1. Data Breach Jeopardizes Security Of Big Data Possessed By IRS
2. Four Ways That Returns Are Selected for Examination
3. How the IRS is matching Big Data to your tax return and selecting you for audit.
4. Questions from our listeners:
a. Why Should I Only Use A Tax Attorney For Representation In A Criminal Tax Investigation?
b. How long should I keep my tax papers?
c. How long should I worry if I haven’t filed tax returns that I should have filed?
d. If I can’t pay my taxes, should I file my return anyway?
Yes we are all working for the tax man!
Good afternoon! Welcome to the KahnTaxLaw Radio Show
This is your host Board Certified Tax Attorney, Jeffrey B. Kahn, the principal attorney of the Law Offices Of Jeffrey B. Kahn, P.C. and head of the KahnTaxLaw team.
You are listening to my weekly radio show where we talk everything about taxes from the ESPN 1700 AM Studio in San Diego, California.
When it comes to knowing tax laws and paying taxes, let’s face it — everyone in the U.S. is either in tax trouble, on their way to tax trouble, or trying to avoid tax trouble!
It is my objective to make you smarter so that you legally pay the least tax as possible, avoid tax problems and be aware of the strategies and solutions if you are being targeted by the IRS or any State tax agency.
Our show is broadcasted each Friday at 2:00PM Pacific Time and replays are available on demand by logging into our website at www.kahntaxlaw.com.
I have a lot to cover today in the world of taxes and helping me out will be my associate attorney Amy Spivey who will be calling in later.
Data Breach Jeopardizes Security Of Big Data Possessed By IRS
The IRS announced recently that criminals used taxpayer-specific data acquired from non-IRS sources to gain unauthorized access to information on approximately 100,000 tax accounts through IRS’ “Get Transcript” application. This data included Social Security information, date of birth and street address.
For those of you who are not familiar with the “Get Transcript” application, it is a self-help service created by the IRS where taxpayers and their authorized representatives can get taxpayer account information through the IRS computers without the assistance of IRS personnel. In light of the IRS budget cuts, the IRS has been working on creating these self-help systems to reduce the personal needed at IRS call centers and IRS walk-in centers and thus save costs. During this past filing season, taxpayers successfully and safely downloaded a total of approximately 23 million transcripts.
Unfortunately, putting self-help systems in place without solid security features could lead to bigger problems and opportunity to defraud the government. And this is what happened over the past few months when third parties gained sufficient information from an outside source before trying to access the IRS site, which allowed them to clear a multi-step authentication process, including several personal verification questions that typically are only known by the taxpayer.
This apparent data breach is under review by the Treasury Inspector General for Tax Administration as well as the IRS’ Criminal Investigation Division. The IRS has identified 200,000 total attempts to access data and will be notifying all of these taxpayers about the incident. And for those 100,000 or so taxpayers whose accounts were accessed, the IRS announced it will provide free credit monitoring services.
The IRS And Big Data.
With the next tax filing or estimated tax payment deadline coming up, you may have spent the last few days thinking hard about your taxes, but the IRS has been doing so for years – positioning itself as a leader in using big data.
Each year, April 15th is a memorable date for those of us in the United States – this is the deadline to file our taxes or to file an extension to delay filing a tax return to October 15th. June 15th is the deadline for your next estimated tax payment and June 30th is the deadline to file an FBAR.
It is clear that the IRS is the dominant government agency in the United States. After all if there are no taxes, there can be no government. Politicians know this and over the decades have ensured that the IRS has all the powers it needs to raise federal taxes from the citizens, residents, and even tourists who stay long enough in the United States.
U.S. citizens cannot even escape U.S taxation by leaving the country because the tax law requires U.S. citizens who currently earn more than $9,750 to file even if they don’t live in the country. Even if you renounce your citizenship, as 3,805 did in 2011, you still have to pay an exit tax of 15% on all your assets including investments, homes, and even your personal possessions.
Extensive data collection
To keep track of this, the IRS has one of the most extensive data collections in the world. Traditionally its power to enforce has come through the matching of data. For example, you received a W-2 Form from your employer showing how much you earned. That same form is submitted by your employer to the IRS. Now the IRS can match your return to that form to make sure you are reporting the income. The same thing goes for 1099 forms showing your earnings from miscellaneous income, gambling winnings, interest and dividend income, sales of assets, deductions, and so on.
