IRS to Fix Problem with Automatic Tax Levies


The Internal Revenue Service plans to fix a glitch that was discovered with its system for issuing tax levies that allow it to seize the assets of delinquent taxpayers.

When taxpayers do not pay their delinquent taxes, the IRS has the authority to work directly with financial institutions and other third parties to seize taxpayers’ assets as part of a tax levy. The IRS Restructuring and Reform Act of 1998 requires the IRS to notify taxpayers of the intent to levy at least 30 calendar days before initiating any levy action to give taxpayers an opportunity to formally appeal the proposed levy.

“Taxpayers’ rights are potentially violated if they are not notified within the 30-day period and a levy is issued,” said a new report issued Tuesday by the Treasury Inspector General for Tax Administration.

TIGTA is responsible for annually determining whether the IRS complied with the IRS Restructuring and Reform Act of 1998 requirement to notify taxpayers prior to issuing levies. In its fifteenth annual audit report on this subject, TIGTA determined whether the IRS has complied with law providing for a notice and opportunity for a hearing before a levy is issued. The report found that the IRS is protecting most taxpayers’ rights when issuing systemically generated and manually prepared levies. 

TIGTA reviewed 15 systemically generated and 30 manual levies identified through the IRS’s Automated Collection System and determined that controls were effective to ensure that taxpayers were given notice of their appeal rights at least 30 calendar days prior to the issuance of the levies.

In addition, TIGTA reviewed 27 systemically generated and 18 manual levies identified through the Integrated Collection System and determined that taxpayers were given notice of their appeal rights at least 30 calendar days prior to issuance of the levies.  However, three systemically generated levies had additional tax assessments in which a new notice of intent to levy was not sent prior to issuing the levies, as required, TIGTA noted.

TIGTA recommended that the IRS determine the feasibility of updating the systemic Integrated Collection System programming to prevent levies from being issued on modules in which a new notice of intent to levy has not been sent after there has been an additional assessment.
IRS officials agreed with the recommendation. The IRS plans to continue to implement a change to the Integrated Collection System programming for systemic levies to prevent levy issuance on modules where an additional assessment had been made and a new Notice of Intent to Levy/Notice of a Right to a Hearing has not been sent to the taxpayer.

“We initiated efforts to update the Integrated Collection System (ICS) to address the required levy notices on subsequent assessments,” said IRS official Ruth Perez, writing on behalf of Faris Fink, the commissioner of  the IRS’s Small Business/Self-Employed division. “In addition, we will provide training on this topic to revenue officers during this year’s Continuing Professional Education.”


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Democratic Lawmaker Sues IRS over Rules for Tax Exemptions


Democratic U.S. Representative Chris Van Hollen sued the Internal Revenue Service to force the agency to adopt regulations that mirror federal law on determining whether a group should be given tax-exempt status.

The IRS is illegally allowing a category of tax-exempt groups to engage in election-related activity by loosely interpreting a requirement in the law that they be engaged exclusively in promoting social welfare, according to the complaint that Maryland’s Van Hollen filed today in federal court in Washington.

“By redefining ‘exclusively’ as ‘primarily’ in violation of the clear terms of its governing statutes, the IRS permits tax-exempt social welfare organizations to engage in substantial electoral activities in contravention of the law,” Van Hollen and three advocacy groups said in the complaint.

The issue of tax-exempt groups spending money on elections triggered a political furor after the IRS disclosed in May that it gave extra scrutiny to organizations seeking nonprofit status if they had “tea party” or “patriot” in their name.

Later, Representative Sander Levin, a Michigan Democrat, said groups with names tied to liberal causes were also subjected to additional scrutiny.

The revelations triggered congressional hearings, the resignation of acting IRS Commissioner Steven Miller and a Justice Department investigation.

‘527’ Organizations
The problem with allowing social welfare groups to spend money on elections is that they don’t have to disclose who their donors are, giving them an advantage over other tax-exempt political fundraising entities known as “527” organizations, which are required to publicly list their contributors, according to Van Hollen’s suit.

Social welfare groups “are permitted to raise funds for electoral purposes without complying with the requirements imposed on 527 political organizations,” Van Hollen said in the complaint.
Van Hollen was in charge of recruiting Democratic candidates for House seats in the 2008 and 2010 election cycles.

