Max Baucus Proposes Ways to Fight Tax Fraud and Simplify Tax Filing

Senate Finance Committee chairman Max Baucus, D-Mont., unveiled a series of proposals Wednesday to combat tax fraud and make the tax-filing process simpler and more efficient.

The proposals come a day after Baucus released a series of proposals in a discussion draft focused on international tax reform . Baucus has been working on putting together a comprehensive tax reform bill with his counterpart in the House, Ways and Means Committee chairman Dave Camp, R-Mich., and the discussion drafts represent a last-ditch effort to get such legislation at least introduced in Congress before the end of the year. However, with the number of days in the legislative calendar rapidly dwindling and partisan gridlock still holding up an agreement on next year’s budget, the prospects for passage of a comprehensive tax reform package appear to be remote, especially with the 2014 midterm elections less than a year away.

Nevertheless, the tax reform proposals that Baucus unveiled in his discussion drafts could eventually make their way into some future legislation. The package of reforms draws heavily from proposals offered by both Republican and Democratic members of the Senate Finance Committee, his office noted.

“Our tax code today is inefficient, and incomprehensible to the overwhelming majority of Americans,” Baucus said in a statement. “This complexity is eroding confidence in our economy and creating uncertainty for America’s families and businesses.  Enough is enough. This discussion draft explores ways to simplify the tax process for all Americans.”

Tuesday’s set of proposals include a number of reforms to modernize tax administration, minimize compliance burdens, reduce tax-related identity theft, and shrink the tax gap.   Specifically, the discussion draft offers proposals to simplify the tax filing process through greater use of technology, provide the IRS with new tools to combat tax-related identity theft and assist victims of this crime, and reduce the tax gap by increasing information reporting and providing IRS with additional collection tools.

Among the proposals related to information reporting, taxpayers would no longer be required to file corrected information returns if the error is less than $25. The IRS would be required to develop a simple Internet platform for preparing and filing Forms 1099 that is functionally similar to the Business Services Online platform that employers use to file Forms W-2. Tax returns generated by a computer but filed on paper would have to contain a scannable code that would enable the IRS to more efficiently upload the return information. Information returns, including Forms W-2 and 1099, would have to be filed with the government by February 21st of each year, rather than by the current law dates of February 28th (for paper forms) and March 31st (for electronic forms). Information returns must still be delivered to recipients by January 31st.

Baucus also proposed a number of reforms to electronic filing. The number of returns that trigger an electronic filing requirement would be gradually reduced over a three-year period from 250 returns per year to 25. Paid tax return preparers would have to electronically file all tax returns and information documents that they prepare for their clients. Forms M-3 and 990 would need to be filed electronically. The Treasury Department would have the authority to delay implementation if appropriate. Electronic filing of Forms 5500 by employee benefit plans would be increased. This proposal is based on a provision of S.1289 (112th), TAX GAP Act of 2011, sponsored by Sen. Carper.

The second set of reforms in the staff discussion draft would provide the IRS with new tools to combat tax-related identity theft and assist the victims of this crime. Access to the Social Security Administration’s public death data—the Death Master File—would be restricted for three years, but an exception would be provided for individuals or entities with a legitimate fraud prevention or business need for the information and who agree to keep the data private. Disclosure to third parties would be permitted if they agreed to protect the information. Penalties would apply to any unauthorized disclosure.

Form W-2 would no longer include the taxpayer’s full Social Security Number. Instead, the IRS would require use of only the taxpayer’s truncated SSN or other taxpayer identification number. The IRS would be granted authority to use the Department of Health and Human Services’ National Directory of New Hires to verify employment data.

Identity Theft Safeguards
The staff discussion draft would also establish new criminal penalties for tax-related identity theft. Filing a tax return using another person’s identity would be a felony subject to a fine of not more than $250,000 fine and/or up to 5 years in prison.

The staff discussion draft also provides aid to taxpayers who have been victims of tax-related identity theft by requiring the IRS to notify taxpayers that it determines to be victims of identity theft. In addition, the IRS would be required to assign each victim a single point of contact to help facilitate rapid case resolution.

The IRS would be required to report to Congress on the viability of expanding the existing personal identification number (PIN) program available for victims of tax-related identity theft. The report would have to consider whether allowing all taxpayers the option of obtaining a PIN from the IRS to secure their return filing is an effective way to combat tax-related identity theft. The report would also have to determine whether the IRS should authenticate taxpayer identity and distribute PINs to participating taxpayers through an internet platform similar to my Social Security (http://www.ssa.gov/myaccount/) used by the Social Security Administration.

Expanded Tax Preparer Penalties and Information Reporting
In addition, the due diligence requirements currently imposed on tax return preparers with respect to the Earned Income Tax Credit would be extended to include the Child Tax Credit. A tax preparer who does not comply with the Child Tax Credit due diligence requirements would have to pay a penalty of $500 for each failure.

