IRS and Social Security Urged to Curb Tax Fraud and Identity Theft

The Internal Revenue Service and the Social Security Administration were urged during a congressional hearing Tuesday to take further steps to curb identity theft-related tax fraud.

IRS deputy commissioner of services and enforcement Steven T. Miller acknowledged the problem, but responded that in some cases tax preparers might have bank accounts that receive multiple tax refunds. Families and Indian tribes might also have such accounts.

National Taxpayer Advocate Nina Olson noted that taxpayers might need to wait months longer to get their tax refunds if the IRS were to put in place the proper identity theft safeguards. In some cases, that led to tax refund delays this tax season because of the identity theft filters used by the IRS.

Olson said she is concerned about the IRS’s ability to develop procedures to promptly assist taxpayers who are victimized by identity theft, in part because of how the IRS has handled a related issue involving fraud by tax return preparers. “The IRS has struggled to unwind the harm done to victims—even when it had plenty of time to develop procedures,” she said. “More specifically, [the Taxpayer Advocate Service] has received a significant number of cases involving preparer refund fraud. These preparers alter taxpayers’ returns by inflating income, deductions, credits or withholding without their clients’ knowledge or consent, and pocket the difference between the revised refund amount and the amount expected by the taxpayer. The IRS ultimately discovers that the taxpayer’s return is incorrect and attempts to recover the excess refund from the taxpayer through levies, liens and other enforcement actions. In one egregious instance involving several returns prepared by the same tax return preparer—and despite the IRS’s concurrence that the returns it processed were not the returns signed by the taxpayers—our Local Taxpayer Advocate could not persuade the IRS Accounts Management function to adjust the taxpayers’ accounts to remove the fabricated income or credits.”

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Supreme Court Rules Couple Must Pay Taxes on Sale of Bankrupt Farm

The Supreme Court has handed down a decision in favor of the Internal Revenue Service collecting capital gains taxes from a couple who sold their family farm during bankruptcy.

In a 5-4 decision Monday, the high court found that Lynwood and Brenda Hall owed capital gains taxes of $26,000 on the $960,000 sale of their 320-acre farm in Willcox, Ariz., which they were forced to sell during Chapter 12 bankruptcy proceedings.

The Halls proposed a plan under which they would pay off their outstanding liabilities with proceeds from the sale. The IRS objected, however, asserting they owed capital gains taxes from the sale. The Halls then proposed treating the tax as an unsecured claim to be paid to the extent that the funds were available, with the unpaid balance being discharged.

The Bankruptcy Court sustained an IRS objection, the District Court reversed that ruling, and the Ninth Circuit then reversed the District Court. The Ninth Circuit Court of Appeals in San Francisco held that because a Chapter 12 estate is not a separate taxable entity under the Tax Code, it does not “incur” post-petition federal income taxes. The Ninth Circuit concluded that because the tax was not “incurred by the estate,” it was not a priority claim eligible for the exception.

Chapter 12 of the Bankruptcy Code allows farmer debtors with regular annual income to adjust their debts subject to a reorganization plan. The plan must provide for full payment of priority claims. However, certain governmental claims arising from the disposition of farm assets are stripped of priority status and downgraded to general, unsecured claims that are dischargeable after less than a full payment.

The Supreme Court agreed with the appeals court and ruled in favor of the IRS. In the ruling, written by Justice Sonia Sotomayor, the high court noted that the federal income tax liability resulting from the Halls’ post-petition farm sale is not “incurred by the estate” under the Bankruptcy Code and “thus is neither collectible nor dischargeable in the Chapter 12 plan.”

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Legislation Would Cut Taxes for Companies that Move Jobs to U.S.


A pair of Democratic lawmakers have introduced a bill aimed at reducing taxes for businesses that move jobs back to the U.S.

The bill, introduced by Congressman Bill Pascrell, D-N.J., and Sen. Debbie Stabenow, D-Mich., would provide a 20 percent tax credit to U.S. companies that bring jobs and business operations back to America, while ending tax breaks for companies that send jobs overseas.

The Bring Jobs Home Act builds on President Obama’s push to encourage more “insourcing” of jobs to boost the U.S. economy .On Tuesday, Obama called on Congress to pass the lawmakers’ tax cut proposal.  Stabenow and Pascrell announced their plans to introduce the legislation last week in their home states. 

The bill would create a new tax cut to provide an incentive for U.S. companies to move jobs and business activity from another country back to America. Companies would be able to qualify for a tax credit equal to 20 percent of the cost associated with bringing jobs and business activity back to the United States under the proposal.

The bill would also end a tax deduction for companies that outsource jobs and business activity. The cost of moving personnel and components of a company to a new location is currently defined as a business expense that qualifies for a tax deduction. The legislation would keep this deduction in place for companies that bring jobs and business activity back home, but businesses would no longer be able to qualify for this tax benefit for shipping jobs overseas.

