IRS Gets Better at Catching Fraudulent Tax Refunds

The Internal Revenue Service increased the number of fraudulent tax refund claims it detected and stopped during the 2011 tax-filing season by 171 percent over the previous year.

As of April 30, 2011, the IRS had identified 775,723 tax returns with $4.6 billion claimed in fraudulent refunds and prevented the issuance of $4.4 billion, or roughly 96 percent, of those fraudulent tax refunds, according to a new government report by the Treasury Inspector General for Tax Administration. That represents a 171 percent increase in the number of fraudulent returns identified during the same period in 2010.

The IRS selected 199,854 tax returns filed by prisoners for fraud screening, representing a 256 percent increase compared to last year.

However, the IRS was unable to identify 140,596 taxpayers who erroneously claimed $140.2 million in tax credits due to processing errors. TIGTA identified several problematic credits, including the First-Time Homebuyer Credit, the Adoption Credit, the Nonbusiness Energy Property Credit, and the Plug-in Electric and Alternative Motor Vehicle Credit. In addition, 26,649 taxpayers had their Homebuyer Credit inaccurately processed, $5.8 million in repayment amounts was not assessed, and $675,063 in repayment amounts was erroneously assessed.

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How to Use Subcontractors to Save Money and Increase Business Agility?


By hiring the expertise of subcontractors, independent contractors, or freelancers to handle your extra work, your business can quickly scale up without creating a lot of additional overhead. However, to realize these savings it’s critical that you understand the pros and cons of working with subcontractors, and the hows of finding the right one for your needs. Here are five tips and considerations to help you assess your hiring strategy.

Benefits of Working with Subcontractors: Some basic math suggests that hiring an employee can cost a small business owner 25 percent more than it would to hire a subcontractor to do the same work. The biggest factor is what you would typically pay for an employee’s Social Security and Medicare tax, worker’s compensation insurance, liability insurance, employee benefits, training, and so on. There are also several other reasons why small businesses find value in utilizing subcontractors. Using the specialist skill set of a freelancer/subcontractor can allow your business to more appropriately meet clients’ needs. By hiring specialists for some tasks, your clients are happier, and you’ve kept your own experts focused on the work they perform best. Subcontractors can also be useful when you are in a start-up or expansion phase and can’t afford to take on full-time employees to immediately help you operate, market, and grow your new business. Subcontractors can also help out during busy seasons when you simply don’t have enough hands-on staff.

Several factors come into play when determining whether or not to seek the help of subcontractors, do it yourself, or hire more employees. To help you decide, consider the following:

·     Cash – What would it cost to hire someone to do the work or do the work yourself, versus having someone else do it? This includes the immediate costs (recruitment, training, desk-space, computer equipment, etc.) and long-term costs (payroll taxes, benefits, etc.) 

·     Skill Set and Time – Weigh whether you have the time to recruit, train, and manage a full-time employee for the task. Can you immediately access the skill set you need from a reputable and trusted subcontractor?

·     Past Performance – How successful are you at making good hiring decisions? How many bad ones have you made? 

·         Classify Independent Contractors Correctly: The law is very firm on how businesses classify independent contractors/freelancers versus employees and any violation can come with costly IRS penalties.

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IRS Could Send Balance-Due Notices Faster

The Internal Revenue Service may be able to collect more money by sending out balance-due notices on a more frequent basis to delinquent taxpayers, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, found that the IRS allows 35 days between notices to give taxpayers enough time to respond. The first notice sent out the IRS to taxpayers with unpaid tax liabilities appears to be the most effective by a wide margin. In most cases, the IRS was able to collect the greatest amount of money and receive the most responses from taxpayers. However, the probability of collection diminishes as time goes on. In addition, taxpayers could potentially save $1.8 million each year in interest payments.