The third set of reforms in the staff discussion draft aims to reduce the tax gap by increasing information reporting in certain areas, providing the IRS with additional collection tools, and clarifying that the IRS may regulate tax return preparers. Banks would have to report the existence of bank accounts, including accounts on which no interest was earned, during the taxable year.  Information returns on mortgage interest must include the outstanding balance of the mortgage; the address of the encumbered property; property taxes, if any, paid from escrow; and the loan origination date.

Life insurance companies would have to file information returns on the sale of a life insurance policy into the secondary market. Colleges and universities would have to report the amounts received (rather than either amounts received or billed) for tuition and other higher education expenses on Form 1098-T.

Businesses would have to show how much of their gross receipts and expenses are reflected in separately filed Forms 1099 by breaking those amounts out on their Form 1040 Schedule C. The staff discussion draft also requests a report from the Treasury Department on how to improve tax compliance by sole proprietors.

Under another proposal, the IRS would be authorized to impose a levy of up to 100 percent on payments to Medicare providers that are seriously delinquent in their taxes. The State Department would be authorized to revoke passports of individuals with seriously delinquent tax debts in excess of $50,000.

The IRS would be authorized to waive fees for installment agreements if the taxpayer agrees to make payment through automated withdrawals.

Regulation of Tax Preparers
In the recent case, Loving v. IRS, the Unites States District Court for the District of Columbia concluded that the IRS and Treasury Department do not have the authority to regulate tax return preparers that only prepare returns for their clients. This case is currently on appeal to the United States Court of Appeals for the District of Columbia.

The staff discussion draft amends 31 U.S.C. 330 to make it clear that the Treasury and IRS have the authority to regulate all paid tax return preparers. “No negative inference is intended or should be taken with respect to whether the IRS and Treasury Department have the authority to regulate return preparers in past periods,” said a summary of the discussion draft.

Other Reforms
In addition to the proposals detailed above, the staff discussion draft includes several other administrative changes, including expanding taxpayer access to the U.S. Tax Court, and permitting the IRS to share certain tax information with the Bureau of Labor Statistics.

A detailed summary of the tax administration staff discussion draft can be found here, and a one-pager on the draft can be found here. The full staff discussion draft in legislative language can be found here.

Baucus plans to release proposals to reform cost recovery and accounting on Thursday. The discussion drafts are based on bipartisan ideas and incorporate bills introduced by both Republicans and Democrats.

He also called for additional feedback from members of Congress, key stakeholders and the general public on the discussion draft and on a number of additional issues, including ways to better protect taxpayer’s rights.

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IRS Sent Erroneous Penalty Notices

 

The Internal Revenue Service has admitted to mistakenly assessing penalties on businesses that had requested extensions on filing the Form 5500 for their employee retirement plans.

The IRS is telling its help center representatives to apologize remove the penalties when they are contacted about the error, acknowledging a timing problem in posting the extension requests, according to a directive obtained by the site BenefitsPro.

“Form 5500 filers that file their return before their extension Form 5558 has had a chance to post are receiving CP 283s assessing them a late filing penalty,” said the IRS. “Proposed changes to the penalty program would allow time for extensions to post before penalty notices are generated. However, until these changes can be implemented, tax examiners and telephone assistors should abate these penalties as Service Errors.

The IRS telephone assistance representatives and tax examiners are also supposed to prepare a Letter 168C explaining that the penalty has been removed due to a “Service Error.”

“If the caller is an administrator or sponsor with multiple plans/clients, you may abate up to five penalties for the caller,” said the IRS. Benefit plan administrators who get more than five penalty notices from the IRS need to put their requests for abatement in writing and send them to the IRS.

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IRS Plans to Step up Audits of Small Business Partnerships

The head of the Internal Revenue Service’s small business unit said his division expects to move from focusing on audits of small corporations to partnerships.

During a speech at the American Institute of CPAs’ National Tax Conference in Washington, D.C., last week, Faris Fink, the commissioner in charge of the IRS’s Small Business/Self-Employed Division reportedly told attendees that his unit would make a top priority of auditing the tax returns of partnerships and other pass-through entities. “The Service has for a long time focused its energy on corporations,” he said, according to Bloomberg’s Lydia Beyoud. “Frankly, we’re a little bit behind the curve in getting around to developing a partnership strategy.”

Part of that strategy will involve training agents at the IRS to look more closely at S corporations, partnerships and other pass-through entities, which now make up 95 percent of all U.S. businesses, according to figures from the IRS.

“Frankly, our training was not geared for dealing with those types of large, complex partnerships,” he said. “Historically, we would think of a partnership as having, say, 10 partners” with a limited number of tiers.

However, the IRS is now encountering partnership returns listing 82,000 partners and 182 tiers. Fink indicated that the IRS plans to step up its scrutiny of such returns in the future.

“We as an organization have recognized that this is something that we’ve got to be paying attention to, not just this year, but going forward,” he said.

The IRS announced earlier this month that it is expanding its Fast Track Settlement program for small businesses, which helps them settle their back taxes with the IRS more quickly

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IRS Succeeding with International Tax Compliance Efforts

A unit set up by the Internal Revenue Service to improve international tax compliance by individuals is paying off, according to a new government report, enabling IRS auditors to assess an additional $36 million in taxes for fiscal years 2011 to 2013.