Obama listed the bill as one of the items on Congress’s “To-Do List” to create jobs and restore middle-class security. “At the moment, companies get tax breaks for moving factories, jobs and profits overseas,” Obama said during a speech at the College of Nanoscale Science and Engineering at the State University of New York in Albany on Tuesday. “They can actually end up saving on their tax bill when they make the move. Meanwhile, companies that choose to stay here are getting hit with one of the highest tax rates in the world. That doesn’t make sense. …Before we completely rework the Tax Code, before we’ve done a full-blown tax reform, at the very least what we can do right away is stop rewarding companies who ship jobs overseas and use that money to cover moving expenses for companies that are moving jobs back here to America. So we’re putting that on Congress’s ‘To-Do’ list.”

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2012 Tax Planning-Part 4


Normally, taxpayers are advised to try to postpone income and accelerate deductions. In an environment, however, of anticipated higher rates in the following year, 2012 is a year to consider the opposite strategy. Accelerate income to get it taxed at the lower rates of 2012, and postpone deductions so they can offset income in 2013 that would otherwise be taxed at a higher rate than 2012 income.


One of the provisions that expired at the end of 2011 was the provision permitting taxpayers over age 70-1/2 to make IRA distributions directly to charity and avoid taking those distributions into income. Taxpayers who have taken advantage of this strategy in the past and who would like to do so also for 2012 should try to postpone required minimum distributions until after the November elections to see if Congress acts to retroactively extend the provision.

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2012 Tax Planning-Part 3-GIFTING TO CHILDREN

The current unified gift and estate tax exclusion of $5 million (actually $5,120,000 for 2012) will revert to $1 million in 2013 under current law. The maximum tax rate will also go from 35 percent to 55 percent. Most taxpayers would be unwilling to accelerate their deaths, but they might be willing to accelerate gifts to take advantage of the current high exclusion amounts.

Neither the Obama administration nor the Republicans are advocating a return to the $1 million exclusion. However, in an impasse, it might happen because no one can agree on how to keep it from happening

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One option being discussed as a way to avoid the increased Medicare taxes on net investment income is to shift more investments to tax-exempt bonds. Tax-exempt bonds generally offer a lower return, and an investment portfolio too heavily weighted in such bonds probably does not offer sufficient diversity, but it is one move to avoid the increased taxes on taxable investments.

Obama has proposed that the same categories of wealthy taxpayers that are subject to the increased Medicare taxes also be taxed on their municipal bond investments. Again, taxpayers can judge after the November elections how likely Obama’s budget proposals are to gain traction in 2013.

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2012 Tax Planning-Part1: REALIZING CAPITAL GAINS

The stock market has been doing rather well of late. Current maximum capital gain rates of 15 percent would rise to 20 percent in 2013 under current law. Realizing those gains in 2012 would ensure taxation at the current rates. Investors can even immediately repurchase the investments that they desire to hold for a longer period and still recognize the gain in 2012.

Of course, there are proposals to eliminate capital gains taxes entirely. Taxpayers may want to wait until after the November elections to get a better sense of which way the political winds are blowing before deciding whether capital gains taxes are more likely to rise or to fall in the future. Investors may also consider the likelihood of some companies sitting on cash to pay out a special dividend before 2013 if the law threatens to start taxing dividends as ordinary income again.

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Six Tips on a Tax Credit for Retirement Savings

IRS Tax Tip 2012-36

 If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be eligible for a tax credit, depending on your age and income.

 Here are six things the IRS wants you to know about the Savers Credit:

 1. Income limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and 2011 income of:

 Single, married filing separately, or qualifying widow(er), with  income up to $28,250

Head of Household with income up to $42,375

Married Filing Jointly, with incomes up to $56,500

2. Eligibility requirements To be eligible for the credit you must be at least 18 years of age, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.

 3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 ($2,000 if filing jointly). The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.

 4. Distributions When figuring this credit, you generally must subtract distributions you received from your retirement plans from the contributions you made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date – including extensions – for filing the return for the credit year.

 5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits you may receive for retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.

 6. Forms to use to claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.

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Social Security Statements Posted Online


The Social Security Administration is providing an online version of taxpayers’ Social Security statements.

The online version is now available at, the SSA announced Tuesday. The new online statement provides eligible workers with secure and convenient access to their Social Security earnings and benefit information.

In addition to helping with financial planning, the online statement also provides workers a convenient way to determine whether their earnings are accurately posted to their Social Security records. This feature is important because Social Security benefits are based on average earnings over a person’s lifetime. If the earnings information is not accurate, the person may not receive all the benefits to which he or she is entitled.

The online statement also provides the opportunity to save or print the personalized Statement for financial planning discussions with family or a financial planner.

