Make a Wise Choice when Selecting a Tax Preparer


While there is still time before the next tax filing season, choosing a return preparer now allows more time for taxpayers to consider appropriate options and to find and talk with prospective tax preparers rather than during tax season when they’re most busy.

Furthermore, it enables taxpayers to do some wise tax planning for the rest of the year. If a taxpayer prefers to pay someone to prepare their return, the Internal Revenue Service encourages them to choose that person wisely as the taxpayer is legally responsible for all the information included on the return.

Below are some tips taxpayers can keep in mind when selecting a tax professional:

  • Select an ethical preparer. Taxpayers entrust some of their most vital personal data with the person preparing their tax return, including income, investments and Social Security numbers.
  • Ask about service fees. Avoid preparers who base their fee on a percentage of the refund or those who say they can get larger refunds than others. Taxpayers need to ensure that any refund due is sent to them or deposited into their bank account, not into a preparer’s account.
  • Be sure to use a preparer with a preparer tax identification number (PTIN). Paid tax return preparers must have a current PTIN to prepare a tax return. It is also a good idea to ask the preparer if they belong to a professional organization and attend continuing education classes.
  • Research the preparer’s history. Check with the Better Business Bureau to see if the preparer has a questionable history. For the status of an enrolled agent’s license, check with the IRS Office of Enrollment (enrolled agents are licensed by the IRS and are specifically trained in federal tax planning, preparation and representation). For certified public accountants, verify with the state board of accountancy; for attorneys, check with the state bar association.
  • Ask for e-file. Any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically.
  • Provide tax records. A good preparer will ask to see records and receipts. Do not use a preparer who is willing to e-file a return using the latest pay stub instead of the Form W-2. This is against IRS e-file rules.
  • Make sure the preparer is available after the filing due date. This may be helpful if questions come up about the tax return. Taxpayers can designate their paid tax return preparer or another third party to speak to the IRS concerning the preparation of their return, payment/refund issues and mathematical errors. The third party authorization check box on Form 1040, Form 1040A and Form 1040EZ gives the designated party the authority to receive and inspect returns and return information for one year from the original due date of the return (without regard to extensions).
  • Review the tax return and ask questions before signing. Taxpayers are legally responsible for what’s on their return, regardless of whether someone else prepared it. Make sure it’s accurate before signing it.
  • Never sign a blank tax return. If a taxpayer signs a blank return the preparer could then put anything they want on the return — even their own bank account number for the tax refund.
  • Preparers must sign the return and include their PTIN as required by law. The preparer must also give the taxpayer a copy of the return.

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Is Canceled Debt Taxable?


Is Canceled Debt Taxable?

Generally, debt that is forgiven or canceled by a lender is considered taxable income by the IRS and must be included as income on your tax return. Examples include a debt for which you are personally liable such as mortgage debt, credit card debt, and in some instances, student loan debt.

When that debt is forgiven, negotiated down (when you pay less than you owe), or canceled you will receive Form 1099-CCancellation of Debt, from your financial institution or credit union. Form 1099-C shows the amount of canceled or forgiven debt that was reported to the IRS. If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. Give the office a call if you have any questions regarding joint liability of canceled debt.

Creditors who forgive $600 or more of debt are required to issue this form. If you receive a Form 1099-C and the information is incorrect, contact the lender to make corrections.

If you receive a Form 1099-C, don’t ignore it. You may not have to report that entire amount shown on Form 1099-C as income. The amount, if any, you must report depends on all the facts and circumstances. Generally, however, unless you meet one of the exceptions or exclusions discussed below, you must report any taxable canceled debt reported on Form 1099-C as ordinary income on:

  • Form 1040 or Form 1040NR, if the debt is a nonbusiness debt;
  • Schedule C or Schedule C-EZ (Form 1040), if the debt is related to a nonfarm sole proprietorship;
  • Schedule E (Form 1040), if the debt is related to non-farm rental of real property;
  • Form 4835, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or
  • Schedule F (Form 1040), if the debt is farm debt and you are a farmer.