But the IRS is not stopping here. The IRS has signed a $650 million ten-year contract with Unisys to further develop Big Transaction Processing Data whereby the IRS is using Unisys ClearPath Dorado Servers running at an estimated 1,200 MIPS to process tax returns.
For those of you who are not techie’s, MIPS is a measure of a computer’s central processing unit performance and its stands for “Million Instructions Per Second”. These servers will reside selected IRS Data Centers alongside several IBM z/196 mainframes, capable of running at an estimated 8,000 MIPS. Along with all this processing power are extensive data storage capabilities which will be managed in the IRS’ private cloud. It is estimated that IRS has 7.5 Petabytes of data. By the way just one Petabyte is equivalent to 1 quadrillion bytes.
Data from social media
But the IRS is not just stopping with Big Data Transactions, the IRS is now pursuing Big Data Social Media Analytics just like Google.
But unlike the normal corporate big data analytics, the IRS has one big advantage: It knows everyone’s social security numbers, as well as all the tax information from the firms we as taxpayers interact with, and as such the IRS can join the dots between Google, EBay, LinkedIn, Facebook, Yelp, Twitter, and perhaps your PayPal and credit card accounts along with your emails to overseas bankers.
And speaking of offshore banks, the IRS has been collecting information from the offshore banks on their U.S. accountholders and account characteristics so that by identifying an account number with a foreign bank, the IRS knows what type of account it is and when it was opened. That information becomes relevant when the IRS computers are scouring tax return information to verify foreign income is being reported and foreign accounts being disclosed.
So while none of us enjoys doing or paying our taxes we as taxpayers can be comforted by knowing that the government is at the forefront of the big data revolution. Let’s just hope that the government can also comfort us that it is safeguarding our information.
Well it’s time for a break but stay tuned because we are going to tell you the different ways that returns are selected for examination.
You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.
Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.
Calling into the studio from our Walnut Creek Office is my associate attorney, Amy Spivey.
Chit chat with Amy
Jeff states: Before I continue with Amy, I must say that the overwhelming majority of taxpayers file returns and make tax payments timely and accurately. As such taxpayers have a right to expect fair and efficient tax administration from the IRS, including verification that taxes are correctly reported and paid with enforcement actions against those who fail to comply voluntarily.
Jeff says: And so if your tax returns are selected for examination you should contact the Law Offices Of Jeffrey B. Kahn. We will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention The KahnTaxLaw Radio Show when you call to make an appointment. The number to call is 866.494.6829. That is 866.494.6829.
Four Ways That Returns Are Selected for Examination
So Amy, I understand that there are four main ways that the IRS selects returns for examination. I will read off each one and let you tell our audience more.
1. Potential participants in abusive tax avoidance transactions — Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. Examples include information received from “John Doe” summonses issued to foreign and domestic banks, credit card companies, businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.
2. Computer Scoring — Some returns are selected for examination on the basis of computer scoring. Computer programs give each return numeric “scores”. The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.
3. Information Matching — Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return. Starting this year the IRS is getting this same level of information from foreign banks who have U.S. account holders.
4. Related Examinations — Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination. In examinations that include undisclosed foreign bank accounts, the IRS will look for family relatives who may have the same involvement in foreign accounts and also failed to make the proper disclosures.
Jeff asks Amy, how does one find out if the IRS does select your tax return for examination?
Amy states: This is where one must be careful because there are scammers out there who are calling people saying they are the IRS and threatening them with arrest and deportation unless they pay right away. If you are selected for an audit by the IRS, the initial contact will always be in the form of a letter sent by the assigned agent under official IRS letterhead.
Jeff asks: And what do these letters typically say?
Amy states: First it will give you the contact information of the agent and what IRS office the agent reports to.
Second it will tell you how the examination is to be conducted – this can be by mail, or through an in-person interview and review of the taxpayer’s records at the agent’s office or outside the agent’s office such as the taxpayer’s business.
Third it will tell you which years are being audited and what records will be needed. Taxpayers may act on their own behalf or have a tax professional represent or accompany them.
Jeff asks Amy, so for those taxpayers who choose to have a representative, do you think their case is treated better by the IRS?
Amy replies, It’s unfair, even illegal, but it’s also human nature. IRS agents are flesh and blood and if they can get away with bullying someone into their interpretation of the law, they probably will. A tax lawyer can ensure the IRS is playing by the rules and treating you fairly. IRS investigators are much more careful about asking inappropriate questions or wasting your time with unnecessary requirements, if they know they are dealing with a tax professional.
Jeff asks Amy but will an IRS agent think that you are hiding something big if you hire a representative?