A similar lawsuit was filed in May by the Washington-based watchdog group Citizens for Responsibility and Ethics in Washington.

Not Required
The share of election spending by non-political party groups not required to disclose the identity of donors has increased to 30 percent in 2012 from 1 percent in 2006, according to a July report by the Committee for Economic Development, a nonprofit business-led public policy group in Washington.

Much of the increase occurred after the Supreme Court’s 2010 Citizens United ruling, which removed limits on independent election spending by corporations and labor unions.

Two of the plaintiffs in the Van Hollen suit, Democracy 21 and the Campaign Legal Center, petitioned the IRS in July 2011 to issue rules in line with the law. The tax agency took no action on the request, according to Paul Ryan, senior counsel for the Campaign Legal Center.

The suit asks the court to order the IRS to conduct the rulemaking.

Dean Patterson, an IRS spokesman, declined to comment on the suit.

The case is Van Hollen v. IRS, 13-cv-01276, U.S. District Court, District of Columbia (Washington).

IRS Sets Rules for Disclosing Tax Return Info under Health Care Law


The Internal Revenue Service has released the final regulations for how it will release tax return information to the Department of Health and Human Services to assess a taxpayer’s eligibility for help in buying health insurance coverage under the Affordable Care Act.

In TD 9628, the IRS noted that Section 6103(l)(21) of the Tax Code allows the disclosure of tax return information to assist the upcoming health insurance exchanges, now known as marketplaces, in performing certain functions of the health care reform law for which income verification is required, including determining the eligibility for the insurance affordability programs described in the Affordable Care Act, as well as to assist state agencies that are administering state Medicaid programs, children’s health insurance programs, and basic health programs.

For taxpayers whose income is relevant in determining eligibility for an insurance affordability program, Medicaid, CHIP, or BHP, Section 6103(l)(21) explicitly authorizes the disclosure of the taxpayer identity information, filing status, the number of individuals for whom a deduction is allowed, the taxpayer’s modified adjusted gross income, or MAGI, as defined under Section 36B of the Tax Code, and the taxable year to which the information relates or, alternatively, that the information is not available.

Section 6103(l)(21) also authorizes the disclosure of other information that might indicate whether an individual is eligible for the premium tax credit under Section 36B of the Code, or cost-sharing reductions under Section 1402 of the Affordable Care Act, and the amount of them.

The final regulations mostly adhere to the regulations proposed by the IRS last year, except that it added Social Security benefits to the list of items that can be disclosed to the Department of Health and Human Services in order to help enable the health insurance exchanges determine a taxpayer’s modified adjusted gross income. If the IRS provides HHS with the amount of Social Security benefits included in gross income under Section 86, an exchange or state agency will be generally able to determine the amount of Social Security benefits not included in gross income under Section 86, the IRS noted. This amount is one of the components of an individual’s MAGI. Eligibility for the premium tax credit, and advance payments of the credit, are based on the household income of the applicant, which is the sum of the MAGI of those individuals who comprise the household. As a result, providing the amount of Social Security benefits included in gross income, along with other items contained in the regulations, will help an exchange determine whether a taxpayer is eligible for the premium tax credit under Section 36B or cost-sharing reductions under Section 1402 of the Affordable Care Act, and the amount of the credit or reductions.

The other major change from the regulations proposed last year is to delete the reference to adoption taxpayer information numbers, or ATINs, from the list of identification numbers to be verified, because the Social Security Administration cannot verify them. Subsequent to the publication of the proposed regulations, the IRS recognized that requests relating to ATINs would not be received because individuals’ identification numbers would first be verified against SSA records. But since the SSA has no records of ATINs, the numbers cannot be verified and HHS will not request return information for individuals using ATINs. While the income of an individual with an ATIN may be relevant for determining household income and, therefore, eligibility for a health insurance affordability program, a health insurance exchange or state agency will instead need to use alternate verification procedures

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How to Save for College Tax-Free

According to the US Census Bureau, individuals with a bachelor’s degree have the potential to earn more than double the salary of those with just a high school diploma, so even though tuition and fees are on the rise, most people feel that a college education is well worth the investment. That said however, the need to set money aside for their child’s education often weighs heavily on parents.

