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Newsroom February 27, 2009
IR-2009-15, Feb. 26, 2009 — Revised Form 941 and extensive question-and-answer section developed for employers.
IR-2009-14, Feb. 25, 2009 — Some individuals who bought their first home in 2009 can claim a credit on their 2008 tax returns and get the benefit now.
IR-2009-13, Feb 21, 2009 ― Tax credit is worth $400 to $800 for many Americans.
Your clients may ask you about certain new tax provisions from the American Recovery and Reinvestment Act. Here are some highlights.
- Economic Recovery Payment: $250 paid to Social Security recipients, veterans and railroad retirees by the Social Security Administration, Department of Veterans Affairs and the Railroad Retirement Board http://www.irs.gov/newsroom/article/0,,id=204468,00.html
- New vehicle purchases: deduct state and local sales taxes paid in 2009 on certain vehicles. http://www.irs.gov/newsroom/article/0,,id=204519,00.html
- Check for frequent updates on the Recovery Act Web page. Want more information; go to summary of key provisions for 19 pages of additional details.
The Homeowner Affordability and Stability Plan is part of the President's broad, comprehensive strategy to get the economy back on track. The plan will help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure. Read the Executive Summary for a quick review.
*NEW* Registration for the 2009 Nationwide Tax Forums is now open! Register now!
2009 Dates and Locations
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Mandalay Bay Hotel
July 7 - 9
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Town and Country
July 14 - 16
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August 4 - 6
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August 25 - 27
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September 8 - 10
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September 22 -24
IRS Partner Headliner
- Volume 259: March 10 Tax Talk Today illuminates the Internal Revenue Service audit process. http://www.irs.gov/businesses/small/article/0,,id=204382,00.html
- Volume 260: Form 1099-OID, Original Issue Discount, Refund Scheme http://www.irs.gov/businesses/small/article/0,,id=204500,00.html
- Volume 261: Internal Revenue Service Updates the Allowable Living Expense Standards for 2009 http://www.irs.gov/businesses/small/article/0,,id=204719,00.html
- Cancellation of Debt – March 18, 2009
· Surviving the IRS Audit - Tuesday, March 10, 2009
· Specialty Taxes: Estate and Gift and Employment Taxes - Tuesday, May 12, 2009
IN THE NEWS:
IN THE NEWS:
NATIONAL MEDIA RELATIONS BRANCH 202-622-4000 IRS.Media.Relations@irs.gov
1. Health Care: Employers Get Guidance for Claiming COBRA Coverage Credit on Form 941 * BNA Daily Tax Report
2. IRS Settlement Program Called Underused as More Taxpayers Face Economic Hardship * Tax Notes Today
4. Top Stanford Official Is Arrested * Wall Street Journal
5. In a Surprise, UBS Will Be Led by a Former Credit Suisse Executive * New York Times
6. Before You Buy, Study Rules for New Tax Credits *
7. Crooks Send Out Monthly Statements, Too * New York Times
8. Tax Preparers: TIGTA Reports Cite IRS Shortcomings in Oversight of Paid Return Preparers * BNA Daily Tax Report
9. Tax Levies: TIGTA Urges IRS to Modify Levy Program to Ease Hardships on Low-Income Taxpayers * BNA Daily Tax Report
10. IRS: TIGTA Report Urges IRS to Step Up Efforts to Measure Skills Needed for Future Tasks * BNA Daily Tax Report
Daily Tax Report The Bureau of National Affairs, Inc. Federal Tax & Accounting
Information that employers need to claim tax credit for Consolidated Omnibus Budget Reconciliation Act health insurance premiums they pay for former employees is now posted on the Internal Revenue Service Web site, IRS said in a Feb. 26 news release (IR-2009-15).
The information, coming nine days after passage of the economic stimulus law, includes answers to 20 frequently asked questions and an updated version of Form 941, the quarterly payroll tax return that employers must use to claim credit for the COBRA subsidy provided under the law.
IRS said this information is only a first step in an effort to help employers implement the subsidy authorized by the American Recovery and Reinvestment Act of 2009 (Pub. L. No. 111-5), enacted Feb. 17(30 DTR GG-1, 2/18/09). Additional forms are being revised to implement the subsidy, IRS said.
Most of the guidance from IRS and the Labor Department is still to come, Susan Relland, an attorney in the
For example, she said, the frequently asked questions made clear that employers are expected to claim the premium credit for the quarter in which the COBRA premium payment is made.
Law Authorized 65 Percent Subsidy. The stimulus bill authorized a 65 percent federal subsidy for continuing COBRA health care coverage for employees who were laid off between Sept. 1, 2008, and Dec. 31, 2009, because of the deteriorating economy.
