Bramwell’s Lunch Beat: IRS Audits Are Sparse This Year

Congress slow to help IRS tackle problem of incompetent tax preparers
During a Senate Finance Committee hearing last week, IRS Commissioner John Koskinen called on Congress to pass legislation contained in President Obama’s latest budget proposal that would allow the IRS to license and educate tax preparers. But that idea’s a tough sell to Republicans who have the IRS in their sights after last year’s Tea Party controversy, even though some have sounded open to tougher rules against unscrupulous preparers, Bernie Becker of The Hill reported yesterday.

“We have not talked about any legislation at this point,” Representative Charles Boustany Jr. (R-LA), a senior member of the House Ways and Means Committee, told The Hill. “It’s one of those things sort of in the back of my mind. But I don’t know where the committee stands on it right now.

“It’s a conversation we just need to have, and we haven’t had it,” said Boustany, who added that he broadly supported the IRS’s regulation efforts but doubted any legislation could get enacted this year.

Senator Orrin Hatch (R-UT), the top Republican on the Finance panel, said crafting effective regulations could be harder than it looks, and suggested the IRS needed to do more to get Congress to act.

"[Finance Committee Chairman Ron Wyden (D-OR)] wants to see if we can come up with some reasonable way of solving this, and I’m certainly willing to try,” Hatch said, according to the article.

[Click here to read AccountingWEB’s article on the Senate Finance Committee’s hearing last week on incompetent tax preparers.]

Chances of getting audited by IRS lowest in years
Budget cuts and new responsibilities are straining the IRS’s ability to police tax returns. This year, the IRS will have fewer agents auditing returns than at any time since at least the 1980s, Stephen Ohlemacher of the Associated Press reported.

“We keep going after the people who look like the worst of the bad guys,” IRS Commissioner John Koskinen said in an interview. “But there are going to be some people that we should catch, either in terms of collecting the revenue from them or prosecuting them, that we're not going to catch.”

Better technology is helping to offset some budget cuts. For example, if you report making $40,000 in wages and your employer tells the IRS you made $50,000, the agency's computers probably will catch that. The same is true for investment income and many common deductions that are reported to the IRS by financial institutions.

But if you operate a business that deals in cash, with income or expenses that are not independently reported to the IRS, your chances of getting caught are lower than they have been in years.

Last year, the IRS audited less than 1 percent of all returns from individuals, the lowest rate since 2005. This year, Koskinen said, “The numbers will go down,” according to the article.

[However, supermodel Gisele Bündchen is one of the unlucky ones. The wife of New England Patriots quarterback Tom Brady is being audited by the IRS – and she blames Forbes. Click here to see why.]

Top earners feel the bite of tax increases
John D. McKinnon of the Wall Street Journal wrote yesterday that the jump in federal tax rates that kicked in last year is causing sticker shock for many higher earners this tax season.

The latest tax-rate increases, passed at the start of 2013, have added to that burden, at least for the highest earners. Those changes included a bump in the top ordinary income rate to 39.6 percent from 35 percent, a limit on itemized deductions, and an increase in the top rate on investment income, he noted. The Affordable Care Act also included some tax increases, including another boost in investment taxes.

Largely as a result, overall federal tax receipts from the top 1 percent of earners rose by 1.3 percentage points to 29.3 percent of all federal tax revenue, the nonpartisan Tax Policy Center estimated, according to the article. The share of overall income for the top 1 percent, now at around 17 percent, has roughly doubled since the early 1980s, according to Congressional Budget Office (CBO) figures.

But it isn't just the super-rich who find their share of the burden growing, McKinnon wrote. The increase in the individual income tax burden borne by the top 20 percent – including, say, couples with two children making more than $150,000 – has gone from 65 percent in 1980 to more than 90 percent as of 2010, the most recent year available, according to the CBO.

Buyers find tax break on art: Let it hang awhile in Oregon
A lucrative, little-known tax maneuver has produced a startling pipeline of art moving across the United States as collectors cleverly – and legally – exploit the tax codes, Graham Bowley and Patricia Cohen of the New York Times reported on April 12.

