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The IRS Defense

The IRS Commissioner John Koskinen has spent a lot of time on Capitol Hill this past week answering questions about the Internal Revenue Service’s targeting ofirs certain political groups and the ongoing Congressional investigations.

Depending upon your political persuasion, you probably see this as a potential conspiracy deserving investigation, or you think this is nothing more than political grandstanding in an election year. Beyond the political theatrics, which are part of all Congressional hearings, there are some serious issues involved, not the least of them is the Service’s response to Congressional inquiries.

While you may disagree with the premise and conduct of the investigations and hearings, the IRS’s response is troubling, irrespective of political affiliations or leanings. As an American taxpayer, do you think you could handle an IRS audit the same way the IRS is responding to Congressional inquiries?

Documentation and Missing Information

The timeliness of providing documentation to Congress has been a point of contention. The investigation started over a year ago, yet some documents still have not been produced. The biggest bombshell hit last week, when the IRS informed Congress it could not provide some of the e-mails from Lois Lerner (the IRS official at the center of the controversy who has pled the 5th Amendment at two different Congressional hearings) due to a computer crash. They noted that six other employees also involved in the investigation experienced computer failures and lost e-mails during the same time period. Despite knowing about these computer issues in February, the IRS didn’t notify Congress until June, but notified the Treasury Department in April.

Everyone has probably encountered computer issues and lost information before. That’s understandable. However, the IRS has strict documentation requirements for taxpayers. You are required to retain your documents for at least three to seven years; sometimes longer. An IRS auditor can disallow a deduction if you don’t have the appropriate documentation.   Imagine telling an IRS agent you can’t produce the requested documents because of a computer crash and you destroyed the backups. Consider how skeptical the agent would be if you knew about it early in the audit process, but waited for months before disclosing it. Do you think the agent would take your word that all is okay and move on?

The IRS is also contending it doesn’t matter that some of the e-mails have been lost, as they cite the thousands of documents they have provided. This is analogous to providing boxes of receipts to substantiate your business expenses, but not providing the ones for your personal vacation you deducted as a travel expense. You can argue with the agent that the mounds of unrelated documents prove everything is legitimate, but it may not be. Furthermore, the agent is under no obligation to simply take your word for it.

The Law v. Common Sense

In a tense exchange between Commissioner Koskinen and South Carolina Congressman Trey Gowdy, the Commissioner stated there was no criminal wrongdoing by anyone at the IRS. Congressman Gowdy, a former federal prosecutor, asked what federal statutes Mr. Koskinen had reviewed to determine no criminal wrongdoing had occurred. The Commissioner responded that he hadn’t reviewed any laws. Instead, he was relying upon common sense that nothing inappropriate occurred.

Try using the common sense argument with the IRS. No Mr. IRS auditor, I don’t know what the law says about reporting that income or deducting those expenses, but relying upon common sense, it must be okay. Certainly the IRS agent will agree with your common sense approach and ignore the tax code.

Attitude

All of the IRS officials’ testimony seems to project an attitude that we’ve done nothing wrong; trust us; now leave us alone. In his recent testimony, Commissioner Koskinen’s demeanor appeared brash, indignant and borderline arrogant when responding to questions. Some of his supporters cheered his behavior, and thought he was standing his ground while being bullied by the Republican interrogators. While no one deserves to be disrespected or berated, the Commissioner showed no sense of remorse for anything and projected an aura of annoyance that he was being questioned.

Again, you should put this in context of an IRS audit. Imagine meeting with an IRS agent and displaying the same type of defiant attitude. Theoretically, IRS personnel should conduct themselves in the same manner no matter how you act or what you say, but do you honestly think that’s true? A basic understanding of human nature tells you that a contentious and condescending attitude will cause the auditor to be more suspect and less lenient in accepting anything that’s questionable.

The IRS Defense

Therefore, the next time you are audited by the IRS, consider employing the IRS defense strategy.

  • You don’t have to worry about missing documents if you inundate them with other information, and if can’t produce the documents, they should just trust you that everything is correct;
  • You don’t have to apply tax law, so long as your common sense tells you it’s correct;
  • You can be brash, indignant and uncooperative because you’ve done nothing wrong, and the IRS is responsible for wasting your time and taxpayers’ money.

On second thought, maybe this isn’t a very good defense and could cost you a lot of time and money in the long run. However, if it works for the IRS why shouldn’t it work for you? Furthermore, if this is how the IRS acts when it’s scrutinized, why should taxpayers be expected to act differently?

