Sunday, April 29, 2012

Scorched Earth

A friend and I saw the play, Scorched Earth, at the Barksdale Theater (Willow Lawn) last night. It is a powerful and challenging production in many ways, not the least of which is the question of whether a mixed race baby, dead shortly after birth, can appropriately be buried in the cemetery of her white mother's church.

That isn't the only thought provoking moral question posed by this play. Based on author/playwright David Robbins' book of the same title, the audience is challenged to respond to conflicts of truth versus justice, forgiveness versus accountability and more.

Don't expect everything to be tied up in a neat little package with all the questions answered. During the play I said to myself more than once, "I didn't see that coming." Since then I've been asking myself, "what happens next in that town," and "did that character do the right thing?" During a Q&A with Robbins and some of the actors after the performance one audience member called out, "sequel" as these unanswered questions were being discussed.

The acting was superb. There's not a weak link in the cast. The set and lighting contributed greatly to the effectiveness of the performance. Director Steve Perigard helped the actors use Robbins' words to craft a great evening. A few ironic chuckles were generated during the show but this is definitely not a laugh-fest.

Scorched Earth is a joint production of the Barksdale and Theater IV and runs through May 20th. Show times and tickets are available here.

Tuesday, April 17, 2012

Tax Season and Tax Audits

Today marks the "official" end of busy season for most CPA firms and other tax professionals. Now all we have to do is deal with returns our clients agreed needed to be extended. Since those extensions are for six months, there will be another mini-busy season ending on October 15th.

Returns get extended for a number of reasons, most of them related to missing information that should be provided to our clients by partnerships, small business corporations (S-corps) and investment managers. Procrastination being what it is, many of those returns will not be completed until this autumn.

Another source of business for tax practitioners is IRS audits. Tax audits are most often handled by mail and are, reasonably enough, called correspondence audits. The IRS sends a letter to the taxpayer (called a CP2000 or 30-day letter) informing the taxpayer that he, she or they failed to include some income on their tax return of a recent year and assessing taxes, interest and penalty for that omission. The taxpayer has 30 days to respond. If the taxpayer doesn't respond, a 90-day letter is issued. At that point, the taxpayer has 90 days to resolve the issue with the IRS or to file a petition with the United States Tax Court.

Too many people respond by writing a check. If the amount is significant, don't do that. The amount the IRS wants is often more than the taxpayer owes. For example, suppose you bought some stock a few years ago and paid $3,000. In 2010, you sold that stock for $2,000 but forgot to report the sale on your tax return. When the IRS notices, they will send you a bill for back taxes on the full $2,000 as if it were ordinary income -- about $500 for most people plus a year's interest ($15) and penalties ($15 minimum, maybe another $100 for being negligent) for a total of as much as $630. However, instead of owing more taxes, this taxpayer is owed a refund for the missing $1,000 capital loss ($150 to $250 for most people). That's a swing of over $780 to $880. And, that is why, when the IRS says you owe more money, you should seriously consider hiring a tax professional (Certified Public Accountant or Enrolled Agent) to resolve the issue, particularly when you know there are unreported costs associated with that income you forgot to report.

Correspondence audits are sent out year round. More detailed audits tend to occur more often in the summer and fall when either the taxpayer is invited to the IRS office (an office audit) or the IRS visits the taxpayer (usually a business) at the taxpayer's location. In both cases, the taxpayer should engage the services of a tax professional to represent his or her interests.

Again, the IRS has ways of learning about income you may have omitted from your tax return. They don't have a way of determining the deductible costs you incurred creating that income. Do not automatically write a check but, also, do NOT ignore correspondence from the IRS. Deal with it and deal with it by the specified deadline.

Thursday, April 5, 2012

Audit Protection Racket

Someone might ask, "Hey, Bill, why don't you get into the audit protection racket?" Because it's a racket, I would reply.

On average, 3% or so of the tax returns filed in a year are audited. Averages are deceiving. If all your income is from W-2s, interest and dividends then your chances of being audited are probably immeasurably small (not counting those notifications by mail that you left out the interest reported on a 1099).

So what about these outfits offering "audit protection?" They claim for a low monthly fee that they will represent you if you're audited by the IRS. For example, one of them offers four plans, the 2nd lowest cost one being what they call their "Premium" plan. If you're audited, you get up to 20 hours of a professional's time to deal with the IRS on your behalf. To get that "protection," you pay $12.95 per month.