The IRS noted that taxpayers could answer the notice in different ways. “While a taxpayer may respond by simply making a payment, quite often taxpayers respond to balance due notices via telephone, correspondence or on-line to address other issues,” wrote Faris R. Fink, the commissioner of the IRS’s Small Business/Self-Employed Division. “In these instances, it may take additional time to respond dependent upon the issue and how the account is being resolved. The timeframe between notices needs to reflect all types of issues and responses, and allow the Service to respond appropriately before the next notice is issued to avoid causing undue burden on the taxpayer or the Service.”

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IRS Allows Tax Break for Bonuses

The Internal Revenue Service has issued a revenue ruling permitting an employer that is using an accrual method of accounting to take a deduction in the current year for a fixed amount of bonuses payable to a group of employees, even though the employer does not know which of the employees will receive a bonus or the amount of any particular bonus until after the end of the taxable year.

Under Revenue Ruling 2011-29, employers could take a deduction on the bonuses, whether or not the employees has determined who will receive the bonus. “In other words, the entire amount of the bonus pool will be paid to members of the group of employees in the following year, but at the end of the current year the employer doesn’t yet know which particular employees will receive any bonus or how much,” the IRS said when issuing the revenue ruling.

The revenue ruling could prove helpful in particular to financial firms that typically award year-end bonuses to high-performing employees. Wall Street banks are expected to pay lower year-end bonuses this year as a result of the trading volatility this past year. Other types of companies could also benefit. In the revenue ruling, the IRS cited court precedents involving the Washington Post Company and casino operator Hughes Properties.

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IRS Dropped Private Debt Collectors’ Leftover

The Internal Revenue Service has not collected delinquent taxes in a sampling of nearly half the past-due tax cases left over from its discontinued private debt collection program, according to a new government report.

The program was a controversial one in which the IRS contracted with three private collection agencies to pursue taxpayers who owed outstanding tax debts. The program was discontinued in 2009 after complaints from the National Taxpayer Advocate and the National Treasury Employees Union, among others.

From 2006 to 2009, however, the program collected $98.2 million from delinquent cases that were considered low-yield and therefore not generally worked on by IRS employees. When the PDC program was discontinued in March 2009, the IRS recalled cases with a total assessed balance of $848.5 million from the remaining contractors. A new report from the Treasury Inspector General for Tax Administration reviewed the effectiveness of collection actions taken by the IRS on the taxpayer accounts returned by the PDC program. TIGTA reviewed a statistical sample of 62 of those past-due tax cases and found that the IRS had not taken collection actions on 29 (that is, 47 percent) of  them.

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Credit Suisse Plans to Disclose Accounts to IRS

Credit Suisse has begun notifying some of its U.S. customers that it will be disclosing their names to the Internal Revenue Service. The bank has started sending out letters to some of its customers informing them that it intends to turn over their names and the details of their accounts to the IRS, according to Reuters. The letter referred to a request from the IRS to the Swiss Federal Tax Administration based on a tax treaty between the U.S. and Switzerland. The Swiss authorities issued an order compelling the bank to comply.

The Swiss bank has come under pressure from the Justice Department and the IRS in recent months, with the former head of its North American Offshore Banking Unit being charged along with other executives at the Zurich-based bank in July. The IRS request covers accounts maintained at any time between Jan. 1, 2002 and Dec. 31, 2010, according to the letter. Credit Suisse clients have the option of either agreeing to the handover of their information or contesting it with Swiss authorities.

Before Credit Suisse, the IRS had primarily targeted another Swiss bank, UBS. The Swiss government agreed to disclose the identities of about 4,450 clients of UBS in 2009 after UBS signed a deferred prosecution agreement with the Justice Department under which it agreed to pay $780 million. Several other Swiss banks, including Julius Baer and Basler Kantonalbank, are reportedly also under investigation.

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Claims for Small Business Health Care Tax Credit Much Lower than Expected

The number of claims for the Small Business Health Care Tax Credit, which was included in the health care reform law as a way to help small businesses provide health insurance for their employees, has been much lower than anticipated, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, found that the volume of claims for the credit has been low despite IRS efforts to inform 4.4 million taxpayers who could potentially qualify. According to the IRS, as of mid-May 2011, just over 228,000 taxpayers had claimed the credit, totaling more than $278 million in claims. The Congressional Budget Office had originally estimated that taxpayers would claim up to $2 billion worth of Small Business Health Care Tax Credits for tax year 2010 and the cost would be $37 billion over 10 years.