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The Budget Deal: And the Winners Are?

US Capitol-WinterWithin the last two days, the U.S. House and Senate have passed the Consolidated Appropriations Act, 2014, a $1.1 trillion spending bill for the 2014 federal budget.

So who are the winners in this budget and spending deal?

Without question, Washington politicians are the biggest winners.  With caveats, the American people can also be considered winners.  The only real losers in this deal were the people who wanted significant increases or cuts to federal spending.  Let’s explore each group a little more closely.

Washington Politicians

Although no party or chamber got everything they wanted, everyone got enough to declare victory.  The political movers and shakers also got to burnish their bipartisanship credentials and willingness to compromise.  They also avoided another bruising government shutdown akin to the first 16 days of October.  Even though another shutdown might have inflicted more political damage to Republicans, Democrats were wise not to antagonize a restless electorate.  It’s an election year, and there’s always a risk voters will develop an anti-incumbent attitude and vote to “throw the bums out.”  At the same time, the bills passed by large enough margins that anyone wanting to cast a vote of displeasure could easily do so without scuttling the deal.  In the end, these votes were more symbolic than substantive.

The American People

We the people are winners to some extent.  Albeit four months into the current fiscal year, Congress passed its first real budget and spending bill in four years.  The government has essentially been operating on autopilot for the past four years via temporary and stopgap measures, rather than following the budgetary and appropriations process.  We also avoided another government shutdown, which ultimately doesn’t save any money and only makes many lives more difficult.  Congress also ended the across-the-board spending cuts known as Sequestration.  Although I agreed with the reduction in federal spending, the manner in which it was carried out was asinine.  Sequestration was a political maneuver which was never supposed to be implemented, but it was.  Therefore, it took some time for Congress and the President to figure out another political angle to extricate themselves from the mess they created.

As much as we are winners in this deal, we’re also losers.  In the deal to eliminate Sequestration, Congress increased short-term spending with the promise of larger cuts to future spending.  History has proven the promises of future cuts rarely materialize.  While spending may not have increased much in the short-term, the hard decisions of how to reduce spending and balance the budget have been postponed once again.  The enactment of a spending plan is good, but the process stunk.  Instead of Congress passing the requisite 12 appropriation bills for federal spending, they combined them all into one 1,582 page, must-pass bill, voted on hours after being released.  How well do you think your Representative or Senator read this 1,582 page bill?

The Advocates

Those who advocated for significant spending increases were disappointed. However, if you consider the federal spending increases over the past four years, they have already won in some respects and were unlikely to secure further increases.  The big losers were the budget hawks and those who want to dramatically pare federal spending and balance the budget.  They not only lost the battle to further cut spending, but some of the guaranteed Sequestration cuts were replaced with a promise of future cuts.  Although this deal is only for the 2014 budget, it has set the stage for the 2015 budget.  The motivations for Congress to reach this deal will drive the politics for the 2015 budget to be quite similar.  Therefore, the 2016 budget will probably be the first real opportunity for the budget hawks to make significant steps towards a balanced budget.

Win  and Lose

The 2014 budget and appropriations bills essentially maintain the status quo, which is a win for preventing major financial disruptions.  At the same time, we have lost another opportunity to make the tough decisions and address the issues which are perpetuating the overspending by the federal government and adding to the mounting federal debt.

Add Another Trillion

debt ceiling_foxIn the midst of the hullabaloo last week over the deal in Washington to end the shutdown of the U.S. government, a little fact missed the attention of most reporters and media outlets.  The public debt of the United States is now in excess of $17 trillion.

Technically, the debt ceiling was reached in May and has been stuck at the same level for months.  As a result of the continued receipt of federal taxes and other “extraordinary measures” employed by the U.S. Treasury, the nation was able to stave off default until the debt ceiling was raised again.  When the debt deal was struck, the official debt of the U.S. increased $329 billion in a day.  As a result, the official tally of the debt increased from $16.747 trillion to $17.076 trillion.

Stop and think about that for a moment.  While many politicians are touting their accomplishments of deficit reduction and fiscal restraint, the U.S. still overspent by $329 billion in less than 5 months.  While it’s an improvement over the recent annual deficits in excess of $1 trillion, the deficit is still projected to be $700-800 billion this year.

While I don’t necessarily agree with their tactics or timing, I do commend those who attempted to draw attention to the continuous deficit spending and rising national debt.  Shutting down the government was a drastic step, and in the end, it probably did little to change the current policies or debate.  However, it seems painfully obvious that something drastic needs to happen for our national leaders to get in touch with the reality that it’s impossible to borrow trillions of dollars forever.

