This is not good news. (Disclaimer: At this point, this is all third party information. While I believe the sources are accurate, there has been no announcement from the IRS.)  It appears that the IRS has started requesting electronic QuickBooks files in examinations of entities that use QuickBooks and supposedly the IRS will make an announcement to practitioners in the next week or so. A CPA that I know personally in California stated that he has a audit document request in which a Revenue Agent referred to an IRS national directive when requesting the QuickBooks file. I’ve also learned that the IRS assembled a QuickBooks training manual for Revenue Agents in in January of this year and that the IRS has obtained a large number of QuickBooks user licenses from Intuit.  The National Association of Enrolled Agents allowed a subcommittee of their organization to review the training manual for the IRS.

The implications of this are far-reaching. Having the entire QuickBooks file available means than an agent could conduct an audit fishing expedition over any number of years that the file contained.  Placing a password protected closing date on the QuickBooks file would be virtually useless since those passwords are easily busted.

The Georgia Department of Revenue electronic payments system is operational again after a June 7 flood took them offline. This flood was apparently caused by an overheated appliance setting off a sprinkler head.  This begs the questions why are they using water sprinklers in a computer room and hasn’t anyone in the department of revenue considered disaster planning?  People in private industry would lose their job for that kind of nonsense. Anyway, they can take your money electronically again.

Due to computer equipment that overheated on Sunday afternoon which activated a sprinkler system and resulted in flooding on four lower floors, the Department of Revenue headquarters building experienced a computer system outage which disabled online systems and halted ground floor customer service operation on Monday.

Following is the status of certain DOR online tax systems as of Tuesday afternoon:

Georgia Registration Tag and Title System (GRATIS):

– Taxpayers cannot renew their annual tag registration online from a personal computer.

– GRATIS is fully functional, however, at the DOR’s Tradeport Processing Center and at all County Tag Offices throughout the state.

Alcohol Liquor Licenses:

– The Department will issue temporary liquor licenses that will be valid through June 30.  DOR staff at 1800 Century Boulevard are available to process liquor license applications and receive payments.

Tax Payments for Online E-File/E-Pay, Refund Inquiry, and General Inquiries:

– Tax payments for online e-file/e-pay can be mailed to the Department or delivered to any DOR Regional Office.  Taxpayers who make a diligent effort to pay timely will not be assessed a penalty.

I’ll post updates here as I receive them.

From CBS Money Watch, here’s some things not to do on your tax returns unless you can support them.  The IRS has a top secret formula for choosing returns for audit.  And remember less than 1% of returns are audited, but that’s 3% of returns with incomes over $200,000.   New tax law changes aren’t in the IRS formula yet. This includes the first time homebuyer credit, the home buyer tax credit and the new car sales tax deduction. The first time homebuyer credit program is loaded with fraud, so much that Congress amended that law to require a closing statement be submitted with the returns that contain that credit.  Here’s their list of things to avoid unless you have good records and can support the deduction:

• Business Use of Your Car – If you’re claiming this deduction you should have a mileage log to support the business use of your car. Anything less is likely unacceptable in an audit.
• Home Office Deductions- This one isn’t worth the trouble but some people can’t resist it.
• High Itemized Deductions like charitable contributions and miscellaneous deductions  for your income
• Non-Cash Charitable Contributions – The last great place on an individual return to lie and the IRS knows it.
• Investment Income Discrepancies
• Math Errors
• Home Buyer Credit
• New-Car Sales Tax Deduction

At the end of the day, audits, audit representation and penalties are expensive.

As I’ve written before, the states are becoming more and more aggressive about collecting taxes from non-residents as the economy has declined. Tax collections in many states are extremely low so states like California (of course) and Connecticut are exchanging information with the Internal Revenue Service in order to identify where money was earned.  Here’s a detailed article in the New York Times  detailed their efforts. Real estate transactions and detailed employee time tracking records discovered during payroll audits are leading to letter to non-residents. The shortcut is to file the non-resident tax return, then take the available credits for out-of-state taxes on your residential tax return.

Beginning in February, 2010, the IRS will begin a new round of audits in its National Research Program. These will be detailed examinations designed to determine the extent businesses comply with employment tax rules. The IRS uses the results to set statistical metrics used to make choosing returns to audit more efficient.  Supposedly the IRS will focus on four areas:

• S Corporation officer salaries and compensation
• Work classification issues – The classic independent contractor vs. employee issue that I’ve written about previously.
• Fringe benefits accounting and documentation for company cars.
• Accountable vs. Nonaccountable employee reimbursement plans. If done properly these are tax free, but taxpayers apparently abuse these.