Exceptions and Exclusions

If you’ve had debt forgiven or canceled this year and receive a Form 1099-C, you might qualify for an exception or exclusion. If your canceled debt meets the requirements for an exception or exclusion, then you don’t need to report your canceled debt on your tax return. Under the federal tax code, there are five exceptions and four exclusions for tax year 2015. Here are the five most commonly used:

Note: The Mortgage Debt Relief Act of 2007, which applied to debt forgiven in calendar years 2007 through 2014, allowed taxpayers to exclude income from the discharge of debt on their principal residence. Up to $2 million of forgiven debt was eligible for this exclusion ($1 million if married filing separately) and debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, also qualified for the relief. As of this writing, Congress has yet to reauthorize the Act for calendar year 2015.

1. Amounts specifically excluded from income by law such as gifts, bequests, devises or inheritances

In most cases, you do not have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance. For example, if an acquaintance or family member loaned you money (and for whom you signed a promissory note) died and relieved you of the obligation to pay back the loan in his or her will, this exception would apply.

2. Cancellation of certain qualified student loans

Certain student loans provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers. If your student loan is canceled as the result of this type of provision, the cancellation of this debt is not included in your gross income.

3. Canceled debt, that if it were paid by a cash basis taxpayer, would be deductible

If you use the cash method of accounting, then you do not realize income from the cancellation of debt if the payment of the debt would have been a deductible expense.

For example, in 2014, you obtain accounting services for your farm using credit. In 2015, due to financial troubles you are not able to pay off your farm debts and your accountant forgives a portion of the amount you owe for her services. If you use the cash method of accounting you do not include the canceled debt as income on your tax return because payment of the debt would have been deductible as a business expense.

4. Debt canceled in a Title 11 bankruptcy case

Debt canceled in a Title 11 bankruptcy case is not included in your income.

5. Debt canceled during insolvency

Do not include a canceled debt as income if you were insolvent immediately before the cancellation. In the eyes of the IRS, you would be considered insolvent if the total of all of your liabilities was more than the FMV of all of your assets immediately before the cancellation.

For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account).

Here’s an example. Let’s say you owe $25,000 in credit card debt, which you are able to negotiate down to $5,000. You have no other debts and your assets are worth $15,000. Your canceled debt is $20,000. Your insolvency amount is $10,000. Because you are insolvent at the time of the cancellation, you are only required to report the $10,000 on your tax return.

If you exclude canceled debt from income under one of the exclusions listed above, you must reduce certain tax attributes (certain credits, losses, basis of assets, etc.), within limits, by the amount excluded. If this is the case, then you must file Form 982Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the amount qualifying for exclusion and any corresponding reduction of those tax attributes.

Exceptions do not require you to reduce your tax attributes.


Don’t hesitate to call if you have any questions about whether you qualify for debt cancellation relief.

IRS: Tax refunds could be delayed next year

The IRS could be forced to delay tax refunds next year if Congress doesn’t strike a deal on dozens of expired tax provisions by the end of next month, the agency’s commissioner said this week.

IRS chief John Koskinen said the agency might have to postpone the 2015 filing season if lawmakers don’t act any sooner on the expired tax provisions known as extenders.

The uncertainty over the fate of the extenders, Koskinen said, has already raised “serious operational and compliance risks.” The IRS is currently upgrading technology systems, offering new instructions to customer service staff and revising forms in preparation for the next filing season, Koskinen added.

“Continued uncertainty would impose even more stress not only on the IRS, but also on the entire tax community, including tax professionals, software providers, and tax volunteers, who are all critical to the successful operation of our nation’s tax system,” Koskinen wrote in a letter dated Monday.

The Senate Finance Committee cleared a bipartisan bill this year that would revive most of the temporary tax breaks that expired at the end of last year through 2015 — including incentives with broad support such as the credit for business research, and more narrow provisions that help NASCAR track owners and Puerto Rican rum distillers.

Senate Republicans blocked that bill this spring as part of their broader fight with Democrats over floor procedure, but GOP senators predicted that a deal on the provisions would likely materialize in the lame-duck session after November’s elections.

House Republicans, on the other hand, have been trying to extend some of the provisions permanently, in particular the research credit and other tax breaks for business write-offs.

Senate Finance Chairman Ron Wyden (D-Ore.), who received Koskinen’s letter, said the IRS warning should prod lawmakers to quickly renew the expired provisions when they return to Washington just over a week after the elections.

“As the economy begins to show signs of strength, uncertainty from the federal tax code is the last thing American businesses and families need as they look to grow and invest,” Wyden said in a statement.