Let's do what accountant's do. Let's run the numbers. Let's assume that 100 people buy that "Premium" coverage which means the provider takes in $1295 per month or $15,540 per year. A generous assumption would be that 2 of those returns would be audited during the year. The audits I've handled required 4 or 5 hours of my time but let's assume the average here is 7 hours and the provider's hourly cost including direct overhead items is $300 per hour. That means $4,200 go out. Gross profit on the year from those 100 suc... er .. clients is over $11,000.

Each individual pays about $155 per year for "audit protection" (but see below). If the taxpayer passed on this deal and just hired a CPA or EA if and when he/she were actually audited, the cost would probably be less than $2,000 and often a lot less. You would have to be audited about every 12 years, about four times the average, to be money ahead on this deal.

Besides 20 hours of audit defense time and 60 minutes of telephone time, the "Premium" package also says you get $5,000 of "Audit Protection." What is that? I'll tell you what the seller wants you to think. They want you to think they will pay the first $5,000 of any balance due if you get audited. Don't think that because it is NOT true. If you dig into the membership agreement you learn that $5,000 is the maximum value of the services they will provide you if you're audited.

In general, the IRS has three years to audit a properly filed tax return. If you filed your 2008 tax return on or before the April 15th 2009 due date, the IRS has until April 17th of this year to initiate an audit (unless you failed to report a bunch of income in which case they have until April 15, 2015). For most situations, if your 2008 return was going to be audited you would have found out about it in 2010 or 2011 at the latest.

Here's another gotcha. The membership agreement defines "covered return" as "a tax return for a single tax year in which the member was active and in good standing with us and at the time of such Internal Revenue Service Audit the member was and is currently an active member in good standing." What does that mean if you joined up today? First, it means tax years occurring before you joined aren't covered. You didn't join in 2011 so 2011 and earlier years aren't covered. Second, even though 2012 would apparently be covered you have to maintain your membership until that year is actually audited or you're not covered after all. So, scratch that $155 above. It's really going to cost you about $310 to have 2012 covered and you probably won't be audited anyway.

There you have it. These guys are offering a better deal (for themselves) then selling extended warranties on electronic goods or running a casino.

One more thing, these audit protection outfits have a very poor track record of actually providing the promised services to their clients that are actually audited. You pay your money, you get audited, you inform your audit protection company, they do nothing, the IRS hasn't heard from you or anyone else and concludes you're a scofflaw, you pay the IRS even more than the original assessment, the racketeer goes on to the next victim.

Audit Reports on the IRS - the not perfect and the pretty bad

The Treasury Inspector General for Tax Administration (TIGTA) has issued two press releases dealing with IRS operations. The first, issued on April 3, is headlined, "IRS Computer Security Center Effective, Could Be Better." The problems with Computer Security Incident Response Center (CSIRC) include the "host-based intrusion detection system is not monitoring 34 percent of IRS servers, which puts the IRS network and data at risk." Overall, though, CSIRC is described as "effectively performing most of its responsibilities for preventing, detecting, and responding to computer security incidents." And, "The IRS agreed with the recommendations and corrective actions are planned or in process for five of the six recommendations." The press release is here and the audit report is here.

The 2nd press release, issued today, is not so favorable. "TIGTA Finds IRS Designated Payment Codes Inaccurate and Ineffective." The IRS is supposed to keep track of payments from tax payers in a manner that allows appropriate people within the IRS to later determine what a payment was for. This is important when determining what additional collection actions may (or may not) need to be taken. Designated Payment Codes (DPCs) are supposed to be used to provide that information when the payment is related to an IRS enforcement action. "TIGTA reviewed a statistical sample of 138 subsequent payments that posted to taxpayer balance due accounts. Auditors determined that 106 (77 percent) of the 138 subsequent payments were processed without the required DPC. In addition, 11 (34 percent) of the 32 subsequent payments that had a DPC were not accurate." 138 may not sound like a large sample but if it was randomly selected from even a very large population, then it probably gives a good picture of that population. Part of the problem is the IRS does not have DPCs for many payment types and the procedures for applying DPCs are inconsistant. The press release conclusion states, "TIGTA made five specific recommendations to encourage the IRS's more consistent and accurate use of DPCs. IRS management disagreed with TIGTA's findings and recommendations and said they plan to complete their own review of DPCs. TIGTA noted that the IRS has already completed an internal study and did not use its results due to concern over its reliability. The IRS took no further action except to initiate another study." The press release is here and the audit report is here.

