Commissioner Arrives Just in Time!

Posted on November 5, 2015 by Paul L. Mancinone

At our invitation, Commonwealth of Massachusetts Department of Revenue Commissioner Mark Nunnelly came out to Western New England University and gave a fantastic presentation to those who attended.

I cannot refrain of commenting on what I believe to be a poor turnout. The Chamber of Commerce invited the Commissioner to come out to speak in Western Massachusetts for fifteen years, and nothing ever materialized. We decided to make an attempt, having learned that Commissioner Nunnelly is a very approachable person (along with his Chief of Staff, Mike Rybicki, who used to work for Mayor Bloomberg in NYC), and were successful. Yet, with this seemingly once in a generation opportunity for one on one with the Commissioner (and the Chamber of Commerce picked up on our invite and participated), only 45 people attended, mostly friends of ours, amplifying the disconnect between Western Massachusetts and Boston. And if any state agency (in the United States!) needed to hear concerns of the people, it’s the Massachusetts Department of Revenue.

Commissioner Nunnelly has arrived just in the nick of time. I asked two simple questions, and he is already working on both. The abatement/appeal system, the fortuitous CA-6, will change. I believe they will separate the amended return function from an abatement request. That system is clearly overloaded. The other is the use of certified mail for time sensitive information. In addition, they will be implementing a new tax management system from a company that claims to have “never been hacked.” Now that’s a challenge for a backroom secret society at MIT, no doubt!

Why “in the nick of time?” We recently completed a sales tax case before the Commonwealth. We negotiated a $50,000 tax bill down to $16,000. We were happy, the client was happy, and everything was roses. Of course, we paid the settlement right away. Enter the Commonwealth and their method of calculating accrued interest. First, the appeals officer indicated interest would be about $10,000 (we calculated about $2,000, which proved to be correct). Then they began sending separate bills for each of the thirty months in the audit period. That’s right, 30 separate bills were en route. We immediately jumped on the phone with problem resolution, got an aggregate interest figure, and had the client pay it. Ironically, the new answer seems to be, “it’s the system and we can’t stop it.”

However, when we got the “correct” interest figure from Problem Resolution, the officer refused to send us the calculation, or even a fax expressly stating the amount due. Keep in mind this is the Problem Resolution Office. We had to take her word for it over the phone. Our cover letter contained a duplicate copy for the officer to stamp and return to us, acknowledging receipt for our records. That cover letter stated that “stamping this letter acknowledges that you provided us with the interest figure, refusing to put it in wiring despite our request,” etc. Well, she refused to acknowledge the copy of the letter and return it to us. We received the certified receipt but she never had the courtesy to acknowledge our letter. We were 100% dependent upon her calculation, with a client that was at his wits end and did not wish to pursue. This is a policy closer to how closely knit inner city lotteries are run, not a taxing agency. It was a disgrace to this practitioner.

Perhaps it’s an internal battle between the status quo regime, and a Commissioner that is going to fix it, almost like a battle of wills. It seems like the Massachusetts Department of Revenue is currently rudderless, heading for the rocks, just as the Commissioner caught the steering wheel. I truly believe his arrival is that timely. One thing is for certain. If anyone is up to the task at hand, it’s Commissioner Nunnelly. Godspeed to our new friend.

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Governor Baker Signs Bill to Expand EIC.

Posted on July 27, 2015 by Paul L. Mancinone

In researching my RIA materials this morning, I learned that MA Governor Charlie Baker signed into law a bill that increased the MA earned income credit from 15% (of the Federal amount) to 23%.

From a bipartisan standpoint, everyone should be surprised that a Republican Governor signed this. And here is why…

First, the IRS website states that 21% to 26% percent of earned income credits are paid in error. That is putting it mildly, as it’s under the caption “Fraud.” http://www.eitc.irs.gov/Tax-Preparer-Toolkit/faqs/fraud

Second, that is an increase in the credit of over 50%.

As a Massachusetts Taxpayer, I am a little surprised to see this. In 2013, $833,000,000 was paid out in the Commonwealth for the earned income credit. By the way, that means that over $5 billion was paid to Massachusetts recipients alone at the Federal level ($833,000,000/15%). Well, with this bill that Massachusetts budget hit will increase to just under $1.3 billion dollars.

If that isn’t sobering enough, how about this: If the IRS themselves state that 26% of earned income credits are fraudulent, $330,000,000 will be paid out fraudulently in the Commonwealth, based upon this increase. Put another way, with a stroke of the pen, the Governor signed into law a bill that just completely and utterly wasted $330,000,000 dollars.

