayer population in 1913 was estimated at 358,000, grew to 47.1 million in 1944, and stands at 141.2 million today. The taxpayer population has become more diverse over time due to demographic developments as well as expansions in the scope of the tax law. With one tax return filed for about every two people in the United States each year, demographic trends – including ethnicity, economics, gender, age, and geography – are having an impact on both taxpayer service needs and IRS compliance initiatives.

Revenue Consequences of IRS Underfunding. The report says inadequate funding for the IRS contributes to many of these problems and means the IRS cannot adequately pursue unpaid tax liabilities. The report points out that the IRS functions as the “accounts receivable” department of the federal government, as it collects more than 90 percent of all federal revenue and therefore provides the funds that make almost all other federal spending possible. On a budget of $12.1 billion, the IRS collected $2.42 trillion in FY 2011. In other words, for every $1 that Congress appropriated for the IRS, the IRS collected about $200 in return. However, current federal budgeting rules do not take into account that a dollar appropriated for the IRS typically generates substantially more than a dollar in additional tax collections, leaving the agency substantially underfunded to do its job and limiting its ability to close the tax gap and thereby help reduce the federal budget deficit.

The report points out that the size of the tax gap raises important equity concerns, because compliant taxpayers end up carrying a disproportionate share of the tax burden. For 2001, the most recent year for which a complete tax gap estimate existed when the report was written, the IRS estimated it was unable to collect $290 billion in taxes. Since there were then 108 million households in the United States, the average household paid a “noncompliance surtax” of almost $2,700 to enable the federal government to raise the same revenue it would have collected if all taxpayers had reported their income and paid their taxes in full. “That is not a burden we should expect our nation’s taxpayers to bear lightly,” the report says. [Last week, the IRS released updated tax gap estimates. For 2006, the IRS estimated it was unable to collect $385 billion in taxes when there were 114 million households, producing an updated “noncompliance surtax” of nearly $3,400 per household.]

National Taxpayer Advocate Recommendation. In light of the IRS’s unique role as the federal revenue collector, the National Taxpayer Advocate recommends that Congress develop new budget procedures designed to fund the IRS at a level that will enable it to meet taxpayer needs and maximize tax compliance, with due regard for protecting taxpayer rights and minimizing taxpayer burden.

TAXPAYER BILL OF RIGHTS

The report urges Congress to codify a Taxpayer Bill of Rights that would clearly list the major rights and responsibilities of taxpayers. “The U.S. tax system is based on a social contract between the government and its taxpayers,” Olson wrote. “Taxpayers agree to report and pay the taxes they owe and the government agrees to provide the service and oversight necessary to ensure that taxpayers can and will do so.”

Most Taxpayers Don’t Know Their Rights. Over the past two decades, Congress has enacted three significant taxpayer rights’ bills, but the number of bills and the lack of publicity have muddled the message. The report describes a recent taxpayer survey in which 55 percent of respondents said they did not believe they had rights before the IRS and 61 percent did not know what their rights are.

“I believe taxpayers and tax administration will benefit from an explicit statement of what taxpayers have a right to expect from their government and what the government has a right to expect from its taxpayers,” Olson said.

10 Taxpayer Rights. The report recommends that Congress organize taxpayer rights under the following ten broad principles: (1) right to be informed; (2) right to be assisted; (3) right to be heard; (4) right to pay no more than the correct amount of tax; (5) right of appeal; (6) right to certainty; (7) right to privacy; (8) right to confidentiality; (9) right to representation; and (10) right to a fair and just tax system.

5 Taxpayer Responsibilities. To help taxpayers understand what the law requires of them, the report further recommends that Congress organize taxpayer responsibilities under the following five principles: (1) obligation to be honest; (2) obligation to be cooperative; (3) obligation to provide accurate information and documents on time; (4) obligation to keep records; and (5) obligation to pay taxes on time.

The report summarizes recommendations the Advocate has made in past reports to create additional taxpayer rights and recommends that those rights be incorporated into Taxpayer Bill of Rights legislation. “It has been 13½ years since we have had major taxpayer rights legislation,” Olson wrote. “Our laws have not kept pace with our notions of procedural fairness in 21st century tax administration, particularly given our tax system’s expanded and diverse taxpayer base and duties.”