This is far from the first time the IRS has warned Congress about pushing back tax refunds. The agency delayed the 2014 tax season because of the previous year’s government shutdown, after pushing back the 2013 season to deal with the late passage of the fiscal cliff deal.

The problems for the filing season would be even more severe if Congress doesn’t reach an extenders deal before the end of 2014, Koskinen warned — “likely resulting in service disruptions, millions of taxpayers needing to file amended returns, and substantially delayed refunds.”

IRS Recovers $576 Million in Erroneous Tax Refunds from Outside Leads

The Internal Revenue Service recovered $576 million in erroneously issued tax refunds last year thanks to outside tips provided by financial institutions and other sources such as tax preparers, more than double the amount from three years ago.

A new report from the Treasury Inspector General for Tax Administration examined the IRS’s External Leads Program, which receives leads about questionable tax refunds identified by a variety of organizations, including financial institutions, brokerage firms, government and law enforcement agencies, state agencies and tax preparers. The questionable tax refunds include Treasury checks, direct deposits and prepaid debit cards.

The program helps the IRS to recover erroneous tax refunds and save money, but the TIGTA report noted that improvements are needed to ensure that the IRS verifies the leads on a timely basis.

The External Leads Program has grown from 10 partner financial institutions returning $233 million in calendar year 2010 to 258 partner financial institutions and partner organizations returning more than $576 million in calendar year 2013, the report noted.

“The IRS’s External Leads Program has more than doubled the amount of questionable refunds returned over the past three years, thus saving tax dollars,” said TIGTA Inspector General J. Russell George in a statement. “However, opportunities exist to improve the program.”

Since taking over the External Leads Program in January 2010, the IRS’s Wage and Investment Division has performed outreach in an effort to continuously increase the number of organizations participating in this program. Participation and the number of questionable refunds returned and the dollars associated with them have grown significantly.

However, the IRS is not always verifying leads in a timely manner, and the verification time frame goals differ significantly based on the lead type, according to the report. The goals do not take into consideration the burden on legitimate taxpayers whose refunds are being held until verification is completed.

In addition, the IRS inconsistently tracked the leads in multiple inventory systems, and the inventory systems did not provide key information such as how the lead was resolved, that is, whether the refund was confirmed as erroneously issued or legitimate.

TIGTA recommended that the IRS establish more consistent time frames to verify the leads it receives based on an analysis of the current and historical lead verification data and, once established, communicate the verification time frames with its external partners. The report also suggested the IRS develop a process to ensure that leads are verified within established time frames. The IRS should also consolidate the current four lead inventory tracking systems into a single tracking system and ensure that key information is captured as to how each lead is resolved, according to the report.

The IRS agreed with TIGTA’s recommendations. The IRS said it is evaluating the treatment streams and work processes associated with the various types of referrals received in the External Leads Program to identify appropriate time frames. The agency is also completing other systemic and procedural enhancements to improve the effectiveness of existing reporting capabilities in evaluating program quality and timeliness. In addition, the IRS is evaluating the feasibility and potential benefits of consolidating the four independent inventory tracking databases into one system.

“The IRS is committed to the proactive detection of fraudulent refund claims and preventing their payment from occurring,” wrote Debra Holland, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Unfortunately, those individuals who commit fraud against the U.S. taxpayers continually modify their tactics to evade or avoid detection, which sometimes results in the issuance of erroneous refunds. Since 2010, the IRS has reached out to financial institutions, government entities, federal agencies, software providers and other stakeholders to develop processes whereby those partners may alert the IRS to suspected refund fraud, and return those funds to the Treasury when the suspected fraud is confirmed.”

IRS creates $36K per-worker Obamacare fine

If you were planning on sending workers out onto the insurance exchanges with a lump-sum of cash for premium costs, you’ll want to read the feds’ latest warning.

But the feds don’t want employers to think they can simply shift their workforces onto the exchanges.

So the IRS is reminding firms – via the most expense health reform penalty to date – that such a strategy isn’t a wise move.

Per-worker penalty up to $36K

In a new FAQ, the feds clarified that if firms set up a plan that contributes un-taxed money an employee can use to pay for insurance premiums, it violates the health reform law.

And the feds could slap firms with a $100 per day, per employee fine for setting up such a plan, which is also known as a stand-alone health reimbursement arrangement (HRA).

End result: a potential $36,5000 annual per employee fine.
This ruling means that employers can’t offer any tax-free money to pay for insurance premiums for non-employer-sponsored healthcare plans.