Embarrassing for me to say, but I did not see this coming.

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Are IRS Collection Procedures Running Amuck?

Posted on July 24, 2015 by Paul L. Mancinone

“An estimated 24,237 taxpayers may have been adversely affected because the Internal Revenue Service did not follow requirements to notify the taxpayers’ representatives of the taxpayers’ rights related to notices of federal tax liens, according to a new report.” This is from this morning’s Accounting Today (July 23, 2015), written by our friend, Michael Cohn.

This is scary. In a study by the Treasury Inspector for Tax Administration, from a sample of 36 cases, 6 lien notices never reached the taxpayer’s representative. That means there is a 16% chance that your representative will not be able to timely file Form 12153. Collection Due Process Application, to protect your rights. That is not a trivial matter, and reflects nothing short of a violation of due process for a material number of U.S. taxpayers.

You know, I’m just not sure about this being an oversight. Something about this bothers me when coupled with what we are starting to see in the field.

I very recently had a case where a Taxpayer’s social security wages were levied. This was during a period of time when we were working with a collection officer to comply with a multi-document request via a Taxpayer Contact Summary. We had procedures and obligations to satisfy during a designated and agreed to time period. Well, during that time period, unknown to us (until we were surprised by a letter, provided to us by our client), the IRS levied our clients social security wages, in full, with none of the statutory limits on such a levy. Whoa.

So I wrote a letter to the collection officer, citing Section 5181.1 subsection (4) of the Internal Revenue Manual, which states “When a taxpayer misses a specific deadline, revenue officers are required to initiate follow-up action within ten (10) calendar days of the deadline unless unique circumstances, such as geographical considerations, etc., warrant a delay.”

Now, although I refer to the IRM weekly and I hate to admit this, it’s NOT the law. But here is how the IRS describes it: “The IRM is the primary, official source of “instructions to staff” that relate to the administration and operation of the IRS. It details the policies, delegations of authorities, procedures, instructions and guidelines for daily operations for all IRS organizations. The IRM ensures that employees have the approved policy and guidance they need to carry out their responsibilities in administering the tax laws or other agency obligations.”

So this was a situation where I believed a discussion with a group manager was in order. Well, I was specifically told by a group manager that they “instruct staff NOT to make such a call when a deadline is missed, and further, (the group manager) would be upset if they ever did.” That is in effect, instructing staff NOT to follow “the official source of instructions to staff that relate to administration and operation of the IRS.” So we, in effect, have a rulebook (IRM) that isn’t worth the paper it shouldn’t have been printed on.

Once IRS collection personnel are free from that, what’s next? We are seeing the Lois Lerner issue unfold. We are seeing articles pointing to bias in not for profit audits based upon IRS employee prejudices (“IRS Should Avoid Bias Risk in Auditing Nonprofits, GAO Finds,” Richard Rubin, Bloomberg, July 23, 2015). And now I am personally being told of instruction to IRS staff directly contrary to their own rule book. Is it not possible, therefore, that in certain cases, perhaps documentation to the POA is somehow mysteriously “forgotten?”

This is the risk the IRS runs when their credibility is waning. Not just the arrogance of selecting the rules they will abide by (which I can attest), but the simple appearance of selecting the rules by which they abide. Once that becomes the perceived culture of the IRS (think Massachusetts Department of Revenue), it’s not hard to speculate on the possibility of representatives suddenly not receiving their copy of time sensitive IRS to taxpayer correspondence. Yes, I hereby submit that it may be more than an accident.

Unchartered waters to be sure. More to come.

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Welcome Commissioner Nunnelly!

Posted on July 17, 2015 by Paul L. Mancinone

I think changes are coming at the Massachusetts Department of Revenue, and I will tell you why.

At a recent seminar in Boston, a former head of DOR audit was discussing what appears to be pending changes at the DOR. Specifically, early retirement for several of the Deputy Commissioners. Now, this presenter (again a former DOR guy) didn’t seem thrilled about it, however, isn’t that the problem? I don’t think any tax practitioner would disagree that the culture at the DOR is very negative, and frankly parochial. Appeals has been basically a rubber stamp for the audit division, and collections? Well this computer doesn’t have enough hard drive space for my thoughts on that division. So I like the idea of pending change.