It wasn’t very many years ago when adding another $1 trillion to the national debt would have been headline news.  Sadly, we keep breaking the next trillion-dollar mark so quickly, it barely garners anyone’s attention.  Of the $17 trillion we owe, nearly 40% of it has been borrowed within the past five years.

If you share the belief of many politicians, pundits and economists that the continual rise of the debt is not an immediate concern, then you probably won’t pay much attention as the debt continues to increase another $1 trillion in a few months.

If you think the perpetual rise of our debt poses a threat to our long-term security and prosperity, you’re probably frustrated that we reached another trillion-dollar milestone and will probably break the $20 trillion mark in the next couple of years.  It can be disconcerting to see the lack of concern over this issue, but don’t give up.  Now more than ever, you need to speak up and press for change.  It may not happen quickly or easily, but if you don’t speak out, who will?

Breaking the $17 trillion mark may have gotten lost in the noise of the deal to end the shutdown and avoiding possible default by the U.S. government.  Whether the lack of coverage was accidental or intentional, this is equally important.  The shutdown and debt ceiling were an immediate crisis, but the continuous overspending and borrowing by our government is slowing creating a future calamity, which will make the last predicament seem like a nonevent.

Dealing with Debt Collectors

credit cardsTips and tricks to dispute the accuracy of the items of the credit report with the debt collecting agencies.

You must be aware of the fact that your credit score may drop with erroneous entries on the credit report. You can dispute with the creditors or debt collectors if you find any inaccurate negative information on the credit report. Well, you need to know that inaccurate and positive information on your credit report can’t be removed from it. So, if you’ve erroneous entries on your credit report, you can manage to dispute the erroneous items with the debt collectors directly. If you’re unaware of the tricks to dispute erroneous entries on the credit report then you need to correspond with the debt collector to remove the incorrect entries.

Here are some of the important points that you need to consider when you plan to dispute the inaccurate information from the credit report:

1. Know your rights: Make sure you’re aware of your rights to remove the erroneous entries from your credit report with the debt collectors who reported the information. So, you need to send a dispute letter to the company that provided the information to the consumer reporting agency.

2. Debt collectors job to investigate: The debt collectors report the agencies in regards to credit information immediately. Make sure the time frame of response is same when you send a dispute letter to a consumer reporting agency. In most of the cases, the company has 30 days for investigation and the this period may get extended up to 45 days if you provide additional information. Make sure you get information in regards to the credit information within five business days of completion.

3. The debt collectors may not respond to your letter: Well, the debt collectors may not respond to your letter if you contact the credit reporting agencies to dispute erroneous information on the credit report. If the debt collectors have already responded to the dispute, then it may not respond to your letters any more unless you provide more information.

4. Liability of the debt collectors: According to the Fair Credit Reporting Act, if the debt collector provides information to the CRA, he has to follow certain liabilities.
• Finds out more about dispute reported information.

• Provides accurate and complete information if the reported information is incorrect.

• Informs the credit reporting agency if the consumer disputes information.

• Checks when the accounts are “closed by the consumers”

• Sends the credit report agency with the required details like the month and years of the delinquent accounts given to the collection agency or charged off.

• Needs to complete the investigation of a consumer dispute within 30 to 45 days time span, so that credit report agency can manage to complete the scrutiny.

Therefore, you’re required to keep the above mentioned points in mind when your plan to dispute the accuracy of the items on the credit report with the debt collectors.

***This article was contributed by Anjelica Cullin.

The IRS and I Don’t Know

irsThe recent IRS scandal involving targeting of certain conservative groups applying for tax-exempt status is troubling on many levels. The more questions asked and the more information uncovered, the disconcerting it gets.

Aside from the potential abuse of governmental authority or violation of civil liberties, the lack of information, knowledge and candor by the IRS officials testifying before Congress is incredulous. Former acting IRS Commissioner Steven T. Miller could only muster a meek apology for not providing good customer service to the affected groups when he testified. In addition to Mr. Miller, multiple IRS officials have testified before Congress over the past three weeks. When questioned about who was responsible for this additional scrutiny, the same basic response is offered every time, “I don’t know. Without sounding overly critical, their response is lame.

The initial response from the IRS and White House blamed two rogue employees in the Cincinnati, OH Service Center. Doesn’t it make sense you might know the names of the individuals if you say its two people? Even if someone didn’t know their identity at the time, I think you could track them down in three weeks. Additionally, the Treasury Inspector General for Tax Administration (TIGTA) investigated this practice for nearly a year before the report was made public. Why wasn’t the TIGTA able to determine who was involved?