This type of arrangement is prohibited because the stand-alone plans with set limits (the maximum amount of money the company promises to contribute) violates the Affordable Care Act’s lifetime and annual limits on coverage ban.

‘Integrated’ HRAs, taxed funds OK

There are, however, a few things the IRS says employers can do. Firms can offer “integrated” HRAs, which are HRAs that are combined with a employer’s group health plan.

Many firms have set up high-deductible health plans for reimbursing co-pays and deductibles.

But the feds also made it very clear that an HRA will only be considered integrated with a health plan if the employee who uses it is enrolled in that health plan.

And employers can still provide their workers with a set amount of money to buy insurance on their own, which many firms feel is cheaper than sponsoring a group health plan.

They just can’t offer this option untaxed. Employers that choose to offer a lump sum must do it by increasing employees’ taxable wages.

IRS to Step up Penalties for Delinquent Payroll Taxes

Employers owed the Internal Revenue Service approximately $14.1 billion in delinquent Social Security, Medicare and individual federal income taxes that they had withheld from employee paychecks as of June 30, 2012, and the Internal Revenue Service is being urged to do more to assess penalties against them.

A new report from the Treasury Inspector General for Tax Administration found that the IRS’s penalty actions against employers who don’t remit payroll taxes are oftentimes neither timely nor adequate. When a business does not remit trust fund taxes withheld from its employees, the IRS can collect the unpaid taxes from the individuals responsible by assessing a Trust Fund Recovery Penalty, or TFRP, when appropriate.

Employees who have taxes withheld from their wages expect the funds to be properly remitted to the IRS, the TIGTA report noted, and businesses that do not pay their taxes have an unfair advantage over businesses that do pay their taxes in full and on time.

TIGTA found that the IRS’s TFRP actions were not always timely or adequate in 99 of the 265 cases it reviewed in a statistically valid sample of cases. For 59 of the 99 cases, the untimely actions averaged more than 500 days to review and process the penalty assessment. Among the problems, TIGTA found incomplete investigations, unsupported collectibility determinations and expired assessment statutes.

When the penalty assessments are not made in a timely way, taxpayers’ financial ability to pay can decline and the IRS’s chances of collecting the overdue taxes decrease. In addition, the government’s interest is not protected if the potential tax assessments are overlooked or missed.

In recent years, TIGTA acknowledged, the IRS has introduced new guidance to better control the Trust Fund Recovery Penalty process and has achieved some improvement in the average time it takes to complete investigations and assess the TFRP. However, significant untimeliness still exists, the report added.

TIGTA recommended that the IRS emphasize to group managers their responsibilities to monitor TFRP cases and ensure that revenue officers take timely TFRP actions; and enhance TFRP communication and training. The IRS should also ensure the completion and adequacy of scheduled system improvements and take appropriate actions to implement the changes, TIGTA suggested. In addition, the report recommends the IRS revise its TFRP guidance regarding the accuracy of the collectibility determination support and controlling the completion of TFRP investigations when installment agreements or currently not collectible closures are approved.

In response to the report, IRS officials agreed with all of TIGTA’s recommendations and plan to take corrective actions.

Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, pointed out that the IRS has significantly improved the timeliness of its TFRP case actions in response to a 2008 report from the Government Accountability Office that found businesses owed billions of dollars in federal payroll taxes. She noted that the IRS’s overall average improvement in the timeliness of TFRP case actions increased from 74 percent in fiscal year 2010 to 93 percent in fiscal 2013, and that the sample TIGTA used for the analysis in its report included cases with actions prior to 2012 before the IRS’s improvements had been fully implemented.

“As we discussed during the audit, we worked diligently to implement the recommendations made by GAO and to improve the timeliness and adequacy of all TFRP actions,” she wrote. “Limiting your review to case actions that occurred after FY2012, when increased controls and guidance had been completely implemented, would have provided a more accurate picture of our current program.”

The IRS plans to make programming changes in its Automated Trust Fund Recovery system to ensure it works more efficiently and it will provide additional training to managers.

“We remain committed to continued improvement and recognize the opportunity for additional systemic enhancements to increase our case processing efficiency and accuracy,” said Schiller.

IRS Oversight Board Opposes Private Debt Collectors

The IRS Oversight Board has sent a letter to the leaders of Congress’s main tax committees urging them not to re-instate a privatized tax debt collection program.