I was recently at a fundraiser for Governor Baker, who I think is off to a great start as Governor of the Commonwealth, and I was talking to a couple of friends about my desire to invite the new Commissioner out to Western MA for a presentation to tax practitioners. I was skeptical, but they both not only thought I should try, but both said that he would accept. I resorted to the bridge in Brooklyn scenario and whether either friend was interested.

In a nutshell, I extended an invitation dated July 14th for Commissioner Nunnelly to come out to speak to a group of Western MA tax practitioners at Western New England University School of Law, and his Chief of Staff, Mike Rybicki, responded affirmatively three days later! Yes, this is clearly a different type of Commissioner.

As the date is set and draws near….more to come!!

Thank you Commissioner Nunnelly, and Chief of Staff Rybicki.

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Docketed Cases. Hard Work (and a little luck!).

Posted on February 9, 2015 by Paul L. Mancinone

Our office has truly been blessed with good fortune over the past two weeks, both docketed cases before the United States Tax Court. The first came to us as a referral from a very talented estate planning attorney – a client having been audited resulting in a Revenue Agent’s Report reflecting $150,000 in additional tax and $30,000 in penalties. On appeal while pending litigation at the Tax Court level, we just concluded the matter in the form of a stipulated decision reflecting no tax and no penalty. Sweet.

The second one was all on us, from audit to tax court. That audit ended with additional taxes of $7,500, including penalties, and we just executed a stipulated decision reflecting $500 in tax.

While the first appears to be the “chest pounder,” it is not. Good facts, great fact assimilation by Alison Walsh here at the office, and then a presentation before the Appeals Officer. True persistence and not giving up is better reflected in Case #2. Bigger is not always better. Case #2 is better because we all learned from it, and this is why we are posting the generics here for the reading practitioner.

We had a client, with a day job, that developed a widget. He had this widget built in bulk in Asia, paid for the widgets, and attempted (and continues to) to sell them here in the United States (a widget primarily designed for high schools and colleges). A little background first, this client was examined for 2010, and was poorly represented (no appeal on great facts), the liability became set in stone, and my client paid the bill. This was a repeat IRS audit of the same facts (for 2011), except this time we were approached to represent.

This was conducted out of Cincinnati, Ohio by the ubiquitous (and probably fictitious) Cindy Morris. I think she is a fictitious IRS created employee…seriously (just like Betsy Rollins before her). You can’t reach her, and she never calls back. We did a detail summary of all disallowed expenses (which was all of them) and forwarded an “Excel” summary sheet with substantiation for all expenses. All done timely and within the unilateral due dates set forth by the Cincinnati IRS office (not coincidentally the home of the events leading to the Lois Lerner disaster).

In a nutshell, all our work went nowhere. A Revenue Agent Report was issued (reflecting $7,500 due, with penalties), and it was as if our package never got there. It was nothing short of amazing. And discouraging. Plus, the IRS used the hobby angle. A hobby. Who develops a product, has it built in bulk in China, and then tries to peddle it during his free time when not working – for fun? Apparently my client does, according to “Cindy Morris.”

Well, as much as it wasn’t financially prudent, our office took it on the chin and docketed the case before the United States Tax Court. No way were we going to let this go, even at our own expense. What’s right is right. Thinking we would spend a couple of days this summer preparing for appeals, just last week we got our results from the Office of Appeals in the form of a stipulated decision, settling for $500!! Keep in mind we never went to appeals. We never spoke to anyone, and never had to present a case. In fact, the letter “introducing” us to the Appeals process came after the decision!!! What happened? Well, the appeals officer must have seen our package and thought “what the heck are we doing here in Cincinnati?” and wrote up the case. The $500 wasn’t justified either, but no way were we letting this opportunity go. Just two hours of arguing would have cost my client more in professional fees.

So there you go. Bigger isn’t better. But for all practitioners handling correspondence cases out of Cincinnati, do NOT give up. It’s not over at the Revenue Agent Report level, take the case up to Appeals. Better yet, docket the case if you can, because it clearly gets a better second look. I think the IRS bets on people walking away from Cincinnati correspondence audits and we are advising the opposite. Don’t give it up.

DON’T GIVE IT UP!!!!

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Taxpayer Advocate. Seriously?

Posted on October 24, 2014 by Paul L. Mancinone

In today’s Accounting Today, there is an article that illuminates the current problems with the Taxpayer Advocate’s Office. Apparently due to budget issues (continued thanks to Lois Lerner, the gift that keeps on giving, or vice versa, as the case may be), a planned automated system designed to improve the workings of the Taxpayer Advocate’s Office will be “put on hold.”