Eligible former employees who elect continuing health care coverage must pay 35 percent of the COBRA premium and employers can claim credit on their payroll tax return for the remaining 65 percent of the premium. The temporary subsidy will provide a maximum of nine months of subsidized health insurance premiums.
Employers will be entitled to the premium subsidies as a credit only after former employees have paid their 35 percent portion of the premium, IRS said.
To substantiate their claims for reimbursement, employers must provide IRS with at least six pieces of documentation, including proof that they have paid the full premium amount to their insurance carrier or, in the case of self-insured plans, proof of the premium amount and proof of coverage provided to eligible employees, IRS said.
Attestation of Involuntary Termination.
One of the documents that employers must keep as part of the required documentation is attestation of involuntary termination, Relland said. That language was added to the stimulus bill to satisfy concerns of some legislative staff members and Treasury Department officials about potential abuse of the subsidy, she added.
For example, she said, "a bad actor employer might try to take advantage by claiming a subsidy for someone who is an active employee."
In the information posted Feb. 26, IRS said it will not extend the deadline for filing the first quarter Form 941.
For most employers, responding to a new regulation in a year's time is considered a fast response, Relland said. "This whole thing is unbelievably fast," she said.
Many employers had concerns that the supporting documentation for claiming the COBRA subsidy is documentation they would have to submit to IRS, Relland said. "Now it appears they don't have to submit it, just maintain it," she said. Because most companies keep their COBRA information in one place in binders and in their computer systems, the documentation requirement does not appear to be a burden, she added.
Subsidy Generally Effective March 1.
For most employers, the COBRA subsidy provision becomes effective March 1, Relland said. But depending on how some COBRA premiums are billed, the effective date could be as early as Feb. 17, she said.
After Dec. 31, the subsidy program will not accept any new participants, Relland said. However, many companies still will be involved in the subsidy program after Dec. 31. "Employers are going to have to live with this for about two years," she said.
Tax Notes Today February 27, 2009
The recent decrease in taxpayers who have requested and been approved to enter into an offer in compromise with the IRS raised concerns at a February 26 House Ways and Means Oversight Subcommittee hearing on ways to assist taxpayers in tough economic times.
When the IRS announced a series of efforts to help financially distressed taxpayers in January, officials said taxpayers who had entered into payment agreements with the IRS might be allowed to miss a payment without voiding their agreement. In addition to possibly allowing a temporary suspension of collection actions against taxpayers, the IRS said it would take a second look at OICs rejected because a taxpayer had enough home equity to pay the debt, as well as ease requirements on taxpayers seeking an expedited release from a levy. (For prior coverage, see Doc 2009-185 or 2009 TNT 3-2.)
In an OIC, the IRS agrees to settle a taxpayer's tax debt for less than the full amount owed. The incentive for taxpayers is to avoid further collection actions and to be allowed to pay what they are able. The government, for its part, is able to collect what it can under a contract requiring that the taxpayer stay in compliance for five years.
Taxpayer Advocate Cites Barriers
At the hearing, National Taxpayer Advocate Nina Olson told lawmakers that taxpayers with OIC agreements have confidence that "the government will deal with them fairly and compassionately," but she also said that many taxpayers are getting "stopped at the door" of the program. (For Olson's testimony, see Doc 2009-4252.)
Citing statistics showing that the number of offers the IRS has received from taxpayers has declined 65 percent, from 125,390 in fiscal 2001 to slightly less than 43,989 in 2008, Olson said Congress and the IRS have erected barriers that keep taxpayers from pursuing the collection alternative.
The IRS in 2001 shifted responsibility for evaluating OICs submitted by taxpayers from field personnel to central campuses, and it implemented more rigorous requirements for processing and considering offers. According to Olson, the IRS took these steps out of concern that it was receiving too many frivolous offers. Yet even as the number of offers submitted by taxpayers declined, the number of offers accepted by the IRS declined at a similar rate, by 72 percent, from more than 38,643 in fiscal 2001 to 10,677 in fiscal 2008, she said.
Congress also "further discouraged" taxpayers from submitting offers when in 2006 it made most taxpayers pay a 20 percent down payment on the offer amount upon submission of the offer, Olson said. She added that a study done by her office showed that the number of offers submitted by taxpayers declined 21 percent from fiscal 2006 to 2007.
Subcommittee ranking minority member Charles W. Boustany Jr., R-La., asked Olson whether there could be a reason other than the 20 percent down payment requirement that caused the 21 percent decline in submitted offers.
"I actually think that the fall is caused by the legislation," Olson said. The study by her office also showed that 56 percent of taxpayers whose offers were accepted and who paid lump sum down payments got the money for the payment from a family member or relative.
Linda Stiff, IRS deputy commissioner (services and enforcement), acknowledged that the data show a decline in offers submitted, despite what she said were "extraordinary steps" taken by the IRS over the years to improve the program. (For Stiff's testimony, see Doc 2009-4250.)