The IRS plans to conduct focus groups to determine why the claim rate was so low. However, the TIGTA report indicates what some of the problems have been. TIGTA found that some taxpayers and tax practitioners made mistakes when completing Form 8941 to apply for the credit. That form, Credit for Small Employer Health Insurance Premiums (Form 8941), also does not contain all of the data and calculations needed to verify each step of credit eligibility. 

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IRS Opens Phone Line for FBAR and Title 31 Help


The Internal Revenue Service has opened a new telephone help line for questions about foreign bank account reports. The IRS FBAR and Title 31 Helpline will connect practitioners and filers, both in the U.S. and abroad, with a team of specially trained technicians, examiners and specialists to answer technical questions about Title 31, also known as the Bank Secrecy Act. They can help taxpayers and tax practitioners with questions related to filing reports on foreign bank accounts. The IRS has been encouraging taxpayers to come forward and report their foreign bank account holdings to avoid stiff penalties.

To reach the FBAR and Title 31 Helpline, dial (866) 270-0733 for toll-free calls within the U.S., or (313) 234-6146 for callers outside the U.S. The latter is not a toll-free phone number. Hours of operation for the FBAR and Title 31 Helpline are Monday – Friday, 8 a.m. to 4:30 p.m., Eastern time. An IRS employee will respond to messages left after-hours.

The FBAR and Title 31 Helpline team answers questions related to reports required by the Bank Secrecy Act of 1970, such as the Report of Foreign Bank and Financial Accounts, commonly known as the FBAR, and reports filed by money services businesses. The Helpline team can also assist with other Title 31 technical issues and BSA correspondence. Taxpayers and practitioners can also find answers on the IRS’s FBAR frequently asked questions page or by sending an inquiry to

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30 Major Corporations Avoided Federal Income Taxes

The 280 most profitable U.S. corporations are sheltering half their profits from federal income taxes, and 30 of them paid less than zero in the last three years, according to a new study. The study also found that 78 of the corporations paid no federal income tax in at least one of the last three years. The study, by Citizens for Tax Justice and the Institute on Taxation and Economic Policy, expands on a preliminary report in June by the advocacy group that sparked controversy.

The average effective tax rate for all 280 companies in the study over the three-year period was 18.5 percent. For the period 2009-2010 it was 17.3 percent, less than half the statutory rate of 35 percent. Total tax subsidies given to all 280 profitable corporations amounted to $222.7 billion from 2008-2010. Thirty companies enjoyed a negative income tax rate over the three year period, despite combined pre-tax profits of $160 billion

Wells Fargo topped the list of 280 U.S. corporations receiving the most in tax subsidies, getting nearly $18 billion in tax breaks from the U.S. Treasury in the last three years. Pepco Holdings had the lowest effective tax rate of all the companies in the study, at negative 57.6 percent over the three year period.

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IRS Faulted on Fuel Credit Card Usage

The Internal Revenue Service needs to do a better job of managing the credit cards used by employees in the IRS’s Small Business/Self-Employed Division when they are visiting gas stations to enforce fuel excise tax laws.

The Citibank credit cards, known as “fleet cards,” are used by employees to buy gas and make minor repairs on government-leased vehicles. In a new government report, the Treasury Inspector General for Tax Administration assessed the SB/SE Division’s Fleet Card Program to determine whether the IRS has established effective controls and whether those controls are sufficient to identify and prevent errors and instances of waste, fraud and abuse.

TIGTA found that the Fleet Card Program lacks sufficient management oversight and internal controls. TIGTA established that in some cases, reconciliation and certification of the monthly Citibank statements were not conducted in accordance with procedures. TIGTA reviewed a sample of monthly statements and found instances of no managerial approval, no employee certification of charges, and missing receipts.

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