This is disheartening news. I say this because I believe the Taxpayer Advocates office is beyond repair. In my opinion, and from my experience, it is a total failure.

Back in the late 1990’s, we used the Taxpayer Advocate’s Office on a couple of occasions, and we were impressed with its function. I recall one issue with a client, and together we worked with the Advocate’s Office in Hartford, Connecticut, and it was a textbook case of working together, patience, and eventually full compliance.

Now? It appears to be either the luck of the draw, or the mood of the person or office that is handling the request. On two recent occasions, both of our requests were “rejected” because they were collection matters. Hmph. Well, here is what the Taxpayer Advocate’s website says:

TAS can help if you can’t resolve your problem with the IRS and:
• Your problem is causing financial difficulties for you, your family, or your business.
• You face (or your business is facing) an immediate threat of adverse action.
• You have tried repeatedly to contact the IRS but no one has responded, or the IRS has not responded by the date promised.

Well, the above certainly seems to include collection matters. In fact, the first two bullets appear to address nothing but collection matters.

Back in June, we wrote a letter to Nina Olsen, the National Taxpayer Advocate, sharing my thoughts with her on the current state of the Taxpayer Advocate’s Office. Suffice it to say, we don’t think she will be responding, lest she would have by now. However, we don’t blame her, because it would have been a boilerplate “Thank you for your correspondence. We appreciate your feedback and can promise that we are doing all we can to keep the Taxpayer’s Advocate’s Office as productive and user friendly as possible.” And we would have attached the letter for all to see. In retrospect, I wouldn’t have answered us either.

For what it’s worth, we believe this is another area in tax law where the United States taxpayer and practitioners alike, are on their own. We are seeing that in a few areas of the IRS. But for all practical purposes, we do not have an efficient Taxpayer Advocate Service in Washington, or anywhere else for that matter. All the more reason to need competent tax practitioners – we are the last line of defense.

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“NO CHANGE AUDITS.”

Posted on November 26, 2013 by Paul L. Mancinone

We received a letter of no change with respect to an IRS restaurant examination yesterday.  There is a saying, “Better to be lucky than good.”  Our office probably fits that paradym when it comes to food service restaurants and audits with the Internal Revenue Service.  Since 1995, when we started our practice, we have never had a change to a restaurant tax return as a result of an IRS examination.  And we have represented many.  We don’t know what to make of that, as we certainly can’t say that of the Commonwealth of MA and meals tax, but then again, the Commonwealth works in the land of “make believe” and the IRS understands small business a lot better.

Having said that, the IRS could use some work in finalizing examinations.  I am every bit as much interested in a closing conference on an examination with no changes, as I am in a closing conference for an examination with changes.  And as an aside, the IRS is pathetically poor in closing conferences for examinations with changes also – they simply don’t conduct them…and they are supposed to.

Why?  Because no taxpayer is perfect, even after a “no change” audit.  Even an examination with no changes could use some guidance as to how they could do something better.  What did they do right?  What did they do wrong?  The IRS may have done something I think was inappropriate and I would like to discuss it informally, and vice versa, frankly.  But they do not.

“No change,” the words of which are music to my ears, therefore must not come without a soreness on the side of the IRS.  And why should that be?  If there is a change, I get a “courtesy” call before the letter (albeit never a conference).  But if there is no change, we won’t know a thing until we open the envelope.  Why is that?  Is it because the IRS feels as though they lost?  I hope that isn’t the case, because audits are supposed to be objective.  No one “wins” or “loses.”  Sure the client is happy, because the tax return is deemed to have been reviewed and accepted as filed.  That is all it means.  It’s a satisfactory conclusion for us, but by no means a “victory.”

Anyways, “congratulations” to a very dear friend and client of our office.  And Happy Thanksgiving to everyone!

 

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IRS Paid Preparer Penalties. A Trend.

Posted on November 25, 2013 by Paul L. Mancinone

In our quest to monitor changes in the tax profession, we were asked by a good friend, Lucien Gauther, Esq., if we would make an inquiry under the Freedom of Information Act to obtain information related to paid preparer penalties.  If the reader is a tax preparer, then you know that the Internal Revenue Code Section 6694(a) and (b) penalties are at the bottom of any tax preparer’s wish list.  The 6694(a) penalty is the less severe and involves unreasonable positions.  The 6694(b) is the more severe and involves wilfull or reckless conduct, and could get you a referral to the Office of Professional Responsibility.