Stiff told lawmakers that the data suggest "that there's a disconnect" between what's available to taxpayers and how the IRS is running the program. She said she would like to "bring in a third party" to help the IRS evaluate the program and better reach taxpayers.
After the hearing, Olson told Tax Analysts the IRS could encourage taxpayers to enter the OIC program in several ways. The IRS could instruct collection employees to "proactively identify taxpayers who might be good candidates for an offer and discuss it with them," she said.
Olson added that the IRS could use data available in the outstanding collection queue to identify taxpayers who qualify for offers and contact them, suspend requirements for financial statements, and offer interim guidance saying the agency can process OICs without the 20 percent down payment in situations in which the taxpayer has a home or retirement plan or if the money would be coming from a third party.
IRS Call Volume Up, Level of Service Down
Stiff said the IRS has received more calls from taxpayers this year than when the IRS was blitzed with calls about the economic stimulus payment in 2008. This year, according to Stiff, several factors are contributing to the "inordinate" number of calls coming in.
She said some taxpayers who did not get the full amount of the stimulus payment in 2008 became eligible for it as the year progressed. Those taxpayers can claim the difference on their tax return -- but Stiff said "unfortunately, it's a complex computation," and taxpayers need help.
Calls are also coming in to inquire about a change to the electronic filing program that discontinued a requirement that taxpayers send in a form with their signature, but that now requires that the taxpayer have other information signed electronically. Finally, Stiff said taxpayers have been calling to ask if they have to do anything to get the Marking Work Pay credit, which for most taxpayers will not require any action.
Olson said early indications are that the IRS is straining to handle the call volume, noting that by early February, the overall level of service for calls was 55 percent, compared with 79 percent in 2008.
Daily Tax Report The Bureau of National Affairs, Inc. Federal Tax & Accounting
The Internal Revenue Service will be giving its employees more flexibility to deal with taxpayers who are struggling in the current bad economy, but Taxpayer Advocate Nina Olson told lawmakers Feb. 26 that the service will need to change its attitude and make those remedies less burdensome on taxpayers in order for them to work.
House Ways and Means Oversight Subcommittee Chairman John Lewis (D-Ga.) kicked off the hearing on what IRS is doing to help taxpayers with economic difficulties by saying the committee is looking for "the gentle and sweet side of IRS."
Linda Stiff, IRS deputy commissioner for services and enforcement, said this year IRS personnel will have greater latitude in promoting economic solutions for taxpayers, with the focus on previously compliant taxpayers who may be unable to pay their taxes for the first time.
Those taxpayers may be able to adjust payments for back taxes, avoid defaulting on payment agreements, or possibly defer collection actions, she said.
To that end, frontline employees have been reminded that they can offer installment agreements at the end of an audit when taxpayers cannot satisfy their obligations immediately, thereby enabling them to minimize interest and penalty charges.
Changes for Offers in Compromise.
Another example of help is the offer in compromise program, which Stiff said is often affected by the battered real estate market. For individual taxpayers, IRS has expedited the process and created flexibility for people trying to purchase or refinance a home, she said.
"The bottom line is IRS should not be the reason someone can't get out of a real estate jam," she said.
IRS is also centralizing the process for reviewing home equity values, especially in offer in compromise situations, she said.
However, she noted, with all the new credits that have come into play under the stimulus law, there is also a greater potential for abuse, and she promised to watch that closely and report back to Congress if there are problems.
The offer in compromise program allows taxpayers to settle their tax debts for less than is owed. Olson has maintained over the years that IRS is fixated on getting 100 percent of the amount that is owed rather than working with taxpayers to get some portion of the tax liability back when taxpayers are willing, but unable, to pay.
According to Olson, at the end of fiscal year 2008, there were more than 2.6 million taxpayers with delinquent accounts. IRS accepted more than 10,677 offers in compromise and entered into 22,000 partial pay and installment agreements to settle outstanding debts, she said. That meant that, combined, one out of 78 taxpayers with a delinquent account was granted one of those collection alternatives.
"It is clearly not the case that 77 out of every 78 taxpayers with delinquent accounts were unwilling to deal with the IRS," Olson said. "Rather, despite its statements of support for these collection alternatives, IRS has made these options too inaccessible for taxpayers to obtain."
Stiff said the program is working and that ratably, more offers in compromise are being accepted than ever before. But she acknowledged that there is some "disconnect" between what is available and what taxpayers are utilizing. Stiff said 50,000 taxpayers tried to use the program in 2008 but IRS must do a better job of promoting it as a viable tool in the minds of taxpayers.
She also said the time has come to have an independent third party make an assessment of what barriers exist within IRS of which the agency might not be aware.
Private Debt Collection.