Amy replies, IRS agents have their own caseloads (usually at least 50 and sometimes as much as 75) and their supervisors will monitor how long a case is open which is why agents need to be most efficient with their time. For this reason IRS agents prefer dealing with tax professionals because they don’t have to waste their time and patience explaining you the ABCs of a tax audit or the basic IRS guidelines for a criminal investigation.
Jeff states, In fact, hiring an experienced tax attorney is generally seen as a sign of good faith to resolve your tax issues and the IRS’s own Declaration of Taxpayer Rights encourages taxpayers to hire tax counsel.
Jeff says: And that is where we come in. We highly recommend that you do not go into the IRS on your own. The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention The KahnTaxLaw Radio Show when you call to make an appointment. The number to call is 866.494.6829. That is 866.494.6829.
Stay tuned because after the break we are going to tell more about how the IRS is matching Big Data to your tax return and selecting you for audit.
You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show .
Welcome back! You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.
An on the phone from our Walnut Creek office I have my associate attorney, Amy Spivey.
How the IRS is matching Big Data to your tax return and selecting you for audit.
Jeff states: According to IRS estimates, in a calendar year employers, businesses, financial institutions, credit card companies and other third party payers will file 2.3 billion information statements. These information statements report income and financial transactions, and can help individuals and businesses prepare accurate tax returns. Using information-matching programs, the IRS compares third-party information statements with taxpayer data, and sends a notice to taxpayers when IRS systems detect inconsistencies.
Amy, please tell us how several of these programs work.
Individual Automated Underreporter (AUR) program
This matching program is better known by its primary notice: CP2000, Notice of Proposed Adjustment for Underpayment/Overpayment. IRS systems automatically send this notice when items reported on Form 1040, U.S. Individual Income Tax Return, don’t match information reported to the IRS by employers and other payers. The first round of these notices arrives just after Thanksgiving, and the second round arrives toward the end of the next year’s filing season.
The CP2000 notice has been a mainstay of IRS information reporting for decades. In 2012, the IRS issued more than 4.5 million CP2000 notices, with an average of $1,572 in additional taxes owed.
So Amy, what other matching programs has the IRS employed?
Form 1099-K merchant card transaction matching program
In 2012, the IRS started receiving from credit card companies, Forms 1099-K, Payment Card and Third Party Network Transactions. With merchant card transactions now being reported to IRS, the IRS quickly began using this information to match against business returns. However, because businesses do not specifically report merchant card transactions as separate line items on business tax returns, the IRS can only infer potential underreporting.
Jeff asks: Amy could you clarify for our listeners what this means?
Amy states: For example, if a business has a disproportionate amount of cash to credit/debit card sales, based on its line of business, the IRS may look closer. These kinds of mismatches have led the IRS to develop compliance initiatives, including “soft” notices requesting explanation and mail audits requesting documentation.
The IRS is developing a Form 1099-K matching initiative that will make the IRS more efficient in identifying problem tax returns. But for now many initial notices indicate that the IRS is focusing on underreporting cases in which merchant card payments appear to make up the majority or even exceed the total business receipts reported on the return. In these cases, the IRS perceives that the business is underreporting cash sales due to the disproportionate share of merchant card payments. Accrual-basis taxpayers and e-commerce businesses whose receipts do not neatly match merchant card transactions are likely early targets in this program and we have had our share of this cases where that is what happened.
Jeff says: So if you receive one of these notices it is important that you don’t ignore it. We have a special offer for our The KahnTaxLaw Radio Show listeners. The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention The KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego. The number to call is 866.494.6829. That is 866.494.6829.
Jeff asks: Amy what type of matching does the IRS do where a tax return does not get filed?
Automated Substitute for Return program
When a taxpayer does not file and the IRS has information statements indicating a filing requirement, the IRS uses the data to file a return on behalf of the taxpayer if there is a projected balance owed. In 2012, the IRS used information statements to file 803,000 returns for taxpayers, totaling $6.7 billion in additional taxes owed. And the sad thing about this is in just about every case, the amount actually owed when a tax return is filed by the taxpayer is much lower than what the IRS says a non-filer taxpayer owes. We have cases where the IRS ended up owing our clients money.
Jeff asks: Amy, where in the future is the IRS going with their use of Big Data?
Amy replies: The IRS has been getting a lot of help from Congress where Congress has expanded the IRS’ reach to access more information to enforce compliance and implement new legislation.