As some of the groups targeted by the IRS have come forth, it is obvious involvement went beyond two low-level employees in Cincinnati. IRS inquiry letters have been produced from multiple locations, signed by various individuals, including Lois Lerner, the head of the IRS Exempt Organizations Division responsible for approving these applications.

These are not low-level employees who are testifying. They are highly paid professionals responsible for the direction and operations of the IRS. It’s not realistic for them to know everything happening at the IRS, but it is their job to find out. Professing ignorance and blaming subordinates is not commensurate with they pay and position.

As someone who interacts with the IRS on a continual basis and has responded to countless IRS inquiries and audits, telling an IRS agent “I don’t know” isn’t sufficient. You may not know the answer at the moment, but you have to find out. When you meet or talk with an agent, you’re supposed to be prepared to answer their inquiries. Justifiably, IRS personnel get frustrated and annoyed if you can’t answer many of their questions and everything is delayed.

The IRS sends you a list of questions or inquiries ahead of time. While Congress may not provide a list of questions in advance, questions like “How did this happen?” or “Who is responsible?” seem rather obvious. To appear before Congress without any ability or intention of answering those questions is mystifying.

As some Members of Congress have already pointed out, the IRS should be held to the same standards of cooperation and responsiveness they expect from the U.S. taxpayers. If “I don’t know” won’t fly with the IRS, “I don’t know” shouldn’t fly for the IRS.

Targeted by the IRS

irsIf you have ever been audited by the Internal Revenue Service (IRS), it’s natural to feel like you have been singled out. It’s like getting pulled over for speeding. Regardless of your actions, you often feel like the authorities should be spending their time pursuing more important criminals. Despite your feelings, rarely are you being targeted by the IRS.

Shockingly, the IRS admitted last week that they had unfairly and inappropriately targeted certain nonprofit organizations because of their beliefs and affiliations. For over two years, IRS employees signaled out conservative groups with names or verbiage including “Tea Party,” “Patriot” and “Obamacare” for additional scrutiny. The IRS admitted this in advance of the pending release of a report by the Treasury Inspector General for Tax Administration (TIGTA) criticizing their behavior.

The IRS claimed the targets were nonpolitical and initiated by low-level employees in the Cincinnati, OH Service Center. The additional scrutiny may not have been ordered by a political appointee, but it seems obvious the additional attention and inquiries were politically motivated. Over the past few years “Tea Party” has as much a political connotation as Democrat or Republican. Additionally, it doesn’t appear any liberal-leaning groups received the same scrutiny. As a result, it seems hard to believe the IRS actions were not politically motivated.

It also appears the knowledge of this behavior went much higher than a few low-level staffers churning through documents in Cincinnati. Lois Lerner, the head of the IRS Exempt Organizations Division, found out about it in June 2011, and despite her instructions to change the review guidelines, the additional inquiries continued throughout 2012. In May 2012, Douglas Shulman, the IRS Commissioner at the time, and Steven T. Miller, his deputy and the current acting Commissioner, also learned of these targeted reviews. Both of these men failed to notify Congress, despite questions from several Senators and Representatives regarding the IRS scrutiny of these conservative groups.

No matter your political affiliation or beliefs, this acknowledgement by the IRS should be of grave concern for all Americans. It’s an extremely precarious position when government officials at any level, abuse their authority for political purposes. Those actions are characteristic of dictators and oppressive regimes; not what’s expected in a free, democratic republic.

You may not have much regard for the ideas and people affiliated with the Tea Party movement, but that should not matter. If the IRS has the ability to target them, they can also come after you.

The IRS claims no exemption was ultimately withheld from any applicant. This reassurance is also subtle claim of exoneration for their actions. The IRS is essentially trying to assert “No harm, no foul.” Even though no exemption was denied, it doesn’t mean these organizations didn’t suffer injury. Given the complexity of the rules, taxpayers often hire professional advisors. These organizations may have incurred substantial fees complying with the additional IRS inquiries, not to mention the delay in being able to pursue their stated mission.

The abuse seems limited to a certain group of employees handling a specific group of taxpayers and is not widespread throughout the IRS. If you receive an IRS notice, it’s probably not politically motivated. However, these actions, albeit limited, set a very dangerous precedent and deserve exceptional scrutiny by our leaders and the public at large.