Chairman Lewis asked if the private debt collectors who have been hired to help IRS recoup millions in delinquent taxes would have any of the new flexibility to deal with taxpayers facing tough times. He was told the outside collectors do not have the same authority as IRS personnel.
They can offer taxpayers only the options of full payment or payment in three years, Olson said. Anything beyond that moves the case back to IRS "and the flexibilities would be applied there,"Stiff said.
Rep. Xavier Becerra (D-Calif.), an opponent of private debt collection, said that while it is good that IRS is now trying to be more accommodating with taxpayers, he is concerned that the private debt collectors may not be fully incentivized to tell taxpayers about all the payment options available to them, because if the case goes back to IRS, the private debt collectors forgo their commissions.
"This is the worst time to have head hunters out there who might not give taxpayers all the options," he said.
The Ghost of Geithner.
In one of the more persistent exchanges between committee members and Stiff, Rep. Peter Roskam (R-Ill.) asked how he should explain to his constituents that Treasury Secretary Timothy Geithner was not forced to pay a penalty on the back taxes he owed IRS, but was "let off by simply writing a check for the tax liability and the interest he owed IRS."
Geithner failed to pay self-employment and Medicare taxes for some years but came into compliance on $34,000 in back taxes and Medicare payments after President Obama picked him to serve as Treasury Department chief.
" I think it's very important as we move forward, where there is more and more concern about people being treated fairly, that people are treated in the same way that powerful people are treated in this country," Roskam said, addressing Stiff.
Stiff said she could not talk about the Geithner matter and she did not know the specifics of his case.
Constituents should expect that they will be charged for their tax and interest and penalties where applicable, she said, but if they believe they meet the "reasonable cause standard" and those penalties should not apply, they should explain to IRS, and the service will then consider it in relation to the facts and circumstances of the case.
Roskam asked that she report back to him in a few weeks on what creates the predictability in such cases and whether it is just a matter of IRS discretion.
WALL STREET JOURNAL February 27, 2009
By EVAN PEREZ and KARA SCANNELL
A Federal Bureau of Investigation affidavit filed in U.S. District Court in
Ms. Pendergest-Holt's lawyer, Jeff Tillotson, said she committed no crime. "We're disappointed in the actions of the government and the SEC," he said.
The SEC earlier this month filed civil charges against Mr. Stanford, Ms. Pendergest-Holt and James M. Davis, chief financial officer of the financial firm. The SEC alleges that Stanford International Bank defrauded investors and account holders of an estimated $8 billion in deposits.
Investigators have been focusing their probe on whether Stanford International Bank operated as a Ponzi scheme, according to people familiar with the investigation. No criminal charges have been brought against Mr. Stanford or Mr. Davis.Neither Mr. Stanford nor Mr. Davis has responded to the civil charges.
The FBI affidavit says Ms. Pendergest-Holt met with Stanford officials in
Ms. Pendergest-Holt, of
The FBI affidavit details the alleged scramble by Stanford officials earlier this month as federal investigators sought details of the billions of dollars in investments that Stanford claimed to have. Unidentified Stanford executives, employees and board members are portrayed at meetings in
During the meetings, some Stanford employees allegedly appeared surprised that certain assets backing certificates of deposit sold to investors consisted of stakes in Stanford-owned companies holding illiquid island real estate in
Soon after the gathering, the affidavit says, a lawyer identified as Attorney A suggested to a Stanford official they "begin to pray together."
The affidavit describes Ms. Pendergest-Holt's deposition with the SEC on Feb. 10, about a week before the SEC sought to freeze the assets of Ms. Pendergest-Holt, Mr. Stanford and related entities. The complaint says Ms. Pendergest-Holt failed to tell the SEC about a meeting she had a week earlier with her counsel, three unnamed Stanford executives and another unnamed person.
An SEC lawyer asked Ms. Pendergest-Holt whether she met anyone else apart from her attorney, and she responded, "In preparation of my part, no," according to the affidavit.
Separately, Mississippi Secretary of State Delbert Hosemann Thursday called on the court-appointed receiver to allow hundreds of
Also, an investor sued the SEC in a
New York Times (NY)
By NELSON D. SCHWARTZ; Joseph Schmid contributed reporting from
ZURICH UBS replaced its chief executive Thursday with a surprise pick from a crosstown rival, Credit Suisse, bowing to the fallout from a tax scandal that has rocked the banking world and soured relations between
Oswald Grubel, widely praised for turning around Credit Suisse before his retirement in 2007, will take over from Marcel Rohner, whose 20-month tenure at UBS was overshadowed by tens of billions in losses on subprime mortgages, the most of any non-American bank, as well as the recent tax case.
''Our primary goal will be to regain the trust of our clients and other stakeholders,'' Mr. Grubel said in a statement. ''The second goal is to restore financial health to UBS.''