Jeff asks: And I bet that you have some examples of new powers enacted by Congress that have been bestowed on the IRS.
1. FATCA – Foreign Account Tax Compliance Act.
This legislation became law in 2010. Starting in 2014, the IRS will have the ability to match taxpayers’ returns against the information it receives on U.S. taxpayers with accounts at foreign financial institutions. The IRS will likely scrutinize taxpayers who have not filed the required Form 8938, Statement of Specified Foreign Financial Assets, or FinCen Form 114, Report Of Foreign Bank Account (commonly known as “FBAR”). Our office has a lot of cases representing taxpayers with undisclosed foreign bank accounts – it is a hot issue with IRS.
2. Patient Protection and Affordable Care Act (“Obama Care”)
As this Act is implemented in the next several years, the IRS will start using information statements for individual and employer compliance with the Act’s mandates. Starting in 2012, employers reported the value of employer-provided health insurance on Forms W-2, Wage and Tax Statement, to inform taxpayers of the value of their health insurance coverage. In 2015, the IRS will also receive information from health insurance companies on employee coverage, including the name and identifying information of the employer. The IRS can use the information to identify and penalize individuals and employers for noncompliance with Obama Care mandates.
Jeff states: A recent U.S. Government Accountability Office study showed that the IRS spends $267 million on underreporter matching programs, compared with the $4.2 billion it spends on audits. But automated information-matching programs return almost six times more revenue than audits. You can see why with fewer IRS agents and reduced budgets, the IRS will increasingly rely on technology-driven matching programs to bring in more tax dollars.
Jeff says: And so we have a special offer for our The KahnTaxLaw Radio Show listeners. The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention The KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet Jeffrey Kahn right here in downtown San Diego. The number to call is 866.494.6829. That is 866.494.6829.
Stay tuned as we will be taking some of your questions. You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.
Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team along with my associate attorney, Amy Spivey.
If you would like to post a question for us to answer, you can go to our website at www.kahntaxlaw.com and click on “Radio Show”. You can then enter your question and maybe it will be selected for our show.
OK Amy, what questions have you pulled from the kahntaxlaw inbox for me to answer?
Question: Why Should I Only Use A Tax Attorney For Representation In A Criminal Tax Investigation?
Answer: When it comes to tax planning, business budgeting and asset management, a CPA is – all things being equal – more useful than a tax attorney is. But when you have a dispute with the IRS, especially if you’re accused of tax fraud or tax evasion, a tax attorney is the only intelligent choice. Tax attorneys are the only ones who can represent you in a court of law and provide you the legal advice and analysis you need. Anything discussed with your tax attorney is protected under the attorney-client privilege. Unlike CPA’s and accountants, attorneys cannot be subpoenaed to testify against a client in a criminal procedure.
Question: How long should I keep my tax papers?
Answer: At least three years, but six years is preferable. The IRS has three years after you file a tax return to complete an audit. For example, if you filed on April 15, 2006, for 2005, keep those records until at least April 16, 2009.
The IRS can audit you for up to six years if it suspects that you underreported your income by 25% or more. If the IRS suspects fraud, there is no time limit for an audit, although audits beyond six years are extremely rare.
Keep records of purchases of real estate, stocks, and other investments for at least three years after the tax return reporting their sale was filed.
Question: How long should I worry if I haven’t filed tax returns that I should have filed?
Answer: At least six years. The government has six years from the date the nonfiled return was due to criminally charge you with failing to file. There is no time limit, however, for assessing civil penalties for not filing. If you didn’t file for some year long ago – say 1995, you still have an obligation if you owed taxes for that year. Not until you actually file a return does the normal audit time limit—three years—and collection time limit—ten years—start to run.
Don’t over worry about a nonfiled return due more than six years ago if you haven’t heard from the IRS. The IRS usually doesn’t go after nonfilers after six years—unless the IRS began its investigation before the six years elapsed. After six years, the IRS transfers its computer files to archives for storage.
Question: If I can’t pay my taxes, should I file my return anyway?
Answer: Yes. Filing saves you from the possibility of being criminally charged or, more likely, from being hit with a fine for failing to file or for filing late. Interest continues to build up until you pay. Of course, filing without paying will bring the IRS collector into your life, but she’ll be friendlier if she doesn’t have to hunt you down. The sooner you start filing, the better.
PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.
Thanks Amy for calling into the show. Amy says Thanks for having me.
Well we are reaching the end of our show.
Don’t forget you can reach out to me on Twitter at kahntaxlaw. Have a great weekend!