Fortunately, there are two savings plans available to help parents save money that also provide certain tax benefits. Let’s take a closer look.

The two most popular college savings programs are the Qualified Tuition Programs (QTPs) or Coverdell Education Savings Accounts (ESAs). Whichever one you choose, try to start when your child is young. The sooner you begin saving, the less money you will have to put away each year.

Example: Suppose you have one child, age six months, and you estimate that you’ll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you’ll need to save $3,500 per year for 18 years (assuming an after-tax return of 7%). On the other hand, if you put off saving until your son is six years old, you’ll have to save almost double that amount every year for 12 years.

Financial Calculator: College Savings Planner
Use this calculator to help develop and fine-tune your child’s college education savings plan.

How Much Will College Cost?

Based on the survey completed for the 2012 Trends in College Pricing, the average cost for tuition, fees, and room and board for 2012-13 was:

$17,860 per year for 4-year public (in state) colleges and universities, an increase of 4.2% from the 2011-12 academic year.

$39,518 per year for 4-year private colleges and universities, an increase of 4.1% from the 2011-12 academic year.

According to Trends in Student Aid, in 2011-12, undergraduate students received an average of $13,218 per full-time equivalent (FTE) student in financial aid, including $6,932 in grant aid from all sources, and $5,056 in federal loans.

Saving with Qualified Tuition Programs (QTPs)

Qualified Tuition Programs, also known as 529 plans, are often the best choice for many families. Every state now has a program allowing persons to prepay for future higher education, with tax relief. There are two basic plan types, with many variations among them:

  1. The prepaid education arrangement. With this type of plan one is essentially buying future education at today’s costs, by buying education credits or certificates. This is the older type of program and tends to limit the student’s choice to schools within the state; however, private colleges and universities often offer this type of arrangement.
  2. Education Savings Account (ESA). With an ESA, contributions are made to an account to be used for future higher education.

Tip: When approaching state programs, one must distinguish between what the federal tax law allows and what an individual state’s program may impose.

You may open a 529 plan in any state, but when buying prepaid tuition credits (less popular than savings accounts), you will want to know what institutions the credits will be applied to.

Unlike certain other tax-favored higher education programs, such as the American Opportunity Credit (formerly the Hope Credit) and Lifetime Learning Credit, federal tax law doesn’t limit the benefit to tuition, but can also extend it to room, board, and books (individual state programs could be narrower).

The two key individual parties to the program are the Designated Beneficiary (the student-to-be) and the Account Owner, who is entitled to choose and change the beneficiary and who is normally the principal contributor to the program.

There are no income limits on who may be an account owner. There’s only one designated beneficiary per account. Thus, a parent with three college-bound children might set up three accounts. Some state programs don’t allow the same person to be both beneficiary and account owner.

Tax Rules Relating to Qualified Tuition Programs

Income Tax. Contributions made by an account owner or other contributor are not tax deductible for federal income tax purposes, but earnings on contributions do grow tax-free while in the program.

Distributions from the fund are tax-free to the extent used for qualified higher education expenses. Distributions used otherwise are taxable to the extent of the portion which represents earnings.

A distribution may be tax-free even though the student is claiming an American Opportunity Credit (formerly the Hope Credit) or Lifetime Learning Credit, or tax-free treatment for a Coverdell ESA distribution, provided the programs aren’t covering the same specific expenses.

Distribution for a purpose other than qualified education is taxable to the one getting the distribution. In addition, a 10% penalty must be imposed on the taxable portion of the distribution, which is comparable to the 10% penalty in Coverdell ESAs.

The account owner may change beneficiary designation from one to another in the same family. Funds in the account roll over tax-free for the benefit of the new beneficiary.

Tip: In 2009, the American Recovery and Reinvestment Act (ARRA) added expenses for computer technology/equipment or Internet access to the list of qualifying expenses. Software designed for sports, games, or hobbies does not qualify, unless it is predominantly educational in nature. In general, however, expenses for computer technology are not considered qualified expenses.