The appointment came a week after UBS was forced to pay a $780 million fine and admit that its executives had conspired to help American clients avoid paying taxes to the Internal Revenue Service, narrowly dodging a criminal indictment in the
Before becoming chief executive in 2007, Mr. Rohner ran UBS's large wealth management business, which included the cross-border unit that catered to American clients at the heart of the Justice Department inquiry. His successor there, Raoul Weil, was indicted late last year and was declared a fugitive in January by the American authorities.
In a statement after the settlement, Mr. Rohner said, ''It is apparent that as an organization, we made mistakes and that our control systems were inadequate.''
As part of the settlement, UBS agreed to disclose the names of 250 clients from the
On Monday, Eveline Widmer-Schlumpf, the Swiss Justice minister, is set to meet in
The chairman of UBS, Peter Kurer, said Thursday that Mr. Rohner, 44, had told directors in January that he intended to step down after UBS's broader effort to reduce risk, restructure its investment bank to become profitable again and refocus UBS on the wealth management business.
With the appointment of Mr. Grubel, 65, UBS is trying to put both the tax scandal and the $53 billion in subprime-related write-down behind it, while delivering the fundamental break with the past that Swiss shareholders and other have been demanding.
Last fall, the Swiss National Bank was forced to come to the aid of UBS, agreeing to buy $39.1 billion in so-called toxic assets, removing them from UBS's balance sheet. The central bank also gave UBS a $6 billion injection of cash.
Analysts praised the return of Mr. Grubel, one of the few globally known bankers left untarnished by the financial crisis. ''Grubel is one of the few executives pretty much worldwide who have real experience turning around an investment bank,'' said Dirk Hoffmann-Becking, an analyst with Bernstein Research in
Mr. Grubel, who fled
At Credit Suisse, his success came by focusing the firm on a few core strengths like underwriting, equity trading and advice on mergers and acquisitions, Mr. Hoffmann-Becking said. He was also known for keeping a lid on expenses in an industry known for excess.
As an outsider in UBS's close-knit executive suite, Mr. Grubel will not have an easy time repeating his success at Credit Suisse. His boss, Mr. Kurer, served in top management roles during both the tax and subprime debacles, and is known for his keen command of UBS's sprawling bureaucracy. Mr. Kurer became chairman last April after Marcel Ospel stepped down amid the subprime losses.
Also, Credit Suisse and UBS are rivals. ''It's very strange because Credit Suisse and UBS are competitors and they hate each other,'' said Charles Wyplosz, director of the
By Michelle Singletary Page D02
I hosted an online discussion recently and one of the participants was particularly perturbed because he had purchased a new car on President's Day, Feb. 16.
Had he waited just one day, he would have qualified for a tax break that allows new car buyers to deduct state, local sales and excise taxes on their federal returns.
The deduction is available only for taxpayers who purchased new vehicles on or after Feb. 17 -- when President Barack Obama signed the American Recovery and Reinvestment Act of 2009, better known as the economic stimulus plan.
"I feel duped," the person wrote during the chat. "The reason I decided on new versus used was because of the tax credit. I thought I would qualify . . . as the dealer told me. I would have waited a day to save the $2,000."
I don't think so. It's not the dealer's fault this person missed out on the credit. The dealer may have believed the buyer would qualify for the tax break. And the buyer would have, had Obama signed the bill by President's Day as was originally planned. But he didn't.
There's a lesson for this car buyer and a lot of people confused about various things in the stimulus plan. You need to separate fact from hearsay when it comes to the law. Here are some questions I've received from readers doing just that:
QWhat are the exact dates covered for the tax deduction for sales taxes on new cars bought in 2009?
AThe deduction for state, local sales and excise taxes on new cars, light trucks, motor homes and motorcycles is allowed from Feb. 17 through Dec. 31, 2009. The deduction is phased out for joint filers with modified adjusted gross income of $250,000 to $260,000. For other taxpayers, it's phased out if your modified adjusted gross income is $125,000 to $135,000.
I am about to buy a new car that I have negotiated from $56,410 to $49,900. Do I have to pay $49,500 or below for a vehicle to get the car sales tax deduction?
As explained well by the National Association of Realtors (http://www.realtor.org), there are a few filing options for first-time home buyers eligible for the credit this year:
-- If you purchase your home between Jan. 1, 2009, and April 15, 2009, you can claim the $8,000 credit on your 2008 return, due by April 15.
-- If are planning to close on your home after April 15 but by Oct. 15, you can file for an extension and just wait until the October tax deadline to file your 2008 tax return to claim the credit. You have up to three years to file an amended return.
-- If you have already filed your 2008 return and qualify for the $8,000 credit but want to take it this year, you can file an amended return on Form 1040X, which is available at http://www.irs.gov.