There have been enough horror stories about computer systems being hacked into for people to understand threats implied in the April 3 press release. Not coding payments correctly may not be seen as that big a deal -- until you make a payment and the IRS says you didn't because they couldn't code it properly. Sure, the problem gets worked out eventually but not until you (or your accountant) have spent a lot of time proving you did what you said you did.

Taxpayers can maximize the chances of receiving proper credit for a payment by following the related instructions. Send the payment to the correct address. Include any required documentation. Indicate on the memo line of the check what the payment is for.

For what it's worth, this statement caught my eye. "... the IRS has already completed an internal study and did not use its results due to concern over its reliability. The IRS took no further action except to initiate another study." One definition off irrational behavior is doing the same thing over again and expecting a different outcome. I guess (or hope) the second study is being conducted differently from the first.

Wednesday, April 4, 2012


The ads are typical and grossly misleading. "Settle your IRS debts for pennies on the dollar." Yeah, right, 98 pennies on the dollar.

A couple of weeks ago, one of the better known (advertising does work) of these outfits filed for bankruptcy, "just as it was preparing to head to court to defend itself from charges of deceptive practices leveled by the Texas attorney general." Now, the verdict is in. A Texas jury as decided that TaxMasters has to pay $195 million in restitution and civil penalties. It remains to be seen whether anyone will face criminal charges.

In fact, if you've been hit with an IRS assessment for back taxes, interest and penalties then you probably should engage a tax professional to represent you. For administrative appeals within the IRS (the usual first step) an Enrolled Agent (EA) or Certified Public Accountant (CPA) can provide the assistance you need. If you're going to court, then an attorney will be required. 

Those IRS assessments are often wrong, at least in part, and a tax pro can help identify those errors. Even if the IRS is correct on the amount of taxes owed, it is still often possible to get penalties removed or reduced if your true story is good enough. In short, do not blindly assume the IRS is correct and send them a check. Get help FIRST.

There are plenty of local CPAs, EAs and tax attorneys who can help you if you have tax problems with the IRS. You do not need to go online to hire some outfit in Texas, Nevada, Tennessee or Kansas.

Sports Quest

As you probably know by now, Dr. Steve Burton is now the former CEO of SportsQuest in Chesterfield County. The new CEO, Dudley Duncan, was selected by a new board of directors.

So far, the project has been a mixture of successes and failures. A series of soccer tournaments have had major positive impacts on the county economy, particularly restaurants and hotels in the immediate area. For example, a few days after one of the first week-end soccer events, an employee at Panera's on Brad McNeer Parkway reported that Saturday had been the busiest in the history of that location. Noteworthy is that interest has already been expressed by another sports/recreation business (RISE) in acquiring the soccer fields.

Not much else has gone right for SportsQuest. Unpaid bills are in 7 figures, law suits abound, and the state AG's office is in the mix.

My own view is the overall project will be a success. It may continue as a single operation or it may be in pieces but there will be an extensive presence of outdoor (for sure) and indoor (farther into the future) recreation on the current SportsQuest property.

Also in my view, Steve Burton is part of a group of entrepreneurs who can generate great ideas but often have difficulty with the implementation. In this case, I believe he tried to go too far, too fast. Hopefully, Dudley Duncan and the new board of directors will bring a more measured, considered pace as opportunities are identified and exploited.

News stories are here, here, and here.

Monday, April 2, 2012

Deadline Approaching

April 17th is a deadline for more people than those of us who have to file a 2011 federal income tax return.

It is also the "drop dead" date for people who have not yet filed their 2008 tax return and are owed a refund. That's because the Internal Revenue Code (a law passed by Congress, not made up by the IRS) says that you have three years from the original due date to file a tax return and get any refund owed to you. The due date for 2008 federal tax returns was April 15, 2009 -- almost three years ago.

Suppose you haven't filed any returns for 2008, 2009 and 2010 and you're due a refund for 2008. The IRS might hold your check for 2008 until you file 2009 and 2010, just in case you owe for those years. They will also hold a refund if you have any other unpaid tax liabilities they know about or for things like back child support. Even then, filing your 2008 return could reduce those debts which is a good thing.