Call me if your employment records aren’t and plans are not in order. There are many things you can do to reduce the bite of an audit, but it’s critical you be proactive about it. Once the notice from the IRS arrives, it’s too late.

The IRS has published their tips to choosing a tax preparer:

1. Check the person’s qualifications Ask if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

2. Check on the preparer’s history Check to see if the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs or the state’s bar association for attorneys.

3. Find out about their service fees. Avoid preparers that base their fee on a percentage of the amount of your refund or those who claim they can obtain larger refunds than other preparers.

4. Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after April 15, in case questions arise.

5. Provide all records and receipts needed to prepare your return.  Most reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items.

6. Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.

7. Review the entire return before signing it Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

8. Make sure the preparer signs the form.  A paid preparer must sign the return as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.

Nina Olson, IRS Taxpayer Advocate, is required to report to Congress annually and one of the things she has to report is the 10 most litigated tax issues. Here’s this years list:

1. Collection Due Process hearings (§§ 6320, 6330)
2. Summons enforcement (§§ 7602(a), 7604(a), 7609(a))
3. Trade or business expenses (§ 162(a) and related Code sections)- This covers Sole Proprietors’ Schedule C, one of the most audited forms.
4. Gross income (§ 61 and related Code sections)
5. Accuracy-related penalty (§ 6662)
6. Frivolous Issues Penalty (§ 6673 and related appellate-level sanctions)- There are still people saying the income tax is illegal and they don’t have to pay it, that it’s voluntary, that they live in Texas and so aren’t subject to it, etc.  If you hear that from someone, run.
7. Civil Actions to Enforce Federal Tax Liens or to Subject Property to Payment of Tax (§ 7403)
8. Failure to file penalty (§ 6651(a)(1)) and estimated tax penalty (§ 6654)
9. Family status issues (§§ 2, 24, 32, and 151)
10. Relief from joint and several liability for spouses (§ 6015). This includes the innocent spouse issue. The IRS won’t give in to that without a fight.

As you may know, the states and cities are broke and they’re looking for income. Many local governments are relying more and more on audits and their traffic law enforcement income to balance the budget. I’ve recently talked to a few CPA friends about the kinds of audits they’re seeing in their practices. Here’s a list of what I heard about about:

• Sales & Use Tax – The auditor got them for not paying use tax on magazine subscriptions, software updates that came in the form of a CD (not a download), and the purchase of some used furniture. The auditor said that technically all businesses are supposed to file a use tax return at least annually. Internet purchases in the business are subject to use tax as well.
• GA Department of Revenue audit of income tax return – Disallowed a vehicle deduction because the vehicle wasn’t in the business name.  Also collected sales tax on firewood sales and cleaning fees in a vacation rental business.
• Unclaimed property audit by GA Department of Revenue – They were looking for uncashed payroll checks for a 5 year period. Most states have unclaimed property laws that eventually require that property to be turned over to the state.

In a report released by the IRS Ombudsman today, National Taxpayer Advocate Nina E. Olson warned Congress that increased demands on the IRS have eroded the agency’s ability to meet taxpayer service needs. This year the IRS has a target to answer only 71% of calls from taxpayers seeking to talk to a customer service representative about account questions. Callers will have an average wait time of 12 minutes. That means the IRS won’t answer 3 out of 10 calls.

Another study found that the IRS procedures for determining a taxpayer’s ability to pay outstanding liabilities may be driving some into long-term noncompliance because the IRS will not consider other debts like credit card debt, school loan balances and medical bills.  These people are dropping out of the system. Ms. Olsen said  “Taxpayers are placed in the intolerable position of agreeing to pay the IRS more than they can actually afford (given their other debts) and then defaulting on the IRS payment arrangements when they channel payments to unsecured creditors in order to get some peace. Thus, the IRS itself fosters noncompliance by its failure to take a holistic approach to the taxpayer’s debt situation.”  She advocates the IRS change their policy and not file tax liens against people that don’t have the ability to pay. The complete report is at:

http://www.irs.gov/newsroom/article/0,,id=217903,00.html

She also praised the IRS for moving ahead with plans to regulate federal income tax preparers. The plan covers unenrolled preparers which excludes attorneys, CPA’s and Enrolled Agents who already must pass a rigid exam in order to practice.