No one likes to be examined or questioned by the IRS, but it’s part of dealing with a voluntary tax system. However, no one should ever be targeted for political purposes. Dealing with the IRS can be annoying, but being targeted for your political beliefs or affiliations is absolutely wrong, and should be criminal.

Paying Sales Taxes

online shoppingBypassing the Senate Finance Committee, the Senate passed a bill on Tuesday which would allow states to collect sales taxes from the certain out-of-state retailers.  Since the bill hasn’t passed the House, it’s not law yet, and although the bill passed by a 69-27 vote in the Senate, the future in the House is much less certain.

So what does this mean for you if this bill eventually becomes law?  In theory… nothing.  In reality… you’ll be paying more taxes.

Here are a few relevant facts about sales and use taxes.

  • 45 States and the District of Columbia collect sales taxes.
  • Although referred to as a sales tax, the tax is technically a tax on the use of purchased property and services.  That’s correct… states charge you a tax for the “right” to use something you bought.
  • Since states don’t trust you to pay the correct or full amount of tax, they impose an obligation upon the seller to collect the tax at the time of sale.  Since this is the mechanism for most people paying the tax, it is primarily known as a sales tax.
  • States would like to impose the collection requirement upon every entity selling merchandise to a resident.  However, a 1992 U.S. Supreme Court case restricted a state’s right to impose a collection requirement to those sellers who had a physical presence in the state.

The original clashes over sales tax collection were prior to the advent of the internet and primarily involved mail order sales companies (i.e., those companies that constantly mail you catalogs).  With the boom of the internet and online shopping, the issues have become more nuanced and pronounced, as the battles involve state tax authorities, local retailers (i.e., brick and mortar businesses), online merchants, and governments needing more revenues to balance their books.

States estimate the unpaid tax exceeds $20 billion annually.  Understandably, most state and local politicians are pushing hard to get this legislation passed.   Brick and mortar businesses see it as leveling the playing field.  By not collecting sales taxes, the total purchase price of an item is less expensive, thereby providing an advantage to retailers who don’t collect sales taxes.

Having lived in Vermont for many years, I know the advantage to retailers not collecting sales taxes.  Vermont has a sales tax, and New Hampshire doesn’t.  New Hampshire retailers have a distinct advantage.  Although they may not advertise the absence of sales taxes, people from all over Vermont travel to New Hampshire to make purchases with the sole intent of avoiding the sales tax.

If you buy something out-of-state without paying a sales tax, you’re supposed to remit the required tax to your state tax authorities.  Whether it’s intentional, an oversight or a misunderstanding of the law, few people ever self-assess the taxes owed on their out-of-state purchases.   In all likelihood, if the tax is not collected at the time of sale, it will never be paid.

If the tax is paid by the customer not the seller, why such resistance to collecting the tax?  For most businesses, it’s the cost of compliance.  Sales taxes are assessed and collected at the state level, which means there are 46 different sets of rules.  For instance, clothing may be taxable in one state, but not in another.  Many states also allow city, county and municipal governments to assess their own tax.  As a result, a business would need to keep up with constantly changing rules in each jurisdiction, collect the tax and potentially file hundreds of tax returns.  The cost may easily be absorbed by a billion-dollar national retailer, but could be way too much for a local business selling a few items a week over the internet.

The new legislation changes the rules of taxation.  It’s intended to supersede the U.S. Supreme Court case and eliminate the physical presence requirement.  Essentially, any business selling more than $1 million to out-of-state customers would be required to collect and remit the tax to the appropriate tax authority.

Unless you live in Alaska, Delaware, Montana, New Hampshire or Oregon (states without a sales tax), the legislation is good news and bad news.  The good news is that your state will likely raise some additional revenue by collecting sales tax on purchased items being shipped into your state.  The bad news is you’ll likely be paying some of that tax.  If you’re a business owner looking to create an online sales presence, be prepared.   If you cross the sales threshold, you’ll be required to collect the tax on any sale in the U.S. and be ready to pay large fees to the software providers and professionals you’ll need to help stay in compliance.

The bottom line on this legislation is this

  • You’re ecstatic if you’re a politician looking to raise revenues or if you’re a brick-and-mortar business feeling like your online competitors have an unfair advantage.
  • If you’re a small business whose tax compliance burdens have just multiplied exponentially, you’re probably concerned with how much it’s going to cost you to comply with this mandate.
  • As an average citizen, you’re probably torn between being glad your state and local government will have more money and being unhappy that some of that money is coming from you.