To get a personalized online Statement, people age 18 and older must be able to provide information about themselves that matches the information already on file with Social Security.  In addition, Social Security uses Experian, an external authentication service provider, for additional verification. People must be able to provide their identifying information and answer security questions in order to pass this verification. Social Security will not share a person’s Social Security number with Experian, but the identity check is an important part of this new, robust verification process.

Once verified, people will create a “My Social Security” account with a unique user name and password to access their online statement.  In addition, the portal also includes links to information about other online services, such as applications for retirement, disability and Medicare. 

The Social Security Administration said it anticipates that some members of the public will not be able to be verified through this process. Some people may not correctly answer the security questions based on information on file with Experian, and others may supply identifying information that does not match their Social Security records. In instances where this occurs, people will have the option to request a paper Social Security Statement be mailed to them.

People who cannot verify online initially also may visit their local Social Security office and present an identity document in order to create an account and gain access to the online version of the Statement.

In February 2012, Social Security resumed mailing paper statements to workers age 60 and older if they are not already receiving Social Security benefits.  Later this year, the agency plans to mail paper statements to workers in the year they reach age 25.

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IRS Could Reduce Fingerprinting Costs

There are opportunities for the Internal Revenue Service to cut the costs of fingerprinting at lockbox bank locations, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, found that lockbox bank employees are not allowed to begin working until a bank receives confirmation from the IRS that the employee has passed a limited background investigation based on a successful fingerprint check. However, according to TIGTA, an excessive number of potential lockbox employees are being fingerprinted. TIGTA estimated that the three lockbox sites reviewed fingerprinted 6,646 lockbox employees, unnecessarily resulting in $161,165 in excessive charges.

TIGTA also discovered that fingerprinted charges were submitted and paid for the same individuals in more than 1,000 instances in the same fiscal year, resulting in nearly $25,000 in unnecessary costs.

Another area for potential cost savings involves the high use of manual fingerprinting at one lockbox bank. At one lockbox site, TIGTA determined that if electronic fingerprinting were fully used, the IRS could have saved approximately $14,000 for fiscal years 2009 and 2010.  Because of these opportunities, TIGTA believes the IRS could have potentially saved 40 percent of the $496,953 in fingerprinting charges for the three lockbox banks reviewed in Fiscal Years 2009 and 2010.

The IRS has used lockbox depositary banks since 1985. This lockbox network comprises three commercial banks that collect tax payments at seven lockbox banks. These banks are authorized to act as financial agents for the IRS to perform electronic and paper-based lockbox services.

The services may include, but are not limited to, mail collection and sorting, mail extraction, remittance processing, deposit proofing and balancing, data transmission/delivery, deposit reporting, and funds transferred to the Treasury Department. According to the most recent available data, the lockbox network processed nearly 110 million payments in fiscal years 2009 and 2010, worth almost $571 billion. Due to the large amount of taxpayer payments received and past incidents of lockbox employees involved in the theft of these funds, employees working in the lockbox operations are not allowed to begin working until the bank receives confirmation from the IRS that the employee has passed a limited background investigation based on a successful fingerprint check.  Many of these lockbox employees are contract, part-time, or temporary workers.

TIGTA recommended that the IRS human capital officer perform an annual assessment of the number of staff needed at each lockbox bank to ensure fingerprinting charges are not excessive, and evaluate the feasibility of requiring lockbox banks to maintain logs of the individuals who have been fingerprinted. The IRS should also develop a process requiring IRS personnel to periodically review and analyze fingerprint billing data, clearly communicate appropriate fingerprinting submission guidance to lockbox bank management, and evaluate the use of electronic fingerprints at all lockbox banks, the report recommended.

In response, IRS management agreed with three of TIGTA’s five recommendations.  IRS management agreed to evaluate the feasibility of requiring the lockbox sites to maintain documentation to identify potential employees who have been previously fingerprinted. IRS management has also revised guidance regarding individuals with unclassifiable fingerprint results and ensured that all lockbox sites have electronic fingerprint equipment. 

However, IRS management did not fully address TIGTA’s concern that lockbox banks are fingerprinting an excessive number of potential employees. While IRS management indicated they would require a justification if the number of applicants fingerprinted exceeded industry standards, TIGTA does not believe that applying the industry standard hiring ratio will effectively ensure fingerprinting costs will be reduced. In addition, while TIGTA said it agrees with IRS management that pre-emptive measures to avoid duplicative fingerprint requests would improve the process, TIGTA believes an analysis of billing information would provide an increased assurance that steps taken by lockbox banks are effective to prevent duplicative charges.

The IRS also disagreed about the savings identified by TIGTA. “Although we agree additional opportunities exist to further reduce the lockbox fingerprinting costs, we only partially agree with the methodology used to determine the reasonable number of individuals who should have been fingerprinted and the amount of the potential savings,” wrote IRS human capital officer Debra Chew. “We believe the potential to save $496,953 in FY 2009 and 2010 is overstated based on the methodology used to determine the number of excessive fingerprints taken.”

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