National Taxpayer Advocate Nina E. Olson released her annual report to Congress today.
The reports says that the combination of the IRS’s expanding workload and declining resources is the most serious problem facing taxpayers. The Advocate said 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’s workload continues to expand due to tax code complexity and frequent changes, the IRS’s responsibility for social and economic policies, refund fraud and the implementation of additional third party reporting requirements like the new Form 1099-K that’s required of credit card processing companies. In 2010, there were 579 changes to the tax code and those of us that deal with it struggled to keep up.

The IRS now does about 90% of their tax liability adjustments with taxpayers through correspondence and not the traditional audit. About 78% of audits were done by correspondence. The IRS made about 15 million contacts with taxpayers to adjust liabilities in 2011. Whew! These correspondence audits are performned with no individual agent responsible for the audit, which makes it difficult for the taxpayer to contest the findings.

Under one program, “Operation Mass Mail”, the IRS determined that 900,000 returns contained questionable claims. They auto-voided the returns and didn’t notify the taxpayer. In thousands of these cases, the IRS later determined that the returns were valid and the returns were “reinstated”. What????? There’s no due process in that process!

Taxpayers that filed for large refunds were often subjected to waits up 6 months if the IRS suspected the return was fraudulent. We’re not told how the fraud suspicion was determined.

All of these things indicate one thing: the IRS is underfunded and overworked. My own experience with the IRS is that most employees are diligently trying to do a good job and they are very professional in carrying that out. When Congress fails to fund the IRS, the taxes unpaid by those willing to cheat increases and that damages all of us.

You can read the whole report here:

http://www.irs.gov/advocate/article/0,,id=252216,00.html

The New York Times is reporting that a company called CoreLogic introduced a new type of credit file, which is based on the giant repository of consumer data it maintains on just about everything that most of the traditional credit bureaus do not: missed rental payments that have gone into collection, any evictions or child support judgments, as well as any applications for payday loans, along with your repayment history. The new report also contains property tax liens, past due homeowner association dues, whether or not you owe more on your home that it’s worth and mortgages from small lenders.

There are three credit reporting agencies in they country: Equifax, Experian and TransUnion. Here in Georgia, I see Equifax reports more than the other two, probably because their headquarters is here. In the past, they have used FICO scores but there are several glaring holes in the FICO score and it can be gamed.

Comprehensive credit scoring is a welcome change to improve credit evaluation by lenders. This is also a boon to homeowners associations with deadbeats that don’t pay their dues. The new report will ding their credit for their past due amounts.

Corelogic and FICO have partnered to provide the new scores, which will be introduced for mortgage and home equity lenders in March. Reports for other types of lending will no doubt follow as the pressure mounts on the large banks to improve profits by reducing their credit card delinquency rates.

Future plans for these reports include adding utility and cell phone payment histories. Consumer groups are scrutinizing the plans to ensure low income folks aren’t being abused under the new rules.

The new report should also make it easier for people that didn’t take out underwater home equity loans and no doc mortgages to get loans.

The Internal Revenue Service has warned of new tax related scam, frequently involving people with no filing requirement. The scams are an attempt to persuade people to file false claims for rebates or credits. There’s no shortage of thieves and unscrupulous people. Taxpayers should be wary of anyone promoting fictitious claims or refunds or advice on claiming the Earned Income Credit. The Earned Income Credit has been a regular source of fraud for the IRS for several years. That’s the negative income tax whereby people that pay in nothing in taxes receive refunds based income and the number dependents they have. You can read more about the scams here.

Many people recycle their clothing and household goods by donating them to various charities.  Goodwill Industries, MUST , American Kidney Services and many others accept or pickup contributed items and the tax code allows a tax deduction for these contributions if they are in good or better condition. A household good that is not in good used condition or better for which you take a deduction of more than $500 requires a qualified appraisal. You are not allowed a deduction for items such as underwear and socks.

The issue comes in documenting and valuing the contribution. I recommend listing your contributing items in detail with brand names, photographing the items and using one of the many websites available for valuing your contribution. With the cost of photography at near zero, this is a great way to document the condition of the item.

If the total value of the donated items exceeds $500, Form 8283 is a required submission in your tax return. That form requires the name and address of the donee, a description of the items donated, the date donated and the fair market value of the items. Any item that’s valued at more than $500 also must include the date acquired and how the items were acquired.