A provision in the tax extenders legislation, the EXPIRE Act, introduced last month by Senate Finance Committee chairman Ron Wyden, D-Ore., would restore the private debt collection program that the IRS discontinued in 2009 (see IRS Nixes Private Collection Contracts). The controversial program had attracted both proponents and opponents in Congress.

The IRS Oversight Board said it was siding with National Taxpayer Advocate Nina Olson, who also expressed her opposition to the private debt collection program earlier this month.

“The concept has already failed twice,” said IRS Oversight Board chairman Paul Cherecwich, Jr., in a letter Tuesday to the leaders of the House Ways and Means Committee and the Senate Finance Committee. “When direct administrative costs are included, which the Joint Committee on Taxation failed to do, the program costs more to administer than the revenue retained. We concur with the NTA in that outsourcing federal debt collection is a bad idea and it makes little sense to resurrect, let alone expand the program to include the assignment of all ‘inactive tax receivables’’ to PCAs [private collection agencies]. The IRS Oversight Board respectfully suggests that if Congress wishes to improve revenue collection, it should invest in IRS priority enforcement programs, such as the Automated Collection System (ACS), which has a proven 20:1 return on investment. Funding another private debt collection program is throwing good dollars after bad, and in our view, should be summarily rejected.”

Cherecwich pointed to the two previous efforts at private debt collection of delinquent taxes owed the federal government. “Although America’s taxpayers were promised a high return on investment from the collection of old debts, the opposite proved true,” he said. “The NTA correctly notes that the IRS terminated the last version of the program after concluding it lost money—$17 million—when opportunity costs, such as diverting IRS collection personnel to administer the PDC, were taken into account. In other words, there was a negative return on investment.”

Cherecwich pointed out that independent studies have confirmed that private collection firms did not outperform IRS employees. During the most recent failed private debt collection program from 2006 to 2009, he noted, employees who worked in the IRS’s Automated Collection System function needed to stop working on their own inventory of cases so they could help the private collection agents who could not resolve tens of thousands of cases. If the nearly $68 million in total costs for the 2006 private debt collection effort had been invested in an additional 700 full-time equivalent employees in the IRS’s ACS function, he observed, they would have collected an estimated $1.4 billion in enforcement revenue rather than the loss incurred by the private debt collection program.

“Moreover, the PDC program never came close to being self-funded or operating independently of the appropriations process as promised,” Cherecwich added.

In a letter earlier this month, National Taxpayer Advocate Olson also wrote to leaders of the House Ways and Means Committee and the Senate Finance Committee arguing against the program.

“The Office of the Taxpayer Advocate and I personally were intimately involved in the development of the 2006-2009 PDC program,” she wrote. “We also handled more than 3,700 cases involving taxpayers against whom PCAs sought to collect. Based on what I saw, I concluded the program undermined effective tax administration, jeopardized taxpayer rights protections, and did not accomplish its intended objective of raising revenue. Indeed, despite projections by the Treasury Department and the Joint Committee on Taxation that the program would raise more than $1 billion in revenue, the program ended up losing money. We have no reason to believe the result would be any different this time.”

IRS commissioner John Koskinen has also objected to the program, telling a hearing of the House Ways and Means Committee this month that the IRS ended up losing money on the private debt collection program.

Sen. Chuck Grassley, a senior member and former chairman and ranking member of the Senate Finance Committee, pointed out last week after reading Olson’s comments in the Washington Post that the non-partisan congressional Joint Committee on Taxation, the official estimator of tax provisions, said the current proposal in the tax extenders bill to engage private contractors to collect tax debts would generate $2.4 billion over ten years for the U.S. treasury.

“The use of private contractors is meant to get at legitimate tax debts that the IRS can’t or won’t collect on its own,” Grassley said in a statement. “These contractors are set up to do the work. They aren’t meant to detract from the IRS’ work. They’re meant to make up for what the IRS can’t do, while saving money. And there’s no getting around the estimate from the Joint Committee on Taxation that the current proposal would raise $2.4 billion over 10 years. That says the proposal would work, as intended. Collecting tax debt is only fair to all taxpayers who pay what they owe.”

Sen. Charles Schumer, D-N.Y., reportedly inserted the provision in the tax extenders legislation, according to the Post. Two of the firms that have been approved by the IRS to provide private debt collection services are located in his state, ConServe and Pioneer Credit Recovery. Another approved contractor, the CBE Group, is in Grassley’s state, Iowa. The other approved contractor, Performant Financial, is in California.