Gift Tax. For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them. Thus they qualify for the up-to-$14,000 annual gift tax exclusion in 2013 (up $1,000 from 2012). One contributing more than $14,000 may elect to treat the gift as made in equal installments over the year of gift and the following four years, so that up to $70,000 can be given tax-free in the first year.

However, a rollover from one beneficiary to another in a younger generation is treated as a gift from the first beneficiary, an odd result for an act the “giver” may have had nothing to do with.

Estate Tax. Funds in the account at the designated beneficiary’s death are included in the beneficiary’s estate, another odd result, since those funds may not be available to pay the tax.

Funds in the account at the account owner’s death are not included in the owner’s estate, except for a portion thereof where the gift tax exclusion installment election is made for gifts over $14,000. For example, if the account owner made the election for a gift of $70,000 in 2013, a part of that gift is included in the estate if he or she dies within five years.

Tip: A Qualified Tuition Program can be an especially attractive estate-planning move for grandparents. There are no income limits, and the account owner giving up to $70,000 avoids gift tax and estate tax by living five years after the gift, yet has the power to change the beneficiary.

State Tax. State tax rules are all over the map. Some reflect the federal rules, some reflect quite different rules. For specifics of each state’s program, see College Savings Plans Network (CSPN). If you need assistance with this, please contact us.

Saving with Coverdell Education Savings Accounts (ESAs)

You can contribute up to $2,000 in 2013 to a Coverdell Education Savings account (a Section 530 program formerly known as an Education IRA) for a child under 18. These contributions are not tax deductible, but grow tax-free until withdrawn. Contributions for any year, for example 2013 can be made through the (unextended) due date for the return for that year (April 15, 2014). There is no adjustment for inflation; therefore the $2,000 contribution limit is expected to remain at $2,000 for 2013 and beyond.

Only cash can be contributed to a Coverdell ESA and you cannot contribute to the account after the child reaches his or her 18th birthday.

The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.

Anyone can establish and contribute to a Coverdell ESA, including the child and an account may be established for as many children as you wish; however, the amount contributed during the year to each account cannot exceed $2,000. The child need not be a dependent, and in fact does not even need to be related to you. The maximum contribution amount in 2013 for each child is subject to a phase out limitation with a modified AGI between $190,000 and $220,000 for joint filers and $95,000 and $110,000 for single filers.

A 6% excise tax (to be paid by the beneficiary) applies to excess contributions. These are amounts in excess of the applicable contribution limit ($2,000 or phase out amount) and contributions for a year that amounts are contributed to a Qualified Tuition Program for the same child. The 6% tax continues for each year the excess contribution stays in the Coverdell ESA.

Exceptions. The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. The excise tax does not apply to any rollover contribution.

The child must be named (designated as beneficiary) in the Coverdell document, but the beneficiary can be changed to another family member, for example, to a sibling where the first beneficiary gets a scholarship or drops out. Funds can also be rolled over tax-free from one child’s account to another child’s account. Funds must be distributed not later than 30 days after the beneficiary’s 30th birthday (or 20 days after the beneficiary’s death if earlier). For “special needs” beneficiaries the age limits (no contributions after age 18, distribution by age 30) don’t apply.

Withdrawals are taxable to the person who gets the money, with these major exceptions: Only the earnings portion is taxable (the contributions come back tax-free). Also, even that part isn’t taxable income, as long as the amount withdrawn doesn’t exceed a child’s “qualified higher education expenses” for that year.

The definition of “qualified higher education expenses” includes room and board and books, as well as tuition. In figuring whether withdrawals exceed qualified expenses, expenses are reduced by certain scholarships and by amounts for which tax credits are allowed. If the amount withdrawn for the year exceeds the education expenses for the year, the excess is partly taxable under a complex formula. A different formula is used if the sum of withdrawals from a Coverdell ESA and from the Qualified Tuition Program exceeds education expenses.

As the person who sets up the Coverdell ESA, you may change the beneficiary (the child who will get the funds) or roll the funds over to the account of a new beneficiary, tax-free, if the new beneficiary is a member of your family. But funds you take back (for example, withdrawal in a year when there are no qualified higher education expenses, because the child is not enrolled in higher education) are taxable to you, to the extent of earnings on your contributions, and you will generally have to pay an additional 10% tax on the taxable amount. However, you won’t owe tax on earnings on amounts contributed that are returned to you by June 1 of the year following contribution.