Collectors who buy art in one state but live in another can owe thousands, tens of thousands, even millions of dollars in state “use taxes”: taxes often incurred when someone ships an out-of-state purchase home. But if they lend the recently purchased work first to museums located in a handful of tax-friendly states, the transaction is often tax-free, they wrote.

Collectors typically learn of this strategy only through savvy lawyers, dealers, and auction specialists. But within the circle of people who know of the practice, it generates debate between those who appreciate how it fosters public access to art and those who suggest that such access comes at too high a price to unwitting taxpayers.

For example, Bowley and Cohen noted, do taxpayers in, say, California even understand that they have given up millions of dollars in tax revenue over the years to, in effect, underwrite the display of paintings in other states?

“Some states are going to become aware of this and realize what potential revenue they are missing under the current laws,” said Steven Thomas, a lawyer in Los Angeles who advises art collectors on tax matters, according to the article.

Walgreen under intensifying pressure to leave Illinois for tax advantage in Europe: FT
According to a Financial Times report, drugstore chain Walgreen Co. has come under intensifying shareholder pressure to use its large ownership stake in the Swiss-based Alliance Boots as a justification to re-domicile in Europe and reduce its US tax bill, Tim Rostan of MarketWatch reported.

Headquartered in Deerfield, Illinois, Walgreen acquired 45 percent of Alliance Boots in 2012 and holds an option to purchase the remainder of the company. At a private meeting held in Paris on April 11, the Financial Times reported that investors owning a nearly 5 percent aggregate stake in Walgreen pressed the case for shifting Walgreen’s headquarters out of the United States.

UBS analysts recently put Walgreen’s tax rate at 37.5 percent in comparison, according to the Financial Times, with the 20 percent rate paid by Alliance Boots, Rostan wrote.

Heartbleed security bug: Canadian tax services back online
The Canada Revenue Agency (CRA) says full service has been restored on all of its online systems as of yesterday, after the agency late last week ordered the immediate disabling of public websites because of the Heartbleed bug, CBC reported.

A release from the CRA said that “individuals, businesses, and representatives are now able to file returns, make payments, and access all other e-services available through the CRA's website, including all our secure portals.”

“Our systems are back online. We apologize for the delay and the inconvenience it has caused to Canadians. That said, the delay was necessary. We could not allow these systems back online until we were fully confident they were safe and secure for Canadian taxpayers,” said CRA Commissioner Andrew Treusch, according to the article.

The agency is also extending the filing deadline for tax returns – from April 30 to May 5 – and promised to resume e-services by the end of the weekend for all federal departments using software vulnerable to the Heartbleed bug.

[Click here for an article by Kay Bell of Don’t Mess With Taxes about how the Heartbleed bug is affecting tax filing for our neighbors to the north.]

Quick Links:

  • Petty thieves being mistaken for Big 4 auditors now (Going Concern)
  • Britain’s accounting watchdog wants right to “name and shame” (Reuters)
  • Citi posts higher income as troubled assets perform better (Reuters)
  • 5 questions you’ve always wanted to ask your financial advisor: Answered (US News and World Report)
  • Pros and cons of filing a tax extension (US News and World Report)
  • Global audits found to be deficient in critical areas (Accountancy Age)
  • Expert advice for students filing taxes for the first time (Motley Fool)
  • Top frivolous reasons for not paying taxes (USA Today)
  • Tax returns go from post office to digital (USA Today)
  • Tax Day freebies, promotions, deals, and specials (Forbes)
  • How preparers can cut down on disclosures in financial reports (Journal of Accountancy)
  • Outdated tax code gives some working spouses a bad deal (NPR)
  • A brief history of big tax breaks for oil companies (Mother Jones)
  • What will Congress do with the 55 expired tax extenders? (Fox Business)
  • If you’re big and move money, watch out (Wall Street Journal)
  • Trillion-dollar firms dominating bonds prompting probes (Bloomberg)

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