The report, from the Treasury Inspector General for Tax Administration, found that the International Campus Compliance Unit, or CCU, appears to be working. The IRS set up the unit as part of its strategic plan to address international tax compliance. Other facets of the effort have also led to agreements with Swiss banks to turn over lists of customers, along with offshore voluntary disclosure initiatives that allow taxpayers with foreign bank accounts to come forward voluntarily.

The IRS expects the CCU to enhance efforts to expand audit coverage of tax returns with international aspects and to increase compliance among international individual taxpayers.

For its report on the CCU, TIGTA reviewed the IRS’s efforts to establish the CCU to determine whether the benefits envisioned in improving international individual tax compliance are being achieved. TIGTA found that the IRS successfully planned the CCU and followed general government guidelines and steps for implementing a new business process during the planning. The IRS is still developing inventory selection criteria for the CCU. However, for fiscal years 2011 through 2013 (through March 13, 2013), the CCU conducted almost 18,000 audits and assessed approximately $36 million in additional tax.

“This program appears to be a step in the right direction,” said TIGTA Inspector General J. Russell George in a statement. “As globalization expands, so do concerns about the international tax gap—that is, taxes owed but not collected on time from a U.S. person or foreign person whose cross-border transactions are subject to U.S. taxation.”

George noted that more needs to be done, adding that despite the CCU’s early accomplishments, it does not have specific performance measures for its operations. “Ideally, an agency should have measures for all its major processes to track costs, quality and timeliness,” he said.

TIGTA recommended that the IRS enhance the performance measures for the CCU to more specifically reflect the work performed by CCU examiners. The IRS agreed with this recommendation and plans to evaluate the current performance measures and CCU inventory results to determine how to enhance the performance measures specific to work performed by CCU examiners. The IRS also plans to use these performance measures to establish effective performance goals and measure the CCU’s success in achieving them.

The IRS is also taking steps to ramp up its international tax compliance efforts for corporations after reorganizing the unit responsible for conducting such audits. “As you report indicates, the IRS continues to realign and expand its international efforts under the Large Business and International (LB&I) Division,” wrote Paul D. DeNard, acting commissioner of the LB&I Division, in response to the report. “We expect that these efforts will improve international tax compliance by focusing on high-risk international issues and examination cases in a consistent and efficient way.”

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IRS Changes Pension Plan Limitations for 2014

IRS Changes Pension Plan Limitations for 2014

The Internal Revenue Service released the annual cost-of-living adjustments Thursday affecting dollar limitations for pension plans and other retirement-related items for tax year 2014, allowing taxpayers to contribute up to $17,500 to their 401(k) plans in 2014.

In addition, the IRS announced Thursday that it is modifying the “use or lose” rule for health care flexible spending arrangements, permitting a carryover of up to $500 to provide greater flexibility to plan participants . The agency also issued the annual inflation-adjusted tax rate schedules and other changes in tax benefits for 2014 on Thursday .

The IRS added that some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment, but there will be changes in some pension plan limitations.

•  The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $17,500.

• The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $5,500.

• The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500.  The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000, up from $59,000 and $69,000 in 2013. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $181,000 and $191,000, up from $178,000 and $188,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000.  For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

• The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.

Here are some details on both the unchanged and adjusted limitations:

Section 415 of the Tax Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.

Effective Jan. 1, 2014, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) has increased from $205,000 to $210,000.  For a participant who separated from service before Jan. 1, 2014, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2013, by 1.0155.

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2014 from $51,000 to $52,000.

The Tax Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2014 are as follows:

The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $17,500.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $255,000 to $260,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $165,000 to $170,000.

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period is increased from $1,035,000 to $1,050,000, while the dollar amount used to determine the lengthening of the 5 year distribution period is increased from $205,000 to $210,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $115,000.

The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.

The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $380,000 to $385,000.

The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.

The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $12,000.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $17,500.

The compensation amount under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $100,000 to $105,000. The compensation amount under Section 1.61 21(f)(5)(iii) has increased from $205,000 to $210,000.

The Tax Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2014 are as follows:

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $35,500 to $36,000; the limitation under Section 25B(b)(1)(B) is increased from $38,500 to $39,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $59,000 to $60,000.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $26,625 to $27,000; the limitation under Section 25B(b)(1)(B) is increased from $28,875 to $29,250; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $44,250 to $45,000.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $17,750 to $18,000; the limitation under Section 25B(b)(1)(B) is increased from $19,250 to $19,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $29,500 to $30,000.

The deductible amount under Section 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,500.

The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $95,000 to $96,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $59,000 to $60,000. The applicable dollar amount under Section 219(g)(3)(B)(iii) for a married individual filing a separate return  is not subject to an annual cost-of-living adjustment and remains $0.  The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $178,000 to $181,000.

The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $178,000 to $181,000.  The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $112,000 to $114,000.  The applicable dollar amount under Section 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.

The dollar amount under Section 430(c)(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under Section 430(c)(2)(D) has been made is increased from $1,066,000 to $1,084,000.

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