Bramwell’s Lunch Beat: IRS May Want to Fix Its Bonus Policy

London Stock Exchange switches auditing to EY
The London Stock Exchange will drop PwC as its auditor and replace it with EY after completion of the audit for the year ending March 2014, Harriet Agnew of the Financial Times reported yesterday.

This marks the first time the UK exchange has replaced its auditor since it became a listed company in 2001.

Earlier this month, the European Union audit reform package was adopted, aimed at shaking up the longstanding and cozy relationships between corporate clients and their auditors. European companies will have to rotate their auditors every 10 years, with the option of tendering a mandate after 10 years and reappointing the same firm for an additional 10-year period, Agnew noted.

“We are in a new era, when tendering and switching of auditors is on the rise,” said James Chalmers, UK head of assurance at PwC, according to the article. “This creates opportunities for all firms, including PwC, to work with new audit clients.”

IRS workers who didn’t pay taxes got bonuses
Gregory Korte of the USA Today wrote on Tuesday that the IRS handed out $2.8 million in bonuses to employees with disciplinary issues – including more than $1 million to employees who didn't pay their federal taxes, according to a new report from the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA found that 1,146 IRS employees received bonuses within a year of substantiated federal tax compliance problems.

The bonuses weren't just monetary, Korte noted. Employees with tax problems received a total of 10,582 hours of paid time off – valued at about $250,000 – and 69 received permanent raises through a step increase, the report said. The report looked at bonuses in 2011 and 2012.

Employees' tax problems included “willful understatement of tax liabilities over multiple tax years, late payment of tax liabilities, and underreporting of income,” TIGTA wrote.

In a written response to the audit, IRS Chief Human Capital Officer David Krieg wrote, “We take seriously our unique role as this nation's tax administrator, and we will strive to implement a policy that protects the integrity of the tax administration system and the reputation of the service.”

The agency suspended most bonuses last year, but reinstated them this year.

IRS’s summons power faces test in Supreme Court
The IRS will go before the US Supreme Court on Wednesday to defend the way it enforces its power to issue legal summonses to obtain sensitive documents from taxpayers who refuse to cooperate with audits, Patrick Temple-West of Reuters reported yesterday.

The IRS is squaring off against Michael Clarke, a West Palm Beach, Florida, investor who is arguing that the US tax agency in 2011 improperly issued a summons “as retribution” against him and his business partners for resisting an audit.

At issue is what legal standards taxpayers must meet to get a court hearing if they think the IRS has issued a summons for an improper purpose, Temple-West wrote. Clarke maintains he should have gotten a hearing, while the IRS says such hearings are unnecessary.

Clarke maintains, according to court filings, that the IRS should have to explain its summons intentions at an evidentiary hearing before a court order is approved by a judge.

But the IRS argues that Clarke does not need a hearing because taxpayers already have the legal rights to challenge a summons, according to the article.

Grassley seeks IRS answers on inadequate fraud detection system
Senator Chuck Grassley (R-IA) sent a letter to IRS Commissioner John Koskinen on Monday, asking why the IRS continues to rely on the Electronic Fraud Detection System, which may not be operable beyond this year, and has yet to finish a new system, the Return Review Program (RRP).

“Identity theft to commit tax fraud is already a $5 billion-per-year problem,” Grassley said, according to a press release. “The IRS puts taxpayers at risk for fraud in using an inadequate system and delaying a better system. This will be an even bigger concern if the new system isn’t in place by the time the number of people filing tax returns increases under Obamacare next year.”

Grassley noted that the fraud detection system could become more acute under Obamacare, as the health care law allows for refundable credits, which are especially vulnerable to fraud.

“This will result in an increase of millions of tax returns in January 2015,” Grassley wrote. “If the RRP is not operational by then, the results could be disastrous.”

According to today’s Politico Morning Tax tipsheet, the IRS responded, blaming Congress for cutting its budget $850 million below its 2010 level.

“This example is a vivid illustration of the difficult budget challenges facing the IRS,” the agency said in a statement. “Which means many critical IT projects have had to be delayed as well as reduced taxpayer service and enforcement efforts.”

The IRS also pointed to recent testimony from Koskinen that the current fraud detection system is sound.

Should Congress curb donor advised funds?
Buried deep in the tax reform plan from House Ways and Means Committee Chairman Dave Camp (R-MI) is a proposal to require donor-advised funds (DAFs) to distribute contributions within five years. The proposal would be a major change for these charitable vehicles, where funds currently can sit indefinitely.

According to Howard Gleckman, Resident Fellow at the Urban Institute and editor of TaxVox, the Tax Policy Center blog, DAFs are an easy, low-cost way for people (who tend to be upper middle-class but not super-rich) to both shelter income and give to their favorite charities. Camp’s plan would require funds to pay out contributions within five years of receipt. Undistributed assets would be hit with a stiff 20 percent excise tax.

In a blog yesterday on TaxVox, Gleckman asked: “Are these funds a tax shelter or an effective tool to encourage well-off (but not rich) Americans to contribute more to charity? The answer may be both.”

Grieving borrowers told to repay student loan
Kimberly Hefling of the Associated Press wrote yesterday that some student loan borrowers who had a parent or grandparent co-sign the note are finding that they must immediately pay the loan in full if the relative dies.

According to the Consumer Financial Protection Bureau (CFPB), lenders have clauses in their contract that explain this could happen, but many borrowers are not aware of them. Complaints related to this issue are growing more common because the practice is catching so many consumers by surprise, said Rohit Chopra, CFPB’s student loan ombudsman.

While it's unclear how prevalent it is, Chopra said it appears to be the practice among many private student loan lenders. It has affected borrowers not just when the co-signer has died, but when the co-signer has declared bankruptcy.

“We do have some concerns that with an aging population and with very long terms on certain private student loans, that this could actually increase over time,” Chopra said, according to the article.

Hefling noted the issue doesn't affect federal student loans, which are more commonly issued than private student loans.

[Chopra wrote a blog about this issue on the CFPB website.]

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