-- You could also wait and take the credit on your 2009 tax return or adjust your income tax withholdings now to get the benefit of the credit before filing your return.
"The key is the date you purchased the home, not the year for which you are claiming the credit," said Eric Smith, a spokesman for the IRS.
The first-time homebuyer credit can be claimed on IRS Form 5405, which also provides additional information about the credit.
What are the income limits for the first-time home buyer credit?
You are allowed the full amount of the credit (based on your home's purchase price) if your modified adjusted gross income is $75,000 or less ($150,000 or less if married filing jointly). The credit begins phasing out when your modified adjusted gross income exceeds $75,000 ($150,000 if married filing jointly). The credit is eliminated at $95,000 ($170,000 if married filing jointly).
Was there anything in the stimulus plan to allow penalty-free or tax-free withdrawals from a 401(k)?
Sorry, the American Recovery and Reinvestment Act does not provide tax relief for early withdrawals from 401(k) or IRA distributions as some financially weary people had hoped.
There are a lot of tax breaks in the stimulus plan. Keep checking the IRS Web site for the latest updates about the law. Or seek the advice of a qualified tax preparer or download the latest updates for tax software before making a financial decision based on what you think the new law contains. To do otherwise could cost you big money.
-- On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and at http://www.npr.org.
-- By mail: Readers can write to her at The Washington Post,
New York Times (NY) February 26, 2009
Crooks Send Out Monthly Statements, Too By DAVID CAY
DURING three decades of marketing employee benefit plans in
The financial disaster that wrecked her retirement plans could easily happen to anyone, even those, like Ms. Brown, who had tried to understand the fundamentals of investing.
How this middle-class businesswoman, now a career coach, lost more than a decade's worth of savings to a man she had never heard of is a cautionary tale for all investors. Ms. Brown's experience shows that getting a statement every month means nothing more than that you own a piece of paper with numbers on it, even if you think you have invested your money with a regulated investment firm.
More broadly, her tale illuminates how, over three decades, spending on the white-collar police -- securities, banking and tax investigators -- has not kept pace with the rapidly expanding financial sector, leaving a cost borne by all investors. Regulatory agencies now operate under tightened rules that restrict their ability to act, budgets that have shrunk their capacity to investigate, and revisions to regulatory laws that have unraveled parts of the fabric of investor protection.
Because of those frayed threads, billions of dollars have been diverted. And the reduced regulation enables con artists to operate for decades, creating the appearance of stability for their flimsy empires.
The confessed Ponzi schemer Bernard L. Madoff took Ms. Brown's money. He is just the currently best-known example of what securities monitors say has been a growing problem with con artists, as the nation's traditional pension plans, which were invested by fund managers and guaranteed a specific benefit, gave way to individual retirement plans that empower people to make their own investment decisions, but also require them to bear all the risk of those choices.
''I know about spending less than you make, diversifying your investments and knowing where you are investing,'' Ms. Brown said.
So she sent her money to Jameson Securities, thinking it was part of a registered investment partnership in
And while Jameson is not a registered firm, Bernard L. Madoff Investment Securities is. Every quarter Ms. Brown received statements showing her investment and her returns, which were modest when the market was down and significant when the market was up. Only a few weeks ago, she learned that Jameson, which has collapsed, had placed her money, through an intermediary, with Mr. Madoff.
''I don't think it matters if you do know your statement is legitimate, because with an operation like Madoff it would have made no difference,'' said Lauren E. Willis, who teaches consumer law at Loyola Law School in Los Angeles, adding, ''How can Ms. Brown or anyone possibly know'' that their money is invested as it says on the statement?
Some steps that Ms. Brown followed reflect the advice of experts. For starters, she sent her money to an institution, not to an individual, or at least so she thought. Investors ''should never make checks payable to an adviser; always make them payable to the custodian,'' said Larry Hughes, executive director of BNY Mellon Wealth Management in
Steven Thel, who teaches securities law at
This is a caution that Ms. Brown -- like a great many other investors -- did not take; she sent her money electronically to Jameson. Investors should also make sure that their monthly statements come directly from the investment firm, not from their advisers. Among the red flags: statements on personal stationery, statements that list offshore banks as the repository of funds or, as happened to Ms. Brown, statements that come from an accounting firm.
''I had no idea I should question why a statement came from a certified public accounting firm, and why would I -- or anyone else?'' Ms. Brown said. More broadly, no statement should be trusted at face value, said Thomas W. Joo, a professor of securities law at the
''There is no way to know a statement is not fraudulent,'' Professor Joo said. He said investors should check their statements immediately and closely, just as they should check each item on credit card and checking account statements. Any item that looks out of place or that the investor does not recall should prompt a call to the institution, he said.