The IRS has announced that because Congress passed a major tax bill late in December, they are unable to reprogram computers to process returns before mid-February.  Taxpayers that itemize deductions, claim the educator expense, the tuition deduction or repayment of the 2008 homebuyer credit are affected.  These are returns that include Schedule A, Form 8917, or Form 5405 repayments. Check my website for updates on IRS delays.

The Emancipation Day holiday in Washington, DC , which is April 16, is being celebrated on April 15 this year. By law, a local holiday in Washington is a tax holiday as well.  All individual tax returns without extension and estimated tax payments for the first quarter of 2011 are due on April 18 as a result.

The Georgia Department of Revenue has thus far been silent on whether they’ll follow the federal due date or not, which means Georgia returns will still be due on April 15 unless the legislature acts.

The IRS published the 2011 mileage rates a few weeks ago. The new rate for business mileage is $.51, up from $.50 in 2010. Medical and moving mileage is now $.19 per mile, up from $.165 and charitable mileage is $.14 per mile, which is unchanged from 2010.

A contemporaneous mileage log is required to substantiate mileage deductions.  For charitable contribution mileage, the log must contain the name of the organization, the date the mileage was driven and the number of miles. At $.14 per mile, this can be a significant deduction for Scout leaders and little league sports coaches.

I represented a client in an audit of business mileage in 2009.  The audit of that item took about 2 minutes as the agent reviewed the log entries and quickly moved to the next item. I can’t overemphasize the importance of the log.

The result of the Housing Assistance Tax Act of 2008, bank and other merchant service providers must begin issuing a Form 1099-K to anyone whose total gross receipts from credit card transactions exceeding $20,000 and 200 transactions in a calendar year. This will no doubt be a painful time for many online sellers that haven’t reported all of their income in the past, but this is a high floor for reporting.

There was a recent tax court case in which an IRS revenue officer who sold on eBay was assessed over $53,000 in tax, penalty and interest for sales on eBay for tax years 2004 and 2005.  What’s remarkable is that it went to tax court.  Did she somehow believe she didn’t have to report her income.

It’s important to remember that you’re required to report your income regardless of how much it is.

Have you ever wondered why your CPA keeps digging for answers until he understands a transaction or nitpicks you for the right details of a deduction? The IRS released IR-2010-82 on July 6, 2010, announcing the disbarment of a CPA. Here’s the announcement from the IRS website:

IR-2010-82, July 6, 2010

WASHINGTON — The Office of Professional Responsibility (OPR) has prevailed in an agency appeal involving issues which include the due diligence responsibilities of a CPA under the Rules of Practice before the IRS (Circular 230).  The May 28th decision of the Appellate Authority has upheld the Administrative Law Judge’s (“ALJ”) disbarment of CPA Tim W. Kaskey finding, among other things, that Kaskey failed to exercise due diligence in preparing tax returns for a corporation and its husband and wife shareholders.

“This is yet another decision highlighting that practitioners have a duty to the system as well as to their clients. Practitioners who do not take this duty seriously can expect to be held accountable,” said Office of Professional Responsibility (OPR) Director Karen L. Hawkins said.

Kaskey is a CPA and tax advisor who also prepared individual and corporate tax returns.

OPR alleged that Kaskey failed to exercise due diligence under Circular 230, section 10.22 when he failed to determine the correctness of the representations he made to the IRS on the tax returns of a corporation and its married shareholders.  OPR also alleged that Kaskey’s misconduct included a failure to comply with the requirement to advise clients of potential penalties and any opportunities to avoid such penalties by disclosure contained in Circular 230, former section 10.34(b) (now section 10.34(c))

When Kaskey failed to respond, or appear, at the administrative proceeding, the ALJ deemed the allegations against Kaskey admitted and entered a default judgment for disbarment.  Kaskey appealed. On review, the Treasury Appellate Authority agreed that disbarment was proper.  Kaskey defended against the due diligence allegations by arguing that his clients had misrepresented their income to him. The Appellate Authority observed that there was “a great deal of evidence reflecting the lack of due diligence by [Kaskey] in the preparation of these returns…[and that] “it was inconceivable that [the individual taxpayers] could pay their living expenses based on the income reported on their returns.”

“Practitioners who think OPR isn’t serious about due diligence should take heed,” added OPR Director Hawkins.  “Practitioners may not ignore the implications of information already known, and must make reasonable inquiries if the information furnished by a client appears to be incorrect, inconsistent, or incomplete.”