Professional Guidance

Considering the wide differences among state plans, federal and state tax issues, and the dollar amounts at stake, please call us before getting started with any type of college savings plan.

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New York to Suspend Driver’s Licenses of Tax Delinquents

New York Governor Andrew M. Cuomo announced a new initiative Monday to encourage individuals who owe significant back taxes to the state to pay their bills by suspending their New York State driver licenses when their past-due tax liability exceeds $10,000.


The crackdown is the result of legislation introduced as part of the executive budget and signed into law earlier this year.

“Our message is simple: tax scofflaws who don’t abide by the same rules as everyone else are not entitled to the same privileges as everyone else,” Cuomo said in a statement. “These worst offenders are putting an unfair burden on the overwhelming majority of New Yorkers who are hardworking, law-abiding taxpayers. By enacting these additional consequences, we’re providing additional incentives for the state to receive the money it is owed and we’re keeping scofflaws off the very roads they refuse to pay their fair share to maintain.”

The new initiative is estimated to increase collections in the Empire State by $26 million this fiscal year and as much as $6 million annually thereafter.

“It’s in every taxpayer’s best interest to pay all tax bills in full,” said Commissioner of Taxation and Finance Thomas H. Mattox. ”If you can’t pay in full, our staff is available to help you arrange a payment plan that will satisfy your debt.”

The New York State Department of Taxation and Finance will send the first round of 16,000 suspension notices to delinquent taxpayers, who have 60 days from the mailing date to arrange payment with the Department. If the taxpayer fails to do so, the Department of Motor Vehicles will send a second letter providing an additional 15 days to respond. If the taxpayer again fails to arrange payment, their license will be suspended until the debt is paid or a payment plan is established.

A taxpayer who drives while the suspension is in effect is subject to arrest and penalties, Cuomo’s office noted. Those with a suspended license can, however, apply for a restricted license, which allows them to drive to work, and return directly home.

In New York State, 96 percent of taxes are paid by businesses and individuals who voluntarily meet their tax responsibilities, Cuomo’s office noted. The remaining 4 percent is collected through the tax department’s audit, collections and criminal investigations programs.

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Criminal Investigations of Identity Theft Increasing at IRS

The Internal Revenue Service opened 1,100 criminal investigations of tax fraud by June 30 of this year, exceeding the 2012 total with three months remaining in the fiscal year.

The agency has doubled the number of employees working on tax-fraud cases to more than 3,000 and is approaching last year’s total of 5 million suspicious tax returns rejected, interim IRS leader Danny Werfel told a congressional committee today in Washington.

Those efforts would be complicated by additional budget cuts proposed in Congress, Werfel said. A budget cut of about $1 billion since 2010 has led the agency to cut about 8 percent of its full-time staff, or about 8,000 workers, he said.

With further cuts, “we would no longer be able to sustain our current level of effort on identify theft without significantly weakening other programs,” Werfel said.

House Republicans have proposed reducing the agency’s budget by 24 percent.

Werfel’s testimony to a subcommittee of the House Oversight and Government Reform panel comes as the agency is mired in controversies over its scrutiny of Tea Party groups, spending on conferences and payment of bonuses to agency officials.

President Barack Obama forced out Werfel’s predecessor, acting IRS commissioner Steven Miller, and yesterday nominated John Koskinen to take over the agency.

“Refund fraud caused by identity theft is one of the biggest challenges facing the IRS today,” Werfel told the House subcommittee.

Death Records
Criminals with access to taxpayers’ identifying information—sometimes from death records or employer payroll files—can create fraudulent tax returns and obtain refunds before the actual taxpayer is aware of the theft.

Obama’s 2014 budget plan included proposals to curb a rise in identity theft occurring through tax returns. It called for a $5,000 civil penalty for tax-related identity theft, restricting access to Social Security death records and allowing employers to avoid putting Social Security numbers on W-2 wage reporting forms.

For fiscal year 2012, the IRS’s identity-theft unit received about 450,000 cases, up 78 percent over the previous year, according to the National Taxpayer Advocate, an independent organization within the agency. This year, the IRS has resolved 565,000 cases, Werfel said.

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