''If you do not act as soon as you get such a statement, the courts will ask, Why were you dumb enough to believe that was a legitimate statement of your account?'' Professor Joo said. Failure to act swiftly could wipe out any chance of recovery in litigation.
The safest way to check statements received electronically is to type the Web address of the firm into your browser and think about whether it makes sense (for instance, does it originate abroad?), rather than copying what may be a fraudulent address from an e-mail message.
Calling the firm to inquire about the Web addresses it uses is also a good idea. And the number called should be obtained independently, not from the statement itself. An Internet search or a call to directory information should yield the number.
Tamar Frankel, who teaches securities law at Boston University School of Law, suggested two basic steps to reduce the risk of being taken in an investment scam.
You should be asking yourself, ''Is my money with a registered investment company or mutual fund?'' she said, because if it is, the risk of being scammed is very small, and ''if employees are pilfering, the firm will have insurance.''
Her second point: ''Because we have such a mishmash of regulation, unless you are dealing with a big-name mutual fund you should ask for a statement from the bank that is the custodian'' of the securities.
Adding to Ms. Brown's injury was her tax situation. When she realized she was a victim of fraud and tried to determine the tax consequences, she found that the Internal Revenue Service offered virtually no guidance on how to treat such situations.
What about the taxes you paid on what you thought were capital gains and dividends? And when can you take your losses, and how, on your tax return?
Howard Bartnof, a lawyer in
''When do you recognize a loss?'' he asked. If your investment turns out to be fraudulent, it poses a series of subtle and complicated tax questions about what kind of loss it is and when you can declare it on your tax return. The authorities typically are of little help.
Without I.R.S. guidance, Mr. Bartnof said, different people will end up with different results because of differing advice, and the I.R.S. will waste audit resources to pursue people trying to comply with uncertain tax laws.
The I.R.S. has not issued any guidance to Madoff investors and none is planned, said a spokesman, Bruce I. Friedland. He said they should consult their tax advisers.
I.R.S. Publication 547 explains how to report fraud losses and Publication 550 deals with investment losses.
Essentially, while understanding financial principles is useful, it is far from adequate to protect investors.
''The overwhelming evidence is that most people make serious investment mistakes, which is why they should put their money into index funds and bond funds with low costs,'' said Professor Thel, ''and not spend too much of their time trying to become financially literate.''
Daily Tax Report The Bureau of National Affairs, Inc. Federal Tax & Accounting
February 27, 2009
The Treasury Inspector General for Tax Administration Feb. 26 released a report finding that the Internal Revenue Service's Office of Professional Responsibility (OPR) was unaware of a significant number of licensed tax practitioners who promoted tax shelters and were still eligible to represent taxpayers before the IRS.
The report was one of two reports regarding IRS's oversight of paid tax preparers. In the release accompanying the reports, TIGTA explained that there are no national standards that a tax return preparer has to satisfy before providing return preparation services to taxpayers.
Paid preparers who want to represent taxpayers before IRS must be licensed as a certified public accountant, attorney, or enrolled agent, the release said. The tax preparers, also referred to as practitioners, are regulated by OPR, which sets rules and enforces standards of "competency, integrity and conduct," TIGTA said.
Shelter Promoters Still Able to Represent Taxpayers.
The first report, Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service, found that OPR was unaware of a significant number of licensed tax practitioners who were assessed penalties, sentenced in a criminal proceeding, or enjoined for tax shelter violations.
The report said that, as a result, these tax practitioners were eligible to represent taxpayers before IRS, and warned that practitioner misconduct could erode confidence in the tax system and create unfortunate consequences for taxpayers relying on those tax practitioners.
The report said that OPR was not aware of 160 practitioners who were assessed tax penalties, permanently enjoined by a federal court, or criminally sentenced for abusive tax shelter activities that caused losses to the government. The practitioners were still eligible to represent 9,766 taxpayers before IRS, the report said.
The report listed a number of recommendations for OPR, steps that IRS management agreed to take. OPR said it would review the identified tax practitioners penalized for abusive tax shelter actions and take appropriate action. If the practitioners are not under OPR's jurisdiction, the individuals will be referred to the appropriate IRS function, it said.
OPR is also in the process of revising the Internal Revenue Manual guidelines governing complaints, referrals, and licensing information. The office said it also will review the cases involving abusive tax shelter injunctions and criminal prosecutions for appropriate action.
OPR said it will continue to provide awareness training to stakeholders to ensure that licensed practitioners involved in potentially disreputable behavior are brought to the attention of OPR and appropriately sanctioned. Finally, OPR will look to develop and maintain a more proactive model of case identification and development, as resources permit, it said.
Complaint Process Against Preparers Ineffective.