OTHER KEY ISSUES ADDRESSED

Federal law requires the National Taxpayer Advocate to submit an Annual Report to Congress that identifies at least 20 of the most serious problems encountered by taxpayers and makes administrative and legislative recommendations to mitigate those problems. Overall, this year’s report identifies 22 problems, provides updates on four previously identified issues, makes dozens of recommendations for administrative change, proposes 13 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts.

Among other things, the report contains:

A comprehensive overview of the nearly 100-year history of the U.S. tax system, which details how the income tax expanded from a “class tax” to a “mass tax,” how the IRS has changed from focusing on personal, local service to automated, centralized processes, and how the mission of the IRS has expanded from pure tax collector to disburser of federal benefits as well.

An analysis of the IRS’s current examination strategy that discusses the IRS’s increasing use of automated procedures not technically classified as audits to adjust tax liabilities. The report argues that these procedures deprive taxpayers of traditional audit rights and make it difficult for taxpayers to discuss their cases directly with an IRS examiner.
A research study on the impact of tax liens on taxpayer compliance behavior. The results suggest the overuse of liens may undermine tax collection by reducing payment compliance, reducing filing compliance, and reducing the amount of income earned (and thus the amount of tax due) by taxpayers against whom liens have been filed.
A recommendation that Congress modify the circumstances under which the personal information of decedents, including their names, Social Security numbers, and dates of birth, are made available to the public shortly after their deaths. Such information is used by identity thieves to commit tax fraud.
A “Most Serious Problem” discussing the IRS’s policy change in applying key terms of the IRS’s 2009 Offshore Voluntary Disclosure Program more than a year after the application deadline had passed. The report states that the policy change contravenes the IRS’s written pledge that “under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.”
An update on the IRS’s progress in developing and implementing a system to register and test federal tax return preparers.
A recommendation that Congress authorize the IRS to issue refunds in hardship cases during a government shutdown. When a government shutdown seemed imminent during the 2011 filing season, the IRS and the Treasury Department concluded that the IRS would have been legally barred from paying certain refunds or taking other actions that would benefit or minimize harm to taxpayers during the shutdown.

About the Taxpayer Advocate Service

The Taxpayer Advocate Service is an independent organization within the IRS. TAS employees help taxpayers who are experiencing economic difficulties, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving problems with the IRS; and taxpayers who believe an IRS system or procedure is not working as it should. If you believe you are eligible for TAS assistance, you can reach TAS by calling 1-877–777–4778 (toll-free). For more information, go to www.TaxpayerAdvocate.irs.gov or www.irs.gov/advocate.

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[TaxMama Note: Another bookkeeping nightmare. Are YOU keeping track of how you pay YOUR vendors and service providers?]

No 1099-MISC if paid by credit card (01-19-2012)

In the instructions to Form 1099-MISC, the IRS has made it clear that payments made with a credit card, or through any third-party payer, are not reported on Form 1099-MISC. These amounts are now reported on Form 1099-K. Thus, if a business pays a service-provider with a credit card, debit card, gift card, or electronically via a service like PayPal, the payment is not included on a 1099-MISC.

Form 1099-K is new for 2011. The form is issued by a credit card company or other third-party payer (such as PayPal) to payees if the payee has more than 200 transactions and more than $20,000 of gross income paid to them. The 1099-K is not issued by either the buyer or seller.

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Courtesy of the IRS

The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious emails, phone calls, faxes or notices claiming to be from the IRS. Many of these scams fraudulently use the IRS name or logo as a lure to make the communication appear more authentic and enticing. The goal of these scams – known as phishing – is to trick you into revealing your personal and financial information. The scammers can then use your information – like your Social Security number, bank account or credit card numbers – to commit identity theft or steal your money.

Here are five things the IRS wants you to know about phishing scams.

1. The IRS never asks for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts.


2. The IRS does not initiate contact with taxpayers by email to request personal or financial information. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site:
   • Do not reply to the message. • Do not open any attachments. Attachments may contain malicious code that will infect your computer. • Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, visit the IRS website and enter the search term ‘identity theft’ for more information and resources to help.


3. The address of the official IRS website is www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site and report it to the IRS.


4. If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious email to phishing@irs.gov.


5. You can help shut down these schemes and prevent others from being victimized. Details on how to report specific types of scams and what to do if you’ve been victimized are available at www.irs.gov. Click on “phishing” on the home page.

• Protect your personal information! The IRS does not initiate taxpayer communications through e-mail
  


• Suspicious e-Mails and Identity Theft

• Phishing Scams – English | Spanish | ASL

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