Cherecwich disputed the estimate from the Joint Committee on Taxation, noting that it relies solely on gross receipts and the assumption that they will come in for 10 years regardless of the administrative costs.

“From a private sector perspective, such an approach would be contrary to fiduciary responsibility and full financial transparency,” he wrote. “What private sector company would make business decisions based solely on gross revenue while ignoring costs and still stay in business? It is doubtful they would. It would be like a major construction firm making a bid for a contract without taking into account labor costs. In this regard, we believe the JCT should modify its 10-year revenue score for any PDC program.”

IRS Finds Problems with Employee Plan Terminations

The Internal Revenue Service’s Employee Plans Compliance Unit recently looked at whether employee benefit plan sponsors had completed all the necessary steps after filing a Form 5500-series return showing they had adopted a resolution to terminate the plan, and found that many did not.

The IRS unit set up a Termination Project to learn if employee plan sponsors who indicated they adopted a resolution to terminate their plan had completed the termination process, complied with Revenue Ruling 89-87 for their wasting trusts, filed a final Form 5500-series return, and distributed all the trust assets as soon as administratively feasible.

The Employee Plans Compliance Unit found that some plan sponsors who indicated they had adopted a resolution to terminate their plan didn’t file a final Form 5500-series return. In general, the IRS noted, plan sponsors must continue to file a Form 5500-series return for their terminated plan until the last return filed is marked “final return/report” and shows zero assets at the end of that plan year. This is required even if the sponsor was exempt from filing a Form 5500-EZ (the annual return of a one-participant retirement plan) in previous years.

Over 75 percent of the sampled sponsors showed that, although they took additional steps to terminate their plan beyond adopting a resolution to terminate, they didn’t complete the termination process. In many cases, they didn’t file a Form 5500-series return marked as the ‘final return/report’ showing zero assets at the end of the plan year. The IRS noted that being in the process of terminating doesn’t eliminate the Form 5500-series filing requirement. Employee plan sponsors must continue filing their annual return until all plan assets are distributed.

In other cases, the plan sponsors distributed all the plan assets but didn’t mark the Form 5500-series return as final. The IRS noted that sponsors can correct this by filing an amended return. Review your Form 5500 return carefully before filing to prevent errors.

In other cases, plan sponsors terminated the plan but weren’t aware there were still assets in the trust. “All plan assets need to be distributed for the plan termination to be complete,” the IRS cautioned.

In some cases, it took a long time to distribute the plan assets because of difficulty locating participants and beneficiaries. Many plan sponsors weren’t aware of the requirements and procedures for locating missing participants and beneficiaries. Plan sponsors can use the Department of Labor’s Field Assistance Bulletin 2004-2 for guidance in locating missing individuals for benefit distributions. The IRS no longer provides letter-forwarding services (Revenue Procedure 2012-35).

In other cases, the plan sponsors distributed all the plan assets but didn’t indicate zero assets at the end of the plan year on their final Form 5500 series return. The IRS pointed out that sponsors can correct this by filing an amended return.

Other plan sponsors didn’t distribute all the plan assets as soon as administratively feasible after the plan termination date. “Some plan sponsors had difficulty distributing certain types of plan assets, such as real estate or partnership investments,” said the IRS. “Generally, a distribution which isn’t completed within one year following the date of plan termination will be presumed not to have been made as soon as administratively feasible unless facts and circumstances show otherwise (Revenue Ruling 89-87, 1989-2, C.B. 81). If sponsors don’t distribute all plan assets as soon as administratively feasible, the IRS considers the plan to be ongoing.”

If sponsors don’t complete all termination actions, there is also potential for plan disqualification, discrimination in favor of highly compensated employees, abusive tax avoidance, and administrative penalties, the noted.

Other filing errors included sponsors who mistakenly indicated they were terminating their plan when they actually did not intend to do so. Some plan sponsors incorrectly marked line 5a on the Schedule H (Financial Information) or Schedule I (Financial Information – Small Plan) of their Form 5500-series return to indicate they had adopted a resolution to terminate the plan.
Some plan sponsors mistakenly indicated the plan was terminated when it was actually frozen.