The second TIGTA report, The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers Is Ineffective and Causes Unnecessary Taxpayer Burden, said that, with current processes, IRS cannot determine how many complaints are received against tax return preparers, how many complaints are dealt with, and the total number of complaints that are received against a specific firm or preparer.
The report said that guidelines provided to taxpayers and employees about filing a tax return preparer complaint are "confusing and inconsistent." It said that taxpayers have to identify whether the tax return preparer is an unenrolled agent or a practitioner and then determine whether the complaint involved fraud and/or a violation of the tax code. In addition, the form used to submit complaints against unenrolled preparers is not designed to provide adequate information to handle complaints, the report said.
It also said the current process did not identify potential problem preparers so that IRS could determine the extent of a problem, if any, or how a problem should be resolved.
Several IRS offices are involved in the process of resolving taxpayer complaints, the report explained, and because there is no central point to identify duplicate complaints IRS spends unnecessary time sorting and redirecting complaints.
The report recommended that IRS clarify guidance to taxpayers on its Web site regarding the preparer complaint process and develop a form, both Web-based and paper, to specifically address return preparer complaints. Such reports should be routed to the correct IRS function and include information so that IRS can adequately evaluate the legitimacy of the complaint, it said. IRS agreed to work on the recommendations.
Daily Tax Report The Bureau of National Affairs, Inc. Federal Tax & Accounting
February 27, 2009
The Internal Revenue Service's use of the Federal Payment Levy Program (FPLP) to collect outstanding taxes creates economic hardships for some low-income Social Security beneficiaries, the Treasury Inspector General for Tax Administration said in an audit report released Feb. 26.
TIGTA said it conducted the audit "to determine the effectiveness of the FPLP in collecting delinquent taxes and whether the Program adequately protects taxpayers' rights."
Through the FPLP, the service can impose systemic levies against federal payments made to vendors, contractors, and employees with tax delinquencies.
TIGTA's audit found that the systemic levies were causing hardship for some taxpayers. Further, in some cases, levy fees paid by IRS were excessive; in other cases, federal payments that should have been identified for levy were not included in the FPLP, TIGTA said.
To remedy these shortcomings, TIGTA recommended that IRS:
. set criteria to ensure Social Security beneficiaries in hardship situations are excluded from FPLP levies;
. periodically match federal payments against a list of taxpayers; and
. take steps to ensure that costs paid to collect the levies, on a per-transaction basis, do not exceed other IRS collection methods.
"TIGTA acknowledges the IRS' efforts but believes that more needs to be done to prevent the hardship on low-income taxpayers. The IRS also needs to take additional action to ensure that it identifies all payment sources to include in the FPLP,"TIGTA said in an e-mail announcing release of the audit report.
IRS disagreed with the recommendation on matching taxpayers against federal payment documents, the report said.
On the recommendation to mitigate the hardships created by FPLP levies, IRS was not sure the model for screening low-income taxpayers would work, TIGTA said, but "will encourage adjustments to payment thresholds" to exclude low-dollar amounts.
Daily Tax Report The Bureau of National Affairs, Inc. Federal Tax & Accounting
February 27, 2009
The Internal Revenue Service lacks the needed agencywide information on "mission-critical" employee skills and competencies to conduct "effective workforce planning" for its evolving tasks, the Treasury Inspector General for Tax Administration said in a report released Feb. 26.
TIGTA said the potential loss of "a large number" of IRS's most experienced technical employees over the next several years, "coupled with the increasing complexity of the work," necessitates effective planning.
"However, the IRS lacks the comprehensive, agency-wide information on mission-critical employee skills and competencies it needs to effectively perform this planning," TIGTA said in a summary of the report, Workforce Planning Efforts Are Hindered by a Lack of Comprehensive Information on Employee Skills Levels.
And because IRS does not have a methodology in place to measure its workforce against current and future skills, it cannot "reshape" the workforce to meet the future challenges, which TIGTA said could hinder the quality of services IRS provides to taxpayers.
TIGTA said IRS's lack of information on employee skills is mainly attributable to the absence of a "corporate process" for the uniform collection, compilation, and analysis of "skills data across the agency."
"In addition, the IRS Human Capital Office has not provided sufficient guidance to support the uniform collection of these data at the business unit and operating division levels,"TIGTA said, and until IRS implements a "consistent methodology"for assessing skills in critical jobs, "it will be unable to plan for future training and recruitment needs."
'Workable' Process for Measuring Skills Gaps.
TIGTA recommended that the Human Capital Office continue with efforts to partner with business and operating units to devise a "workable" corporate process for measuring skills gaps. It also suggested a detailed plan be devised by the deputy commissioners for operations support and for services and enforcement to guide such an assessment effort.
In a response, IRS said it agreed with the report and the recommendations, and noted that it is developing a competency management system under the auspices of its Workforce of Tomorrow Task Force's "Planning a Dynamic People Strategy."
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