Well, how often do these penalties actually get assessed?

After considerable letters of delay, etc., our response from the Internal Revenue Service arrived today.  One page.

They would only provide combined (a) and (b) penalties, and wouldn’t provide them to us based upon professional designation.  For example, we originally requested to know how many penalties were assessed against Attorneys, CPA’s, Enrolled Agents, Registered Tax Return Preparers and Nonregistered Tax Return Preparers.  They said “the IRS does not have a listing of paid preparer penalty assessments broken down in the categories requested.”  With all respect, if you believe that the IRS doesn’t have this information, then 1) why are they trying so hard to regulate preparers who aren’t CPA’s or attorneys?, and 2) we have a bridge in Brooklyn perhaps we can interest you in.

For 2005, 406 penalties asserted ((a) and (b) penalties combined), the rest are as follows:

2006 – 738

2007 – 812

2008 – 954

2009 – 803

2010 – 835

2011 – 929

2012 – 889

Is there a trend?  Well, the most paid preparer penalties ever assessed was in 2008 with 954.  However, the average penalty assessments over the first four years (2005 through 2008) is 728, whereas the average preparer penalty assessments over the last four years (2009 through 2012) is 864.  As such, the trend over the last eight years clearly shows paid preparer assessments are on the rise.

This practitioner continues to hope, however, that preparer penalties are being assessed by the IRS against those with patterns of behavior deserving of the penalty.  The fear of this practitioner is that the IRS will use the paid preparer penalty as a sword against representatives they simply “don’t like” as opposed to objective applications of the law.  This is a subjective analysis by the IRS, that can wreak havoc to competent yet zealous representatives simply because of the passionate advocacy of their clients, and not because of any inappropriate tax positions taken on a tax return.  The appeal process would no doubt run its course and get to the truth, but an innocent preparer who is a strong advocate should not suffer retaliation for being good at what they do.  Time will tell whether the paid preparer penalty assessments are monitoring tools, or simply disguised retaliatory swords.

 

 

 

 

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IRS Woes. Is this just the beginning?

Posted on May 20, 2013 by Paul L. Mancinone

We believe the problems with the IRS, stemming from the tax-exempt organizations division, are just beginning.

This reminds us of the Congressional Hearings of the late 1990’s, when hapless victims of aggressive IRS collection procedures were paraded up Capitol Hill to testify.  Albeit, the stories were scary, and procedures were put into place to keep that type of aggressive IRS collection behavior from occurring.

For about a year after those hearings, we think it’s safe to say the IRS was afraid to implement collection procedures against anyone, at all.  If the word “harass” was used against a revenue officer, the consequences to that officer could be dire.  Therefore, they followed the old adage, “the best way to avoid a problem is to not be there!”

Well, that went too far.  The IRS couldn’t do anything, which doesn’t help them enforce the tax laws by any stretch of the imagination.  In all honesty, without the threat of collection procedures, they’d never get paid.  So things got back on track a couple of years after those hearings, and continued, in my humble opinion, to slowly become increasingly aggressive…and here we are.

Now, this writer, as a practitioner, wasn’t expecting this disaster for the IRS.  Lois Lerner is a alumni of my law school, and I’ve always wanted to meet her.  The media has now made her the poster child for IRS gestapo-like behavior in the tax-exempt sphere, and frankly, she has done and said some dumb stuff.  Everyone reading this must now realize that she is in the center of a firestorm by which the IRS targeted “tea party” or other right leaning exempt status applications with relentless intrusive questionning and extremely slow processing. In the “what she has done” category, let’s consider she admittedly (Commissioner Miller’s testimony) planted a question to “out” the issue, after neglecting to tell Congress at a hearing two days prior.  In the “what she has said” category,  “I am the IRS,” or “I own them” (i.e., referring to her staff), aren’t exactly quotes that warrant a warm fuzzy feeling, not only from taxpayers, but the IRS employees who report to her.  And lest we forget “I am not good at math.” Indeed.  I regret to predict I think Lois is cooked.

The IRS currently has much more than a PR problem.  The IRS is on the roof, and the neighbor’s kids took the ladder – there is no where to go.

Because of this momentum, we don’t think these inquiries are limited to the tax exempt division.  We believe this will open up a pandora’s box of alleged aggressive behavior by the IRS, and in its wake, more Congressional hearings.  The pendulum has had nearly 15 years to swing, and this practitioner thinks its time to take a fresh look at the current policies and procedures in place at the IRS.  And then the pendulum shall swing again.

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