“These sponsors weren’t aware of the differences between a frozen plan and a terminated plan,” said the IRS. It noted that in a frozen plan, participants don’t accrue any additional benefits (whether because of service or compensation) except under special circumstances. A frozen plan must continue to meet annual information reporting and plan qualification requirements including having the plan sponsor amend the plan for current law by the required deadlines; otherwise, the plan may lose its qualified status for tax benefits.

Some plan sponsors mistakenly used the same plan number from a previous or different plan. Once plan sponsors use a plan number, they should continue to use it for that plan on all future filings with the IRS, the Labor Department and the Pension Benefit Guaranty Corporation. Even if the plan sponsor terminated their plan, they can’t use the same plan number for any other plan, the IRS cautioned.

There were also some processing errors that occurred before the implementation of the Department of Labor’s electronic filing system. Plan sponsors now must file Forms 5500 and 5500-SF electronically using DOL’s EFAST2 web-based filing system or through an EFAST2 approved vendor. Plan sponsors paper file the Form 5500-EZ with the IRS. Plan sponsors can’t paper file Forms 5500 or 5500-SF. For more information, see DOL’s EFAST2 site or the IRS Form 5500 corner.

The IRS recommended that employers review their terminated plans to see if they have finished all the steps in the termination process, including:
•  Filing all current and prior Form 5500-series filings
•  Filing a final Form 5500-series return showing zero assets
•  Distributing all assets
•  Finding all missing participants and beneficiaries

Plan sponsors should also recognize the differences between active, frozen, and terminated plans. They should correct any errors you discover and amend your return, if needed. Correct the plan administrative procedures so the mistakes don’t happen again. It may be helpful to ask at least two people to review the 5500 return before it is filed.

IRS Employee Took Home Data on 20,000 Workers at Tax Agency

An Internal Revenue Service employee took home a computer thumb drive containing unencrypted data on 20,000 fellow workers, the agency said in a statement.

The tax agency’s systems that hold personal data on hundreds of millions of Americans weren’t breached, the statement said Tuesday.

“This incident is a powerful reminder to all of us that we must do everything we can to protect sensitive data—whether it involves our fellow employees or taxpayers,” IRS Commissioner John Koskinen said in a message to employees. “This was not a problem with our network or systems, but rather an isolated incident.”

The IRS is contacting the current and former employees involved, almost all of whom worked in Pennsylvania, Delaware and New Jersey. The information dates to 2007, before the IRS started using automatic encryption.

IRS officials were told of the breach “a few days ago,” Koskinen’s message said.

The Social Security numbers, names and addresses of employees and contract workers were potentially accessible online because the thumb drive was plugged into the employee’s “unsecure home network,” Koskinen’s message said.

The IRS said it had no knowledge of the information being used to commit identity theft.

Inspector General
The IRS said it’s working with its inspector general to investigate the incident. The IRS statement didn’t say why the incident was discovered now, didn’t include the name of the employee who used the thumb drive and didn’t say whether the employee still works at the IRS.

David Barnes, a spokesman for the inspector general’s office, declined to comment.
House Ways and Means Committee Chairman Dave Camp, a Michigan Republican, said in a statement that the IRS in the past has released taxpayer information to the public and “has not been able to effectively prevent and detect identity theft.” He said the committee will look into the incident.

The IRS’s data breach is much narrower in scope than the security incident at Target Corp., where hackers stole credit- card information used by millions of shoppers.

It comes during a trying year for the tax agency, which has been under congressional investigation for its spending at conferences and its scrutiny of small-government groups.

For more information:

IRS Criminal Prosecutions Climbed 23% under Obama

The number of criminal prosecutions referred by the Internal Revenue Service to the Justice Department has increased 23.4 percent during the Obama administration.

Prosecutions in fiscal year 2013 alone jumped 30.6 percent from the previous year, according to a new report by Syracuse University’s Transactional Records Access Clearinghouse.

Convictions for tax crimes under the Obama administration are also drawing slightly longer average prison terms, 27 months under Obama, compared to 25 months during the George W. Bush administration, according to information obtained by TRAC under the Freedom of Information Act from the Executive Office for United States Attorneys.

Among U.S. federal judicial districts, Alaska registered the highest per capita rate of IRS prosecutions, 53 per million people, compared with 6.4 prosecutions per million nationally. Next in line was the Middle District of Alabama (Montgomery), with 30 per million, followed by the District of Columbia with 27 per million.